World Kinect Corporation (NYSE:WKC) Q3 2023 Earnings Call Transcript

World Kinect Corporation (NYSE:WKC) Q3 2023 Earnings Call Transcript October 28, 2023

Operator: Thank you for standing by, and welcome to the World Kinect Corporation Third Quarter 2023 Earnings Conference Call. At this time all participants are in listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions]. I would now like to hand the call over to the Vice President of Investor Relations, Elsa Ballard. Please go ahead.

Elsa Ballard: Good evening, everyone, and welcome to the World Kinect’s third quarter 2023 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 Elsa Ballard, the VP of 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. Before we get started, I would 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 risk that could cause actual results to materially differ.

Factors that could cause results to materially differ could be found in our most recent Form 10-K and other reports filed with the Securities and Exchange Commission. World Kinect 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. A reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measure 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 Q&A period. At this time, I would like to introduce our Chairman and Chief Executive Officer, Michael Kasbar.

Michael Kasbar: Thank you, Elsa, and good afternoon everyone. I’ve been spending a great deal of time over the last few months at industry conferences, and the offices of our customers around the world and engaging with our employees. It is clear to me that now more than ever, the demand for World Kinect service is as strong as it’s ever been. Our broad base of customers and supply partners are grappling with an industry influx from changing sustainability requirements and expectations, to an increasingly prescriptive and disjointed regulatory environment. For nearly 40 years we have been providing energy solutions, creating value for both suppliers and customers, and I don’t believe I have ever experienced a more complicated operating environment for our industry than now.

Despite this, we continue to execute on our mission to meet our customers’ energy needs safely, reliably and in the most efficient manner possible. The third quarter demonstrated our ability to exercise financial discipline in managing within a higher interest rate and inflationary environment. We continued to leverage our global operating platform as we saw the near full return of aviation demand, while heightening our focus on working capital management. Our marine business delivered solid returns despite experiencing some weakness in a few physical locations and a less constrained credit environment. And our land business began to see our investments in sustainability bear fruit during the quarter. We expect a further stream of activity as we continue to build out our global capabilities.

Last quarter I shared with you our three pillar focus to accelerate growth and diversify earnings by maximizing efficiencies in our conventional businesses, expanding our suite of energy management solutions and increasing the availability of renewable energy and low-carbon fuels. This strategy is exactly aligned to where our customer’s current needs are and where their future needs will be. We will do this while optimizing our network of thousands of airports, seaports, cardlocks, retail stations and distribution assets. In marine and aviation, we have built a highly competent and efficient global platform with dedicated professionals and established processes. We are replicating this in our land business and expect it to be a material part of meeting our medium-term 30% operating margin target.

Simultaneously, we are sharpening our portfolio, exiting non-core and low-return businesses and reallocating capital for better returns. This is recently evidenced by our addition of 20 cardlocks in the Midwest to further expand our U.S. land business. And we continue to look for further accretive opportunities to grow our land and global sustainability businesses organically and inorganically. Speaking of sustainability, that business produced an excellent result this quarter, and we continued to expect great things from our team. Sustainability knows no borders or segments. And so we are hyper-focused on bringing these solutions to customers across all of our businesses and continuing to evolve our offerings to meet the current and future needs of the marketplace.

Finally, we continue to embrace automation, and I believe the recent advances in AI will be a game changer. We are already leveraging many of these tools and have been for a long time. We believe AI will improve our efficiency, cost management and ability to drive top line growth, creating greater market value for us while improving the lives of our employees. Before I wrap up, I’d like to announce that we will be hosting an Investor Day in March of next year to discuss our corporate strategy in more detail. We’ll be sharing more information and a registration link shortly. I’ll now turn over the call to Ira for a financial and business review of the quarter.

Ira Birns : Thank you, Mr. Kasbar. And good evening, everyone. For starters, please note that results for the third quarter reflect no adjustments to GAAP results. However, the comparative prior-year numbers do exclude the impact of certain nonoperational items, which are highlighted in our earnings release. Reconciliations are as always on our Investor Relations website, and they’re also in the webcast presentation. Now let’s continue with the financial highlights. On a consolidated basis, total volume was 4.54 billion gallons, which was down slightly and consolidated gross profit declined 13% from last year’s third quarter, primarily due to lower gross profit in our marine segment, which benefited significantly from record prices and volatility in the prior year.

