World Kinect Corp (WKC) 2017 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the World Fuel Services 2017 Second Quarter Earnings Conference Call. My name is Colin, and I will be coordinating the call this evening. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to Mr. Glenn Klevitz, World Fuel's Vice President, Assistant Treasurer and Investor Relations. Mr. Klevitz, you may begin your conference.

Thank you, Colin. Good evening, everyone, and welcome to the World Fuel Services Second Quarter 2017 Earnings Conference Call. I'm Glenn Klevitz, World Fuel Service's Assistant Treasurer, and I will be doing the introductions on this evening's call alongside our live slide presentation. This call is also available via webcast. To access this webcast or future webcasts, please visit our website, www.wfscorp.com, and click on the webcast icon.

With us on the call today are Michael Kasbar, Chairman and Chief Executive Officer; and Ira Birns, Executive Vice President and Chief Financial Officer. By now you should have all received a copy of our earnings release. If not, you can access the release on our website.

Before we get started, I would like to review World Fuel's safe harbor Statement. Certain statements made today, including comments about World Fuel's expectations regarding future plans and performance are forward-looking statements that are subject to a range of uncertainties and risks that could cause World Fuel's actual results to materially differ from the forward-looking information. A description of the risk factors that could cause results to materially differ from these projections can be found in World Fuel's most recent Form 10-K and other reports filed with the Securities and Exchange Commission. World Fuel assumes no obligation to revise or publicly release the results of any revisions to these forward-looking statements in light of new information or future events.

This presentation also include certain non-GAAP financial measures as defined in Regulation G. A reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures, is included in World Fuel's press release and can be found on its website.

We will begin with several minutes of prepared remarks, which will then be followed by a question-and-answer period. At this time, I would like to introduce our Chairman and Chief Executive Officer, Michael Kasbar.

Thank you, Glenn, and thank you to everyone on the line for taking the time to join us. Today we announced first quarter adjusted earnings of $34 million or $0.50 adjusted diluted earnings per share. Our aviation business performed well, as the aviation industry continues to experience healthy passenger growth globally, as more people gain access to air travel throughout the world. It's an impressive statistic that 82% of the world population has never flown.

Furthermore, air cargo activity has also started recovering after a lengthy period of depressed demand. World Fuel has been a beneficiary of these macroeconomic trends as a consequence of our geographically diversified platform and our emphasis on strengthening our global footprint through strategic distribution acquisitions, as well as organically expanding our strong global supply and logistics network. These factors combined to drive aviation volume to its highest level ever exceeding an $8 billion gallon annual run rate in Q2.

Relatively stable supply dynamics throughout Q2, particularly in North America, made for improved supply efficiency minimizing some of the incremental costs associated with supply disruptions that have been periodically experienced in certain prior quarters and can potentially arise at any point in time. Furthermore, Q2 experienced stable demand in our government business.

Despite the volume increases, costs remained flat to the prior year demonstrating the scalability of our aviation platform. While intensive competition in the current low price environment, resulting from an abundance of supply, is expected to continue for the foreseeable future. Nevertheless, we believe our aviation segment is well positioned to maintain competitiveness. Organic growth in existing locations, ancillary service revenue and increasing earnings contribution from our recently completed acquisition and subsequent network expansion facilitated by this acquisition, should enable us to leverage our industry-leading platform.

In our Marine business, the global shipping industry continues to experience weak demand and abundance of supply and continuing consolidation of the customer base. Factors that have dramatically impacted many bunker fuel suppliers. Despite this phenomenon, we were able to demonstrate consistency posting gross profit and operating income results largely consistent with the prior quarter. The drivers of the year-over-year decline were primarily related to a drop off in Asian business, as well as a lack of demand for risk management. This was offset by a reduction in operating expenses directly attributable to the restructuring and cost control initiatives that were announced in 2016.

We do not anticipate a material improvement in the macroeconomic or low oil price environment that will continue to put pressure on demand and profit margins. Nonetheless, we anticipate that financial results in Q3 and Q4 will be in line with Q1 and Q2 income levels to our continued emphasis on rigorous operating efficiency and expansion of our diversified value proposition.

