World Kinect Corp (WKC) 2022 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the World Fuel Services First Quarter 2022 Earnings Conference Call. My name is Jerome, and I'll 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, Treasurer and Investor Relations. Mr. Klevitz, you may begin your conference.

Thank you, Jerome. Good evening, everyone, and welcome to the World Fuel Services First Quarter 2022 Earnings Conference Call. I'm Glenn Klevitz, and I'll 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 the World Fuel Services website 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 includes 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. (Operator Instructions)

At this time, I would like to introduce our Chairman and Chief Executive Officer, Michael Kasbar.

Thank you, Glenn, and thank you, everyone, for joining us this evening. I want to start by recognizing our global team for their tremendous individual and team effort and execution during these turbulent times, both through COVID, then supply chain disruptions and now coupled with historic price -- fuel price volatility arising from geopolitical events. During all of it, we have continued to deliver on our commitments to our customers and suppliers each and every day with extraordinary skill and expertise, remaining calm in the face of what was, in essence, a perfect storm of logistical complexity and difficulties and market dynamics. A big thank you to all of you.

I've always said that our company's diversified business model is uniquely positioned to deliver during times of uncertainty in the markets we serve and that when taken together, complement each other during times of heightened volatility. This quarter's solid overall result is a perfect example of that.

In our aviation segment, our commercial passenger business aviation and cargo volumes were all up year-over-year, with commercial passenger volume approaching 80% of 2019 prepandemic levels globally. Our aviation service and technology offerings also delivered strong year-over-year growth.

While our core aviation business performed very well, aviation results were negatively impacted by historic factor-dated fuel price environment, which Ira will explain in greater detail shortly.

At the same time, our marine business performed extremely well, navigating a sharply rising bunker fuel price environment, where average bunker prices increased 30% sequentially. Unlike our aviation business, most of our marine transactions are executed on a spot basis, and we earned higher returns on the back of higher prices, resulting in extraordinary performance when compared to recent periods.

As credit capacity invariably tightens in high-priced markets, the scale of our business and the strength of our balance sheet differentiates us in a volatile pricing environment, where we can continue to provide our customers with the products, services and credit they require when they need it most. And simply put, this served us well in the first quarter.

With the backdrop of high container and dry bulk rates, strong commodity demand, capacity constraints, rising interest rates, supply chain inefficiencies and sustainability, we have expanding opportunities to play an important role in the success of our marine customers.

And lastly, our land business performed well in the first quarter. We experienced seasonally strong results in our U.K. heating oil business and solid contributions from our natural gas and power activities, which served to further augment the immediate benefits from the addition of the Flyers Energy operations to our overall land business. With Flyers Energy, we are better positioned to build a more ratable and leverageable national platform with a myriad of growth opportunities ahead.

And now I will turn the call over to Ira for his review of our financial results.

Thank you, Michael. Before I walk through our first quarter results, please note that the following figures exclude the impact of nonoperational items, which are highlighted in our earnings release. These items include acquisition-related expenses and integration costs, which in aggregate were only $500,000 after tax in this year's first quarter. To assist you in reconciling results published in our earnings release, the breakdown of the nonoperational items can be found on our website and on the last slide of today's webcast presentation.

Furthermore, before getting to the numbers, as Michael already mentioned, this was a quarter which clearly demonstrates the value of our diversified business model, with aviation negatively impacted by unprecedented market pricing dynamics, while marine significantly benefited from the sustained high price environment, and land delivered strong results with Flyers now on board.

I will get into the details shortly, but I thought it was important to start by pointing this out. Consolidated revenue in the first quarter was $12.5 billion, up more than 100% year-over-year, and putting us on a $50 billion annual run rate for revenue for the first time in our history.

Volumes continued to improve across all of our business segments as commercial aviation passenger volumes continue to recover, contributing to a 26% year-over-year increase in consolidated volumes. Adjusted first quarter net income and earnings per share were $26.8 million and $0.42 per share, respectively.

