World Kinect Q2 2024 Earnings Call Transcript

There are 7 speakers on the call.

Operator

by, and welcome to World Connect Corporation's Second Quarter 2024 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 I would now like to hand the call over to Elsa Ballard, VP, Investor Relations and Communications. Please go ahead.

Speaker 1

Good evening, everyone, and welcome to World Connect's Q2 2024 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, VP of Investor Relations and Communication. With me on the call today is Michael Kasbar, our Chairman and Chief Executive Officer and Ira Burns, our EVP and Chief Financial Officer. Before we get started, I'd like to review our Safe Harbor statement.

Speaker 1

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 can be found in our most recent Form 10 ks 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.

Speaker 1

We will begin with several moments of prepared remarks, which will then be followed by a Q and A period. I would now like to introduce our Chairman and Chief Executive Officer, Michael Kauffman.

Speaker 2

Thank you, Elsa, and good evening, everyone. While we face challenging market conditions in our land business this quarter, we remained focused on increasing our percentage of core recurring revenue activities and driving improved operating efficiency to deliver our medium term targets, which we shared with you at our recent Investor Day. As I've highlighted over the prior few quarters, our management team's focus is on building a more ratable and leverageable business model across all of our businesses. Aviation is a great example of this. Our aviation business continued to deliver strong performance and has excellent momentum heading into the second half of the year.

Speaker 2

Our optimized scale platform provides consistently high operating margins and we continue to demonstrate our value to customers around the world in both business and commercial aviation. Aviation generated a very strong operating margin in the Q2 and continues to be a model of efficiency. Advancing our objective of sharpening the portfolio, the strategic divestiture of the Avanade business within the quarter further enhanced our liquidity and created economic value well beyond what we were able to achieve by retaining the business in our portfolio. This was followed by a tuck in acquisition in Business Aviation that we signed today. This transaction will expand our bulk fuel distribution network by adding nearly 300 customers, including 100 FBO locations.

Speaker 2

Our market leading business aviation distribution platform will be able to bring additional supply and solution capabilities to these locations as well as outstanding customer service and comprehensive operational support. While not initially a significant earnings contributor, this acquisition is an example of the type of synergistic and strategically complementary deals we will continue to seek. While not at the ratability of aviation and while results were down year over year, our marine platform remains highly efficient and working capital light. Because marine is more of a spot business, it can deliver outsized results when market conditions are favorable, but creates value even in less beneficial environments. It is a consistent cash generator with minimal capital requirements and significant potential upside.

Speaker 2

We continue to appreciate the diversification and return profile of this business. Land is clearly where we are highly focused on building similar efficiencies. Unfortunately, in the second quarter, we experienced an unusual situation in which a number of our market forces negatively impacted several parts of the land business. Ira will cover this in more detail in his comments. We are actively working to grow and scale those parts of the land business that we believe are more ratable, have a better return, are less susceptible to market conditions and provide the best platform for increased operating leverage.

Speaker 2

Last week, I participated in a 2 day management off-site with 50 of our key leaders. We focused exclusively on accelerating the transformation of our core U. S. Land business. There is little doubt in my mind that we have assembled and organized the best team we've ever had with a clear focus on flexing the capabilities we have across the company and a sense of urgency to install the processes and tools necessary for growth and operating leverage.

Speaker 2

Before I return the call to Ira, I want to stress that we believe that improvements in our land business remains a critical element of meeting our medium term financial targets. The land result this quarter was clearly a disappointment, but in no way alters our commitment to maintain our Investor Day objectives or impacting the confidence in our ability to achieve these objectives. If anything, the result underscores the need to move more quickly. To reiterate, we are committed to consolidating our offers and reallocating capital to improve operating leverage. This is our number one management priority and we will be updating progress towards this objective quarterly.

Speaker 2

Now I'd like to thank our fantastic global team for their consistent dedication to our business. Your passion for what we do shows and in an uncertain world, our customers, suppliers and partners know that they can rely on us as they have for the nearly 40 years. Thanks for listening. And now Ira will give a financial and detailed business update.

