World Fuel Services Corporation

Welcome to the WorldFuel Services Corporation fourth quarter and full year 2021 earnings conference call. My name is Sylvia and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question and answer session. During the question and answer session, if you have a question, please press star then 1 on your touchtone phone. I will now turn the call over to Glenn Clevitz, WorldFuel's Vice President, Treasurer Investor Relations. Mr. Clevitz, you may begin.

Thank you, Sylvia. Good evening, everyone, and welcome to the World Fuel Services fourth quarter and full year 2021 earnings conference call. This is Glenn Clevis, 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 Corporation website and click on the webcast icon. With us on the call today are Michael Kasbar, 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 WorldFuel's 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 or future events. This presentation also includes 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 WorldFuel'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. 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. I hope all of you are doing well and adjusting to a somewhat more normal environment. On behalf of our leadership team, I would like to again thank our employees throughout the world for their continued dedication in maintaining and building our global energy solutions business. Your collaborative efforts remain seamless as we successfully managed our commercial business during COVID for a second straight year. And a special call out to our physical operations team members that managed our logistics through the last two years. Thank you for your dedication and teamwork It's truly a pleasure to work with you all. Our aviation business finished the year strong in what has become a more broadly improving operating environment. While the U.S. market has experienced the strongest recovery to date, we are beginning to also see many markets improving in other regions, positioning us well as we continue through 2022. The marine industry also finished the year well, With improving opportunities in various key markets combined with rising prices and interest rates, which have historically benefited the marine business, we are seeing some renewed momentum heading into 2022. And lastly, our land business has a tremendous amount of excitement in the air between the recently completed flyers acquisition, which has immediately added scale and geographic density to our North American operations, and our growing Connect sustainability platform, where we are finding more ways to help our customers navigate the energy transition. We are partnering with our customers to develop carbon reduction plans, advising them on how to reduce energy use, source renewable energy, and finally compensate for residual carbon emissions using carbon offsets. We have a breadth of and a depth in the sustainable services and products such as onsite solar, power agreements, energy efficiency, and many more that we custom tailor for a diverse set of clients to achieve near-term targets while preparing for the energy transition of tomorrow. Our solid financial position will continue to serve us well over the course of 2022 with an abundant pipeline of organic and inorganic growth opportunities across our core lines of business. I'm encouraged about our market position and our ability to deliver comprehensive energy solutions in the years ahead. Now I'll turn the call over to Ira for a review of our financial results.

