World Fuel Services Corporation

Ladies and gentlemen, thank you for standing by, and welcome to the World Fuel Service's first quarter 2021 earnings conference call. My name is Joelle, and I will be coordinating this call this evening. During the presentation, all participants will be in a listen-only mode. After the speaker's remarks, there will be a question and answer session. Instructions on how to ask a question will be given at the beginning of the Q&A session. If at any time during the conference you need to reach an operator, please press star zero. As a reminder, this conference is being recorded. I would now like to turn the conference over to Mr. Glenn Clevitz, World Fuels Vice President, Treasurer, and Investor Relations. Mr. Clevitz, you may begin your conference.

Thank you, Joelle. Good evening, everyone, and welcome to the World Fuels Service's first quarter 2021 earnings conference call. My name is Glenn Clevitz, and I will be doing the introductions on this evening's call alongside our live presentation. This call is also available via webcast. To access this webcast or future webcasts, please visit the World Fuel Service Corporation website and click on the webcast icon. With us on the call today are Michael Kaspar, Chairman and Chief Executive Officer, and Ira Burns, 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 Safe Harbor Statement. Certain statements made today, including comments about WorldFuel's expectations regarding future plans and performance, are forward-looking statements that are subject to a range of uncertainties and risks that could cause WorldFuel'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 WorldFuel's most recent Form 10-K and other reports filed with the Securities and Exchange Commission. WorldFuel assumes no obligation to revise or publicly release the results of any revisions to these forward-looking statements in light of new information for 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 Fuels 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. As with prior conference calls, we ask that members of the media and individual private investors on the line participate in listen-only mode. At this time, I would like to introduce our Chairman and Chief Executive Officer, Michael Kasbar.

Thank you, Glenn, and good evening, everyone. Thank you for joining us. I hope you're all well, and I hope you are as optimistic as I am about the medium and long-term future market opportunities. We opened the year with a strong first quarter, once again demonstrating the resiliency of a well-diversified portfolio. And considering current market conditions, all of our businesses performed well. Our balance sheet in cash flow has never been stronger. We believe we have a significant medium and long-term opportunity to deploy capital in our North American C&I, meaning commercial and industrial, liquid fuel business, and globally in fuel, gas, power, carbon, and renewables to serve our aviation, marine, and land customers and drive the energy transition. As I mentioned last quarter, the work we have done over the last few years in talent, culture, and leadership is having a positive impact. We are converging our organization and business solutions in line with the transitioning marketplace. Combining functions and the business itself is creating greater efficiencies and effectiveness, as well as greater mobility and career opportunities for our global teams. consolidating our global origination, fulfillment, and support with our digital and sustainability competencies gives us a forward-ready business as the world emerges from this global health and economic crisis. We are already a globally diverse group. And the inclusiveness that convergence drives is accelerating value creation as our customers see comprehensive solutions and pathways to lower carbon footprints and supply chains. We are maintaining the cost discipline achieved so far in our operations as markets reopen. We have grown market share in our global land business with higher quality, rateable business activity. We see a long runway of growth opportunities in this space. And now, as we experience the world's growing commitment to sustainability, we view this as an incredible opportunity to tap into our ability to create innovative solutions. I am personally more excited and enthusiastic about our future prospects as a global team than I have been in years. We have been through our most challenging stress test ever, and our global teams performed flawlessly. We have never been tighter or more coordinated. Building a global, diverse, and increasingly digital energy and logistics solutions business is not easy, but that is exactly what we have done, and we are highly motivated to continue to build and leverage our platform. It's not easy to have global share of anything, but we have achieved that in two businesses, and we are well on our way to do that in our World Connect global land business, simultaneously creating lower carbon synergies for our global marine and aviation businesses. We are not only becoming more sustainable ourselves, but driving sustainability for the marketplace. We are truly helping to build a better tomorrow by accelerating the green and digital agenda with and for our partners around the world. It is hard to find an energy-related subject or problem anywhere in the world that we cannot address in one way or the other. World Connect is the emerging brand for comprehensive energy solutions. And finally, more of our teams are getting fully vaccinated, and this is both raising optimism and providing opportunities for greater engagement with each other and the market. I look forward to your questions, but let me first hand you over to Ira for a review of our quarterly results.