This was partially offset by increased gross profit in our land segment, and I’ll now provide some more detail segment by segment. Aviation volumes increased to 1.92 billion gallons in the quarter, up 4% year-over-year due to another robust summer passenger travel season. However, year-over-year gross profit was down slightly to $126 million in the quarter. We have been successful at achieving higher margins on recent commercial contract renewals considering the current interest rate environment. However, overall gross profit improvement was muted by both the reduction in inventory-related profitability as a result of significant fuel price volatility during the quarter as well as our efforts to rationalize low return business activity. The net result of our strategy has increased returns and enabled us to reduce aviation net working capital nearly $200 million year-over-year, contributing to our reduction in interest expense.

As we look to the fourth quarter, while we expect the seasonal decline in aviation gross profit, this projected decrease could be mitigated if commercial passenger activity remains strong through the holiday season. Turning to our land segment. Volumes were 1.55 billion. That’s up 2% year-over-year, principally due to an increase in natural gas and power volume, offset in part by lower volume in our commercial and industrial and retail business activities in North America. Similar to the second quarter, approximately 1/3 of total reported land volume relates to our natural gas and power activities converted into gallon equivalents. From a profitability standpoint, land generated $121.2 million of gross profit in the third quarter. That’s up approximately 3% year-over-year.

We saw an increase in profitability from our sustainability-related service offerings, continuing the positive trends for this business that we have noted on prior calls. Specifically, we experienced strong growth in our renewable energy solutions business and continued strength in our power business in Europe. Looking to the fourth quarter, we expect a modest year-over-year decline in gross profit, considering the current pricing environment and market conditions. And lastly, our marine segment volume of 4.1 million metric tons was down 16% from the third quarter of last year. Third quarter results were lower than anticipated leading into the quarter, principally related to weakness in a few physical locations. More broadly, we experienced some modest margin pressure, but overall business activity was stable.

Decreased volumes and lower average fuel prices led to a marine gross profit of $35 million, which is down 54% from the prior year when bunker prices and market volatility were at record or near-record highs. While gross profit is down from last year’s record levels, marine working capital efficiencies remain exceptional with no real net working capital investment regardless of the market price environment. For the fourth quarter, we expect a modest sequential increase in gross profit. And while marine margins should remain well ahead of historical averages, we expect marine gross profit to be down year-over-year. Again, this is due to the comparison to the fourth quarter of ‘22 when bunker prices and market volatility were considerably higher.

Our total consolidated operating expenses were $208 million in the third quarter, below the guidance range provided last quarter and down 6% from last year’s third quarter. Looking ahead to the fourth quarter, we expect consolidated operating expenses will be in the range of $205 million to $208 million, representing a modest sequential decline. For the full year, operating expenses should be generally flat year-over-year after several years of year-over-year increases, excluding the ‘20 and ‘21 COVID years. This is a testament to our heightened efforts in managing expenses in the face of inflationary economic environment, and we remain focused on making significant progress towards our 30% operating margin target over the course of 2024.

In terms of working capital, I already mentioned our focus on working capital at the segment level, but our team has done a great job driving record efficiencies in this area across the business. Considering the current interest rate environment, we have talked about improving margins, but at the same time we have also significantly increased our working capital efficiencies, which has driven our consolidated net trade cycle to a record low. This obviously has contributed to strong cash flow generation, which has also enabled us to further reduce interest expense. Speaking of interest, all these efforts allowed us to reduce interest expense, which came in within our guidance range for the quarter at $29 million, that’s down 12% sequentially and 16% year-over-year.

So as we look ahead to the fourth quarter, we expect interest expense to be relatively flat sequentially, but again should be down significantly year-over-year. Our adjusted effective tax rate for the third quarter was 23%, somewhat higher than our 21% rate for the first half of the year. For the fourth quarter, we expect our tax rate to be generally consistent with the third quarter, resulting in a full year tax rate of approximately 22% to 23%. In terms of cash flow, we have continued our strong performance this year, adding an additional $80 million of operating cash flow this quarter, bringing year-to-date operating cash flow to $267 million. And our average annual operating cash flow over the past five years has now been nearly $300 million, fueling our ability to employ our flexible capital allocation framework.

