World Kinect Corporation

Thank you for standing by and welcome to World Connect Corporation's first quarter 2025 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. To remove yourself from the queue, you may press star 1-1 again. I would now like to hand the call over to Braulio Medrano, Senior Director of FP&A and Investor Relations. Please go ahead.

Thank you, Latif, and good evening, everyone. Welcome to World Connect's first quarter 2025 earnings conference call, which will be presented alongside our five-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 us on the call today is Michael Kaslar, Chairman and Chief Executive Officer, and Ira Burns, Executive Vice President and Chief Financial Officer. 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 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 Kaslar.

Thank you, Braleo. Good evening, everyone, and I welcome you to our call today. Just over a year ago, we laid out a strategic roadmap to improve profitability and reduce earnings volatility. That included streamlining our portfolio and reducing our fixed cost structure to better position World Connect for sustainable growth and enhanced resiliency in an increasingly volatile marketplace. As we assess the first quarter of 2025, while we face some macroeconomic headwinds in parts of our business, I am pleased that we have accelerated our progress towards achieving many of the strategic and operational objectives we had outlined. Our aviation business carried strong momentum from 2024 into the first quarter of 2025, delivering a healthy -over-year increase in both volume and gross profit. The marine segment generated an earnings contribution generally consistent with the last three quarters, although lower than in the first quarter of 2024, when both bunker prices and market volatility were higher. In our land segment, the North American liquid land fuel business was negatively impacted by both market trends and broader economic conditions, which impacted our volume and margins. Nonetheless, it is in this business that we are most aggressively executing our platform consolidation, cost reduction, and capacity rightsizing initiatives in a planned and orderly way. We expect the benefits of these actions to contribute to profit improvement by the second half of 2025, establishing a more focused and rateable growth vehicle for many years to come. To this end, following the sale of our Brazilian business announced in December, we recently finalized the divestiture of our UK land business as the latest step in our efforts to reshape our land portfolio. I want to thank all of the employees of this business for their dedication over the years and wish them well. Our UK land business has had a long and proud tradition of serving its loyal customer base, but unfortunately the heavily weather-dependent, acid-intensive nature of this business is inconsistent with our strategic objectives, and this sale will allow us to redirect capital and management attention to the core business activities that better fit our desired portfolio. In previous quarters, I have emphasized the value of our portfolio diversification, not only across various industrial and transportation sectors, but also within our geographic diversification. Significant uncertainty exists today regarding the manner in which changes in trade and tariff policies may ultimately impact international markets. But we have consistently demonstrated that World Connect's broad geographic footprint positions us well to participate in any shifts in the global movement of people and products. I'll wrap up my comments by emphasizing that first, we remain committed to our strategic and operational objectives, and second, we'll do this by leveraging our demonstrated expertise in -half-mile distribution solutions. I look forward to reporting our continued progress over the balance of this year, and now I'll turn the call over to Ira for his financial review.

