World Kinect Corporation (WKC) Q1 2013 Earnings Report, Transcript and Summary

At this time I would like to welcome everyone to the World Fuel Services 2013 First Quarter Earnings Call. My name is Dave and I will be your event specialist today. (Operator Instructions). After the speakers’ remarks there’ll be a question-and-answer session. Instructions on how to ask a question will be given at the beginning of the Q&A session. It is now my pleasure to turn the webcast over to Mr. Jason Bewley, Vice President of Corporate Finance. Mr. Bewley, you may begin your conference.

Good evening everyone. Welcome to the World Fuel Service 2013 First Quarter Conference Call. My name is Jason Bewley, Vice President of Corporate Finance 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 ones please visit our website wfscorp.com and click on the webcast icon. With us on the call today are Michael Kasbar, President and Chief Executive Officer, and Ira Birns, Executive Vice President and Chief Financial Officer. By now you should’ve all received a copy of our earnings release. If not, you can access the release on our website. Before we get started I’d like to review World Fuel Safe Harbor statement. Any statements made or discussed today that do not constitute our not historical facts particularly comments regarding World Fuel’s future plans and expected performance are forward-looking statements that are based on assumptions that management believes are reasonable but are subject to a range of uncertainties and risks that could cause World Fuel’s actual results to differ materially from the forward-looking information. A summary of the risk factors that could cause results to materially differ from our projections can be found in our Form 10-K for the year ended December 31, 2012 and other reports filed with the Securities and Exchange Commission. Our comments will include non-GAAP financial measures as defined in Regulation G. The reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures and other information required by Regulation G has been posted on our website. We will begin with several minutes of prepared remarks which are going to be followed by a question-and-answer period. At this time I’d like to introduce our President and Chief Executive Officer, Michael Kasbar.

Thank you, Jason, and good afternoon everyone. Today we announced earnings of $48.7 million or $0.68 per diluted share for the first quarter of fiscal 2013. Overall, we are pleased with our results and we ended the quarter once again with a very healthy level of cash and liquidity. In the operating environment that has seen little improvement to start the year, our company delivered a solid performance overall and continued to place an emphasis on our strategic initiatives. We made a significant acquisition in Multi Service at the end of 2012. Multi Service is an exciting extension of our solutions based offerings in transportation, logistics, energy and payment processing. We are very excited about the opportunities this acquisition will create over time. Within Aviation, our team delivered a good start to the year experiencing success in both commercial and business aviation, and we are optimistic in our prospects for the remainder of the year across our aviation platform. A strong position in the market continues to add value to the multitude of customers and suppliers we serve throughout the world. With oil prices generally stable, our commercial and business customers are poised to continue to perform well financially. As a partner to both commercial and business customers, a healthy airline industry is a positive for our company. The market in Marine continues to present a formidable challenge as our first quarter result show. While volume was up both sequentially and year-over-year gross profit declined as our business mix shifted further towards blue chip customers in major ports and there was also limited price volatility during the quarter. Our team remains disciplined in its approach to risk and credit and we continue to actively compete in all areas of the marine business. Though we don’t anticipate a fundamental shift in…

Thank you, Mike, and good evening everybody. Consolidated revenue for the first quarter was $10.2 billion, up 3% sequentially and up 7% compared to the first quarter of last year. The year-over-year change in revenue was entirely attributable to the increase in overall volume across all three of our business segments, offset by lower average fuel prices. Our Aviation segment generated revenues of $3.9 billion, up $21 million, essentially flat compared to the fourth quarter but up $519 million or 15% year-over-year. Approximately 79% of the year-over-year increase was a result of increased volume and the remainder was a result of higher average jet fuel prices. Our Marine segment revenues were $3.7 billion, up $268 million or 8% sequentially but down $187 million or 5% year-over-year. The entire year-over-year decrease was a result of lower average bunker fuel prices offset by increased volume. And finally, the Land segment generated revenues of $2.5 billion, down $41 million or 2% sequentially but up $373 million or 17% year-over-year. The year-over-year increase was entirely due to the increase in volume offset slightly by lower average fuel prices. Our Aviation segment sold 1.1 billion gallons of fuel during the first quarter, down 23 million gallons or 2% sequentially but up 127 million gallons or 13% year-over-year. The sequential decline in volume was principally related to the fact that the first quarter had two less days than the fourth quarter. Volume in our Marine segment for the first quarter was 6.8 million metric tons, up 200,000 metric tons or 3% compared to last quarter and up 400,000 metric tons or 6% year-over-year. Fuel reselling activities constituted approximately 92% of total Marine business activity in the quarter which is up 5% compared to last quarter. Our Land segment sold 840 million gallons during the first quarter,…

(Operator Instructions) Okay. We’ll take our first question from Jon Chappell with Evercore Partners. Your line is live. Jon Chappell – Evercore Partners: Thank you. Good afternoon, guys.