Our land segment once again suffered under an oversupplied market on the East Coast, and we were also impacted by an adverse pricing environment in Brazil. While our Land segment represents an extremely large growth runway, as mentioned previously, we still have to work -- we still have work to do to get tightly integrated global platforms. We have undertaken a comprehensive review of the North American platform and we are executing on that over the balance of the second half, which will position us well for 2018.

Finally, we continue to focus on integrating and streamlining overall operations across all of our segments and functions by utilizing standardized processes and technology that create efficiency internally and greater value for our supply and demand partners as we build out our global energy management, fulfillment and payments business.

We appreciate the continued support from our long-term shareholders, customers and suppliers, tremendous engagement of our global teams. And now I'll hand over the call to Ira to go through our financial results.

Thank you, Mike, and happy birthday, by the way.

Thank you, Ira.

Consolidated revenue for the second quarter was $8.1 billion, up 22% compared to the second quarter of 2016. The increase was due to a 6% increase in oil prices, as well as increased volume principally from an 18% volume increase in the aviation, land segments.

Our aviation segment volume was 2 billion gallons this second quarter, up 300 million gallons or 18% year-over-year. Volume growth in our aviation segment was derived principally from gains in our core resale operations in North America, as well as from the sales coming from recently acquired international fueling operations. Our aviation segment continues to deliver strong organic growth and has now reached 2 billion gallons of quarterly volume for the first time ever.

Volume in our marine segment for the second quarter was 6.8 million metric tons, down approximately 1.5 million metric tons or 18% year-over-year. The largest driver of the volume reduction relates to our core operations, principally in Asia. Our land segment volume was 1.5 billion gallons during the second quarter, up approximately 230 million gallons or 18% from the second quarter of 2016. And total consolidated volume for the second quarter was 5.3 billion gallons, an increase of approximately 150 million gallons or 3% year-over-year.

Consolidated gross profit for the first quarter was $231 million, an increase of $12 million or 6%, compared to the second quarter of 2016. Our aviation segment contributed $111 million of gross profit in the second quarter, that's an increase of $12 million or 13% compared to the second quarter of last year. The principal drivers of the gross profit increase in aviation came from increases in our core resale business in North America and profit from our recently acquired international fueling operations.

As we look to the third quarter, which has traditionally been the seasonally strongest quarter for the aviation segment, we expect both volume and profits to again increase on both the sequential and year-over-year basis as we continue to leverage our industry-leading platform. The marine segment generated gross profit of $33 million, that's down $7 million or 17% year-over-year. The gross profit decline was again principally driven by reduced volume in our core business, primarily in Asia and a further decline in profits from the sale of price risk management products. We do not anticipate a meaningful improvement in the macroeconomic or low fuel price environment anytime soon. Therefore, we are not expecting any material improvement in marine results over the balance of the year.

Our land segment delivered gross profit of $87 million in the second quarter, that's an increase of $7 million or 9% year-over-year. The increase in land segment gross profit is principally attributed to recent acquisitions, offset by lower profitability related to supply and trading activities in the United States, associated with the continued conditions on the East Coast where the market remains oversupplied. We were also impacted by a decline in profits in our Brazilian operations due to unfavorable supply dynamics in the country.

Gross profit associated with our Multi Service payment solutions business was $14.1 million in the second quarter, that's an increase of 10% compared to the second quarter of last year, demonstrating the continued expansion of our global payment platform. Our Multi Service team continues to identify additional growth opportunities that should benefit us in 2018 and beyond.

As I continue with the remainder of the financial review, please note that the following figures exclude the impact of $5.7 million of pretax nonrecurring expenses in the second quarter, as well as nonrecurring items in periods previously reported as highlighted in our earnings release. This amount is principally comprised of acquisition-related expenses and severance costs. To assist all of you in reconciling results published on our earnings release and 10-Q, the breakdown of the $5.7 million is as follows: $3.2 million relates to aviation; $1.1 million to land; $800,000 to marine; and $600,000 relates to unallocated corporate expenses. The reconciliation of these amounts can be found on our website, on the last slide of our webcast presentation.

