World Kinect Corporation (WKC) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to World Kinect Corporation's Third Quarter 2024 Earnings Conference Call. [Operator Instructions] I would now like to hand the call over to Braulio Medrano, Senior Director of FP&A and Investor Relations. Please go ahead.

Good evening, everyone, and welcome to World Kinect's Third Quarter 2024 Earnings Conference Call, which will be presented alongside our live slide presentation. Today's presentation is also available via webcast on our Investor Relations website. I'm Braulio Medrano, Senior Director of FP&A and Investor Relations. With me on the call today is Michael Kasbar, Chairman and Chief Executive Officer; and Ira Birns, Executive Vice President and Chief Financial Officer. I'd like to take a moment to announce that Elsa Ballard will be leaving World Kinect after this earnings call. We would like to recognize and thank Elsa for the fantastic job that she has done with our Investor Relations efforts by improving communication channels, driving greater transparency and improving the quality of our materials. As she moves on to new opportunities, we want to wish her the best in her future endeavors. Thank you, Elsa. And now I'd like to review our safe harbor statement. Certain statements made today, including comments about our expectations regarding future plans and performance are forward-looking statements that are subject to a range of uncertainties and risks that could cause actual results to materially differ. Factors that could cause results to materially differ can be found in our most recent Form 10-K and other reports filed with the Securities and Exchange Commission. We assume 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. A reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures is included in our press release and can be found on our 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, Braulio. And thank you, Elsa, for all the great work that you did for us. We really appreciate it. And best wishes on all your future endeavors. Good evening, everyone. Last quarter, we spoke about challenging market conditions in our land business. And even though some of these headwinds persisted in the third quarter, our land segment rebounded from the second quarter as expected. Our overall business also performed in line with the guidance provided last quarter, highlighting our progress towards more predictable financial results. Consistent with my messaging in prior quarters, our management team remains focused on implementing a more leverageable business model across all of our company's operations. Our capital allocation strategy remains consistent, prioritizing opportunities that drive more predictable returns within an acceptable risk profile, all while leveraging our last half-mile value-added energy distribution solution platform. That's a mouthful, but that's what we do. This disciplined approach to return, risk and cost management is the key to achieving the operating efficiency targets we shared with you at our Investor Day earlier this year. Our commercial business and general aviation platform continues to be a great example of this strategy, and we marked another quarter of excellent momentum. This scalable platform of diversified yet highly complementary offerings, combined with robust summer demand in both the passenger and air cargo sectors, propelled aviation to double-digit growth in operating margin. Operating margin in aviation also benefited from the strategic sale of Avinode last quarter as growth in core revenue contribution more than offset the income from Avinode, but with a lower expense profile. As we noted last quarter, we reallocated some of the proceeds from the Avinode sale to the acquisition of a tuck-in bulk aviation fuel distribution business, which was completed at the beginning of the fourth quarter and is expected to be fully integrated into our aviation platform by year-end, expanding our distribution network and customer base. While relatively small, this strategically complementary acquisition is a great example of the core investments we will prioritize to drive operating leverage growth and returns. Our global aviation business is well positioned to capitalize on the long-term growth trajectory in aviation. Although more cyclical than aviation, our marine business also operates an efficient and highly scalable platform, delivering outsized financial results from small improvements in market conditions while still creating value and contributing cash flow even in less favorable economic environments. So in the third quarter, while marine generated an 8% year-over-year increase in gross profit, marine operating margin improved by 450 basis points, demonstrating the power of the platform to create operating leverage. Marine continues to represent a valuable diversification component of our portfolio, a business with minimal working capital requirements and significant potential upside under the right conditions. As I stated in my opening remarks, land rebounded significantly in the second quarter of this year as market conditions improved in our North American fuel business as well as natural gas, where prices and volatility edged upward from the uncharacteristically low levels experienced in the second quarter. I will share more details in these comments. As discussed in New York in March, growing and scaling the more predictable offerings in our land business is our largest opportunity for value creation. In our North American liquid fuel business, we now have a clear path to improving operating efficiency and margins by consolidating and standardizing on a single technology and operating platform, much as we have done in our aviation and marine segments. We will be completing this migration over the course of 2025. Not only should this initiative increase the profitability of our existing North American fuels business but it will establish a vehicle for effective integration and synergy capture. Rapid and efficient acquisition integration has been an effective growth strategy for our aviation and marine segments that will finally be replicated in our land business. Doing so in what is still a relatively fragmented land space, a market significantly larger than the combined marine and aviation markets, is a key driver as we discussed at our Investor Day to accelerate attainment of our medium-term operating margin target. And finally, as always, we wouldn't be here without our outstanding global team. It's their passion, innovation and dedication to serve our customers, suppliers and partners with the essential energy and logistics supply assurance that they require that makes us who we are and what we are. Thank you for what you do every day. It is truly a pleasure to serve with you. Ira will now provide a detailed financial and business update. Ira?