Thank you, Mike, and good evening, ladies and gentlemen. I hope you are all doing well and finding ways to return to some sense of normalcy. Although the pandemic continues to present significant challenges across businesses globally, there has certainly been some encouraging developments, which has many of us a bit more optimistic about the prospects of increased levels of business activity. I am extremely proud of how well our team has performed in the face of a multitude of ongoing challenges, and our results this quarter are a testament to the value of our diversified business model, our expertise in the markets we serve, and the dedication of our global team. Before I walk through our first quarter results, please note that the following figures exclude the impact of non-operational items as highlighted in our earnings release, and in comparison period exclude the operating results from multi-service that was sold at the end of the third quarter of last year. The non-operational items for the quarter principally relate to acquisition, divestiture, and restructuring related adjustments and expenses. To assist you in reconciling results published in earnings release, The breakdown of the non-operational items can be found on our website on the last slide of today's webcast presentation. Now, let's begin with some of the first quarter highlights. The adjusted first quarter net income and earnings per share were $21 million and 33 cents per share, respectively. The adjusted EBITDA for the first quarter was $62 million. We generated another $103 million of operating cash flow during the first quarter and increased our net cash position to more than $210 million. Consolidated revenue for the first quarter was $6 billion, an increase of $1.3 billion, or 27% sequentially, but still well behind the pre-COVID revenue levels, which is principally driven by the year-over-year decline in volumes. in our aviation and marine segments when compared to 2020. Our aviation segment volume was 1.1 billion gallons in the first quarter, essentially flat sequentially, but still well below pre-COVID activity levels. While cargo operations and business aviation activity remain strong, overall aviation volume remains significantly below prior year levels, driven by continued softness in global commercial passenger aviation activity, principally given slower vaccine rollouts abroad. In the U.S., we have been experiencing increased activity with TSA daily throughput back to nearly 65% of pre-pandemic levels. But despite some modest improvements in parts of Europe in the first quarter, continuing restrictions in most of Europe and Asia will likely prolong the broader recovery until vaccination rates accelerate in these regions. Volume in our marine segment for the first quarter was 4.2 million metric tons, flat sequentially, and down 13% from the strong prior year results we generated when the new ILO 2020 regulations were implemented last January. Our land segment volume was 1.3 billion gallons, or gallon equivalents, during the first quarter. That's down 6% year over year, but up 2% sequentially, principally driven by increases in our World Connect natural gas operations, as well as some seasonal improvement in the UK. Land volumes have now rebounded to 97% of first quarter 2019 pre-pandemic levels. Consolidated volume in the first quarter was 3.6 billion gallons, up slightly on a sequential basis, but down year over year, again related to the items already mentioned. Consolidated gross profit for the first quarter was $192 million. That's a decrease of 18% compared to the first quarter of 2020, but an increase of $26 million, or 16% sequentially. Our aviation segment contributed $77 million of gross profit in the first quarter, down 15% year over year, but up 9% sequentially. Year over year, in addition to the COVID-related profit declines from depressed commercial passenger aviation activity, The decrease was also related to the decline in government-related activity associated with the continued drawdown of troops in Afghanistan. These declines were partially offset by higher average margins from a more profitable core business mix. As we look ahead to the second quarter, aviation gross profit should increase sequentially, principally driven by the continuing recovery in domestic commercial passenger activity and partially offset by a further decline in our government business in Afghanistan. As I am sure you are aware, earlier this month the U.S. and NATO announced the final withdrawal from Afghanistan by September, and therefore we expect further declines in this business activity over the balance of the year. The rain segment generated first quarter gross profit of $25 million. That's down 57% year-over-year, but up 12% sequentially. In addition to the pandemic-related impact, the year-over-year declines were principally driven by the strong results we saw in the first quarter of 2020, again related to the ILO transition to very low sulfur fuel oil. But as we forecasted on last quarter's call, marine gross profit increased sequentially, relating to strong results from our physical operations. As we look ahead to the second quarter for marine, based on what we've experienced through the first few weeks of April, we expect marine gross profit to increase sequentially, driven by improvement in our core resale business activity. And as we look to the latter part of the