Thank you, Michael, and good evening, everyone. Before we begin, as always, please note that our non-GAAP results reflect several adjustments to our GAAP results this quarter. Reconciliation is on our Investor Relations website and also in today's webcast presentation. Our first quarter non-GAAP adjustments totaled approximately $60 million, or $48.4 million after tax. Approximately $45 million of the non-GAAP adjustments relate to the sale of our UK land business, which we completed earlier this month. As you are aware, earlier this year, we announced the sale of our business in Brazil that was underperforming and also faced unique country risks as part of our strategic journey to continue sharpening our portfolio of business activities in our land segment. Along these lines, in early April, we have now also sold our UK land business, which had principally focused on the heating oil market, which has certainly changed, as Mike mentioned, as weather trends and the energy landscape in the UK has evolved over time, making it more challenging to generate acceptable returns in that market. The total one-time non-cash pre-tax charge associated with this sale will be approximately $110 million. Since this transaction closed shortly after quarter end, we needed to record approximately $45 million of this amount as an asset impairment in the first quarter, with the balance of approximately $65 million to be recorded in the second quarter. Similar to Brazil, a significant portion of the overall charge, in this case approximately $55 million, relates to cumulative unrealized foreign currency translation losses previously included within Sherald's equity, which will be recorded as part of the second quarter charge. With these two moves completed, our land liquid fuels business is now effectively concentrated in North America, where we have greater scale and opportunities for operating leverage and significant growth potential over time, and a clearer path to achieving enhanced returns in land and our broader financial targets across the business. By streamlining our portfolio, we are better positioned to execute against our strategic priorities and focus on business activities that better align with our long-term vision. I would also like to take a moment to thank all of our UK land employees for their hard work, dedication, and contributions throughout the years. We wish them continued success in their next chapter. The remaining $15 million of the non-GAAP adjustments in the first quarter relate to restructuring activities during the quarter. We remain committed to strengthening our long-term financial performance, and these targeted restructuring actions, which span across the business, including corporate and back office functions, are aimed at further improving our cost structure and driving increased profitability and returns. While these actions are always difficult, they do align with our broader efforts to drive greater operating efficiencies and operating margins in our business. Today, let's turn to our first quarter operating results. And as a reminder, these results exclude the non-GAAP adjustments I just reviewed. Consolidated volume was 4.2 billion gallons, down 5% -over-year, and consolidated gross profit declined 9% from last year's first quarter to $230 million. The -over-year decline in gross profit was principally driven by weaker than expected results in our land segment, and was also impacted by the sale of Avanode, which closed in the second quarter of 2024. This was partially offset by a solid -over-year increase in gross profit in our core aviation business. Now I'll provide some additional details for the quarter to help explain these movements within each segment. In the first quarter, aviation volume was 1.7 billion gallons, up 2% -over-year, and gross profit was $116 million. That's a $7 million or 7% -over-year increase, driven by an increased profit contribution from our airport operations in Europe, strong inventory results more broadly, and increased profitability in general aviation. I should note again that aviation gross profit increased 7% -over-year, despite the impact of the sale of Avanode, which had contributed approximately $10 million of gross profit in last year's first quarter. As we look to the second quarter, aviation volume and gross profit should be similar to what was a very strong quarter in the second quarter of 2024. Of course, in the current uncertain economic environment, things can change quickly. So while we are comfortable with this forecast based upon what we know today, we will be paying close attention to the market and our customers' potentially evolving requirements. While there has been recent dialogue on declining demand in the market, thus far, this seems generally limited to domestic leisure travel, with no real signs of weakness abroad. In the first quarter, land volumes decreased 6% -over-year, principally related to the sale of our operations in Brazil and the exit from certain operations in North America during the fourth quarter of last year. Land adjusted gross profit in the first quarter was $79 million. That's a 19% decline -over-year. The -over-year decrease was principally driven by weakness in our core North American fuel business, where industry trends and economic headwinds impacted both volume and margins in the first quarter. While our first quarter land results were certainly weaker than expected, our strategy of sharpening our land portfolio of business activities, as evidenced by the sale of our business in Brazil and the UK, and driving greater efficiencies in our core land business, has not changed. As we've indicated in the past, our journey to build a more profitable and resilient land platform is prone to bumps along the road, but we remain confident that we are moving in the right direction and should deliver improving results, margins, and returns as we look forward. Looking to the second quarter specifically, we expect land gross profit to be up -over-year, despite the impact of the recent Brazil and UK divestitures. Again, with greater improvement expected in the second half of the year, as we continue to drive more efficiencies in the land North American platform. First quarter marine volumes were down 14% -over-year, and while marine gross profit was up 4% sequentially, it declined about 26% -over-year. The -over-year decline in volume and gross profit principally relates to lower bunker fuel prices and reduced volatility compared to the first quarter of 2024, as well as growing uncertainty related to rapidly evolving and generally unpredictable trade policies. As evidence of the impact of such uncertainty on the broader market, volume in Singapore, the world's largest bunker fuel hub, dropped to its lowest level nearly two years in the first quarter, principally tied to a decline in tanker and dry bulk activity. Looking to the second quarter, we expect marine gross profit to be down modestly -over-year, assuming continuing uncertainty in the global shipping market. Although it is important to note that the upcoming change in the Mediterranean ECA standard, which goes into effect next week on May 1st, could lead to short-term supply and demand imbalances and even logistical challenges. These factors could provide some upside opportunities over the balance of the second quarter. Despite a level of uncertainty in some of the markets we serve, we expect second quarter consolidated gross profit to be in the range of $235 to $244 million. And as a reminder, these numbers now exclude the land UK business we just sold. While we came up a bit short of expectations for consolidated gross profit, adjusted consolidated operating expenses were $178 million in the first quarter, below the guidance provided last quarter, and down 6% -over-year. For the second quarter, we are expecting adjusted operating expenses of $175 to $179 million, representing another -over-year decline, impacted by both our recent divestitures as well as the restructuring activities during the first quarter. Interest expense was $23 million in the first quarter, down a little over 20% -over-year, and consistent with the guidance provided last quarter. For the second quarter, we expect interest expense to be in the range of $24 to $27 million. Our adjusted effective tax rate in the first quarter was 15%. This was positively impacted by discrete tax benefits, and that drove our rate below our full-year guidance range of 22 to 25%. We now expect our full-year adjusted effective tax rate to be slightly lower than originally projected, somewhere in the range of 22 to 24%. During the first quarter, we generated operating cash flow of $114 million and free cash flow of $99 million, demonstrating our ability to deliver strong cash flow, even during periods of market uncertainty. We also repurchased $10 million of shares during the first quarter, reiterating our continued commitment to enhancing shareholder value through both buybacks and dividends. In closing, I'd like to leave you with a few thoughts. Our aviation segment delivered solid -over-year results driven by strong results across the business. While our land segment experienced weakness in our North American fuels business, now that we have exited both Brazil and the UK, which required significant management attention and continued investment, we're able to more fully focus on our core domestic land market. We have continued to position our land business for sustainable growth, with significant opportunities remaining to scale and improve operating efficiencies. Additionally, our relatively low North American market share highlights the potential for meaningful growth opportunities in this business, looking forward. Marine delivered results generally aligned with expectations, despite an elevated level of uncertainty in the shift to being accentuated by a rapidly evolving trade policy. We took actions to further right-size our cost structure by reducing headcount during the first quarter, immediately improving operating efficiency. We generated strong operating and free cash flow results this quarter, while also repurchasing $10 million of shares, demonstrate our continued commitment to enhancing shareholder value. While the broader macroeconomic environment remains uncertain, we built a resilient and agile operating model that enables us to adapt quickly to changing market conditions, as it has in the past. And in closing, our strong balance sheet, disciplined working capital management, and heightened focus on operational efficiencies, positions as well to navigate near-term challenges, while also making progress toward broader financial targets. Thank you very much. I would like to now turn the call back over to our operator, Latif, to open up the Q&A session.