Hi, Jonathan.

Hey, Jon. Jon Chappell – Evercore Partners: Hey, Mike. I wanted to ask you a question about the Marine business and maybe a little bit differently than the way I’ve asked in the past.

Go for it. Jon Chappell – Evercore Partners: Clearly, ships are still moving, bunkers are still being sold. You’ve obviously scaled back your risk and gone to a kind of a lower risk, lower margin type business. But I would assume that in the industry today, there’s probably more higher risk business just given the balance sheets of a lot the shipping companies. So my question is who’s taking that business on? What’s the competitive landscape look like today? And then what your comfort with your ability to come back once the Marine business starts to get its feet under it and kind of regain some of that other business that you may have sacrifice right now, given the counterparty concerns?

Well, thanks, Jonathan. It’s a good question. I think a big part of success in the Marine business is patience. You certainly know from your years in this space that you get a lot of people doing a lot of the interesting things. Sometimes it seems like science fiction with the number of folks that jump back into market. So it’s a spot market. Things always change, so as it relates to who’s taking that risk, you know, it’s still fragmented. You have a lot of small players that maybe play some bets. There’s some amount of prepay there that’s going on. We don’t necessarily participate in some of that even though it’s very tempting. There are some folks that take a little different risk profile and are willing to, perhaps, lose a little bit of money and they’ll work the numbers that way. We’re not necessarily participating in that particular space. Whether that’s right or wrong, that’s kind of our disposition at the moment. And I think we’ve got an excellent franchise. We continue to innovate and build our network. And you certainly have the appreciation for the state of the industry. So we’re taking our focus not so much – obviously, we’re engaged in understanding that risk, but we like some other parts of the supply chain and we’re really focusing our time and effort on some other opportunities that may be long-term oriented. So you always have that business that you can pick up but – I don’t know – maybe we’re getting a little bit older and a little bit conservative where we really don’t want to take so much of that credit risk. But certainly, if you look at the tanker side, the crude tanker side you – of course, you know what the profile…

Yeah. I think it’s principally – good question, Jon, principally the latter. At the end of the day, while we had a $300 million increase in accounts receivable driven heavily by price in the marketplace, our accounts payable were up even more than that. So we managed that AR versus AP equation very well in the quarter and it contributed to a solid result and it had nothing to do with the M&A environment. We’re always looking at opportunities there and which quarter they land in is really more determined by when we’re ready to get a deal done. So the first quarter was just an example of – it wasn’t necessarily a high growth quarter which involved significant increases in networking capital. Inventory was up a little bit but we more than made up for that with the payable increase over the receivable increase. Jon Chappell – Evercore Partners: Okay. Understood. Thanks, Ira. Thanks, Mike.

Okay. We’ll take our next question from Greg Lewis with Credit Suisse. Your line is live. Greg Lewis – Credit Suisse: Good afternoon, guys.

Hi, Greg. Greg Lewis – Credit Suisse: Mike, I guess my first question is related to the impact that maybe we’ve seen in aviation over the last couple weeks just given the shutdown of American about a week ago, and then just the whole sequester where there’ve clearly been a lot of flights cancelled, a lot of delays. In thinking about all the headaches that were experienced over the last week, was that able to provide you guys any sort of opportunity to sort of make additional money or is more just, hey, there were less flights so there’s less volume and it’s just going to be a little bit softer in the second quarter?

I know as a passenger there was an impact. I want to be careful how I answer the question because sometimes these impacts are a little bit delayed, but I certainly, to the best of my knowledge at this stage, I haven’t seen any impact. So but you never can tell when you have ripple effects, but at this stage, I don’t think that’s something that we’re seeing. Greg Lewis – Credit Suisse: Okay. And then as we sort of – as we sort of, you know, turning over to the Land business, as we think about Multi Service and its impact in the first quarter, when we think about leveraging Multi Service and Land, do you kind of think we’re in – or is there a lot more upside from leveraging Multi Service in the Land or are we kind, we’re taking advantage of it and it’s just going to be a nice run rate going forward?