Thank you, Mike, and good evening, everyone. Before I walk through our fourth quarter and full year 2021 results, please note that the following figures that I'm about to share exclude the impact of non-operational items highlighted in our earnings release. effectively all of the non-operational items in the fourth quarter related to our recent acquisition of Flyers Energy. Also, all comparisons to 2020 exclude the operating results of multi-service that was sold at the end of the third quarter of 2020. To assist you in reconciling results published on earnings release, the breakdown of the non-operational items can be found on our website and on the last slide of today's webcast presentation. So now let's continue with the financial highlights for the quarter and the year. Consolidated revenue for 2021 rebounded to $31.3 billion, up 54% year over year. Adjusted fourth quarter net income and earnings per share were $17.6 million and $0.28 per share, respectively, up from $1 million and $0.02 per share in the fourth quarter of 2020. Adjusted full-year net income and earnings per share were $86 million and $1.36 per share, respectively, both increasing nearly 20% from prior year results. Adjusted EBITDA for the fourth quarter was $56 million, an increase of $12 million, or 26% compared to the fourth quarter of 2020. And for the full year, EBITDA was $241 million, effectively flat when compared to the prior year. Volume continued to improve across all of our business segments as markets continued to recover, with fourth quarter consolidated volume of 4.3 billion gallon or gallon equivalents up 23% year over year, and full year volume of 16 billion gallon or gallon equivalents up 11% compared to the full year 2020. And now I'll get into our results in greater details, starting with segment volumes. Our aviation segment volume was 1.7 billion gallons in the fourth quarter. That's an increase of 2% sequentially and 47% compared to the fourth quarter of 2020. The year-over-year volume increase resulted principally from the ongoing recovery in commercial passenger activity. Full-year aviation volume was 5.9 billion gallons. That's an increase of 25% year-over-year. Volume in our marine segment for the fourth quarter was 4.9 million metric tons. That's an increase of 2% sequentially and 15% year over year. We experienced increases in our core resell activity and physical operations during the fourth quarter and expect volume to continue to grow moderately over the course of 2022. For the full year, marine volume was 18.5 million metric tons. That's a 6% year over year increase. Our land segment volume was 1.4 billion gallons or gallon equivalents during the fourth quarter. That's an increase of 6% sequentially and 8% year over year. The year over year volume increases span across much of North American retail, wholesale, commercial, industrial operations, and our connect natural gas and power activities. For the full year, land volume was 5.3 billion gallons or gallon equivalents, an increase of 4% year over year. Moving on to gross profit, consolidated gross profit for the fourth quarter was $215 million, an increase of 9% sequentially and 30% year-over-year. And full-year gross profit was $789 million, up slightly from the prior year when excluding the results of multi-service, and despite the decline in activity in Afghanistan, which terminated during the third quarter of 2021. Our aviation segment contributed $110 million of gross profit in the fourth quarter. That's a 3% decline sequentially, but an increase of 56% year-over-year. The year-over-year increase in aviation gross profit related to the continuing recovery in commercial passenger volume, which reached 76% of pre-pandemic levels in the fourth quarter, driven largely by the strong rebound in activity in North America and an accelerated recovery in Western Europe, most specifically in countries such as France, Germany, and Italy. We also benefited from approximately $10 million of inventory-related gains related to price volatility during the fourth quarter. And finally, our business aviation activity and our related service businesses also experienced strong year-over-year growth. For the full-year aviation, gross profit was $388 million. That's a 12% increase compared to 2020, again, despite the year-over-year decline in activity in Afghanistan. As we look ahead to this year's first quarter for aviation, while we expect to experience a meaningful seasonal sequential decline in aviation gross profit, year-over-year aviation GP should still increase relative to the first quarter of 2021. The marine segment generated fourth quarter gross profit of $30 million. That's a 38% sequential increase and a 33% increase year over year, driven principally by improvement in core resale and physical supply activity. For the full year, marine gross profit was $100 million. That's a 33% year over year decline. While volume was stable, we experienced margin declines when compared to the prior year, where we benefited from the volatility surrounding the IMO transition during the first half of 2020. As we look ahead to the first quarter for marine, we expect gross profit to increase sequentially and year over year, driven by renewed signs of improving market conditions in our core resale and physical operations, with a strong opportunity for further improvement as we navigate through 2022. Our land segment delivered gross profit of $75 million in the fourth quarter, an increase of 20% sequentially and 4% year over year. In addition to sequential seasonality related to heating oil in the UK and natural gas in the US, we also experienced growth in our Connect sustainability platform. Year over year, we experienced growth in our commercial, industrial, retail, and natural gas activities, partially offset by the decline from Afghanistan. For the full year, while also impacted by the termination of activity in Afghanistan, Land delivered $301 million gross profit That's a 3% year-over-year increase. As we look ahead to the first quarter for land, gross profit will increase significantly, principally related to the inclusion of Flyers Energy, which we closed at the beginning of the year, as well as expected growth in our heating oil business in the UK. While the first quarter is a seasonally soft quarter for Flyers, we still expect their full-year contribution for 2022 to meet or exceed initial guidance. Core operating expenses were $176 million in the fourth quarter. This is significantly above the range provided on last quarter's call. The reason for this is clear. Our people are our greatest assets, and they have provided unwavering support over the past two unprecedented years, yet the pandemic's impact on our operating results have made it difficult to reward them in the way we would have liked to. However, when we significantly outperformed our expectations in the fourth quarter, we took the opportunity to increase incentive compensation, enabling us to better reward our high-performing and well-deserving team for the year, while still delivering a solid net result for the quarter. I would call this a big win for everyone. Looking ahead to the first quarter, apples to apples, our operating expenses will decline, principally due to the impact of the additional incentive compensation expense in the fourth quarter, but we then pick up the operating expenses related to Flyers Energy for the first time. Considering both of these factors, we expect core operating expenses to be in the range of $180 to $185 million in the first quarter. Bad debt expense in the fourth quarter was $3.4 million and $6.3 million for the full year, representing a very significant improvement from 2020 and even a significant improvement from years prior as our team continues to manage our receivables portfolio and related credit risk with excellence. Adjusted EBITDA for the fourth quarter was $56 million. That's at 26% over the fourth quarter of last year. And for the full year, adjusted EBITDA, again, was $241 million, flat with the prior year, resulting from a significant rebound in aviation, offset by reduced profitability in marine and the conclusion of operations in Afghanistan during the third quarter. Fourth quarter interest expense was $11 million, and that was effectively flat year over year. As we look ahead to 2022, interest expense will increase, principally due to higher borrowings related to the recent flyers acquisition and rising interest rates. With that being said, first quarter interest expense is expected to increase to the range of $12.5 to $13.5 million. Our adjusted effective tax rate for the fourth quarter was 24.6%. That's below the guidance provided last quarter. For the full year, our adjusted effective tax rate was 26%, down materially from 38.3% in 2020. This relates to our continued efforts to drive greater tax efficiencies across our global business. As we look ahead to 2022, we expect our full year effective tax rate to be in the range of 25 to 28%. During the fourth quarter, operating cash flow was negative $50 million. That principally relates to the significant sequential increase in fuel and natural gas prices during the fourth quarter. However, for the full year, we still generated a healthy $173 million of cash flow from operations. And finally, we repurchased approximately 1 million shares of our common stock during the fourth quarter, demonstrating our continued commitment to drive additional shareholder value. And now I would like to turn the call back over to Mike for his closing comments.