Speaker 3

Thank you. Thank you, Michael, and good evening, everyone. Before I begin, please note that our 2nd quarter non GAAP results reflect approximately $88,000,000 of pre tax adjustments. This is primarily due to a $96,000,000 pre tax gain on the sale of Avanode, which was completed in early May, offset in part by certain restructuring costs and a single investment related impairment. The after tax gain on the Avanode sale was approximately $87,000,000 contributing $1.45 to GAAP diluted earnings per share for the quarter.

Speaker 3

Congratulations again to our team for successfully completing this transaction during the Q2. Reconciliations of our non measures are available on our Investor Relations website as well as today's webcast presentation. So now getting into the Q2 details. Consolidated results were clearly impacted by weaker than expected performance in our Land segment, which was offset in part by solid results in Aviation. Despite the underperformance in land, our expenses again declined year over year, our tax rate was lower than anticipated and we generated strong cash flow, which contributed to a further reduction in interest expense.

Speaker 3

I'll now provide more color on the 2nd quarter segment by segment results. Starting with Aviation, where as a reminder, results were modestly impacted by the Avanote sale, which we completed on May 1. Aviation volume was down slightly year over year. This was principally related to a reduction in low margin activity over the past 12 months, including 100,000,000 gallon per quarter reduction in bulk activity that we discussed last quarter, offset by volume growth in much of our core aviation activities. Our efforts to improve returns in aviation contributed to a near record 53% operating margin for the quarter.

Speaker 3

Aviation gross profit was generally flat year over year with the benefit from margin improvements generally offset by the impact of the Avanode sale. Just to note, since Avanode was a service business with no underlying volume, the divestiture will impact unit margins in Aviation by approximately 0.5¢ per gallon going forward. As we look to the Q3, if we exclude the impact of the Avanote sale, gross profit should be up meaningfully year over year, reflecting improved operating leverage from our growing global supply network. One of numerous examples of year over year growth would be an expected incremental contribution from the Paris Olympics as we added Paris Vachery Airport to our network earlier this year. And looking towards the Q4, we'd expect the aviation tuck in transaction that Mike discussed earlier to be a strong strategic fit for our Business Aviation segment.

Speaker 3

While not a significant earnings contributor day 1, this transaction will be modestly accretive and we expect it to close in the fall subject to customary closing conditions. In our land business, while commercial and industrial retail and nat gas volumes actually increased year over year, overall volumes decreased slightly, principally driven by unfavorable market conditions in our North American wholesale activities. The percentage of land volume associated with our natgas and power business was 33% in the 2nd quarter, down from 41% in Q1 and modestly up from 31% in the Q2 of last year. While volumes were generally flat, land's 2nd quarter was quite weak from a margin perspective resulting in a 28% year over year decline in gross profit. The principal drivers of this decline were unfavorable supply dynamics in the renewable fuels market, principally on the West Coast, an oversupplied natural gas market where inventories were 20% above the previous 5 year average at the end of June, driving near record low prices and virtually no market volatility during the quarter.

Speaker 3

And even Brazil, where exponential growth in cargo imports, which started impacting us in the Q1 has further driven down local market prices resulting in further pressure on margins. And finally, while up sequentially, gross profit from our core sustainability related offerings declined year over year. We are seeing growing opportunities for the second half of the year and beyond in many parts of this exciting business throughout the world. One example for the second half relates to renewable credits where demand generally strengthens in the latter part of the year when customers firm up their carbon requirements before closing out their fiscal years. In summary, Land's 2nd quarter was clearly a bump in the road.