Well, this is something that I think is going to have a significant impact on the company over the long term. I think as I’ve mentioned last quarter, Multi Service is a freestanding, successful business and has been for many years. Certainly, they’ve operated that as a closely held private company. And now as part of our group, we’re certainly giving them greater capability to spread their wings. They do – they provide solutions using technology, and it’s a great parallel and companion business to the solutions that we’ve provided in the physical world. So we’re actively looking at growing that business. We certainly like the international aspect of it. There’s certainly the capability of bundling their offerings. So we feel good about that, and it’s still in the early stages of that, but we’ll look to grow that business organically combining it with all of the services and the products and introduction to the clients and the suppliers that we have as well as bolting on and combining other acquisitions in the same space. Greg Lewis – Credit Suisse: And then when we think about Multi Service going forward on the international basis, is it going to be similar to what we’re seeing in North America where it’s primarily land, or is there maybe an outside aviation opportunity for Multi Service internationally?

The land space is certainly the bigger one. It’s the more obvious one. So I’d say that that’s more probable. But when you start to get into the wonderful world of technology, it’s – and solutions using technology it’s a pretty broad space. So that’s the exciting aspect of it. But certainly, land is the most likely area that we’d see expansion in. Greg Lewis – Credit Suisse: Okay, guys. Hey, thank you for the time.

Thanks, Greg.

Okay. We’ll take our next question from Jack Atkins with Stephens. Your line is live. Connor Hustava – Stephens: Hey, guys. This is actually Connor Hustava on for Jack today.

Hi, Connor. How are you? Connor Hustava – Stephens: Doing well, Ira. First question from me is can you help us understand what’s driving the strategic decision internally to cull the lower credit quality marine business? And what do you think you’d need to see in the market to take a step back out on the risk curve there?

Well it’s – I think that, that is something that – it’s a combination of things. I think we called out not only that dimension but also the fact that there is slack demand and you do have a lack of volatility which is significant. I make no bones about it, and we’ve said this for quite some time, a big chunk of our value add is being able to provide value through our risk management function in terms of managing the forward curve, backwardated markets, volatile markets is where we do get to add a little bit more value. So the lack of volatility definitely has an impact on our margins. So it’s not only that dimension and demand is soft and competition hasn’t sort of gone away. So we, I think, are conservative. We prefer to earn our keep through providing value and innovation and services and outsourcing to our large clientele. You see our volume has moved up, and it’s had some of an impact so that revenue management equation certainly is an important dimension to it. But the shipping industry is not in a great place. So I think that we’ll probably be in this mode for a little while. But as the economy starts to recover – certainly, China demand is off, Europe is still weak – but as you start to see different sectors come through, I think you’ll start to see our results improve. Connor Hustava – Stephens: Okay. Great. That’s helpful. And then for my second question, just curious if you all can talk about how a narrowing spread between Brent and WTI affects profitability in your North American crude operation?

Sure. If you look at – if you look at the refineries on the East Coast, a lot of those refineries would take West African product that was priced on Brent. Right now you’ve got a lot of crude that’s coming out of North Dakota, that’s coming out of Canada, that’s priced on WTI. So that spread makes that crude oil more competitive. So our Canadian business is a spot business, unlike our North Dakota business which is more term based and has unique logistic properties. Canada is a spot market, so our ability to move Canadian crude down into the U.S. market is going to be a function of that spread and just basic supply-demand dynamics. Connor Hustava – Stephens: Okay. Great. Thanks for the time.

You’re welcome.

And we’ll take our next question from Ken Hoexter with Bank of America Merrill Lynch. You line is live. Wilson – Bank of America: Hey. Good afternoon, guys. It’s actually Wilson sitting in for Ken. I guess my first question was just looking at the cash flow statement, I noticed that the CapEx spend jumped pretty high this quarter to nearly $13 million. I mean, can you give some color around where the extra, kind of, capital was going and what can we expect for the rest of the year around that?

Yeah. The number has definitely moved up a bit in this particular quarter. There were a couple million dollars spent around our filament facility in the UK. Just basic upgrades and upkeep of that facility. That will be ongoing over the balance of the year. So we’ll be spending some more money there. And we spent a little bit of money on the, in the Bakken area in terms of that project. There’s some capital investments tied to that joint venture that we made, and there’ll be a little more of that over the course of the year. So there were a couple of items in there that were one-time, but there were a couple that will be there over the next couple of quarters. So the balance of this year will clearly show, while not a very large number, a higher number in quarterly CapEx than we saw last year. Wilson – Bank of America: Can you quantify that as a percentage of revenues possibly or even as cash flow or is that just, kind of, so TBD as.

