World Kinect Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 27, 2023

There are 7 speakers on the call.

Operator

And thank you for standing by. Welcome to the World Connect Corporation's 2nd Quarter Earnings Call. At this time, all participants are in a listen only mode. After the presentation, there will be a question and answer session. You will then hear an automated message advising your hand is raised.

Operator

Please be advised that today's conference is being recorded. I would now like to hand the conference over to your host today, Elsa Ballard, Vice President of Investor Relations. Please go ahead.

Speaker 1

Good evening, everyone, and welcome to World Connect's Q2 2023 earnings conference call, which will be presented alongside our live slide presentation. Today's presentation is also available via webcast on our Investor Relations website. I'm Elsa Ballard, the new VP of Investor Relations here on the call for today the first time. I am thrilled to be here. With me on the call today is Michael Kasper, Chairman and Chief Executive Officer and Ira Burns, Executive Vice President and Chief Financial Officer.

Speaker 1

Before we get started, I would 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 actual results to materially differ. Factors that could cause results to materially differ could be found in our most recent Form 10 ks and other reports filed with the SEC. World Connect 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.

Speaker 1

A reconciliation of these non GAAP financial measures Their most directly comparable GAAP financial measure is included in our press release and can be found on our website. We will begin with a few minutes of prepared remarks, which will then be followed by a Q and A period. At this time, I'd like to introduce our Chairman and Chief Executive Officer, Michael Kaspar.

Speaker 2

Thanks, Elsa. Welcome to you, Elsa, and welcome to all. This is Elsa's first call and you may notice some new elements going forward Thank you, Glenn, for all of your work over the years. It's been an exciting few months for us here at World Connect. Importantly, that I can now officially call the company World Connect.

Speaker 2

I want to begin my remarks with why the name World Connect and what that means for the company and for you as investors. For nearly 40 years, we have been providing energy, logistics Finance solutions creating value for both suppliers and consumers of energy. When we went public on the New York Stock Exchange over 30 years ago, We were a small reseller of petroleum products, primarily in the U. S. When we rang the New York Stock Exchange Closing Bell last month at our official rebrand, it was as number 70 on the Fortune 100 with nearly $60,000,000,000 in sales last and maintaining and growing an energy ecosystem of thousands of customers, suppliers, partners and experts Around the world fulfilling energy in 200 countries and territories.

Speaker 2

Our mission was then and still is today To meet our customers' energy needs in the most efficient manner possible and to provide our supply partners with a world class distribution While we are not in the business of producing or refining the energy we supply, we work every day to improve access and deliver value to Our global network of customers, suppliers and partners. The changing of our corporate name to World Connect is part of our ongoing commitment to that mission and more clearly reflects our future facing businesses that anticipate and adapt to our customers and the market's evolving requirements. One of the ongoing challenges our customers face today is the need to source and consume a diverse energy diet That is affordable, reliable and increasingly lower carbon to achieve their sustainability targets or satisfy regulatory requirements. At World Connect, we are not only serving our customers' conventional energy needs today, but also expanding our portfolio to provide customers with greater access To sustainably sourced energy across aviation, land and marine. As an update on the renewable energy front, During the Q2, we announced an expansion of our partnerships with 2 of the largest sustainable aviation fuel or SAF providers, Expanding our ability to supply SAF to over 40 airports in North America and Europe.

Speaker 2

Additionally, we also made a minority investment Through World Connect Sustainability Ventures and a commercial mobile EV charging company providing charging as a service To fleets and other consumers, these are all excellent examples of World Connect's strategic evolution as we seek to leverage our Stensive supply network to bring value to our partners and customers alike. So while we are very focused on supporting our customers' energy transition journeys, we recognize this part of our business today remains small relative to our conventional energy business. However, this business has been gaining traction growing year over year and creating synergies with our conventional fuel offerings. Our commitment to growing sustainably related products and services is evidenced first by our continued investment in people Supporting these activities with headcount of 250 across the globe. We are also working to drive organic growth in related areas, including digital and technology enabled data management for what is a relatively complex specialized and evolving space.