Adjusted EBITDA for the first quarter was $75 million. That's an increase of $14 million or 23% compared to the first quarter of last year. With regard to segment volumes, aviation volume was 1.7 billion gallons in the first quarter. That's down 2% sequentially from a seasonally strong fourth quarter, but an increase of 45% compared to the first quarter of 2021. The year-over-year volume increase resulted principally from the ongoing recovery in commercial passenger activity.

Volume in marine for the first quarter was 4.7 million metric tons, a decrease of 3% sequentially, but an increase of 11% year-over-year. As stated on last quarter's call, continued increases in our core resale activity principally in the container and dry bulk markets and physical operations drove the expected improvement in year-over-year volume.

Land volume was 1.6 billion gallons or gallon equivalents during the first quarter, an increase of 16% sequentially and 22% year-over-year. The year-over-year volume increase was principally driven by volume associated with the Flyers acquisition as well as continued growth in our natural gas and power activities.

Consolidated volume was 4.5 billion gallons or gallon equivalents. That's up 3% sequentially and 26% over last year. Consolidated gross profit in the first quarter was $231 million, an increase of 7% sequentially and 21% year-over-year.

Before I discuss aviation gross profit, I would like to provide some backdrop. As you know, backwardation occurs when oil futures forward prices trade at lower levels than current spot prices. During the first quarter, future forward prices were trading significantly lower than spot oil prices, which resulted in the most severe level of backwardation since future prices have been tracked.

Many have actually referred to this as super backwardation. Why has this happened? Short-term supplies have dwindled. And as most economies have bounced back from COVID-19, supply growth has simply not kept up. And second, Russia's invasion of Ukraine has increased supply concerns and driven up current prices, with longer-dated futures much lower as the market clearly does not expect these dynamics to last.

So what does this mean for us? The impact on our results is most pronounced in aviation, where we carry higher levels of inventory with the longer cycle times, and we hedge our price exposure with heating oil derivative contracts as heating oil is the forward market commodity that is most closely correlated to jet fuel.

When heating oil futures prices trade significantly lower than the spot market, since we hedge our inventory with futures contracts, it is difficult to avoid losses. This materially impacted aviation's margins and net results in the first quarter.

While the fundamentals of our aviation business remains strong, with commercial passenger business and general aviation and cargo activities all posting solid growth versus last year, the segment's gross profit contribution declined 42% sequentially and 16% year-over-year, with the sequential decline driven principally by the inventory issue and seasonality, and the year-over-year decline driven by the inventory impact and the exit from Afghanistan during 2021.

As we look ahead to the second quarter, we expect the core business to benefit from the continuing recovery and seasonality, with the sequential seasonal increase in volumes likely to be 15% or greater. However, with the market remaining steeply backwardated, it is likely that aviation gross profit will continue to be significantly impacted by the effects of backwardation on our physical inventory positions.

With most of our aviation contracts renewing at the end of the second quarter, as we enter the third quarter, we have more opportunities to mitigate or eliminate this risk should the steeply backwardated market continue into's the summer months or beyond. On a more positive note, the marine segment performed extraordinarily well, generating first quarter gross profit of $47 million. That's an increase of 55% sequentially and 85% year-over-year.

As noted earlier, the strong result this quarter was driven by increased returns in our core resale business and a tightening credit environment caused by the significantly elevated price of bunker fuel during the quarter. As we look ahead to the second quarter, we expect marine gross profit to remain strong as the price of bunker fuel remains at or above first quarter averages. If this trend continues, second quarter marine results should again be materially ahead year-over-year and relatively consistent with the results delivered in the first quarter.

Our land segment delivered record gross profit of $120 million in the first quarter, up significantly both sequentially and year-over-year, principally as a result of the recent Flyers acquisition, which performed very well in its first quarter since we closed the transaction in early January.

Additional highlights in land include strong seasonal strength in our U.K. operation, which actually delivered record results in the month of March. And while our natural gas activity was down from last year's record performance, which benefited from extreme weather conditions in last year's first quarter, performance was still solid, and our power business delivered strong year-over-year growth as well.