I think the number you saw this quarter was probably a little higher than what the average quarter will be for the balance of the year. Maybe it may not be completely linear, but it’s certainly going to be closer to the ballpark of where we were this quarter on a quarterly basis from a cash flow standpoint than where we were, let’s say, in Q4. Wilson – Bank of America: Got you. And just a follow-up, I guess it would be a related question on the cash level and kind of leverage. I mean, where is a comfortable level of that, you know, INT feels is appropriate to run the business given your volatility outlook? Or is there a leverage level that you guys look to keep the business around, absent any kind of acquisition opportunities?

Well, we’ve – I’ve already often stated the cash – the answer to the cash question, and the number on our balance sheet is basically the answer. We’ve been trying to keep that number in the range of between $100 million and $150 million. The last couple quarters, it was actually a little bit higher because we didn’t have any more short-term debt to pay off. So, but generally $100 million to $150 million is a number that we’re more than comfortable with, and that’s where the number’s been. You go back many, many quarters and you’ll see that we’ve either been in that range or slightly above it. In terms of leverage, as I mentioned in my prepared remarks, leverage was under one time this quarter. We don’t feel the burning desire to sort of keep it at that level, but we also aren’t looking to increase that number by large multiples either. So if the right deals come along, we’re very comfortable in using some more of our liquidity on our balance sheet to fund those opportunities, but we’re also very focused on maintaining a strong balance sheet. So we’ve – tough to state an exact number, but we’re certainly more focused on remaining closer to the unleveraged side of the equation than what some companies look like in terms of companies with significant leverage. We’re not looking to move in that direction. Wilson – Bank of America: Sure. And if I could get – squeeze, kind of, one last question in. I mean, if I try to do the math around the Land business, I mean, I think you guys called out that $2 million of, kind of, the gross profit was probably attributable to the Multi acquisition. But looking at it on a sequential basis, it looked to be a pretty steep ramp up. I mean, were there any kind of one-time items that are flowing through on that end? And if so, could you give some more color around that?

I’m not sure where you got the $2 million from. In my prepared remarks, I said that total gross profit was $64 million, and fuel-related Land business delivered gross profit of $53 million. So - Wilson – Bank of America: Oh, okay. Got you. All right.

Okay. So that – that was, the rest of that was acquisition-related. And then, if you look at the delta between the $53 million in last quarter, which was still pretty nice, a very large chunk of that was the rebound in the Western business that we talked about. Wilson – Bank of America: True. Thank you for the clarification.

Okay.

Thank you very much. Ladies and gentlemen, the floor remains open for questions. (Operator Instructions) And we’ll take our next question from Kevin Sterling with BB&T Capital Markets. Your line is live. William Horner – BB&T Capital Markets: Hey. It’s actually William Horner on for Kevin. Thanks for taking my call, guys.

Hi, William. William Horner – BB&T Capital Markets: Going back to Marine for a second and your improved outlook for the second quarter – obviously, I know you’ve talked on – or touched on a lot tonight, Mike, but a lot of moving parts on the demand and credit side, but should we view your improved outlook as more of an improvement in seasonal volumes and flat spreads? I know you mentioned there’s still some decent competitive pressures.

Well, yeah, I think a big chunk of it is going to be related to the amount of volatility that we’re going to see in the marketplace and what the forward curve is. So I think we’re going to have a moderate recovery. Certainly, this quarter we’re not really too pleased with. So we could see some recovery off of this quarter, but it’s just too soon to tell. William Horner – BB&T Capital Markets: Okay. Thanks. And, Ira, just one housekeeping, I missed in your prepared remarks on the Aviation side, what the – what your gain on the supply side was. Could you go over that again one more time real quick?

The inventory-related number that I talked about often, I said it was fairly inconsequential this quarter. It was only slightly positive. William Horner – BB&T Capital Markets: Okay, all right. Thanks, guys.

You’re welcome.

Okay. I’m showing no further questions in queue.

Okay. Well thank you for joining us. We feel good about the evolution of our global business and look forward to discussing our results with you next quarter. Take care. Stay well.