Q4 2019 Earnings Call
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Ladies and gentlemen, thank you for standing by welcome to the World fuel services 2019 fourth quarter and full year earnings Conference call. My name is Kevin and I won't be coordinating the call.
During the presentation, all participants will be analysts and only mode.
The speakers remarks, there will be a question answer session constructions on.
I don't want me given at the beginning <unk> session.
Anytime during the conference you need to reach an operator, Please press star zero.
As a reminder, this conference is being recorded Thursday February 27th 2020.
I would now like turn the conference over to Mr., Glenn Klevitz World fuel and Vice President Treasurer, and Investor Relations Mr. Since you may begin your conference.
Thank you Kevin Good evening, everyone and welcome to the World fuel services fourth quarter and full year 2019 earnings conference call I'm, Glenn Klevitz and I'll be doing the introductions on this evening call alongside our lives slide presentation.
This call is also available via webcast.
Access this webcast for future webcast. Please visit the world fuel services web site and click on the webcast.
With us on the call today, or Michael Kasbar, Chairman and Chief Executive Officer, an IRA Birns Executive Vice President and Chief Financial Officer.
By now you should have all received a copy of our earnings release, if not you can access or at least on our website.
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Well, we get started I would like to review World fuel Safe Harbor statement.
Certain statements made today, including comments about world fuel expectations regarding future plans and performance or work are forward looking statements that are subject to a range of uncertainties and risks that could cause world fuels actual results may materially differ from the forward looking information.
A description of the risk factors that could cause results to materially different 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 released 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. So they're 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 Perry.
As with prior conference calls, we ask that members of the media an 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 good evening everyone.
Our goal team executed very well the fourth quarter driving solid results and close the gap year, having made further progress within our strategic plan.
Sharpened our portfolio, we improved our returns we improved operating leverage and we drove cash flow.
The aviation segment, yet again posted a solid increasing year over year results in the fourth quarter driven by strong contribution from government related activity, primarily attributable to sales today, though as well as growth in commercial activity in Latin America, as we continue to expand our supply capabilities in that.
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Supply chain optimization of our global network continues to position us as a highly valued and strategic partner, providing cost effective tier wouldn't solutions in many cases uniquely capable of addressing our customers' requirements.
And finally, we expect to close the previously announced you year acquisition in March you year with well perfectly complement our organic growth initiatives and provide additional momentum to the advancement of our global aviation platform.
Hi, Marine segment posted yet another quarter of outstanding results closing out of here. They produce the strongest annual marine earnings since 2015 ever experienced and talented marine team did an exceptional job of assisting customers in managing their energy supply before the IMO 2020, low sulfur regular.
Lesions that took effect on January 1st.
Diversity in global rest of our supply relationships, our financial strength and our technical expertise enabled us to help our customers navigate the increased price volatility and product quality availability and logistics risk that have risen as a consequence of the regulatory changes.
On an annual performance of our marine business in the fourth quarter is testimony to the value of our core reselling business and our growing network of strategic physical locations. Both activities complement each other and provide us with an unparalleled ability to manage risks and provide surety of supply.
We obviously cannot accurately predict timing or magnitude of fuel price movements demand shifts source supply disruptions as markets react and adjust to regulatory changes economic cycles, where external events since the Cobiz 19 outbreak. However, we remain confident in the resilience and commercial.
Joe what do you have our global Marine and aviation business networks to adapt quickly just such dynamics focusing always on servicing the marketplace, while managing risks and of course financial returns.
Our wine segment delivered earnings growth in 2019, while simultaneously exiting non core business activities. Looking ahead to 2020, we continue to focus on growing our diesel gas power and sustainability businesses and investing both organic and strategic investment opportunities.
Across all of our businesses I continue to be pleased by the reception, we received from our existing and new clients better services and solutions I'm very proud of and energized by our entire employee base, we have driven significant improvement in our financial and business performance over the last two years.
World fuel was an impressive story of transformation from its roots not so long ago and it continues to transform today I have every expectation that together, we will create greater value to address the current and future needs and opportunities today's changing marketplace and or 5500 professionals around the world.
People are focused on exactly that.