Speaker 2

2nd, we have a dedicated team focused on a growing pipeline of inorganic investment opportunities. Importantly, we aren't looking to make investments for the sake of making investments, but rather carefully identifying innovative future solutions that will strategically enhance our customer offerings and satisfy their requirements for today and tomorrow, while driving incremental and long term shareholder value. Furthermore, we are also selectively investing in certain early stage ventures that show promise of delivering innovative future solutions As the market continues to evolve, one such investment is Producers Trust, a digital platform supporting regenerative agriculture For small and medium sized farmers in developing countries, this investment brings us closer to nature based solutions It is a reflection of our commitment to bringing high quality, high impact carbon offsets to market. We will also continue to roll out technology enabled solutions To drive value and operational integration with the marketplace, automate as many of our internal processes as makes economic sense And continue to logically deploy AI on use cases with the best business and organizational outcomes. We are on course to be a cloud first company by year end, meaning all of our systems and infrastructure will be in the cloud giving us greater security, resilience and the flexibility to expand and scale our global offerings.

Speaker 2

Finally, in the same way that we built the world's 1st and largest Independent Marine Fuel Services business and the most diversified independent aviation supply and services business, we will build our land and renewable energy Supply and Carbon Management Businesses. While Aviation and Marine took longer to build, we expect these 2 will take considerably less time Because we already have the global footprint to leverage together with knowledgeable and experienced professionals executing with better tools. The foundational principles of return on capital, cash flow and risk management upon which World Fuel Services built our base businesses We'll continue to govern our evolution as World Connect. We are laser focused on driving efficiency and returns within our global platform and improving the consistency of profit contribution from all of these activities. And so in summary, We believe our recent name change to World Connect is very meaningful.

Speaker 2

While we will continue to meet the critical fueling requirements of our customers day in and day out, This change is intended to emphasize our ongoing transformation alongside that of our customers and suppliers, Further solidifying our existing relationships and trust we have built in the past with enhanced and expanded relationships in the future. Therefore, World Connect more clearly reflects our future facing business as we continue anticipating and adapting to the evolving needs And capabilities of our partners in the markets we serve throughout the world. It's certainly exciting times for us. As I turn the call over to Ira for a review of our financial results and business results, I want to conclude with a thank you to the over 5,000 members of our global team who work every day to ensure the success of our company. It is only because of their hard work, Your hard work that we will continue to drive our long term growth strategy and deliver on our mission.

Speaker 2

It is truly a pleasure and privilege To work with such a talented, dedicated and passionate group of people who make coming to the office every day an engaging and meaningful experience. Thanks very much. Ira, let's hear all the good stuff.

Speaker 3

Thank you, Mike. Good evening, everyone. As Mike noted, I'm about to share all the good stuff. It's clearly been an exciting several weeks for us, Considering the World Connect name change and the recent convertible offering, etcetera. But now I'll get into some of the details specific to The Q2.

Speaker 3

For starters, as always, I'd like to note that our non GAAP results for the 2nd quarter Reflect limited adjustments to GAAP results with no EPS impact this quarter, which is consistent with last quarter. However, the comparative prior year numbers do exclude the impact of certain non operational items, which are highlighted in our earnings release. To assist you in reconciling the results published in our release, the breakdown of last year's non operational items can be found on our website and also in today's Webcast presentation. So getting into the real numbers on a consolidated basis, while total volume of $4,470,000,000 was down Slightly year over year, consolidated gross profit increased 11% to $282,000,000 from last year's Q2, when we experience the impact of extreme backwardation in our Aviation segment. Speaking of Aviation, as I mentioned last quarter, We have been laser focused on driving efficiencies and solid returns in the face of the current elevated interest rate environment.