As a reminder to ask a question, you will need to press star 1-1 on your telephone. To remove yourself from the queue, please press star 1-1 again. Please stand by while we compile the Q&A

roster.

Our first question comes from the line of Ken Huckster of B of A. Please go ahead, Ken.

Hey, great. Good afternoon, Michael and Ira. Maybe just talk a little bit about the UK sale. So ever since you bought it, we've always heard about the volatility, particularly in the first quarter, fourth quarter. So the first quarter has already passed. So how do we think about land volumes? I don't know if you can give us some numbers. What's being pulled out? And obviously, how would you think about, was it flat to profit? Is this going to be a creative getting rid of it? Maybe walk us through some of the factors there. Great

question. So always being prepared for you, Ken. Volume in that business in 2024 was just under 375 million gallons. So obviously, that was more heavily tilted towards Q4 and Q1. But the number is about 375 million on an annual basis. And in terms of your creative question, which is a good one, it is a creative because if you use 24 as a proxy, that business was generating an operating loss. And while we did generate some profit in the first quarter, our forecast for the rest of this year was not as rosy. So it's an immediate benefit to the P&L, immediately improves land's operating margin. And it's just what was becoming a bit of a distraction in a difficult environment with weather trends. It hasn't been, for the last time you were in the UK for the holidays, December or January, it hasn't been really cold there for a very long time. So that's certainly impacted the heating oil piece of that business, which is what we always relied on in the winter. So we made the move to move on, get some cash out of it. That business also was a piece of our capex. We're continually upgrading the physical infrastructure. There's something we also don't have to do anymore. So it brings our capex run rate down a little bit as well.

So about, am I right about 6% of your overall volumes for ground? That's

about right.

Yeah. Yeah. So, but it's not, clearly it's not evenly spread, right? So you said heavily weighted. Is there a number you could provide in terms of kind of distribution or, you know, it's not 25% each quarter?

You know, it actually is fairly, I would say maybe it's, you know, 60% in Q4 and Q1 and 40% of the volume in the other two quarters. Fourth quarter last year was a bit on the weaker side. So that, you know, that was even made it a bit more even than normal. But historically, I would say 60 some-ish percent of the volume was spread throughout the fourth and first quarters with a balance in the weaker summer months where we didn't have the heating oil activity.

So can you remind me what you paid for the business and what cash, I know you're taking the write-off, but what do you get that you can now redeploy after the sale?

Thanks for asking. We paid a bit north of, you know, many moons ago, a bit north of $150 million. It's fair to say that we did generate a significant amount of cash flow over the years in that business. The first several years we actually did very, very well during COVID. During that unique time period that business performed very well. We're getting somewhere in the neighborhood of $50 million plus today. So not, you know, not a phenomenal number, but it's $50 million in the bank. And we, you know, we cut off the need to continue investing in that business going forward.

So is that something you take that cash, redeploy it in additional land-based facilities in the U.S. or, you know, how should we think about kind of this?