Thank you, Michael. And one last time, thank you, again, Elsa, and good evening, everyone. Before I begin the core financial review, please note that our third quarter non-GAAP results reflect approximately $3.2 million of total after-tax adjustments. This includes approximately $2.1 million associated with the incremental tax expense related to the sale of Avinode, and approximately $1 million principally related to an impairment charge within our land segment. Reconciliations of our non-GAAP measures are always available on our Investor Relations website and also in today's webcast presentation. On a consolidated basis, our aviation and marine segments delivered solid year-over-year results, and our land segment made meaningful improvement sequentially as certain market conditions that impacted us in the second quarter improved. Total volume of $4.4 billion was down slightly year-over-year, and consolidated gross profit declined 5% from last year's third quarter to $268 million, in line with the guidance we provided last quarter. The year-over-year decline was primarily due to lower gross profit in our land segment, partially offset by higher gross profit in both aviation and marine. Our aviation volume was down approximately 16 million gallons or just about 1% year-over-year. Again, this was impacted by our decision to exit certain low-margin bulk fuel business during the fourth quarter of last year. If you exclude the impact of exiting this bulk fuel activity, volume was up approximately 4% year-over-year and also 4% sequentially, benefiting from summer seasonality. Aviation gross profit increased $3 million or 3% year-over-year positively impacted by stronger physical inventory-related profitability in our core commercial business when compared to the third quarter of 2023. This is offset in part by the sale of Avinode, which contributed approximately $10 million of gross profit in last year's third quarter. Also, as Mike mentioned, we recently closed a small tuck-in acquisition in business aviation. This transaction will expand our network of FBO and aviation fuel card customers in the United States. As we look to the fourth quarter, we expect a sequential seasonal decline in gross profit. We also expect a year-over-year decline in gross profit in aviation driven principally by the impact of the Avinode sale. In the land business, volumes decreased 3% year-over-year principally driven by decreases in our North American wholesale and retail business activities, offset in part by increased natural gas and power volume. Natural gas and power represented 33% of volume in the third quarter, flat with the second quarter and up from 31% in the third quarter of 2023. In land, while our core North American fuel and natural gas businesses improved from the soft second quarter, contributing to a 26% sequential increase in gross profit, on a year-over-year basis, North American fuel activity was still lower. This, combined with the continuation of the unfavorable market conditions in our Brazilian operations that we discussed last quarter, contributed to a 16% year-over-year decline in gross profit for the overall land segment. Looking to the fourth quarter, land results should continue to improve on a year-over-year basis, with gross profit expected to be flat to up slightly year-over-year. As we have discussed throughout the year, we remain focused on refining and optimizing the portfolio of activities within our land business. As we head towards 2025, we have identified several opportunities to significantly improve the profile of this business, which should drive improved margins and returns, benefiting the broader business and strengthening our foundation to achieve our medium-term financial targets. We hope to share more details by the time of our next earnings call in February. In marine, volumes were down 3% year-over-year and gross profit increased approximately 7% principally driven by strong performance in our core resale business activities, including year-over-year growth at several of our physical locations throughout the world. As we look to the fourth quarter, we expect marine gross profit to be effectively flat sequentially, but lower year-over-year, principally related to reduced market volatility and somewhat lower bunker fuel prices compared to the fourth quarter of 2023. As you look to the fourth quarter, on a consolidated basis, and with the backdrop of the related segment gross profit comments shared a moment ago, we expect consolidated gross profit to be in the range of $253 million to $260 million. That's $253 million to $260 million. Now let's turn to adjusted consolidated operating expenses, which were $195 million in the third quarter, down 6% year-over-year, also consistent with the guidance provided last quarter. For the fourth quarter, we are expecting adjusted operating expenses of $194 million to $198 million, generally consistent with the third quarter and a decline of approximately 5% year-over-year, impacted in part by the elimination of Avinode-related expenses, offset in part by expenses associated with the recent aviation tuck-in acquisition. We remain focused on our medium-term consolidated operating margin target. As mentioned earlier, ongoing efforts in sharpening our portfolio of activities and greater operating efficiencies in our land business should be a significant factor in making progress towards this target. But we also remain focused on driving additional efficiencies across the broader business which should contribute to the achievement of this target as well. Interest expense was $24 million in the third quarter, down about 16% year-over-year and below the guidance provided last quarter, as we benefited from the recent interest rate reduction, and we also had lower utilization under our liquidity facilities during the quarter. We expect another year-over-year decline in interest expense in the fourth quarter to $23 million to $25 million with our full year 2024 interest expense on track to come in approximately 18%, below fiscal year 2023. Our adjusted effective tax rate in the third quarter was 24.7% and that's slightly higher than anticipated and up slightly year-over-year. Based upon what we know today, our adjusted effective tax rate for the fourth quarter should be in the range of 20% to 23%, resulting in a full year '24 adjusted effective tax rate of 17% to 19%. In the third quarter, operating cash flow was actually negative $39 million. The use of cash in the third quarter was principally related to increased capital requirements associated with seasonal increases in business activity, most specific to our aviation business. As we work through the fourth quarter, we are focusing on every opportunity to drive a solid cash flow outcome to finish the year. Also during the third quarter, we repurchased an additional $28 million of shares, increasing total year-to-date repurchases to $57 million. And we also announced the $200 million increase to our share repurchase authorization, further demonstrating our commitment to returning capital to shareholders. In closing, I want to leave you with a few thoughts. Aviation delivered solid year-over-year results driven by strong performance in our core commercial business, offset in part again by the impact of the sale of Avinode and we recently closed a small tuck-in acquisition, which further expands our core offerings in the United States. Our land segment rebounded nicely from the significant weakness experienced during the second quarter. We remain highly focused on driving greater ratability across our business by continuing to carefully sharpen our portfolio of business activities, including the refinement and optimization of activities within our land business. Marine also delivered year-over-year growth principally related to higher profit contribution from our core resale business activities. And again, we repurchased $28 million of shares during the quarter increasing year-to-date repurchases to 2.1 million shares. Finally, we remain highly focused on making progress towards our medium-term financial targets, which we shared in March. The achievement of these targets will further strengthen our balance sheet, enhance profitability and improve our return on invested capital, all driving greater shareholder value. Thank you. I will now turn the call back over to our wonderful operator, Latif, to begin the Q&A session. Latif?