Thanks, Ira. So in summary, our aviation business continues to recover from the peak of the pandemic with volume and gross profit up significantly in 2021, despite the decline in year-over-year activity in Afghanistan. We continue to support our customers throughout the world with a growing suite of products and service offerings to assist them in navigating the energy transition, driving growth in 2021, and opening up more opportunities going forward. Despite the double-digit year-over-year increase in volume and a near doubling of average fuel prices, we generated solid operating cash flow for the year, representing our 10th consecutive year with operating cash flow greater than $100 million. The recent completion of the Flyers acquisition significantly expands our North American land fuels business, enhancing opportunities to drive operating efficiencies and accelerate further organic growth. This is a real game changer for our North American land business. And finally, our balance sheet continues to remain strong, providing us with ample liquidity to continue pursuing additional strategic investment opportunities in our core businesses and maintaining our dividend and buyback strategies. Thanks for listening. And now we'll turn the call over to our operator to begin the Q&A session.

Thank you. We will now begin the question and answer session. If you have a question, please press star, then 1 on your touch-tone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. Once again, if you have a question, please press star, then 1 on your touch-tone phone. And our first question comes from Ken Hoekstra from Bank of America.

Hey, great. Good evening. Congrats on solid performance. Ira, just can you clarify the price on the buyback and the shares you bought in the fourth quarter? And then maybe just delve into the working capital you talked about. It looks like accounts receivable up $323 million, accounts payable up $375 million. So maybe talk a bit about the, you're obviously extending more credit, or is that just solely on rising fuel prices? Maybe talk about the strategy there.

On the buyback, We purchased $50 million worth of shares for the year. And in the fourth quarter, there was about $26 million of shares. That's what you're looking for there, right, Ken?

No, no. Yeah, number of shares or price. Yeah, I got the dollar amount from the cash flow. Just looking to see what you bought it at and how many shares.

Well, we'll get you that detail in a few moments. Okay. Okay. And then you want to know about accounts receivable.

Well, yeah, just kind of your use of working capital, right? So your AP was up, what, $50 million more than AR. Is that just on rising fuel prices?

Well, look, prices are up, and we're also experiencing more volume quarter over quarter as the recovery continues, especially in aviation. The cool thing, not to say that we're always going to repeat this, is our team continues to do a fantastic job managing working capital. Our net trade cycle was only 4.3 days in the fourth quarter. Our total AP, I think as you point out, was actually slightly ahead of our accounts receivable, which I don't believe has ever happened before. So we're managing both sides of that coin very well. So our net working capital, despite the continued recovery and $30 billion worth of revenue in 2021, was still well under $500 million. So, you know, yeah, we're extending more credit. You know, you've got, you know, with much of the world recovering more and more, you know, every week, every month on the aviation side, you know, some of the credit lines there and outstanding receivables are going up, and that's why our AR is back up to, you know, I think we're twice our low point that we hit in 2020. We were down to $1.2 billion, and you know, we're back to $2.4 billion. And, you know, team continues to do, you know, just a fabulous job managing through that while making sure we're wisely extending credit, meaning, you know, we're getting the returns that we feel we deserve for, you know, every piece of business we execute on.