Operating expenses in the second quarter excluding our provision for bad debt and onetime items were $173 million, that's up $8 million year-over-year. However, when excluding the impact of recent acquisitions, operating expenses actually declined by $8 million year-over-year, reflecting the impact of our ongoing cost saving initiatives. In terms of the status of our $20 million cost savings initiative announced in February,

we still expect to realize $15 million of our such saving during this year, with the incremental savings to be realized in 2018. We have continued to identify additional savings opportunities across the business, which should help further improve our operating efficiencies. Actually, as we look towards 2018, the remaining savings from our February cost savings announcement, combined with the impact of additional savings already identified, should result in an incremental cost reduction of at least $15 million in 2018.

Total operating expenses excluding bad debt expense and any onetime items should be in a range of $173 million to $177 million in the third quarter. Our bad debt provision for the second quarter was $1.5 million, that's down $1 million compared to the second quarter of last year. Consolidated income from operations for the second quarter was $57 million, that's up $5 million or 11% year-over-year.

Nonoperating expenses, which again principally consist of interest expense in the second quarter, was $16 million. This represents an increase of $8 million compared to the second quarter of last year, principally related to increased borrowings associated with our increased volume, the funding of acquisitions and higher average interest rates as compared to last year. However, total debt declined by $118 million since the end of last year, demonstrating our continued commitment to maintaining a strong balance sheet. Looking forward, I would assume nonoperating expenses to be in a range of $14 million to $16 million in the third quarter.

Our effective tax rate in the second quarter was 15.1%, that's compared to 19.5% in the second quarter of last year. And at this time, we still estimate that our effective tax rate for the full year of 2017 should be between 15% and 18%. Adjusted net income was $34 million this quarter, which was flat when compared to the second quarter of last year.

Non-GAAP net income, which again excludes onetime expenses and also excludes intangible amortization and stock-based compensation, was $45 million in the second quarter, that's up $1 million from the second quarter of last year. Adjusted diluted earnings per share was $0.50 in the second quarter, which is flat with the second quarter of last year and non-GAAP diluted earnings per share was $0.66 in the second quarter, up 5% from $0.63 in the first -- second quarter of last year.

Our total accounts receivable balance, was $2.2 billion at quarter-end, effectively flat year-to-date. Net working capital was approximately $890 million, down approximately $50 million sequentially, contributing to the generation of $19 million of cash flow from operations in the second quarter, which takes are year-to-date operating cash flow total to $156 million, and more than $1.4 billion over the past 5 years. During such time, we have generated positive operating cash flow in all but one quarter.

We also repurchased an additional $21 million of our common stock in the second quarter, taking our year-to-date repurchases to $32 million or 850,000 shares. Delivering on our commitment to continue providing incremental value to our shareholders through share repurchases.

As a result of our outlook through certain parts of our business, now being lowered than previously forecasted, we are lowering our full year guidance range. The principle drivers, which have lowered our expectations for the year, relate to increased weakness in our marine segment where volume declines in our core business, principally in Asia, are unlikely to recover through the balance of the year, and a continuing low-price environment has further reduced the sale of the derivative products to our customers. Also, protracted headwinds in our domestic land business, principally relating to the impact of oversupplied market conditions in the Northeast also seem likely to continue for the balance of the year.

And finally, unfavorable pricing policies implemented by our state-controlled supplier in our Brazilian land operation has led to increased margin pressure in this market, which will also likely persist for the balance of 2017. Due to these and other factors, we believe that adjusted full year diluted earnings per share will now be in the range of $2.10 to $2.40 for 2017, which is down from the $2.55 to $2.90 previously forecasted. Again, our guidance assumes anticipated contributions from recently acquired businesses, our ability to continue to deliver on cost saving initiatives, continued strong government related activity and normal winter weather patterns.