Speaker 3

We have made it clear that the work necessary to achieve our medium term targets for land specifically would not be a straight upward arrow. So while we certainly aren't pleased with the 2nd quarter outcome, we are confident in our ability to achieve these targets and we remain very much committed to doing so. What are we doing here? Well, we remain focused on continuing to sharpen our portfolio of activities in land and significantly improving operating efficiencies. With the continued goal to migrate more and more of the business to higher margin, higher return, more leverageable and ratable activities such as our card lock and retail distribution networks.

Speaker 3

We also have the ability to utilize our strong liquidity position to capitalize on a growing pipeline of synergistic investment opportunities in these areas of our business, which should enable us to accelerate profitable growth and returns in the land business over time. In the short term, while we are currently seeing a reversal of some of the unfavorable trends that impacted the 2nd quarter, which should result in overall sequential improvement in land, 3rd quarter gross profit is still expected to be down when compared to an extremely strong Q3 in 2023. However, we should return to year over year gross profit growth in the 4th quarter, while remaining focused on driving greater opportunities for growth and increasing returns in 2025 and beyond. Moving on to marine, while volumes were essentially flat year over year, gross profit decreased about 13% driven principally by lower market volatility that experienced in the prior year period. While we anticipated a sequential margin decline heading into the Q2, the actual decline was a bit more than had been anticipated.

Speaker 3

As Mike mentioned earlier, while marine profitability is down from the highs of 2022, it remains an extremely efficient capital model and allows for strong returns and contributions to cash flow each quarter. As we look to the 3rd quarter, we expect marine gross profit to be effectively flat when compared to the Q3 of 2023 as year over year volatility comparisons finally seem to be normalizing. To help better frame our comments on expected year over year gross profit performance segment by segment, we have decided to begin providing color on consolidated gross profit for the Q3 and going forward. With the backdrop of the related segment gross profit comments I've just shared, we expect consolidated gross profit to be in the range of 265 to $274,000,000 in the 3rd quarter. Hopefully, this will be helpful for modeling purposes going forward.

Speaker 3

Now let's go to consolidated operating expenses. That was $192,000,000 in the 2nd quarter, down 7% from the Q2 of 2023 and below our guidance range provided last quarter. 2nd quarter expenses were lower than anticipated, principally by reduced variable compensation, but also lower G and A expenses serving as evidence of our ongoing efforts to carefully manage all cost categories across the entire business. The elimination of Avanode related expenses was already reflected in the expense guidance we provided last quarter, so the Avanode sales did not contribute to our expenses being lower than forecasted for the Q2. For the Q3, we are expecting adjusted operating expenses to be in the range of $193,000,000 to $197,000,000 another year over year reduction, in this case, benefiting in part from the elimination of Avanote expenses.

Speaker 3

We remain focused on our medium term consolidated operating margin target. We discussed efforts in our land business earlier, but we are also focused on driving cost efficiencies across the business, including our corporate back office functions. There were numerous ongoing initiatives aimed at further improving our cost structure. Interest expense was $27,000,000 in the 2nd quarter. That's down about 15% year over year as our team remains focused on optimizing our working capital position and related cash flow with additional benefit from last year's low coupon convertible notes issuance and the cash proceeds from the sale of Avano this past quarter.

Speaker 3

As we've demonstrated over the past few quarters, we've been successful at reducing our quarterly run rate of interest expense by 25% from the peak level reached in the Q4 of 2022. And we expect another year over year decline in interest expense in the 3rd quarter to $26,000,000 to $27,000,000 with our full year 2024 interest expense on track to come in 10% to 15% below fiscal year 2023. Our adjusted effective tax rate for the 2nd quarter was only 6% as our effective tax rate was positively impacted by a discrete tax benefit realized in the 2nd quarter, resulting in an effective tax rate significantly lower than anticipated heading into the quarter. Based on what we know today, we expect our effective tax rate for the second half of the year to be down to approximately 19% to 22%, resulting in a forecasted full year rate of 15% to 18%. We generated $68,000,000 of operating cash flow and $53,000,000 of free cash flow in the 2nd quarter.