Lastly, for me, just obviously given the global market right now, geopolitics. What is your exposure on aviation or bringing to Russia, Ukraine, any kind of exposure?

First, I'm going to go back a step. It was 923,000 shares that we bought in the fourth quarter, Ken. In terms of Russia, the numbers are relatively small. There's a few million dollars on the aviation side, a few million dollars on the marine side spread amongst a pretty small number of customers in total. So obviously, we're monitoring the situation just as you are considering the escalation overnight. And we're being very careful about managing any additional credit from today going forward. And we'll hopefully manage through that very well. Of course, there's a lot of factors outside of our control that will become clear in days to come related to sanctions, et cetera. So it's a relatively small number, but, you know, it is several million dollars.

The only color I'll add to that, Ken, is, you know, we're pretty much used to this. I mean, you know, sanctions are not something new for us and certainly not new for the world. And so we're used to, you know, managing that and understanding how to respond to it. You know, diversity of the business model, as you know, is a broad portfolio. And, you know, obviously our military activity there is something that, you know, we understand quite well. So it's not the first time we've been in a situation like this, and we know how to respond.

Last one for me. I'm sorry, there's one more. Just because, Mike, you mentioned the $100 million cash flow. And, Mike, in your opening comments, you mentioned organic and inorganic growth. do you want to take time to digest the flyers acquisition or do you think, you know, now is a good time to be in the market? Maybe just talk about your thoughts.

And I said it on, I said it on the last call and you know, I've got to give Ira kudos for this one and the whole land team. And so that one, I think it was a beauty. It's proceeding well, phenomenal organization, phenomenal team. And listen, integration, you never take that for granted. But the beauty of buying well-run companies is that they're a pleasure to deal with. And it's performing well. Our expectation is that it will perform well. So we are pretty ready to rock and roll. So U.S., we've mentioned it, we've been consistent that it's U.S., certainly a good place to do business. That is for sure within land. And then, of course, our Connect business, you know, we very much see the future to have, you know, our sustainability infused through everything we do. So we like doing business in the U.S. We certainly do business around the world. But, you know, land U.S., leveraging that, getting operating leverage, you know, out of the platform, you know, we feel good about that. Takes a while. It took us a long time to build our global aviation franchise. And we're confident that we're on our way finally in land. And our Connect business goes from strength to strength. Really excited about that. And that is we're investing. The thing that you have to appreciate is that there's still a good amount of navigation there. There are things that are not necessarily proven yet. You know, the voluntary market is here. We don't think it's going away. It's had its ups and downs. But we know what we're doing. We've got a phenomenal team of professionals there. So it's Connect and it's U.S. land is the priority. Obviously, we have our other core businesses of marine. You know, we like that business. We've got a global franchise there, you know, products and services. And, you know, certainly our commercial aviation business, aviation business. have a good amount of organic growth, but we're always open for good ideas and the comprehensive solutions, which has basically been our operating model. Custom-tailored solutions for those clients, you know, and selectively penetrating the supply chain. We started in the middle, and we've expanded in both directions. So that will continue. We're agnostic to what the source of energy is, but, you know, we've got our third-party business, our physical inventory distribution assets, and, you know, our digital value proposition for, you know, for our clients. So nothing's changed there, and those are the focuses.

Ken, to answer your question, yes, we're going to continue doing it.

Thanks, Ira. Thanks, Mike.

Our next question comes from Ben Nolan from Stateful.

Yeah, thanks. Hey, Ira, Mike. So I wanted to go back to something. I think, Ira, you mentioned that your aviation volumes are 76% of where they were on a pre-pandemic level, if I heard that correctly. I was just curious, as we look at that, where, you know, it seems like things have picked up pretty well in the U.S., And just without being able to have a good sense of sort of how volumes shake out for you guys on a global basis, where do you think are the areas that are lagging in terms of being able to get back closer to those pre-pandemic levels with respect to your portfolio? Sure, sure.