So in closing, while we are still facing challenges in our marine segment and parts of our land segment. We delivered good results in what was our seasonally weakest quarter of the year. We, again, generated operating cash flow and repaid debt, further strengthening our balance sheet. While our guidance for the balance of the year has been tempered due to the factors previously described, our leadership position in global energy management, procurement, supply fulfillment and payment solutions should continue to service well as we expand our growth opportunities to benefit a global suite of customers.

While market conditions will step in our path from time to time, our long-term opportunities remain strong across our legacy activities as well as our newer growth engines, such as Kinect, representing natural gas and power and Multi Service, which continues to grow with innovative solutions aimed at a broadening group of customers. Lastly, we continue to be focused on improving efficiencies and driving growth backed by the strength of our balance sheet and the dedication of our best-in-class global team of professionals around the world.

I would now like to turn the call over to Colin to begin our question-and-answer session.

(Operator Instructions) Our first question comes from the line of Gregory Lewis with Crédit Suisse.

So as we think about aviation, I mean, clearly Q2 was pretty strong. Heading into Q3, usually its sequentially a better quarter. I guess, over the last 3 years we've seen volumes up anywhere from, what, 7% to 10% on a sequential basis. I guess, we're a few weeks already into the third quarter. Is there any -- how will we think, how should we be thinking about the outlook for aviation in Q3 and in the back half of the year? Should we expect normal seasonal patterns? Or -- I just want to get a little color around there.

Sure. I would certainly expect traditional patterns where we, as I said in my prepared remarks, Greg, should see some increases in the third quarter both sequentially and year-over-year in volume and gross profit. So we expect to make a few million dollars more on an operating income basis in Q3 versus Q2, which again is traditional -- we had a really strong Q2, so the delta between Q2 and Q3 may not be as large as it's been in previous years but we should still see an increase. And then when you get to Q4, that number drops back down to a number similar to Q2 and maybe even a little below. So I would say, Q3 and Q4 combined, if you take the average of those 2 quarters, you could have a result very similar to the second quarter.

Okay. Great. And then as we think about the guidance, you provided the updated guidance, thank you for that. How should we think about -- I guess, what drives guidance to the low end of guidance? And then on the flip side of that, what should we be thinking about, as potentially getting to the high end of the guidance, what needs to happen? If you could sort of bracket those 2.

Okay. So that's a good question. The marine business, obviously, has been pretty challenged. More so than, I think, we had expected. So volatility is pretty low, I mean the (inaudible) is -- not that that's a complete indication of what goes on in our specific world, but I guess it's the lowest in 23 years. I mean, I don't think anybody sees a lot of risk. Disruptions don't disrupt anymore. So I think we feel like we have sort of hit bedrock on marine, and we had a little bit of breakage there in terms of the rightsizing of the organization. So some improvement in the marine business, I'm not sure that we're going -- we don't expect anything there. It's really going to be our performance there. The East Coast is pretty challenged with that market. All the refineries in the Gulf Coast who are essentially supplying South America, so that hard -- where we were making a good amount of money on the East Coast, it is very much challenged, so some relief there, I think. A big part of, I think, our business is really pivoting from taking margin from some of the commodity side that we had and really getting the operation to be a lot tighter. So I think that we've got our work cut out for us. Markets like this, really, a stress test for management and your business model. The government activity is always a wildcard. We never really know what's going to happen there. It’s all requirements there. So that potentially could be a surprise on the upside or down. So other than that, I think those are really sort of the guardrails there. I don't know if you have any other commentary on that, Ira?

I think, again, when I provided the guidance, Mike already alluded to a lot of this, so I may be slightly repetitive. But I qualify it to say that even revised guidance assumes expected contributions from recently acquired businesses. We've talked about PAPCO and APP and the ExxonMobil transaction. So we've made expectations for those businesses for the second half of the year. ExxonMobil is kicking in and starting to step up. So we need that to happen to hit the reasonable, let's say, midpoint of the guidance. If that accelerates further, we've got some upside there. Also, I said that it assumes that we continue to deliver on our cost saving initiatives if we could outperform there, we have the ability to outperform on a guidance and move towards the higher end of the range. Mike mentioned government, that could go either way, but we've seen that that's been very resilient. So there are opportunities for us to do better than expected and its certainly possible that could contribute to a better result. And then, finally, the winter weather, right? So we're assuming -- we're not assuming a warm winter or a frigid winter, we're assuming something in the middle of the road to the extent winter conditions in the U.K. in particular, even in the U.S., where we've got a growing natural gas platform that's somewhat seasonal. That weather impact could help us or hurt us a bit, and that's why the range is relatively wide. That's why we provided a $0.30 range similar to what we did last go around. So our goal is to try to do as well as possible and focus on maximizing our opportunities in all those areas throughout the rest of our business globally.