Speaker 3

This cash flow performance was positively impacted by our continuing efforts to drive efficiencies in our working capital model resulting in a net trade cycle at just over 2 days for the Q2. And our strong cash flow performance also enabled us to reduce our net debt to $355,000,000 and our net debt to adjusted EBITDA to below one time. Returning capital through share buybacks and dividends as always remains an important part of our balanced capital allocation framework and there are no changes to our priorities going forward. To underscore that commitment, in addition to our quarterly cash dividend, we repurchased $30,000,000 of stock or approximately 1,200,000 shares during the Q2. So in closing, yes, our Land segment had a weak quarter due to a confluence of factors, which negatively impacted an unusually large number of business activities within a single quarter.

Speaker 3

And as already stated, while this was an unfortunate bump in the road, we remain focused on improving land operating efficiencies and profitability going forward, both by continuing to sharpen the portfolio of activities in which we participate, while significantly improving our cost structure is something we're focused on each and every day. Our Aviation business performed well as our team continues to deliver on a strong value proposition globally and we see strong momentum heading into the second half of the year. We generated $68,000,000 in operating cash flow $53,000,000 of free cash flow in the 2nd quarter, plus approximately $200,000,000 from the Avanode sale further strengthening our liquidity profile. Interest expense again continued to decline from peak levels of interest in late 2022 and we were once again able to reduce operating expenses year over year by remaining laser focused on cost controls. We repurchased approximately 2% of our outstanding shares demonstrating our continued commitment to returning value to our shareholders.

Speaker 3

And finally, we remain focused on driving our EBITDA and operating margin towards our 2026 stated goals, which should deliver increasing levels of cash flow and an improvement in our overall return on capital. Nothing has changed there. We remain equally committed to achieving those goals. There's lots of work to be done, but our team remains relentlessly focused on driving towards these critical goals over the next several months and quarters to come. Thank you.

Speaker 3

I'll now turn the call back to our operator to open up the Q and A session.

Operator

Our first question comes from the line of John Rehaut of JPMorgan.

Speaker 4

Hi, good evening. Thanks for taking my question. So my first question is on land. Can you talk a little more about the headwinds in renewable fuels on the West Coast that Ira spoke about for 1 for 2Q? And then what you're seeing in terms of the recovery there into the Q3?

Speaker 3

Yes. Thanks for the question, John. To try to answer it in a simplest way possible, there have been what I would best describe as logistics related issues, which have both impacted our ability to push through volume on the West Coast and push it through as economically as we would like to. What does that mean? There have been pipeline terminals have effectively been slow to convert to renewable diesel.

Speaker 3

So in many parts of the region, we're forced to move more product through rail and truck and that's not as cost efficient. So that impacted us from a volume perspective and a bit from a margin perspective as well. What does that mean going forward? There are discussions and activities going on each and every day, which hopefully will enable us to create more efficiencies in that network, but it's probably going to take a couple of months or so before we see any significant change there. But there are opportunities for that to improve.

Speaker 3

There's some new refineries that have come online that have impacted the market. So there's a bunch of factors that when put all together had a meaningful enough impact on us for us to mention that as a factor in the second quarter.

Speaker 4

Okay. That's really helpful. Thanks. And then my follow-up is just a housekeeping question is I don't think we have the 10 Q yet. Can you talk about what's been received in cash on the Avanode sale and when the tax bill will be paid if it hasn't already?

Speaker 4

And should we think about the tax portion is just the $87,000,000 gain times tax rate?

Speaker 3

Actually, the tax on that transaction is for all sorts of reasons is a relatively small number. So for starters, almost exactly $200,000,000 is what came in, in May. You'll see that on the cash flow statement. And the related tax that would go out the door, I would say most likely in Q3 is only about $9,000,000

Speaker 4

Great. Thanks very much.

Speaker 3

So your net net has a positive after tax benefit from a cash perspective of about $190,000,000 Great. Thank you. You're welcome.

Operator

Thank you. Our next question comes from the line of Ben Nolan of Stifel.

