Ladies and gentlemen, thank you for standing by, and welcome to the World Fuel Services 2020 Second Quarter Earnings Conference Call. My name is Kevin, and I will be coordinating the call this evening. [Operator Instructions] As a reminder, this conference is being recorded, Thursday, July 30, 2020. I would now like to turn the conference over to Mr. Glenn Klevitz, World Fuel's Vice President, Treasurer and Investor Relations. Mr. Klevitz, you may begin your conference.

Thank you, Kevin. Good evening, everyone, and welcome to the World Fuel Services second quarter 2020 earnings conference call. I'm Glenn Klevitz, and I will 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 Birns, Executive Vice President and Chief Financial Officer. You should now 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's safe harbor statement. Certain statements made today, including comments about World Fuel's expectations regarding future performance and plans are forward-looking statements that are subject to a range of uncertainties and risks that could cause World Fuel'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 World Fuel's most recent Form 10-K and other reports filed with the Securities and Exchange Commission. World Fuel assumes no obligation to revise or publicly release the results of any revisions to these forward-looking statements in light of new information or future events. This presentation also includes certain non-GAAP financial measures 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 Fuel'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. We are speaking to you today for our second quarterly earnings call during the COVID-19 pandemic. First, I want to say how proud I am and how well our global team has continued to operate our day-to-day business activities with nearly all of our employees working from home or on the frontline delivering fuel. It is a testament to their professionalism and passion for the business. As I've said previously, we took swift action at the beginning of the pandemic to activate our safety procedures and protocols. And fortunately, we have had very few cases of COVID-19 among our employees. Despite all of the continuing complexities in the world around us, we delivered a very respectable result in the second quarter. While our aviation volumes were naturally lowered in the current environment, we delivered better-than-expected results, driven by increased cargo activity, unscheduled aircraft activity as well as historic oil price volatility during the quarter. Global airline passenger volume, while recovering at varying cases in different parts of the world, is still far from pre-pandemic levels. Before COVID-19 hit, the aviation industry was on a strong upswing with good passenger mile growth, consistent with a very long growth trend. It's clear the world wants to travel by air. That is not likely to change. I'm optimistic that science will ultimately prevail and the airlines focus work on safety and cleanliness will bring back this industry, which is so vital to local, national and global economies and modern living. World Fuel is fortunate to have a geographically and segment diverse portfolio of energy clients that rely on our solutions. Our core marine activity held up as well. While the cruise market continues to work its reentry plan with some limited cruising occurring in Asia and…

Thank you, Michael, and good evening, ladies and gentlemen. Before I get into the company's results for the second quarter, I would like to reiterate our thanks to our 5,000 loyal employees worldwide who dedicated countless hours to our business during a quarter, which has posed some unique challenges for the world and, of course, our company. The resilience of our company and commitment to best-in-class service has differentiated us as a solid counter-party with a sustainable business model for decades, and this has only been further accentuated over the past few months. While the timing of returning to any sense of normalcy remains unclear, we remain focused on our long-term strategy, which encompasses strategic growth in our core businesses and a continual focus on cost and balance sheet management to deliver greater value for our shareholders and other stakeholders, while, of course, looking after the health and safety of all of our employees worldwide. And now I will provide you with our financial update. As usual, please note that the following figures exclude the impact of pretax non-operational items in the second quarter, which have been highlighted in our earnings release. The non-operational expenses in the second quarter principally consisted of an $18.6 million asset impairment relating to our decision to rationalize our global office footprint in light of the new world we are living in. Some of our office locations will simply transition to a more permanent remote work environment and some will be relocated to smaller, more flexible and cost-effective locations. Non-operational expenses also included costs related to certain other organizational changes as well as acquisition and divestiture-related expenses. To assist you, as always in reconciling results published in our earnings release, a breakdown of the non-operational items can be found on our website, and they're also…

Thank you. [Operator Instructions] Our first question is from Ken Hoexter with Bank of America. Please go ahead.

Hi. Good afternoon, Michael and Ira and Glenn. So congrats on the sale and managing through this rough environment. Maybe just given the sale, Michael, Ira, maybe just your thoughts on acquisitions as you consolidate assets, do you want to now take that capital and focus on land, marine, aviation? Is there particular segments within that? I guess given what's going on in the world, are there – are you seeing competitors that are more available now to thinking about joining teams with a larger entity to get available access to capital?