Our next question comes from the line of Jack Atkins with Stephens.

This is Andrew, on for Jack. Ira, let me start with -- in your prepared comments, you mentioned, an incremental $15 million of cost cuts that you think you -- I guess you've identified for 2018. Can you add some color on to what areas of the businesses or areas of the business this costs are in? And is there a reason that you would need to wait until 2018 before you start to realize some of the benefit from these?

So just to be perfectly clear and to slightly correct what you just said, we had announced in February a $15 million to $20 million worth of cost savings. And at the time, we said we expect to realize approximately $15 million of that amount in '17, which implies that the balance wouldn't be achieved until '18. So it's basically reconfirming that, saying that we expect that this year we'll benefit by the $15 million and we already have plans in place that would give us the additional $5 million but we won't see it until '18. And then we found, effectively, an additional $10 million, which will generally benefit us in '18. So why not sooner? I mean, a lot of it are -- there are a lot of pieces to the puzzle that have timing elements that can't necessarily be excluded on a moments notice. There needs to be -- there's some planning involved in some of the things that we're doing. To the extent we could -- it's a Greg Lewis' question, to the extent we can move some of those things up, we will, and that would only improve upon our expectation. But for now, I think it was fair to say that we'll pick up that $15 million -- if we get a little bit of it this year, great. If not, we've got a $15 million improvement as we turn the clocks on New Year's Day.

Sounds good. Thanks for clarifying that. And then, Mike, can you provide some color on your M&A pipeline today and kind of your appetite for the rest of the year for potential M&A. I know you guys just wrapped up that aviation deal, so I'm just wondering is there anything for the rest -- or what's your appetite would be for the second half of the year?

So I mean listen, we're always open for business. And we have, I think, both the organization and the focus and the balance sheet to drive growth organically and to selectively be able to vet opportunities as they come through. So the name of the game is to be this diversified energy management fulfillment and payments business. And while these businesses seem like they are dramatically different, and there are certainly some nuances to them, there is a lot of similarity, there's a lot of synergies. So the name of the game today in today's reality is you've got to be an exceptionally sharp operating company. And if you get some value out of the market place, that becomes optimization. So as it relates to M&A, there's a lot of stuff on the market and it's really understanding what's worth buying versus growing organically. So our capability is, I think, pretty strong. I think we've demonstrated that we've got the ability to handle a lot of capacity. So it's something that we just take under review, but were not shut for business. It's really just what is the wisdom based on whether we've got an organic opportunity to grow in the space or whether it becomes a property that brings us things that we can't do ourselves. It's capability, extensions, all of the common logic that you would apply to those investment decisions. So we're mindful of pacing. I think I mentioned last quarter that we've got a good amount that we're digesting now, but we've got the best team we've ever had in the organization. I think I said in the last quarter that despite the results not being what we'd ideally like, the company is healthier than it ever has been. So from that perspective, acquisitions are always going to be part of the purview. So I wouldn't say that it's something that we're aggressively looking at, it's just something that we're always open for business.

Good deal. And then last one for me. Ira, just to clarify, what was the -- on the operating expense guidance, you said $173 million, and then I didn't catch the top end of that?

To $177 million. So you've got a little bit of a pickup as we were closing parts of the Odyssey -- or the ExxonMobil business into the second quarter. So we have a little more incremental expense there, that's really what represents the step up from the second quarter.

Our next question comes from the line of Ben Nolan with Stifel.