Sure. So, you know, you hit on the head. So, you know, the U.S. opened up earlier on, and, you know, as we've experienced, for those of us who have been at airports, it seems like, aside from the masks, the pandemic never happened. So, you know, that's been happening for several quarters now, you know, arguably even a full year in the U.S. The rest of the world was lagging pretty severely, but over the past couple quarters, you know, Western Europe started coming back pretty strongly. There was some fits and starts where, you know, strong summer, you know, things slowed down a little bit and then, you know, picked up again. So, you know, if we're at, let's say, you know, 70 some odd percent in the U.S., we're still at maybe some, we're probably in the 60s, you know, in Europe on a comparative basis. And then Asia-Pac, you think of, you know, if you throw Australia into that mix, et cetera, that part of the world, you know, that's barely at 50%, right? So, you know, everything's moving in the right direction, but there's a much longer runway to return in areas outside of the U.S., but there's still a reasonable runway. You know, that 24% delta, you know, being at 76%, is, you know, a couple billion gallons plus of activity that was there in 19 that hasn't found its way back yet.

Right. Right. And maybe just another way to address that question is to say, how should we think about, on a pre-pandemic level, where your aviation volume was? Like, you know, roughly X percent was U.S., X percent was Europe, just trying to... source out sort of where the exposure is?

Yeah. In 2019, about 60% of the volume was in North America. Europe was about, you know, 15% or so. The rest of it was, you know, Latin America or Asia Pac. So, you know, if you look at 21, the numbers are more heavily tilted towards North America right now just because it's rebounded faster. So hopefully that helps.

No, that's exactly what I was looking for. Thanks. Now, switching gears a little bit, we were kind of thinking that there might be some margin expansion in the marine business in the fourth quarter, at least a little bit more than there was, with the idea being that ordinarily when you have oil prices swinging around all over the place and higher just in general, um, it, it tends to be pretty good for your, your margins. Uh, uh, and, and certainly in the last month and a half, two months that if anything, that's accelerated, uh, is there, is, are we, am I wrong in thinking that or, uh, you know, should all of this volatility be helping that business a bit?

Yes, that's a great, great question. On a historical basis, as, you know, we've told you before, there's been a much tighter correlation between price and margin marine than our other businesses because it's principally a spot business and arguably more of a bulk business, you know, selling, you know, for dollars per unit instead of pennies per unit. So the issue is it's it doesn't happen overnight. There's historically been a bit of a lag. I would say not necessarily has happened every single time either. So we were starting to see that at the tail end of the quarter, which is why we outperformed our expectation of Q4, to be honest. And I'll use the term, I don't want to count my chickens because I have 33 of them at home, but that's spilled in thus far to the first quarter. Not meaningfully, but margins are certainly increasing you know, consistent with or maybe slightly higher than where we were in December. So, you know, that'll play out over time. Of course, you know, prices are even higher as we speak today because of last night's events. But so there are opportunities there, and that's why we were a bit more optimistic in our comments about Marine for 22 than, you know, than we may have been three months ago. But, you know, that'll play out over time.

Okay. And I had no idea you were a chicken farmer. But the last question for me is it relates to some of the adjustments, and I know that they're on the last page of the slide presentation, but the bigger one seemed like it was in land. Am I right in thinking that that was entirely acquisition-related or...? 100% related to the flyer's acquisition. Okay, perfect. So, and... That closed, so it shouldn't be any residual impact to that.

Is that fair? I think there is. It would be nowhere nearly as material. I mean, there may be some things that were still going on in the first quarter, but nowhere near $3 million, maybe another few hundred thousand dollars in Q1. Okay. A few hundred thousand to a million bucks in Q1.

Right. All right. Well, that does it for all of my questions. I appreciate it. Thanks. Okay. Thanks, Ben.

We have no further questions at this time. Mr. Casbar, I will now turn the call over to you for closing remarks.

Thanks, everybody, for listening in. We appreciate the support to all of our team members around the world, to our investors and friends, suppliers and customers who may be on the call. Thank you so much. We enjoy working with all of you, and we look forward to catching up with you next quarter. Take care. Stay safe. Be well.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.