Speaker 3

While we experienced organic growth in many parts of the aviation business, including international passenger activity and business and general aviation, These volume gains were offset in part by weakening cargo demand and we also made a conscious decision to reduce our exposure To certain working capital intensive activities, which while resulting in some volume reduction, contributed to overall margin improvement as well. Considering all of this, aviation volume of 1,850,000,000 gallons in the 2nd quarter was only up slightly year over year. However, 2nd quarter aviation gross profit of $128,000,000 was up significantly when compared to the Q2 of 2022, which was materially impacted again by inventory losses driven by significant price volatility and extreme backwardation. And again, we also benefited from our heightened focus on margins and returns during this year's Q2. As we look to the Q3 for aviation, we expect the traditional summer seasonal increase in aviation gross profit with an anticipated further improvement in margins benefiting in part from our recent contract renewals.

Speaker 3

Now turning to our Land segment, volume was just over 1,500,000,000 gallons, down slightly year over year, driven in part by some lingering weakness Our North American commercial and industrial activity offset in part by a further increase in volumes associated with our natural gas And power trading activities. Consistent with last quarter, approximately 1 third of total reported land volume relates to these natural gas and power activities. From a profitability standpoint, Land generated $111,500,000 of gross profit in the 2nd quarter, down approximately $11,000,000 or 9% year over year. As forecast on last quarter's call, the principal portion of this year's year over year decline Relates to our U. K.

Speaker 3

Operations, where prior year results benefited from significant market volatility. We also experienced a year over year decline in profitability In our North American commercial industrial business offset in part by an increase in gross profit from our sustainability related service offerings. As we look to the Q3 for land, we expect a modest year over year improvement in volume and gross profit, driven principally By a somewhat stronger summer driving season in North America, aided by a significant year over year decline in fuel prices at the pump, as well as continued year over year growth in our sustainability related service offerings. And lastly, our Marine segment volume of 4,200,000 metric tons It was down approximately 14% from the Q2 of last year, driven primarily by declines in activity in the container market. In terms of profitability, marine gross profit was $42,000,000 in the 2nd quarter, down from a record $78,000,000 in the prior year When bunker prices were approaching record highs and market volatility was quite significant.

Speaker 3

While year over year results were down as expected, Marine margins remain well ahead of historical averages. As I mentioned during my aviation commentary, we also remain focused on ensuring we generate margins in marine, which enable us to maintain acceptable returns in the current interest rate environment. For the Q3, while marine gross profit should be generally flat Sequentially, gross profit will again be down year over year similar to the year over year decline we experienced in the 2nd quarter. Moving on to expenses. Consolidated operating expenses were $205,000,000 in the 2nd quarter, which is at the lower end of last quarter's guidance.

Speaker 3

As we look ahead to the Q3, we expect operating expenses to be in the range of $214,000,000 to $218,000,000 which will be up sequentially, principally driven by seasonality, but will be down year over year. In the face of what remains an uncertain macroeconomic environment As well as persistent inflationary conditions, one of our primary priorities is vigilant expense management With heightened scrutiny on areas such as hiring and travel as well as all other expense categories, our primary objective is to deliver the best possible Reaffirming our operating margin target of 30% or higher by 2025. As a reminder, This target relates to our adjusted income from operations as a percentage of gross profit. This strategic focus is expected to contribute positively to overall returns and drive incremental earnings per share progressively over time. We've talked a lot about interest expense over the past year And we continue to focus on managing working capital and capital expenditures, generating positive cash flows and optimizing the terms and conditions of our liquidity facilities.

Speaker 3

These efforts have been paying off with 2nd quarter interest of $32,000,000 down $2,000,000 sequentially and down more than $3,000,000 from our peak Quarterly interest expense in the Q4 of last year. Looking ahead to the Q3, we expect interest expense to decline again to the range of 28 The $30,000,000 with a further reduction principally related to the benefit of the lower interest rate associated with our recent convertible note offering, which I'll talk more about in a few moments and also outstandings under our liquidity facilities have been trending lower. Our adjusted effective tax rate for the Q2 was 24%. That's a bit higher than expected. However, we continue to believe that our 2023 full year tax rate We'll remain generally consistent with 2022 at approximately 20%.