Looking ahead to the second quarter, land gross profit should experience a sequential seasonal decline but should be up materially year-over-year, driven largely by the impact of Flyers.

On to expenses. Core operating expenses were $187 million in the first quarter, slightly higher than the top end of the range provided on last quarter's call. Looking ahead to the second quarter, we expect core operating expenses to be similarly -- similar to Q1 in the range of $185 million to $190 million.

Bad debt expense in the first quarter was only $2 million. That's down about 40% sequentially and year-over-year as our team continues to manage our accounts receivable extremely well at a time where volume growth and higher fuel prices have increased the size of our overall receivables portfolio to $3.5 billion.

Adjusted EBITDA in the first quarter was $75 million. That's up 36% sequentially and 23% compared to last year's first quarter. Our interest expense was $14.3 million in the first quarter. As we mentioned on last quarter's call, interest expense increased principally due to higher borrowings related to the recent Flyers acquisition, increased working capital and rising interest rates.

With rates forecasted to rise further this quarter, we expect second quarter interest expense to be in the range of $15.5 million to $16.5 million.

On another positive note, our adjusted effective tax rate continues to decline with the first quarter rate at 19.6%, with the rate for this year's second quarter expected to be even lower. For the full year, we currently expect our effective tax rate to be in the range of 19% to 22%, which is down significantly from 2021.

During the first quarter, operating cash flow was negative $72 million, which principally relates to a 50% increase in average fuel prices from December to March, driving a 50% or $1.15 billion increase in accounts receivable in the first quarter.

We mitigated the working capital impact of higher fuel prices during the first quarter by maintaining our net trade cycle at a near record low. And as announced a few weeks ago, on April 1, we amended our banking facilities, increasing the size of the facility to $2 billion and improving terms, which further enhances our liquidity profile, and extending the facility's maturity date to April 2027.

This demonstrates the strength of our relationships with our global bank group and their confidence in our longer-term opportunities. All in all, our balance sheet remains strong, and we remain committed to disciplined capital allocation to support our ongoing business activities and strategic investments in our core business, all focused on driving long-term shareholder value.

Finally, we repurchased 500,000 shares of our common stock during the first quarter, demonstrating our continued commitment to drive additional shareholder value through buybacks and dividends.

In summary, despite near-term headwinds in our aviation business, we delivered a solid overall result in the first quarter. Our land business is larger and stronger than ever following the recent Flyers Energy acquisition. And our marine business once again demonstrated its ability to contribute to results handsomely during periods of market and price volatility.

Overall, our business is now significantly more ratable than our business evolved with a much refined portfolio of business activities, providing greater opportunities to drive operating efficiencies, EBITDA growth and higher returns going forward.

And now I'd like to turn the call back over to Mike for his closing remarks.

Thank you, Ira. As I mentioned earlier, over the last several decades, we have designed a business model that we believe is built to be resilient through times and adversity. Since our operating model was not constrained by a single method of fulfillment, our physical operations is just one component of what we call 3PV, our third-party physical inventory and logistics and virtual modes of fulfillment.

It is our global network of third-party supply and service partners, together with our physical inventory and distribution capability, which is further supported by our evolving virtual or digital capability that manages costs and creates operational integration with our customers and partners and has become a bona fide technology and software business. The combination drives strong value creation that decommoditizes energy to provide real value add to the market.

As you know, we have reshaped our land portfolio, and Mike Crosby gets a lot of credit for that, and I will be forever grateful for his contributions. As a result of his work and many others, I believe the quality of our earnings and the diversity and complementarity of our portfolio will help us drive more durable, ratable and repeatable results. The rollout of our common operating model under John Rau, combined with the arrival of our long sought-after liquid land platforms that will connect sustainability solutions, better positions us for operating leverage, taking market share and embracing transitions.