Speaker 5

Thanks. A couple. First, just quickly, you talk about the tuck in acquisition on the aviation side. Any context on how the capital outlay for that?

Speaker 3

Thanks for the question. I mean, is there a capital outlay for that? Is that the question?

Speaker 5

Yes. Right.

Speaker 6

Yes.

Speaker 3

It's about total purchase price was around $45,000,000 of which several $1,000,000 is deferred for a period of time. So it's somewhere around $40,000,000 that will go out the door when we close that transaction somewhere around the end of Q3.

Operator

Okay, perfect.

Speaker 5

And I was going to also dig in a little bit on the land side. It did seem like some of these factors should have been we should have seen them in the Q1 as well. I'm curious whether that's the West Coast fuels or Brazil or any of the handful of things that you laid out there. I'm curious what changed from sort of how you were thinking about the business when you last reported, and as compared to how it played out over the quarter and maybe how it was in the Q1 versus how it was in the Q2?

Speaker 3

Sure. So, great question. Thanks. So, in the Q1, thinking back, the largest year over year variance really related to weather issues that impacted both the UK that had a weaker quarter year over year and our nat gas business. So we highlighted those.

Speaker 3

On something like Brazil, we did have an impact on the Q1, but in terms of the overall year over year variance, it wasn't quite as significant. That situation deteriorated a bit further this quarter and it became meaningful enough to call it out. But we were impacted by that one in Q1 as well. We weren't impacted as much on that renewable piece of the puzzle that I just described to John. And in terms of nat gas, we called nat gas out last quarter and this quarter, right?

Speaker 3

So I think those are the principal moving parts. So again, biggest factors last quarter were the weather impacts in Europe and the U. S. And this quarter you had more significant impacts.

Speaker 2

And a little bit of sustainability this week.

Speaker 3

Yes. And then in this quarter, it's just our sustainability related products and services, as I alluded to, were off a little bit. So we mentioned that as well. But not somewhat different than what we experienced in the Q1.

Speaker 5

Got it. All right. I appreciate it. Thank you, guys.

Operator

Thank you. Our next question comes from the line of Graham Price of Raymond James.

Speaker 6

Hey, good afternoon guys. Thanks for taking the question. Maybe firstly on Aviation, given that we've seen a lot of problems in the airline industry with outages and whatnot. Just wondering if there's any impact from that, that you're seeing on Q3 guidance specifically?

Speaker 2

So far, none. We know some of the airlines that got impacted. Obviously, capacity is a little bit more than what is optimum and there's adjustments being made, but really no impact. Our network continues to increase and expand. So being able to grab share as the locations increase is a favorable development for us.

Speaker 2

But no impact, not expecting an impact. And if there is one, we're not expecting it to be impactful. So I think it's steady as she goes and we'll sort of ride that A lot of our business there is contractual. We do have a good amount of ad hoc is what we call it in the aviation market. So there's always the possibility obviously, but that's not presently in our forecast.

Speaker 2

It's the opposite.

Speaker 6

Great. Good to hear there. And then just a housekeeping question for my follow-up. What was the Q2 percentage of EBITDA from low carbon energy, I guess the Connect businesses?

Speaker 3

In the Q2, Graham, the number I usually give Pavel is GP actually the percentage of that part of our business was about 8%. The EBITDA percentage this quarter was much lower on the back of principally of the much weaker performance on the natgas side. But it was about 8% of gross profit.

Speaker 6

Okay. And that GP number, that 8% compares to I think you told us 12% last quarter?

Speaker 3

That's right.

Speaker 6

Okay, got it. Thank you.

Speaker 3

You're welcome, Graham.

Operator

Thank you. I would now like to turn the conference back to Michael Kasmer for closing remarks. Sir?

Speaker 2

Well, thank you everyone for listening this afternoon, this evening. I appreciate the interest and look forward

Earnings Conference Call
World Kinect Q2 2024
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