[Operator Instructions] Our first question comes from the line of Ken Hoexter of BoA.

Great. And I'll throw my thoughts and also thank you for the discussions over the time. Ira, maybe just looking at the business review you just talked about, and now your cost focus, is there any other Avinodes out there that you look to monetize? Are there other pieces that you look to refine as you review the businesses?

I wouldn't necessarily put anything in the Avinode category because that was obviously an outstanding achievement, considering the valuation that we got for that business. But yes, there's certainly other opportunities to look at pieces of the business that we may be able to move on from and reallocate capital into our core businesses. There's lots of discussions around those topics. But again, Avinode was great but an outlier in terms of it's not necessarily part of our core. Now we're more focused on our core activities and where accelerating investment makes sense and also where it may make sense to either pump on the brakes or even consider exiting certain activities, which in land, in particular, the goal is to simplify the land story, improve our operating margins and profitability and simply allow us to focus more of our time on what really matters, which should only benefit our efforts to drive greater levels of growth across the business.

So let me take the flip side of that because years ago, kind of when we launched coverage, you were very, very acquisitive over time and that seems to have decelerated. So I guess, alternatively, given the elongated freight recession, is it creating any additional sellers, like the tuck-in one you announced this quarter? Are you seeing more opportunities like that?

Yes, there's a few things. Obviously, we lived through COVID. We were digesting a very large acquisition in Flyers and interest rates were skyrocketing, which didn't favor M&A for anyone, really. Flyers is integrated. We're actually benefiting from their very efficient platform within our North American fuels business, and rates are starting to come down which, I would say, is bringing more opportunities out of the woodworks. I would say there's greater opportunity today than there has been in a while to find opportunities to grow inorganically, but we're always very, very careful about where we make those investments and take our time to make those decisions. But I would say the pipeline and opportunity set is growing, and we have greater confidence in our ability to quickly integrate those types of businesses because our team has worked phenomenally hard on moving to a platform that's highly leverageable, something we didn't have many years ago.

Great. I appreciate that. Let me wrap up with the core business, right? So you talked about land maybe being a little disappointing in terms of performance. I just want to understand, you kind of listed a bunch of things. Was it more seasonality than you thought? Was it just, I guess, different things impacting the business? Maybe can you walk through that a little bit more?