year, there's an increasing likelihood that cruise lines will begin sailing again, providing opportunities for additional improvement in the fourth quarter and into 2022. Our land segment delivered gross profit of $89 million in the first quarter, up 5% year-over-year when excluding the profitability related to the multi-service business from last year's results, and actually up 24% sequentially. As anticipated, we experienced solid sequential improvement in our UK heating oil business, driven in part by lockdowns for most of the quarter, but we also generated additional profitability during the quarter related to improved performance in our US natural gas supply activities that was principally driven by the extremely cold weather in parts of the US in February. Looking ahead to the second quarter, we expect a traditional seasonal decline in land gross profit, which will be further impacted by the strong natural gas profit contribution in the first quarter. We believe the land segment has many opportunities ahead, from global sustainability initiatives to potential infrastructure bill spending, which would all benefit our commercial and industrial fuels business, as well as our natural gas power and sustainability activities. We continue to manage our operating expenses prudently. Core operating expenses, which exclude bad debt expense, were $146 million in the first quarter, down $29 million, or 17%, from the first quarter of last year. Looking ahead to the second quarter, operating expenses, excluding bad debt expense, should be generally in line with the first quarter in the range of $144 to $148 million. Pandemic expense in the first quarter was $3.6 million, down both sequentially and year-over-year, and down materially from the elevated levels in the second and third quarter of 2020. This is further evidence of the solid team effort in managing our receivables portfolio through this stage of the pandemic. Adjusted income from operations for the first quarter was $42 million, down 38% from last year, but up 68% sequentially related to the segment activity that I mentioned previously. Adjusted EBITDA was $62 million in the first quarter, down 29% from 2020 and up 39% sequentially. Again, the year-over-year decline in income from operations and adjusted EBITDA was principally driven by the impact of the pandemic, as well as benefits from supply imbalances and price volatility arising from the ILO 2020 implementation in the first quarter of 2020 for our marine business. First quarter interest expense was $8.7 million, which is down 44% year over year and approximately 20% sequentially. Total interest expense continues to benefit from lower average borrowing and interest rates. At the end of the first quarter, we again had no borrowings outstanding under our revolver and ended the quarter in a net cash position in excess of $200 million. we expect interest expense in the second quarter to be approximately $9 to $10 million. Our adjusted tax rate for the first quarter was 35.8%, compared to 30.6% in the first quarter of 2020. At this time, we expect our effective tax rate to remain elevated in the near term, primarily due to the current mix of U.S. and foreign earnings, as well as the continuing effects of GILTI and valuation allowances on certain of our foreign entities. Our total accounts receivable balance increased significantly on a sequential basis to approximately $1.7 billion at quarter end, principally related to the 37% rise in average fuel prices from the fourth quarter. We remained focused on managing working capital requirements, which resulted in operating cash flow generation of $103 million during the first quarter, despite significant sequential increase in accounts receivable. In closing, despite continued weakness in the commercial passenger aviation market, we delivered a solid quarter driven principally by very strong results in our land segment. And we again delivered strong operating cash flow. With vaccination rates up significantly in the United States, we are encouraged by the recent trends we are seeing in domestic commercial passenger activity and are hopeful that other parts of the world will begin to catch up over the next several months. While we are appropriately inwardly focused over the first 12 months of the pandemic, during which time our team performed at a level of excellence for which they should all be very proud. We can now more clearly see the light at the end of the tunnel, and we are coming out of the pandemic with a strong balance sheet, actually a stronger balance sheet than when we started pre-pandemic. This strong balance sheet, including $735 million of cash, provides us with capital to further grow our core business organically as well as the ability to capitalize on strategic investment opportunities, which should drive scale and efficiencies, most specifically in our land and world connect business activities. Our balance sheet liquidity and solid operating cash flow also provide us with capital to repurchase shares and fund dividends to further enhance shareholder value. In demonstration of our commitment to enhancing shareholder value, over the past few years, we've repurchased $134 million of our shares, and we increased our cash dividend twice, most recently a 20% increase during the first quarter. Thank you for your time. I would now like to turn the call back over to our operator, Joelle, for Q&A.