Thanks, Ken. It really varies across the board. The companies that may want to sell assets are not necessarily the ones that you may want to buy. Those are the ones that are perhaps the businesses that are not highly desirable and have been impacted the most. So buying quality, I think the thing that we've learned is certainly buying at a good price is always a good idea. But you're always better off buying a good company that is in an area that you're going to accelerate. So we've said it before, the land business. The energy transition business in terms of our connect activity is interesting. That's certainly a growth area. So our C&I business, our commercial and industrial, diesel, delivering diesel to commercial users is a fairly large part of the business. You saw that we acquired UVair, and that was a good acquisition, straight in our wheelhouse. So the marine area, again, is an area that we're still committed to, and certainly, the commercial aviation and business aviation space. So I think the thing we've learned over the period of time is stick to your knitting, work with your core. So this is a similar answer that we've given in the past that, that broader land business we like. There's an interface between land and marine and land and aviation. Ships come into port and aircraft comes into airports. So anything that is within that core of logistics that is a service that's compatible with our end-user community, we'll consider. The government business, we're a fairly active government contractor. That's another area that I think we get some consideration. We acquired NCS about 10 years ago. That's been an excellent acquisition for us. We always knew that, that business was not going to last forever as…

So just maybe a couple of quick ones. Loss of revenues from the sale and then in aviation, Ira, you mentioned some bankruptcies. And you want to just kind of expand on that, your thoughts on what of the current revenue stream might be exposed or at risk? How would you break it down, maybe categorize it?

Well to start, happy birthday, Ken. Now to your questions, revenue stream going away on multi-service was the question?

Yes.

It's under $100 million of – because in each of their business, their gross and net revenue is effectively the same number. So it's a little – run rate is about $90 million, $91 million, $90 million or so. In terms of the bankruptcies, look we've obviously all experienced the last few months, which has been historic is probably an understatement, and its impact on the aviation industry is also using the word historic on that is probably an understatement as well. So every single airline in the world has been affected. Some of them went in a little stronger than others. Some of them have been fortunate enough to be domiciled in a jurisdiction that's provided either significant government support or banking support or equity support and even many companies that got some support from bondholders. There are some jurisdictions where there wasn't as much help available. And that tended to be in Latin and South America. So there are a few publicized bankruptcies there that were customers of ours that we're working through and it's still early stages in terms of where those might come out. As I mentioned in my script, the aviation receivable portfolio overall, the glass half full of the significant drop-off that we've seen and where we stand today is our entire aviation receivable portfolio is now only $400 million, which is 40% of where it was at year-end, with no significant exposures individually remaining because no one has a lot of activity right now, right? So ironic to the situation, our past due balances are at historic lows for maybe somewhat obvious reasons because we've been collecting, and that hasn't been recycled back out at the same pace because volumes are down so much. So the future is still unclear in terms of where we go tomorrow, being very careful in terms of the extension of credit, even though that's one of our core value props going forward as the market starts to rebound. We're looking at that very carefully. So it's tough to give you a clearer answer than that, working very hard at a day-to-day to make sure that we keep additional potential needs for reserve down as much as possible. There's certainly more issues out there. But arguably, none of them as big as some of the ones we've already seen. So hopefully, that answers your question.

No, it does, definitely. I appreciate it. I appreciate your answer and to you Michael on yesterday. The – last one, sorry, Ben, but can you break down marine maybe just before this downturn, what percent was containership? What percent was cruise? And then what percent was other?

Container is – I don't have the exact percentage for you. A reasonable piece of the pie that hasn't changed that much. Cruise is only about 10% of our portfolio. And that obviously is the portion of marine that's got impacted – that has been impacted the most. Even though similar to my comments in aviation, Ken, there's repositioning of ships, moving crew members to their home bases, et cetera. So it's actually been a reasonable amount of activity there that we've supported even during the period where there's no passenger activity. And they're...

No, I just wanted to – as a percentage, just to understand what was at risk within the group, but if it's a vast majority of container and 10% cruise, that's good. Unless there's anything else in there?

No. I mean cruise is a portion of that business that got impacted the most.

Alright, thanks for the time Ira.

Thanks, Ken.

Thank you. Next question is from Ben Nolan with Stifel. Please go ahead.

Hey, guys. And I appreciate Ken leaving a couple for me. I there's a few things. Well, let me start with multiservice. I got a handful of questions. So let me start with multiservice. Appreciate, Ira, you've given the kind of $90-ish million revenue run rate. But was curious if you maybe if you have the how we should think about the volume impact and also maybe the any impact to the going forward net income?

Well, there is no volume in multiservice because they don't sell fuel. So that's the easiest question today. That would be zero. And part two I'm sorry, part two, I was so focused on that difficult question. I figured...

How should we think about any negative impact to net income or remove profitability going forward?

Well, I think the best way I could describe it is on an EPS basis, the net impact, considering the cash will be used to repay debt is less than $0.10 a share. So it will have a relatively minimal impact on EPS.

Perfect. All right. So that helps me there. The other thing I was going to well, one of the other things I was going to ask about is the gross profit on the aviation business, as you talked about was on a per gallon, maybe the highest that I've ever seen it or at least this fall back as my model goes. And obviously, there were some things that were enabled you to sort of keep those numbers higher. But I think interesting at least what's interesting to me is, I think, Ira, you said you expect the third quarter gross profit for aviation would be flat sequentially. So is that in that sort of expectation? Are you anticipating there to be some recovery in volumes? Or is it a continuation of some of this higher-margin kind of activity in the third quarter as well?