As mentioned earlier, the resiliency of our business model allows us to pivot and respond to the inevitable gyrations of energy logistics and the endless amount of geopolitical and societal issues that impact local, national and global commerce.

Our evolution from a simple intermediary to a sophisticated underwriter of risk in omnichannel and an omnichannel participant speaks volumes about our potential. Our evolution continues to be a source of pride for our team. It's what motivates and animates us and our mission to support global commerce each and every day. I'm optimistic about the opportunities we have across all of our end markets, and I'm increasingly confident in our ability to execute our 3PV growth plan with a growing suite of highly desirable energy solutions.

I'd like to now open the call to Q&A, operator.

(Operator Instructions) Our first question comes from the line of Ken Hoexter from Bank of America.

Great. Phenomenal results, if not for the inventory issue. So let's hit on the aviation for a quick second and -- or I guess, more on the inventory side. Ira, are there things you can do in the interim? I don't know, maybe not take possession of as much and move away from the own side and just do the reselling? Is that an opportunity to avoid some of these backwardation issues? Or is this something you have to do to get price certainty and understanding the market at any given time? Maybe just walk us through your thoughts on that.

Yes. I'm going to intercept then pass to Ira, and he'll fill in with some details. So just a short history lesson. We got involved in the physical part of the market, particularly in aviation, I think it was 2003. And it took us a little while to develop expertise there, and we certainly have it today. I mean I'm very proud of what we do every day to keep aviation and a lot of other folks supplied. And we're, I think, an extraordinarily responsible counterparty. So we have extended that model to many, many locations. And if not for our inventory in some locations, there wouldn't be supply -- where there wouldn't be reliable supply. There is a cost of that.

And because there is no perfect hedge within jet fuel, and we're a conservative company, we're a risk management company and we look to cover off our risks. And there are not really perfect hedges for jet fuel. In this crazy market, these were not affected, as Ira suggested. So we're revisiting some of our deployment of those physical locations, and we're also reviewing some other things that we can do in terms of pricing structures on buy and sell.

So -- but we can't turn on a dime. That is the nature of the business. It's a contractual business. We made commitments, and we uphold those commitments, and we always have. So we reviewed that as we do with all of our businesses. These are extraordinary times. So we believe that we'll have some ability to moderate, but those will not really kick in until Q3. So I don't know if you want to add some more color to that, Ira.

No. I think Mike said it all. Clearly, we're trying to optimize and carry no more inventory than we need to. And also, as Mike mentioned, as we get into the third quarter, we have some more flexibility in terms of pricing structure and trying to find ways to reduce this specific risk as much as we can. But that's -- again, as Mike said, it can't -- it doesn't turn on a dime. You can't do it overnight, but something we're heavily focused on managing through in the short term.

And Ira, just to clarify, or Mike. This is completely different than a few years ago, where you got caught in terms of hedging and pricing went the other way, where you could have made money right so you got out of the hedges. This is just a factor of taking ownership of that, like you said, Michael, to ensure you had inventory at specific locations?

Well, I think it's really a question of scale. It's a question of scale and extremity. So certainly, we've built out the business, and we're a significant global participant and the business has grown. The severity of the movements is what -- in a short period of time has created the impact. So I don't know if there's other comments you want to make, Ira, on that.

Yes. No. I mean this is different than that what you're talking about, Ken. This is purely the inventory that we have to support the core business. And just because of the structure of the market, it's just very difficult to avoid the losses right now. There's -- again, there's lots of things we're focused on. We're trying to shorten the amount of transit times that we have, which creates more risk and in some cases, buying a location rather than buying in the Gulf Coast and then being locked in for several weeks as the fuel travels up the pipeline.

So this is a little different. The market has never seen this level of backwardation before, meaning next month's price versus the spot price, that difference is just absolutely extraordinary. So yes, we're working on focusing on how we could mitigate some of those impacts. And as time goes on over the next couple of months, the chances increase significantly that we'll be able to do that.