Speaker 3

On to cash flow, After delivering very strong operating cash flow in the Q1, we generated an additional $44,000,000 of operating cash flow this quarter, driven by again carefully managing all related balance sheet levers. That brings year to date operating cash flow to $186,000,000 Keeping our liquidity profile strong and positioning us well to continue pursuing growth opportunities while maintaining solid financial flexibility and enabling us to continue focusing on opportunities to drive incremental profitability. More specifically, As we often receive questions about capital allocation, I wanted to quickly touch on our flexible capital allocation framework and remind you how we make decisions About our uses of capital. Our guiding principle remains supporting the growth of our business while carefully managing balance sheet leverage, All with an eye on delivering incremental shareholder value. In the growth bucket, our primary focus is on organic growth An accretive M and A, which could include opportunities like the Flyers acquisition last year, which expanded the breadth and depth of our North American land business, as well as opportunities to continue building our sustainability related product and services platform, where we continue to make good progress organically, Thanks to our growing and talented team focused on this part of our business.

Speaker 3

On the balance sheet side, again, we prioritize low leverage Through prudent capital management and work to maintain ample liquidity throughout all business cycles. And on shareholder returns, We want to remain an attractive holding for our investors, which is why we have consistently returned capital to our shareholders through both buybacks and dividends. Speaking of buybacks and dividends, we've returned $67,000,000 to shareholders year to date, paying $17,000,000 in dividends and repurchasing $50,000,000 of stock in conjunction with our recent convertible offering. Just to note for your models, our recent $50,000,000 buyback Reduces our share count by approximately 2,200,000 shares or 3.5% going forward, effectively starting with Q3. And we have now repurchased more than 10,000,000 shares over the past 5 years.

Speaker 3

As mentioned earlier, We issued $350,000,000 of convertible notes maturing in July 20 28 at the end of the second quarter, which diversifies our capital structure and immediately reduces our annual run rate of interest expense by approximately $10,000,000 Again, this is one of the many opportunities being focused on to reduce interest expense in this elevated interest rate environment. As we entered into a series of related bond hedge and warrant transactions simultaneous to the convertible offering, it is important to note That there is no equity dilution related to the convert upon conversion unless our stock price exceeds $40.14 And whatever value may be created when our stock price does exceed this conversion price can be sold in cash or shares or a combination of the 2 at the company's option. This was a very successful transaction for us and we are very happy to welcome so many new investors to the World Connect story. With the maturity of our bank facility recently extended to 2027 and the new convertible notes maturing in 2028, We have significantly strengthened our financial position with our liquidity well secured for an extended period of time. So in summary, despite a tax rate a bit higher than anticipated going into the 2nd quarter, we delivered solid overall results.

Speaker 3

We delivered additional cash flow contributing to strong year to date operating cash flow and free cash flow. We diversified our capital structure with our first ever bond offering. We continue to find ways to reduce interest expense with sequentially lower interest for the 2nd consecutive quarter. We repurchased $50,000,000 worth Stock reducing our share count by approximately 3.5%, and we should deliver strong results in our seasonally strong third quarter and remain intently focused on driving profitable growth and carefully managing expenses to ensure we deliver strong results for the full year 23 and into 2024. And finally, as Mike mentioned earlier, we remain proud of our team and we are excited about the continued evolution of World Connect and the growing opportunities that lie ahead.

Speaker 3

Thank you. I'd like to now turn the call back over to Liz, our operator, to begin the Q and A session.

Operator

Our first question comes from the line of Ben Nolan with Stifel.

Speaker 4

Is it me?

Operator

Yes. Your line is now open.

Speaker 4

Sorry. It just went quiet there. Hey, guys. Ben Nolan from Stifel. I have just a couple of questions.