Our guiding principles for capital allocation priorities remain consistent, supporting the growth of our business both organically and through strategic investments, while also returning capital to our shareholders through buybacks and dividends, which have totaled $76 million year-to-date, all with an eye on delivering increased shareholder value. So in summary, we delivered solid results in the third quarter with another $100 million plus quarterly EBITDA contribution. Our emerging sustainability business continues to be a strong contributor in our land segment. While our marine profitability clearly declined from the record highs of 2022, our team continues to manage this business very efficiently. Our broader focus on working capital across the business has contributed to strong year-to-date operating cash flow of $267 million, while also mitigating interest expense in this higher interest rate environment.

And we remain intently focused on driving profitable growth and carefully managing expenses to ensure we drive even strong results as we look towards 2024 and beyond. That’s it for me. I’d now like to turn the call back over to our operator to open the call to Q&A. Thank you.

Operator: Thank you, sir. [Operator Instructions] Our first question comes from the line of Pavel Molchanov of Raymond James.

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Q&A Session

Pavel Molchanov: Thanks for taking the question. Let me start with aviation. Since the start of the crisis in the Middle East three weeks ago, we’ve seen a lot of disrupted airline activity in the region. Can you talk about your exposure to that regional market? And is there any effect on the business outside of the aviation segment?

Michael Kasbar: Thanks Pavel. Our business is global as you know, and the impact has been very, very modest from our demand within that region. So that’s not a major operating location. As you know, we’re doing business worldwide. But the impact on our aviation activity has been de minimis, and then the other impacts in terms of the marketplace have also been de minimis. As horrific and tragic that incident and the whole scenario there is, it’s been contained — and that’s obviously represented in terms of the market’s reaction to it. So no meaningful impact to the business.

Pavel Molchanov: Okay. Good to hear. Same question I asked three months ago and you’ve been kind enough to share this number in the past. What percentage of net revenue or EBITDA is at this point coming from low carbon and renewables?

Ira Birns: Pavel, thanks for the question, which you asked last quarter, consistent with the answer last quarter, the way we pull those pieces together. I think I told you in the last quarter that it was approximately 10% of GP and 10% of EBITDA. That includes our power and gas activities and sustainability-related solutions. I would say this quarter that number has actually gone up slightly. It’s a little over – both of those numbers are a little over 11%. So up about 1%, 1.5% from last quarter.

Pavel Molchanov: Okay. And then lastly, on the marine segment. So obviously, a lot of international trade headwinds, just given the macro. Is there any evidence at your disposal that marine volumes are stabilizing?

Michael Kasbar: Well, in terms of the market, the macro is certainly softer. Slow steaming is not an immaterial dimension to it, both for economic reasons, as well as emissions management. The overall impact of that I think is low single digit. So it’s certainly not robust, and that’s had a modest impact on the segment. I think Ira may have some additional color to add to that.

Ira Birns: Yes. In addition to what Mike had to say, if you focus on us specifically, similar to our comments recently in Aviation, one of the things we’ve done in Marine over the last couple of years is rationalize some lower-margin business that historically we may have been doing for the sake of volume. So we – our volume numbers year-over-year are impacted by both a bit more of that as well as the impact of the market itself. I would say your question was, is it stable? I would say we’re at a level now that is stable with possibly some opportunities to pick up some additional volume next quarter. I don’t see it dropping materially more from the level that we found ourselves at in Q3.

Pavel Molchanov: All right, thank you very much.

Ira Birns: Thank you, Pavel.

A – Michael Kasbar: Thanks, Pavel.

Operator: Our next question comes from the line of Ken Hoexter of Bank of America.

Kenneth Hoexter: Hey, great. Good afternoon. Hey Ira, Michael, Elsa.

Michael Kasbar: Hi Hoexter. How are you?

Kenneth Hoexter: Good, good. So Ben, you’ll get in a minute, hang on. Marine, you noted a few locations were impacted. Is that all up and running now? Was that port strikes out West in Canada? Was it freight diversion because of the negotiations? Can you talk about what was going on in the marine side and if it’s resolved?