In the short term, it repays debt, but obviously it does increase our available liquidity and capital to focus on investing in the U.S. So yes, that's a reasonable statement or, you know, in other parts of our business.

Okay. And then maybe just if I could wrap up before handing over to Ben, the aviation, obviously a strong quarter. You mentioned not only the billion, 17 gallons up 1.5%, but really the gross profit, I guess, really was a lot stronger than anticipated. Can you just help me understand what drove that? Is that pricing and increased demand? Is that more passenger flying? What is driving the aviation profitability?

We continue to, you know, the mix of that business has continued to evolve over time. The European assets that we have where we're selling fuel on airport at 100 or so locations, most of them in Europe, there's some in Canada as well, has been performing very, very well. You know, that's, you know, a different go to markets, our last half mile piece of the aviation business. So that business performed well from both a volume and a margin standpoint. There's more, you know, sustainable product going into those markets today. So that contributes a bit to margin as well. And our general business and general aviation business is performing, you know, very well, which is more spread throughout the world, including the U.S. So really, you know, we did, you know, proud of the team. You know, we just performed very well across the entire business taking advantage of market opportunities and increased our margins a bit and our volumes a bit as well. Wonderful. Appreciate the thought and time.

Let me turn it back to you.

Thanks. Thank you. Our next question comes from the line of Ben Nolan of Stiefel. Question, please.

Ben. Yeah, thank you, and thanks for Ken for putting me in there. So I wanted to. I remind I wanted to ask a little bit about I'm having trouble getting my head around what was happening in the land segment. You said there was a 6% decline in volumes associated primarily with the sale of the Brazil business. And but but then you also talked about how volumes were down as a function of industry trend and that that also was a big contributor to the decline in gross profit. But but then you're expecting to Q to be relatively similar to what it was last year, although it seems like I don't know. It seems like the if anything industry trends are more opaque now. Can you maybe walk me through how you're just thinking about all of that?

Yeah, so a lot to unpack there, but you know, one thing I'll start backwards from where you ended last. We don't have a really higher hurdle in terms of second quarter last year. That was a relatively weak quarter. We'll do better than that. But again, that that is consistent with the story, considering the fact that the second quarter last year had some challenges as well. So there's a couple of pieces to the pie, similar to the general statements across the business. You know, economic uncertainty is affected certain types of customers in in different parts of the country. You know, as an example, there's on the East Coast in some of our card lock business, we had a few customers that simply disappeared during the first quarter. Either go out of business, cease operations in supporting different industries. On the West Coast, the story I try to tell hopefully tells better this time than I did a few quarters ago, as that market continues to evolve. And that's a big market for us when I say continues to evolve in terms of moving more and more to renewable products. That that has resulted in a reduction in in supply of traditional fuels domestically for major refiners in California that are retooling all their refineries to go to renewables. So it's just changing the dynamics of our ability in the short term to optimize our supply position that's affected our margins on that part of the country. The team is constantly evaluating opportunities to improve our optionality within our own supply chain. But in the short term, that's affected margins more than it has volume. Right. So there's a little bit of volume decline based on the economy pockets of customers just not having the same position in the ecosystem as they may have had before. And then we've got some of those supply dynamics in California. But at the same time, we're also working at just optimizing our our business overall in terms of the number of trucks we have, drivers, supply route optimization. That's something that the team is working on religiously every day that we see starting to pay dividends more in the second half of this year. So, you know, as we said, right, that business is still a work in progress. We've eliminated some of the big distractions in Brazil and the UK. And now we're doing everything we can to focus on driving both volume and operating efficiencies, which improve our ability to generate a margin in the domestic land. I think that covers the various. Yeah, that

was helpful. Yeah, I those details certainly got me in the right direction. So appreciate it. I also wanted to ask a little bit about subsequent on the land side, subsequent to some of the restructuring that you've done, even over and above. I think it was over and above just the getting out of the UK and Brazil, but just in general, sort of sounds like you were cutting costs elsewhere. Do you think you think you're in a place where there can be a material step change in margins? Like, is it or do you feel like where your landing here is going to be substantially more profitable on a on a per gallon basis than than where we had been?

I would point you more towards operating margin than you look. We're always trying to optimize the per gallon profitability, but really counts the end of day is what drops to to our operating margin. We've been kind of stuck in the same zip code somewhere around 25 percent for a while with a 30 percent target that we put out there. We had our investor day, I think, between the the the vestitures, the restructuring activity, as you just said, above and beyond the exits that we did in terms of taking some costs out in the first quarter and continuing to, you know, to fine tune the core land business. We're that's certainly helping us make progress towards that 30 percent target. We probably won't get the whole way there this year, but we should get, you know, we should make some healthy progress towards that number this year, which we didn't last year. And that, you know, that contributes to cash flow contributes to, you know, EPS accretion and improvement in returns. So that certainly a possibility how much that step changes in your words, you know, TBD. But we've certainly improved the odds of of, you know, those needles moving in the right direction with with the moves that that we've talked about today and previously.