Speaker 4

The first, I think I already mentioned on the aviation side That you repriced contracts and I think that's usually something that happens around this time of the year. Can you maybe talk to How those are being repriced both with respect to the trajectory or the incremental pricing And how those conversations are going? What portion of the business is price sensitive or not?

Speaker 3

Sure. Hey, Ben. Thanks for joining us today. So no simple Straight line answer to that question. So I'll try to give you a broad one to help as much as possible.

Speaker 3

Considering the current interest rate environment, I Probably keep repeating myself about the fact that we're focused on meeting our hurdle rates that have increased considering the environment that we're in. So with that in mind, as we've gone through some of our contracts renewed in the spring, many of them renewed On July 1, at the beginning of Q3, that's a factor that the very well experienced team that's been doing this forever Takes into serious account when deciding their strategic position with each and every account. You have to take into account the interest rate environment, Competition in certain markets being stronger than others, etcetera. And as a result of that, the easiest way to answer your question, say, is Some business that didn't necessarily meet those hurdle rates, which I alluded to in my prepared remarks, which will result in a little bit of Volume declined versus the organic growth that we've seen in the areas that I mentioned, but also in many cases, we've A bit of an increase in our margin compared to the contracts that were expiring in the spring or at the end of June. So That's one of the reasons I mentioned that we should see an even stronger margin in the 3rd quarter Then we did in a second because we should have some uplift there.

Speaker 3

It's not massive, but the teams did a great job in finding whatever opportunities possible to bring those margins up. So we'll have several $1,000,000 annual incremental benefit From those margins, net of anything that we may have given up.

Speaker 4

Okay. And then changing gears, As it relates to the buyback, the $50,000,000 buyback, I'm curious that it For you guys buybacks have been sort of episodic. Would you characterize that as just sort of a one off? Or Are you thinking about something a little bit more continual with respect to your buyback activity?

Speaker 3

So episodic, I'll remember that word. We've actually bought back on average a couple of 1,000,000 shares a year quite ratably over the last Several years, what I mentioned on the call, 10,000,000 shares over 5 years. We targeted a number very similar to The number that we want to buying back in conjunction with the convert, as that's a number that ensures that we're at least At a minimum offsetting the dilutive impact of employee related equity awards. So that's an amount we probably would have purchased anyway. There was a strategic value to doing that in conjunction with the convert because it helped Reduce what the type of volatility some companies would often see when issuing a convert before closing the deal and actually Worked very well for us as our stock only moved about 4% on the day that we were in the market.

Speaker 3

That's considered Pretty immaterial on a comparative basis to other transactions. So It's unusual that we get it all done in one day. It was kind of efficient to do it that way. It all got done at the same price. But going forward, we'll be going back to the same rationale we've always had of trying to Combine that with our dividend to return $60,000,000 $70,000,000 a year to shareholders between Those two items, there are times we bought back a bit more defending our stock when it got Beaten up to levels that really, really disappointed us.

Speaker 3

But I would say generally, The $50,000,000 number is a good metric to think about going forward, plus or minus for future years.

Speaker 4

Okay. So in other words, an annual number of $50,000,000 is a good annual number. Yes.

Speaker 5

That's right. Okay.

Speaker 4

Okay. All right. I appreciate it. And That's my questions, but did want to say also I appreciate the deck. It's good work on that.

Speaker 1

Thank you.

Operator

Our next question comes from the line of Pavel Molchanov with Raymond James.

Speaker 6

Thanks for taking the question. So you talk about Sustainability, kind of expanding within the revenue mix. Can you maybe put some Specific numbers kind of Q2 contribution versus previous year or any historical comparisons along those lines?

Speaker 3

I mean, if you look at everything that we historically defined as World Connect, Which is our natgas, power, and sustainability related services businesses. It's grown to about 10% of revenue and that's progressively increased Year over year by a few percentage points. But second quarter, year to date, full year expectation, Somewhere around almost exactly 10% of gross profit.