So obviously, the marine business is kind of stuck in no man's land a little bit here. And we're really a little bit more curious about the aviation and land businesses and how you guys think about that from a longer-term perspective with respect to your ability to organically grow those? Is there sort of a, I don't know, a target rate at which you think that you're going to be able to grow those 2 businesses?

So aviation, I think, speaks for itself, certainly. Exceedingly good track record. And I think the thing that's instructive there is it took a long time to get there. Unfortunately, things take time and a little bit of money, but the aviation journey has been a 25-year journey. It's highly specialized and the aviation team should be exceedingly proud of what they've been able to achieve and accomplish. The part that I think is really cool about our business is, while they're different industries, I guess, and they're different products, they do have similarities. So the aviation platform and the aviation story is a great model. Certainly, for the land story, there's a lot of commonality between land and aviation. The land marketplace is perhaps 10x the size of aviation, so it’s got an enormous runway. Land, as I've indicated, does not have the platforms. We've integrated the companies, but I guess there is levels of integration. And we still have that in front of us in terms of the processes, the organization, the technology platforms in the U.S. and globally. But that's pretty exciting in terms of the level of organic growth that we could get. Certainly, there's plenty of opportunities on inorganic growth within that land space, so there's a lot of collaboration amongst all of the different "segments". John Rau, I think, is doing a great job of working with the marine team to reposition the business for today's market. And I'm confident that we're going to be able to navigate that business to more enhanced value prop that addresses that needs and realities of shipping companies today. So right now, the market share in land, I mean, we probably can't even measure it, it's like a millionth of a percent. So the upside there is significant and there's a heck of a lot of collaboration going on in the company today, which I'm proud of and we should be. So guidance is an interesting thing. We did that because we're not Tootsie Roll, we're not a company that has got an enormous amount of comparables. So now the art of guidance is really interesting and what you say you better be able to deliver on. So we still have got the variability of the markets that we're engaged with, and we are pivoting to a little bit of a different model because the party, I think, is sort of over to a certain extent when you look at commodities. It's been that Kodak moment for commodities, super cycle is over, this is not news. So the way a lot of companies operated was living off of some of that, and it's hard to see how that's going to change. Shell Oil has put a lid on pricing. We are range bound. You've got low pricing, easy credit, all that sort of jazz. So it's about being a very sharp operating company. So in any case, kind of getting off topic here a little bit, but we intend to create greater visibility on that. We will be announcing an Analyst Day, probably on some winter Friday or Monday, and really create a little bit more clarity on that so that people have got a little better understanding of some of the mechanics of what we're doing and to create more predictability and ratability in our business model. So we're on our way. But unfortunately, these things take a little bit of time, but we're focused on it.

Great. And as a Chicago guy, I'll take an Analyst Day or an Investor Day in the winter anytime.

I think we were considering Chicago for the venue, unfortunately.

My second question relates to the cost side of it. And obviously, it sounds like you guys are making pretty good progress on cost savings, especially in the OpEx side. I was curious if there is much work to be done or any fat to be trimmed on the G&A side?

We're covering every single line item on the P&L that ends with the word expense. Whether it be compensation, whether it be real estate, whether it be professional fees. I got our General Counsel sitting here looking at me. So we're leaving no stones unturned. Obviously, both G&A and compensation are really large numbers, hundreds and hundreds of millions of dollars. And we're very focused on OpEx as a percentage of GP. And our current level of gross profit, every 1% improvement there is almost $10 million. So with our first 2 rounds of cost savings, we've effectively taken out about 3% in that number on a pro forma basis, so to say. And we're focused on trying to continue the drive that number in the right direction and that's, again, that's every line item. They're IT-related costs as we create more efficiency through integration we should be able to reduce those types of expenses. So we've got a lot of different initiatives going on internally, all aimed at the same single end goal of making us more efficient and improving our cost leverage going forward.

Mr. Kasbar, there appear to be no further questions at this time. I'll now turn the call back to you for closing remarks.

Thanks, everyone. We appreciate you sticking around, and we look forward to talking to you next quarter. Thanks again, best to everybody.

Ladies and gentlemen, that does conclude the conference for today. We thank you for your participation and ask that you please disconnect lines.