Great. And just one other follow-up to me, and then I'll hand it over. But you mentioned, Ira, in your remarks the change in cycle terms. I think I've only seen you rein it in maybe in a weaker economic time where you were concerned about bad debt and potential for bankruptcies and surrendered in. So maybe walk through -- I mean, obviously, now you're extending more credit as pricing goes up and volumes are increasing. So maybe walk through your process there, how you -- do you have to wait until contracts are renewed to change those cycle times? Or walk us through where it is now versus where it is historically.

I think you're talking about the trade cycle in that it might be in terms of...

Yes, yes, yes. Sorry. Yes, yes, yes.

So that's something we've worked on religiously for years. And of course, the tighter you could manage that trade cycle, the better your longer-term cash flow profile is going to be. And there's a little bit of risk mitigation there as well. So we've been bringing that down over time. Some of that's mix of business. Some of that is just smarter business.

We're great trading partners. But maybe in some cases, we're a bit too great and had too much flexibility historically in terms of things like extended terms beyond traditional trade turns. So we've got much less of that.

So we had been pretty consistently running at about a 7-day trade cycle for several years. We've just continued to work at that every quarter and now it's just a little over 4 days. I don't think we could bring it down much lower than that, but we're looking to maintain that level between 4 and 5 days, which is, compared to a lot of other business in a lot of other industries, a very respectable metric.

And of course, it reduces the amount -- think about we're a run rate of $50 billion of revenue, and we only have about $700 million of net working capital. That's a pretty good comparative. And so we just work at it every day. And we work the receivables, we work the payables, work the inventory days and solve for the lowest net number possible.

Great. Great job on the Marine and certainly, the land side and on Flyers.

Thanks, Ken.

Thanks, Ken.

Thank you. Your next question comes from the line of Ben Nolan from Stifel.

I've got a couple here. First is -- I forgot. One of you, Ira or Mike, one of you talked about -- I think it was you, Ira. You talked about the impact of -- on the business and a rising interest rate environment and how that has historically been positive. Obviously, we are in a seemingly very quickly rising interest rate environment. Can you help -- just help me walk through maybe each of the segments or just in general, how that does impact the business and the margins and volumes and everything else. And how big of a determinant is it in how the business does?

Yes. So, the greatest impact, Ben, is in marine because as we've mentioned on many occasions, marine is a spot business, meaning we're pricing transactions every day as opposed to aviation, where we're heavily locking into contracts for a year at a time. And even in parts of land, we're locking many contracts for multiple years at a time.

So I would say the interest rate is secondary, but important. I say that because -- I mean, the principal driver this quarter, in particular, is just the substantial increase in flat price or the price of the metric ton of bumper fuel rising to more than $800. So that's one.

And then if you combine that with rising interest rates, you've got a world -- many of the folks that we may come up against in the market don't have the size balance sheet that we do, right? So they need more capital, and capital is becoming more expensive. So it just naturally makes them a little less competitive or in some cases, a lot less. And it gives us a greater chance to win on the back of our global scale and strong balance sheet. And that has historically, as it did this quarter, provided greater opportunities for us in the market and has led to much stronger results. So this isn't the first time we've seen that.

Less of an impact in the other businesses. The interest factor, of course, the competitive issue could impact everyone that's participating in a commodity in a sharply rising price environment. But in the short term, we see the greatest impact in marine just because we're reacting and bidding on business on a day-to-day basis with that long-term commitment, so to speak.

So that's why in this environment, you've seen the greatest positive impact in marine. But there are parts of land as well, as an example, where we also saw improvement in results. So we saw that at Flyers in our first quarter. They outperformed our expectations, driven in part by that phenomena. And even our land U.K. business in my prepared remarks, I mentioned that March was a record. They also improved their results indirectly tied to this issue as well. So hopefully that answers your question across the business.