Yes. A lot of the things that we talked about last quarter, which was very weak on a comparative basis, year-over-year started to improve. One of the things we talked about last quarter was nat gas because you had an oversupply situation, extremely low prices. That market has stabilized, and we did much better this quarter. On the flip side, we talked about Brazil and Russian imports and single-supplier market aside from those imports, and that hasn't improved. So the year-over-year comparison there remains weak. And then last quarter, we talked about our fuels business in North America. Specifically, we talked a bit about what was going on in the West Coast. That hasn't changed that much, but we did see improvement in other parts of the country. So we certainly had a better outcome in our North American fuels business in this quarter than we did last quarter, but still down a bit from last year. So I think as we enter into '25, I think with your previous question, and market conditions hopefully continuing to move in a better direction and maybe reshaping the portfolio a bit more, land has an opportunity to perform certainly at a higher level next year. And we need that, right, to start moving more significantly towards the targets we've shared for operating margins, in particular, and even our EBITDA target.

Our next question comes from the line of John Royall of JPMorgan.

So I think you both touched on it a little in the opener and it sounds like maybe we'll get some more details soon, but I was hoping you could dig in a little on the path from here to the 30% operating margin you're targeting in land. How much of the bridge, from where you are today, those headwinds coming back and normalizing? And how much is maybe some of these more controllable levers that you've discussed?

Look, if the market conditions normalize, it could only help. But to be honest, the path to, which you've nailed, is even bigger, right? There are things that we control and strategic moves that we can make that could provide us with significant progress towards that goal relatively quickly. None of it is an overnight exercise, and that's why we've given ourselves until '26 with the targets we shared. But we have some businesses that significantly outperformed the operating margin target in our portfolio. And unfortunately, we have some that significantly underperformed that target. Simply by doing less in the underperforming category, that metric moves in the right direction, right? So we're focusing on things like that. And also, the right type of M&A could help as well because, if you look at the card lock business, for example, that operates at a premium to our target operating margin, right? That's an extremely low cost, higher-margin, low-cost operation. So there's multiple levers, right? Rebound in the existing business that you mentioned, things within our control that we could change or stop doing, and then strategic M&A right up in the middle of the fairway that could drive growth and synergies with our existing platform. So a lot of that umbrella of items that I described, I would say, is within our control, and we're spending a lot of time focusing on moving in that direction. And we're really hoping we'll have more tangible details to share by the time we get to the February call.

Just to add a little bit of color to that, John. It's more of less that has less variability into it in terms of its market profile. So again, distribution, listen, we come from the commodity side and we're pretty good at it, but disproportionate and the variability of it, obviously, is not kind to results. And then platform, so the Flyers platform is what we're going to consolidate under and that is going to make all the difference in the world, so the right portfolio selection with the right profile and the right both commercial and financial dynamics and the right team with the right platform. So the combination of all of those, as Ira has said and he's working on, and the rest of the team, is stopping and exiting some of the parts of the businesses that while are okay are not necessarily additive. And there's some amount of trading activity that is perfectly good, but variable, but they've been disproportionate. And it's been difficult, obviously, to have predictable results and to be able to communicate, and they don't really fit with where we're going. So there's a clear focus. There's a clear plan. The platform is going to be transformative. So hopefully, that gives you a little bit of color.

Yes. That's really helpful color. And then my follow-up is just on working capital. it was a pretty sizable headwind, over $100 million in 3Q. And I know Ira mentioned some seasonality there. So given that seasonality, is there a natural reversion there where we can see some offsetting tailwinds in future quarters? And then relatedly, any of that headwind in 3Q, was any of it price related?

Yes and yes. So certainly, our goal is to recover from our first negative cash flow quarter in a while. It was a strong seasonal quarter on the aviation side. So we had some investment in working capital. We had some customers coming to us asking for temporary increases in their credit line because of the expected strong summer, which came to pass. So that increased some of our receivable requirements. So that was part of it. And then there are some price-related timing differences that we encounter from time to time on our inventory positions around the world. So that impacted us a little bit as well. And so we're shooting for a positive cash flow quarter in Q4, and we remain confident that we should be delivering in the approximate range that we shared longer term on an annual basis in '25 and beyond from an operating and a free cash flow standpoint.

[Operator Instructions] Our next question comes from the line of Pavel Molchanov of Raymond James.

A standard question to start. Low carbon was 12% of gross profit in Q1, 8% in Q2. What was it in the most recent quarter?

Gross profit was 11% this quarter.

Okay. Clear. As you look at SaaS, you've had a series of announcements along those lines over the past few months, I mean still not huge volumes, obviously, in the grand scheme of things. But on a percentage basis, how much more volume do you think you'll do in SaaS this year versus the year before?