Speaker 6

Yes. Just to clarify, did Did you mean 10% of top line or 10% of EBITDA?

Speaker 3

I'm talking about 10% of net revenue. And the EBITDA contribution is also very similar to that number. So it's pretty close to 10%.

Speaker 6

Okay. And maybe kind of zooming in on one aspect of that, you guys recently announced Sustainable Aviation Fuel deal with Neste and I think you said that your SaaS volumes will be up 20 fold In 2023 versus last year, obviously, from a pretty small base. But just talk about What you're seeing as you talk to airlines about their interest in SaaS?

Speaker 2

Yes. Pavel, all of the airlines have got commitments that they have to meet. And I think it's pretty well known that the demand far exceeds the supply. It's a feverish pitch of a lot of folks looking to build manufacturing and production. But I mean the truth of the matter is that it's willfully inadequate for the amount of demand.

Speaker 2

So This will continue. Certainly, the support in terms of LCFF We'll help the cause and you'll see the cost of that being distributed. But there's going to be a slow burn. We're participating in it. And particularly in any of the businesses, any of the sustainability businesses That are using the same infrastructure, we're going to participate fully.

Speaker 2

So drop in fuels are a beautiful thing And we'll invest in projects that we think make sense. We've done that Over the history of the company, and we'll continue to do that. So we started this journey in capability, which is right in our wheelhouse, and we'll continue to do that. So that's our commitment. We're following What our customers are looking for and helping them achieve their targets and their goals, We'll invest in projects and help make it happen, but it's going to take a little bit of time.

Speaker 6

Okay. Last question for me. I hope I can get your kind of macro perspective on this. In the last 4 weeks, we've seen Pretty notable escalation in oil prices, still lower than a year ago, but certainly the steepest increase in oil year to date. Is there any resulting demand impact that you've observed since the beginning of July?

Speaker 2

Well, I'm not sure it's directly related to price. I think there are probably larger macro Issues at play that may be just more fundamental economic So the trends and cycles, in fact, On the retail and the gasoline side, we feel that we'll probably benefit from the relative lower comparative But I think some of the drop off in demand in shipping and in some of land based, Some of the disruptions that you've got within air travel, despite the fact that You're seeing an increase in demand certainly on the international long haul, which is beneficial. So it's a lot of swirling trends and I don't think you could really put your finger on any one thing, but I wouldn't say that Price is really driving behavior so much right now. It's not, I think, a meaningful enough move to have impacted Consumer or commercial activity.

Speaker 6

Okay. Very helpful.

Speaker 3

And Pavel, just to add to that, we it is our seasonally strongest quarter. You got that impact, which maybe would have a negative somewhere, but it's being masked by the fact that you're seeing growth because It's the summer, especially in commercial passenger activity and crews in areas like that are more Consumer oriented, if you will. So and we're seeing that. We're not really we're not seeing any significant headwinds To that seasonal pattern that we expected going into the quarter.

Speaker 6

Appreciate it.

Speaker 3

Thanks, Pavel.

Operator

Our next question comes from Ken Hoexter with Bank of America.

Speaker 5

Hey, good afternoon, Ira and Mike. Just want to talk about the sustainability of Aviation gross margins, obviously pretty key here. So Maybe you could talk about that a little bit.

Speaker 2

Ken, I think It's been a pretty wild ride. I mean, nobody knows this better than you. You've been following us for quite some time. But If you go back from 2014 to 2022, from the implosion of the energy complex So the recovery in 2019 to COVID and then the Ukraine and the disruption of oil Supply market and what that meant in terms of the pricing profile, it's been quite extraordinary. The mix of our business, I think our aviation team should be extraordinarily proud of what they've been able to accomplish Both in commercial and business aviation.