Thank you. At this time, I would like to remind everyone, if you would like to ask a question, please press the star followed by the number one on your telephone keypad. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the pound symbol. If you are using a speakerphone, please lift your handset before entering your request. As a reminder, we would appreciate if the participants will limit themselves to two questions with associated follow-ups. We will pause for just a moment to compile the Q&A roster. Our first question comes from the line of Ken Hexter with Bank of America. Please proceed with your question.

Hey, great. Good afternoon, Mike and Ira and Glenn, and looking forward to this continued rebound. It's looking great so far. But on the cash flow, typically a rising fuel environment negatively impacts free cash flow. You mentioned the robust free cash you're still seeing. What are your thoughts on cash flow going forward? And given the huge $700 million in cash, is there a likelihood you start the buyback sooner? And what should we expect from that? Thanks.

Sure, thanks, Ken. So, yeah, as I said on the call, there was a 30, or as I said earlier, there was a 35, 36% increase in average prices in the first quarter. And, you know, we managed through that very well. Part of it is a mix of business currently. And part of it was our ability to sell some more receivables during the quarter under our receivables program. So if you put it all together, we had a really significant increase and we had some recovery as well, and our net working capital barely moved. I'm not sure we could continue to replicate that every single quarter, but we're doing our best to manage working capital and our net trade cycle as effectively as possible. So depending upon the rate of recovery in volumes, depending on what happens with price, that could have meaningful impacts on what our cash flow would be over the next several quarters. In terms of cash, uh 7 35 i believe that glenn is a record uh for us for for a given quarter uh as we've you know repeatedly uh said you know the first priority for us is is investing in our business uh in both organically and and inorganically as there are a lot of opportunities with pipeline today most specifically in our land in many parts of our land business uh but we'll also always include a portion of our capital to repurchase shares, again, principally to offset the dilutive impact of equity awards, and also look at our dividend as well, which, as I mentioned, we increased in January.

I'll just add, Ken, on price, and I think I mentioned this last time, it does have a salutary effect on our equity results because we're leveraging our underwriting most notably in aviation and marine so you know high prices obviously you know have you know a price to it so to speak but we do get some return on that because the value of our balance sheet and you know counterparty you know, increases. Lower prices and stable prices, not so much. So, you know, there is the other side of the coin on that.

Great. So good job on the land. Marine was a bit soft. Aviation was in line. Maybe Ira or Mike, if you could just walk us through on the gross profit per gallon, you know, the impacts there. Marine was down 50%. Why such a sharp drop and land down 10%. Is that now a good run rate? It was obviously up significantly sequentially. Is that because the UK and then aviation, what's the impact as, as commercial business rebounds? Thanks.

Well, you know, once again, um, You know, the credit equation, you know, a combination of different things, you know, higher quality credit, lower prices, not a whole lot of volatility, not as much demand on credit. you know, are credit or underwriting. So, you know, that sort of dynamic means that those value-added services, you know, are not getting priced into the equation, so to speak. And that would, you know, apply most notably to marine, but, you know, also to some extent, you know, on aviation, you've got a good amount of business mix within aviation. So that's going to vary. I mean, we're dealing with unusual times. So getting back to historic norms I think you're going to see a revert to mean when business activity starts to normalize, whenever that's going to be. In the meantime, it's a combination of the mix of business activity, most notably within aviation, as you're not seeing international passenger cargo come back so strongly. So I think that's the end of my comments. I don't know if you had any other color you want to add to that, Ira?

Yeah, you know, a couple of highlights, so I'm not repetitive. On marine, remember, year over year, you're comparing to the extraordinary Cube One, which is when the IMO implementation happened, and that would explain the substantial year-over-year decline. But the result, aside from that, is not that far off from where we had been trending over the past few quarters. And as I said on the call earlier for Marine, that number has been moving up a bit in the first few weeks of April. In aviation, when you compare our margin to last year, we're up. That's principally, as Mike said, because of mix, because we have way less of lower margin, high volume commercial passenger business, and more of the mix is cargo, business aviation, etc. improvement in margin. And in the land business, you probably have multi-service in your numbers last year, which would affect that year-over-year comparison. Their margin in the first quarter in land was a bit higher, again, driven by the really strong results in the UK and in that gas business. So, from a trend standpoint going forward, you know, aviation may trend down a little bit as the mix begins to shift towards more commercial passenger business. Marine, again, should be – we're hoping to be up a little bit. And land should trend down a little bit, again, coming off the extraordinary results in the first quarter.

All right, great. And then those are my two questions. My one follow-up quickly would be Afghanistan, just in aviation. Can you describe how much is left in the results? I know you've got commercial that will rebound and offset some of that, but is there a way just we can counter with what is left in the number?

Yeah, I can say when you look to the second quarter, we'll be down to about 7% of gross profits. that remains coming out of that business. And based upon the announcements coming out of the White House and NATO, obviously that number will decline quite possibly to zero by the end of the year. So you've got the confluence of two factors, right? That's most likely going to decline. There's still some fuzziness on timing, and there may be some lingering activity we don't know yet. And at the same time, you've got the core aviation recovery going on that likely will continue to improve a bit over the balance of the year. Again, the improvement plus and minus will be tied to you know, what happens in Europe, for example, when that starts coming back. So, you know, on an overall basis, you know, aviation should start training up a little bit, maybe not as much as it otherwise would have if the Afghanistan activity continued. And by the way, that 7%, just to clarify, in the second quarter, a little bit of that is in land, too. So that's a consolidated number, I would say, 5% aviation, 2% relates to land. 5% of aviation? 7% is the percentage of our total consolidated gross profit.