Yes, so let me describe that as best I can, Ben. So the answer to recovery on volumes, yes, there is an assumption on some recovery. We're being conservative. But through July so far, fortunately, we started to see different recovery levels in different parts of the world, nothing overly significant, but certainly better than going in the opposite direction, right? So you have that coming back some of the traditional passenger activity, contract-type business that was almost nonexistent in the second quarter is slowly creeping back a bit, but nowhere near the levels of the first quarter, for example. So to give you a broader answer on the flattish forecast, so you had the nontraditional business that I described in the second quarter that almost certainly will not continue at the same pace in the third quarter. You never know, but I think that was more situation-specific, and that's not necessarily a piece of activity that will continue on at the same rate. Cargo business is still pretty strong, but it was even stronger for some of those reasons in Q2. We also had a significant amount of volatility. Again, I mentioned the price facts that we're all familiar with, where we were around zero. And then we went all the way back to almost $40 at the end of the quarter. Market returned to a contango environment. We had some challenges for a while before corona with the market in a backwardated state. So by the volatility that we saw and a curve that is now more shaped in the contango variety, if you will, that provided us with a lot more opportunity for upside in the second quarter. Now prices have been relatively stable since the beginning of the month, right? We've been hanging out between $40 and $42 consistently. So that level of volatility is way down for now. That could change tomorrow. So we don't necessarily expect the same benefit from that, I think, I also mentioned that we expect government activity to be down a little bit more. So if you balance all that out, it puts us maybe a complicated answer, but it puts us in a similar net position. The mix will drive a lower margin than what we saw in Q2, but there should be more volume to get us to about the same place.

Okay. No, that's helpful. And next for me, is the sort of capital allocation, obviously, you are still generating pretty cash flow here, pretty good cash flow leverage is not really an issue, a lot of liquidity. And with the sale of multiservice, that is just enhanced that much further. I know Mike, you talked about looking at potential opportunities to acquire things. It sounds like the first take for multiservice liquidity or subs what you're generating out of that is to repay debt. I believe in the first quarter, you guys bought a lot of shares back. I mean where does that rank with the shares being where they are and relative to either of the other two buying debt or buying assets?

Go on, Ira.

Yes. So on yes. So we may be sound like we've gone back and forth a bit, but we were never big fans of buybacks. And then we started generating cash way more consistently. Our balance sheets start improving. So we started, including a greater portion of our capital allocation for buybacks. I would say, while we bragged about our liquidity being strong, which it was again at the end of the second quarter. A multiservice will obviously add that a bit more. We're still in a very uncertain world in terms of what the next few quarters might bring, how quickly business may come back. And so preserving the liquidity that we're so proud of is important to us in trying to maintain as much of that as possible as time goes on. So I would say for the time being, even though we may not be very happy with our current valuation, it is not necessarily as high of a priority as it may have been four months ago. But over the long-term, it remains a key element of our capital allocation strategy. We just want to take a little more time to see what develops over the next couple of quarters to get more comfortable before we start reinvesting in our own stock.

Okay. That's helpful. And then last one for me is the bad debt, close to $25 million of bad debt provisions, I guess, for bad debt. I'm curious, historically, and you guys have a long track record of managing credit here. Would you anticipate any of that actually being able to be recouped back into the P&L, either, I don't know, ultimately is collected or some other credit provision that enabled you to capture that back. I mean it's a pretty critical service that you guys provide, and I believe even in case of bankruptcy, puts you pretty high in the repayment profile. So I'm just curious if maybe you could discuss that a bit.

I'll put our General Counsel on the spot and say, if he does a really good job? Yes, maybe. So of course, we will do everything possible to minimize the potential damage related to some of the bankruptcies that are already out there. It's always a very complicated process. You're right. There's things like essential vendor. Fortunately, most of these airlines are still operating and want to need credit going forward. So there are a lot of things that could happen. I wouldn't count on recouping any of that amount but certainly, we would love to. And we're working as hard as possible to reduce the risk to a small of the number as possible, which would increase the odds of that happening. But it's really I would say it's too early to tell. But you're absolutely right. We have maybe some strategic advantages over other types of creditors, but it's a tough and unique environment. So I wouldn't make any promises along those lines.

Okay. All right. I appreciate it. And that's it for me. I appreciate the time, guys, and congrats on multiservice sale, I think that is a pretty good idea.

Thanks a lot, Ben.

Thanks, Ben.

Okay. No further questions from the phone.

Well, thanks very much to all of our shareholders, to our employees. Its head down, but we're optimistic about our future. It's been a heck of a journey over the last several months, but we see the future, and that's really what we're looking toward. So thanks very much, and we'll look forward to updating you next quarter. Take care now.

That does conclude our conference call for today. We thank everyone for participating and you may now disconnect.