Speaker 2

And we've got a material business aviation practice now, Which is sort of exemplary. So it's a combination of both the business mix and I think tremendous discipline on the team. And as Ira commented earlier, From interest rate hurdle rates and really being more discerning in terms of Where are we showing up? All supply is local and some local supply It was rather expensive, long transit times, difficult to manage when you've got all sorts of whipsawing market Pricing, so it's been a combination of things. And I think that Volume growth obviously and some of our services growth is Something that we obviously want to focus on, I'm not sure that if you look at sort of historic norms, It would be prudent for us to continue to think that we can flex On some of these items because we're at reasonably healthy levels.

Speaker 2

But I think going back to Ira's comments and what we're really focused Is the efficiency of the organization and bottom line sort of returns and working on cost And looking at where we're spending money, what we're doing on headcount and just taking a closer look At those areas and looking at return on a broader sort of holistic perspective, So I don't know if that kind of helps you think about the business.

Speaker 5

Just to

Speaker 3

add a little bit to that. Ken, if you go back to pre COVID, this is kind of a A bit of a thank you to our phenomenal team in the Aviation business. You'll remember, right, we had a lot of government Related business, it was obviously higher margin. So you would think that it would be hard to achieve The unit margin that we had back then considering those dynamics which are now all gone. But over the last few years with some COVID related interruptions, our mix of business has really changed a lot, right?

Speaker 3

We've got a growing Business Aviation Business, Mike mentioned, we bought UV Air 20 minutes before COVID started. But now a couple of years later, that's really Kind of return to where we expected it to be and beyond. Our business that's now 5, 6, 7 years old, Principally in Europe on airport, the business that really started out from the acquisition from Exxon, that's a A bit more physical higher margin business as travels come back in Europe, that's become a bigger piece of the pie. And then of course just on the core Commercial business, as Mike mentioned, greater focus on margins. So what's pretty remarkable to answer your question, I think The general zip code where we're at today is sustainable, and it's better than where we were in 2019 With the dynamics again that have been gone now for the next last couple of years.

Speaker 3

So that's pretty cool. And there's some seasonality, right? So our margin always peaks in the Q3. It will probably be lower in the Q4 than the Q3. But these levels are sustainable.

Speaker 3

It's not that we have some short term blip In an apples to apples comparison, the overall mix of all the contributing factors and Mike even mentioned some non fuel offerings That have grown to contribute to our margin. So, it's just a great job and we're at levels now that we should be able to hang on to.

Speaker 5

So Ira, would you break it down into buckets in terms of, I don't know, passenger versus Small Private Jets versus other? And is it a mix shift that's occurring within that or just Calling up different business that you'd like to share.

Speaker 3

Absolutely. If you go back a few years or 3, 4, 5 years, I would say that the business in general, The private jet market as you would call it, was maybe 20%, 22% of the business. Now it's closer to 50%, Right. So that's a big shift. And then we had we were 0, 5, 6, 7 years ago, the type of business we have at over 100 airport locations today, That was 0.

Speaker 3

We weren't at any, right? And that's just because of the nature of the beast where we're on the ground with the truck and the driver and the fuel and the tanks, That's a much higher margin business as well. So now that's a bigger piece of the mix, right? So yes, you've had a mix shift. You lost the government piece, but those two pieces that were relatively small back then have become much bigger pieces of the pie that have Arguably more than offset what went away.

Speaker 5

And then just one on land, right, which is You talked about 30% is natgas related. Maybe talk about how that is priced, I don't know, versus What we know on a per gallon diesel methodology, and it sounds like that part is growing fast. How do we think about that and margins there?

Speaker 3

Great question. So they're both different, natgas and power. There's more nat gas volume than power volume. It's still I know it's grown as a bigger piece of the pie to sit about 30%. If you it's a little confusing.