Most of that, 80% of that is in aviation and about 20% of that is in land. Okay.

Sorry, Michael. I'll give on that, Ken. And, you know, notwithstanding timing, you know, clearly for better or worse, you know, global tranquility is not going to break out anytime soon. So, you know, we're committed. We've been in the space for many, many years. So there's different locations. We do have activity, not, you know, to the extent of the concentration within Afghanistan. But so... We will be seeing that. We already do have activity there. In any case, that's a business we continue to be committed to. It's a good business. It gives us great capability that we leverage into our commercial activities. You know, that, of course, will be combined within our other business operations until such time that, you know, it becomes sizable that, you know, we would actually break it up.

Great. Appreciate the time. Thanks, Michael, Ira. Thank you.

Thank you. Our next question comes from the line of Ben Nolan with Stiebel. Please proceed with your question.

Yeah, so first of all, I appreciate the breakout on the Afghanistan stuff there. That was helpful. I wanted to stick with aviation for a moment if I could, and obviously here in the U.S. we're seeing a lot more passenger air freight moving and people on vacations and that kind of thing. But as you said in the prepared remarks, you're not necessarily seeing that in other places around the world like Europe, in Asia. I was curious if you might be able to break down sort of what your business mix is, how much of what you do is domestic here versus other parts of the world, and how do you think through sort of what that means with respect to the cadence of normalization?

Yeah, that's a loaded question, Ben, from the standpoint of looking at that at different points in time. Historically, 70% plus of our aviation business would be commercial with something close to 50-50 split between North America and parts of the world. But that's varied over time. That's probably pretty close to where we've trended to start with. Okay. Now, yeah, different type of business though, right? I would say the piece of business internationally on average would be higher margin because that's where we have more of a physical presence. Again, driven by our Exxon related acquisition a few years back, we're operating over 100 airports today. where we have the infrastructure and we're not quote-unquote just the man in the middle, that type of business, which hasn't come back yet because of all the lockdowns and restrictions in Europe, is generally higher margin, where the domestic larger volume type customers and that type of business in the U.S. is generally on the lower end of the margin spectrum, right? So... You may be 50-50 on volume, but you have an increasing amount of profitability over the last few years coming from our international operations.

Okay, that's helpful. And then secondly for me, sort of a similar question, but as it relates to land, and especially as we look back into the last quarter, you know, it was a pretty good number, especially without the multi-service in there. And some of that I think is, as you say, UK normal seasonality, but then there was also the natural gas business, which was helped by weather and everything else. At this point, how much of the land business is natural gas? That's kind of my question, and how much of what we saw in the first quarter might have been just sort of weird weather versus what is a normal run rate?

Yeah, it's still been running at a relatively small level on a run rate basis of land's overall profitability. There was probably an extra $7 or $8 million of profitability beyond the norm that contributed to land results in the first quarter. If you back that out and look at the results, short of that, you still have someone better than normal Q1 again because of the strength in the UK.

Right. Okay. That's great. And then I guess for my follow-up or third question or however, on the marine side, hopefully, I think, by July, they'll start running cruise ships again. Can you maybe talk to how big of a deal that is to the marine business? I know, obviously, you guys are located right there in the – cruise hub of the world, right? But, um, how, how much of the business is cruise and, or, or maybe more importantly, how much of that gross profit is ordinarily, uh, derived from the cruise business for you guys?

It is historically a big question that that's only been about 10% of our, of our brain profitability, uh, over, you know, over the years. Now it's accelerated a bit as we add some new locations and, The year or so, year or two prior to COVID, maybe it's 11%, 12%, but it's somewhere between 10% and 12% to start. So it's enough to have a few million dollars of profitability on a quarterly basis going forward when that does come back. And it seems like it should start coming back around the end of the year. Now, just because you're sailing in the fall, if that's going to happen, the number of ships sailing are going to be nowhere near where they were pre-pandemic day one. So it's going to be a relatively slow ramp for that business, you know, unfortunately for them. But I'm sure they're happy. They're all happy to be, you know, getting on the seas again, even if they're not running at 100% of their capacity.

Sure, sure. All right. Well, that is my three questions. I appreciate it. Thanks, guys.

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

Well, thanks everyone for listening in, and thanks to all of my colleagues around the world. You're doing a great job. It's great to work with you every day. Thanks everybody, and we'll talk to you next quarter.

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.