Yes, that's helpful, Ira. Appreciate it. Speaking of Flyers, the land numbers are pretty good -- really good. And you'd call out Flyers as sort of outperforming. I know there's a degree of seasonality there. But a quarter into the deal now, does it feel like -- what sort of you had originally outlined in terms of your expectations for accretion and the impact on the company, does it feel like given us one solid quarter in, that this might have been a little conservative yet?

Yes. But they were -- I'll say a couple of things. They were a little conservative by design because when you're doing something new, you don't want to get ahead of your skis until you hit the slopes, so to speak. So we had a good first run in the first quarter, and your comment on seasonality, first quarter is a seasonally weakest quarter for that business historically. So we saw outperformance there to the extent that maybe there won't be seasonality because it's not definite that they're going to repeat that in the second quarter.

But overall, I would say, yes, based on where we are today, things could change. They're certainly performing at a level above our initial expectations, which is just fantastic.

A great team of people. They've been working around the clock to kind of integrate themselves into the World Fuel platform. And we've learned a lot about what they do well, and they're -- even though we're the bigger company, we're learning from them every day in some areas. Some areas they're winning from us. But we've certainly gotten off to a good, solid start, and we hope that continues through the balance of the year.

All right. And then last -- well, if I'm limited to 3, maybe I'll have one little tiny follow-on. Heating oil was, again, one of the things on the land side that you called out as having a good impact. Natural gas prices, especially in Europe with LNG and everything else, are just crazy, and I think there's a lot of people looking for alternatives to meet their thermal energy demand. Are we in an environment here, do you think, where maybe there's an opportunity to continue to see a little extra benefit for -- whether it's heating oil or fuel oil or whatever, just people looking for a higher margin for you, alternative to a really expensive natural gas price?

No, I don't think that is necessarily the case. And we did -- as you pointed out, we did very well in the heating oil season in the U.K., combination of weather and just volatility in the marketplace. But that season is about to end, right? And I think -- I would say we're doing -- we still did really well in April. But once you get into May and June, that level of activity wanes. Whether what you're describing may have a positive impact as we approach the fall, good question. I'd be guessing if I said that would be the case.

But despite the craziness going on in many parts of Europe, our guys hunkered down and really delivered very, very solid results. Claire and Chris and the rest of the team in the U.K., if they're listening, they really nailed it. And we're looking forward to nailing it again next winter season in that part of our business.

Great. Well, there are probably a few pines in, in the U.K. at this point. But the...

Just for more clarity. When you're talking about sort of switching between heating oil and natural gas, I'm not sure that -- I didn't quite understand.

Yes. Yes. That's right. Just because natural gas is so high, maybe there's a little bit more persistent demand for heating oil as kind of the...

Yes. I'm going to have to say I don't know the answer to that question, but I'll research that.

Okay. The last -- and this is just a little -- really just kind of a modeling-type question maybe, Ira. There was I think a little over $5 million other income item that had an impact on net income. Any color as to where that came from?

Yes, of course. So I knew you would ask that question so I got the answer to it. So there's some -- look, one area we've done a much, much better job at the last several years is managing foreign exchange risk. We actually have a couple of new folks that we brought on board that focus on that day in and day out to make sure we don't have any unnecessary losses. In this particular quarter, we actually -- with all the volatility, we couldn't avoid generating some gains. So we had a couple of million dollars of foreign exchange gains in regions that are very difficult to hedge, and markets moved in the right direction.

And we also had, I would say, more than our average income from minority investments. We have a couple of those. One of them relates to the Exxon deal in aviation that we did several years ago. As those markets in Europe come back, we generated some more profitability there. And there were a couple other miscellaneous buckets, but most of it was the equity earnings and a couple of million dollars of foreign exchange gains. So that offset a bit of the growing amount of interest expense, which was interest rate.

Mr. Kasbar, there are no further questions at this time. I will now turn the call back to you for closing remarks.

Well, thank you. I really want to say thank you to our incredible, dedicated, talented, passionate team that really makes our company what it is every day of the week for our customers, our partners, our shareholders, communities. So thank you very much, and look forward to talking to you next quarter. Thanks very much for all your support.

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