Speaker 3

If you try to convert it to kind of a gallon equivalent margin, which makes sense in the analysis you're trying to do, The nat gas volume is much lower than our average volume, but has a much lower cost to serve because that's A very small tight, another fantastic group, but small, so we don't spend a lot of money to generate that profitability. The power Related volume is much smaller. That number is actually higher than our average land margin. But I would say if you split the natgas and Power volumes, 75%, 80% of it is net gas and only about 20% of it is power. So that That has arguably a bit of a negative impact on our average margin.

Speaker 3

If that outgrows our fuel business, that could have an impact. But again, it's dropping it's all dropping to the bottom line because of the to the extremely efficient cost structure that exists in that business. So good question.

Speaker 5

Thanks for that. Last one for me, just a small one, just given all The move on the debt, talk about balance of debt off balance sheet receivables versus your long term debt, what got paid off. Can you just abbreviate that real quick?

Speaker 3

So the only thing that really changed at the June 30 date at the end of the second quarter is we took the $350,000,000 minus all the associated costs That deal has a $50,000,000 buyback and that those net proceeds just repaid our revolver, Right. So, that's really all that happens. You have lower revolver borrowings, now you've got the convert. On average, The other part of your question on receivable sales, since that remains our most expensive Cost of capital today, the average outstandings on that are coming down, Which is one of the things that's contributing to reduced interest expense. So somewhat lower receivable sales, Somewhat lower revolver borrowings and then the new $350,000,000 Line on the balance sheet for the convert.

Speaker 3

So net net, our overall average interest rate Has come down for two reasons because of the convert and a somewhat lower mix of receivable sales and then Glenn Mike mentioned at the beginning of the call are now full time treasurer as opposed to 80% of time treasurer. He's done a great job renegotiating some of those deals, so even the receivable sales that are outstanding are coming with Somewhat lower coupon than they were back in the Q1.

Speaker 5

If I can just sneak a quick one in, just the last couple of downturns, right, we've Not that delinquencies are a big part of your business or so small, but you manage that business really well. I just want to understand from an economic point of view, from your point of view, Is anything shifting here? Are we do you feel like anything from your economic point of view, has anything changed? Are we getting closer to the And on that or is it just too small part just given how your risk department works well?

Speaker 3

Yes. So if I got the question correctly, I would say, we went through the horrors Of COVID and managed through that very well. There were a few bankruptcies. Most companies with Whether it would be governmental support or otherwise did a really good job and have rebounded phenomenally well. Obviously, the market is really strong.

Speaker 3

But I would say, I wouldn't set off the fire alarms, but certainly There's a lot more focus today on certain parts of the business where Customers balance sheet strength may have weakened a little bit. I don't think it's anything again, I don't think it's anything alarming, But we're paying close attention to certain elements of the market and customers, knock on wood, No issues on the horizon that we're aware of. Our team has done a great job avoiding a couple that it could have become a problem, which is something We've repeatedly done well for decades. So overall, I would say 90% of the portfolio is just as strong as it was A year ago, the other 10% has weakened a little bit and we're looking at it very carefully. But as you could See from our results again, very limited write offs.

Speaker 5

No, I know thank you for that. I know you've always had low write offs and that's because you guys manage it and you take down the day Sales outstanding. I just didn't know if there was like a if you were seeing that tighten or if you were seeing it rewiden because things are getting better. That was a question.

Speaker 3

No, actually, if we look at something like our metric on past dues, we've actually that's come down, right? So our Part of that is our team doing a phenomenal job, but we haven't seen a deterioration at all in terms of something like past dues.

Speaker 2

Yes. That was just part of Matt. The portfolio continues to get better. When you look at our service offering, The service offering we have speaks to the largest and the best So that obviously has its own benefit to it. That wasn't always the case going back quite some time ago, but the portfolio is significantly better and That's where we do our business.

Speaker 5

No, I know. Yes, I was just trying to see if you had a more macro view after the company stuff that, Perfect. I appreciate the time and the answers. Thanks, Mike and Howard.

Operator

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

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Earnings Conference Call
World Kinect Q2 2023
00:00 / 00:00