We are pleased to announce the addition of sure we have shorter sure will add to our board of directors. She recently retired as a senior partner at Ernst and young after more than 37 years of service, where she launched in spearheaded wise intelligent automation program and directed their investments in robotics.
Process automation and digital transformation initiatives, we believe her experience in advising companies on digital transformation automation strategies will be invaluable and helping us further advance our strategic initiatives.
To enhance our value proposition and drive greater scalability and operating leverage.
Hi, good fortune sharing more information about our progress over the course of 2020 I will now turn the call over to Iraq for review of our financial results.
Thank you, Mike and good evening, ladies and gentlemen throughout the year, we've communicated our plan to deliver profitable and more ratable growth.
Continue to drive greater operating leverage and evaluate all lines of business to ensure they remain focused on our core competencies.
I am pleased to report that we executed very well and many of these initiatives and produced a very strong results for 2019.
Before I get into the details here a couple of highlights.
We delivered more than $1.1 billion of gross profit for the year, that's up 9% year over year, our full year adjusted EBITDA increased nearly $50 million and exceeded $400 million for the first time, and we generated $229 million of cash flow from operations.
Consolidated revenue for the fourth quarter was $9.4 billion down $630 million were 6% compared to the fourth quarter 2018.
Year over year decrease in revenue was principally driven by lower average fuel prices during the quarter as well as the year over year reduction in marine volume offset in part by your year over year increase in aviation volume.
For the full year revenue was $36.8 billion, that's a decrease of $2.9 billion grew 7% compared to 2018.
Our aviation segment volume was 2.2 billion gallons in the fourth quarter up 160 million gallons or 8% year over year, principally related to our core aviation operations for the full year aviation delivered volume of 8.5 billion gallons up 300 million gallons or 4% compared to 2000.
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Volume in our Marine segment for the fourth quarter was 5.1 million metric tons, that's down 1 million metric tons or 17% year over year.
For the full year volume in our Marine segment was 20.9 million metric tons, that's down 2.8 million metric tons or 12% year over year.
Year over year volume decline for the fourth quarter and the full year, both relate to the portfolio rationalization, we have discussed over the course of 2019.
Our land segment volume was 1.4 billion gallons or Gallup equivalents during the fourth quarter, an increase of approximately 70 million or 5% compared to the fourth quarter 2018.
Year over year increase in quarterly volume was driven by growth of our connect energy services business.
For the full year volume in our land segment was 5.5 billion gallons or Gallup equivalents, that's down 140 million or 3% compared to 2018.
The decline in land segment volume was principally related to our efforts to reduce non core low margin supply and trading activities in North America. During 2018 and into 2019. This decline was partially offset by growth in our connect business.
Total consolidated volume for the fourth quarter was 5 billion gallons per gallon equivalents, that's a decrease of approximately 40 million gallons or 1% year over year.
And lastly, total consolidated volume for the full year was 19.5 billion gallons or gallon equivalents, that's a decline of approximately 580 million or 3% year over year.
While volumes were down slightly year over year, our strong results reflect the ongoing improvement in business execution driving record adjusted EBITDA and an improved return on capital for the year.
Please note that the following figures exclude the impact of pretax non operational items in the fourth quarter as well as non operational items in periods previously reported as highlighted in our earnings release.
The non operational expenses in the fourth quarter, principally related to a gain on sale of a non core business within our land segment. This gain was principally offset by restructuring related items relating to severance costs and the impairment of certain IP assets.
To assist all of you and reconciling results published in our earnings release, the breakdown of the non operational items can be found on our website last slide of today's webcast presentation.
Consolidated gross profit for the fourth quarter was $287 million, an increase of $22 million or 8% compared to the fourth quarter of 2018.
Our aviation segment contributed $140 million at gross profit in the fourth quarter, that's an increase of $10 million or 8% compared to the fourth quarter 2018.
Year over year, the increase in aviation gross profit for the quarter was the result of continued strength in government related activity.
For the full year aviation gross profit was a record $552 million, that's an increase of $44 million or 9% compared to 2018.
We expect first quarter aviation profitability to be down year over year, principally based on upon a quarter to date reduction in government related activity in Afghanistan.