OK, and then and then lastly for me, just as you look forward, anything first of all, another decent quarter here in terms of free cash flow is we're looking out in this subsequent quarters and given all of the moving parts here, anything that should be any different or should we think about the free cash flow or cash flow coming to you any differently than the last several quarters? Or it's where we are is now kind of a way to think about it going forward.

Sure. Look, you know, prices are now pretty low. We've had two really healthy quarters of cash flow in a row. I wouldn't count on us delivering one hundred million dollars of free cash flow per quarter. That would be about double our kind of forecasted run rate at Investor Day. So, but, you know, our goal is to, you know, to to deliver numbers in that ballpark. You know, could we outperform that this year with a strong beginning we had in Q1? I hope so. But I guess the one message is I wouldn't expect one hundred million dollars a quarter of free cash flow. Yeah, but but obviously the goal is to try to deliver as much as we can on a quarterly basis while while also making the right investments in the business that generate the returns that will drive profitability.

All right. I appreciate it. Thank you.

Thank you. Our next question. Comes from the line of John Royale of JP Morgan. Your question, please, John.

Hi, good evening. Thanks for taking my question. So my first question is maybe you could give a little more detail on the restructuring actions in the quarter and just, you know, maybe the different buckets and how much savings you think will come out of each of the actions. And should we expect more charges in future quarters or was this kind of everything in one queue?

Thanks. Thanks for the question, John. So, you know, we took a fifteen million dollar charge, which is almost completely related to, you know, kind of hate to say it, because there's always a sad part to a story like this related to people. Right. And just driving efficiencies in the headcount side of the business. Right. It's as simple as that. And it's it's across the business. So it's, you know, people that are kind of in the unallocated corporate bucket bucket, but also people in land aviation marine. I would say a heavier concentration related to corporate and land. But there, you know, there was some elements across the other segments as will be disclosed in our ten queue in the morning. That should result in about thirty million dollars of annualized cost savings. We probably won't recognize the full run quarterly run rate of that until the third quarter, because some of those activities were, you know, still kind of underway and not fully completed by, you know, by today. So, should you expect more? I can't tell you that at this point, but I also say that there's there's always opportunities. We are looking at some, you know, some specific opportunities to further reduce costs. But, you know, having completely nailed that yet when we're ready, you know, we'll share that. But in the very short term, the goal was to try to get whatever we thought was was available and sensible done in the first quarter. So that that project, if you

will, is, you know, is complete.

Great. Thank you, Ira. And then my next question is on M&A. Maybe you could talk about how you see the opportunity set and the pipeline today for acquisitions. Does anything about the uncertainty in the current environment maybe make you pause on things like M&A until there's a little more clarity or is it kind of more ordinary course right now?

I would say generally it's ordinary course. You know, there's always, I would say the pipeline of opportunities has been pretty stable. It's not growing dramatically. It's not shrinking. We certainly are seeing a bit more, hope they're not listening, but sensibility on the side of sellers in terms of expectations, which creates more opportunities, right? Because we're we're never one, at least at this stage in our lives, to look to, you know, to overpay to, you know, to bring on some inorganic growth. The interest rate environment's been hanging a little higher. We're hoping that we'd be in a different place as of today, which would make, you know, that that opportunity set stronger. That's taken a little longer than than we thought. But, you know, there are opportunities. There have been some, as an example, without any specificity where over the course of a courtship, the sellers, the sellers facts and figures began to deteriorate, right? So we've seen some of that as well, which has put, you know, a potential dealer to on pause. But at the same time, you know, there are other opportunities that remain solid and we should be able to execute on on on

something I would say over the next 12 months. Thank you.

Thank you. I would now like to turn the conference back to Michael Casbar for closing remarks, sir.

Thanks, Ken, Ben and John, for the questions. I'm good. Good job feeling all of those. I'm remote and out of the office. Look forward to talking to you next quarter. Can you hear me? Okay. Or am I not coming through? Yeah. Okay. Fine. Any case, yeah, I'm remote out of the office here. But thanks very much. Appreciate the support. We're highly focused on the agenda that we discussed a little over a year ago and look forward to reporting back to you next quarter. Take care and stay well.

This concludes today's conference call. Thank you for participating. You may now disconnect.