We also expect to close the previously announced you hear acquisition in March and while this will not have any meaningful impact on first quarter results. We remain excited about this transaction, which will further enhance our global business and general aviation platform.
As stated when we announced this transaction, we still expect non-GAAP accretion from this transaction to be 16 to 19 cents in the first 12 months, excluding any onetime acquisition related expenses.
Our marine segment generated fourth quarter gross profit of $57 million, that's an increase of $13 million were 29% year over year. This represents the highest level of marine quarterly gross profit since the fourth quarter or 2014.
The significant year over year gross profit increase was principally related to strong results in core resale activity driven in part by market volatility related to the new IMO standard and the transition from high sulfur so low sulfur fuel.
For the full year Marine gross profit was $182 million, that's an increase of $33 million were 22% year over year.
Marine team did an outstanding job driving increased profitability throughout 2019.
Regarding the core portfolio and a heightened focus on driving stronger returns.
Again with the new IMO regulations now in place we estimate the nearly 85% a marine fuel you sold in the first quarter will be either low sulfur fuel oil for marine gas oil that's up from approximately 55% in the fourth quarter.
While the unit price for low sulfur fuel and marine gas oil has declined over the past several weeks. These prices remain substantially higher than unit price for high sulfur fuel oil today.
This should provide opportunities to again drive strong profitability in the first quarter and we therefore expect marine results to reflect significant year over year improvement compared to the first quarter of 2019.
I should mention that our first quarter expectations for both aviation and marine are not expected to be meaningfully impacted by the effects of the corona virus as the regions, which had been most notably impacted to date do not contribute meaningfully to our overall profitability.
We continue to monitor the situation closely but again as of now any impact on first quarter results are expected to be immaterial.
Our land segment delivered gross profit of $90 million in the fourth quarter, that's a $1 million a 1% year over year decrease principally driven by a conscious reduction in supply and trading activity in North America, which was principally offset by growth in government related activity and in multi service.
A portion of land gross profit generated by multi service in the fourth quarter was $20.2 million, that's an increase of 7% year over year.
And for the full year gross profit from the land segment was $379 million, that's an increase of $13 million or 4% compared to 2018.
Looking ahead to the first quarter, we expect profitability in OLED segment to be generally consistent with the level of profitability generated in the first quarter of 2019.
As I mentioned earlier consolidated gross profit for the full year was $1.1 billion, that's an increase of $90 million or 9% compared to 2018.
Operating expenses in the fourth quarter, excluding bad debt expense were $205 million, which is up 15% year over year.
Fourth quarter operating expenses were higher than forecast on our last call driven in part by approximately $8 million, an unanticipated expenses principally related to incentive stock compensation expense.
5 million to this increase resulted from our stronger than expected earnings per share performance in 2019, driven principally by an effective tax rate, which was significantly lower than anticipated I will discuss taxes in more detail shortly.
As we looked at the first quarter, we expect operating expenses, excluding bad debt expense to decline, 5% to 7% sequentially to a range of $191 million to $195 million.
Full year operating expenses again, excluding bad debt expense were $765 million, that's an increase of 6% year over year.
While we did not hit our target to reduce our operating expense ratio by 250 basis points for the year, excluding the impact to the fourth quarter expenses I just mentioned, we want to hit our target.
We have now reduced our expense ratio by nearly 600 basis points over the past two years and we remain committed to continue driving improving this ratio in 2020 and beyond.
Adjusted EBITDA was $99 million in the fourth quarter, that's up $8 million or 9% for the fourth quarter 2018.
The full year adjusted EBITDA increased the $409 million, that's up $49 million or 14% from 2018 and up 17% compound and annually since 2017.
Year over year, increasing adjusted EBITDA also provides us with additional financial flexibility and greater liquidity to support organic growth initiatives and strategic investment opportunities.
Adjusted income from operations in the fourth quarter was $75 million, that's up $7 million or 10% year over year.
And full year adjusted income from operations was $322 million up $43 million or 15%.
Compared to 2018.
Interest expense in the fourth quarter was $17 million, a decrease of $3 million compared to the fourth quarter of 2018, resulting from a decrease in overall borrowings a declining interest rates and the benefits of the improved terms under our recently amended and extended banking facility.
I would assume interest expense to again be in the range of $16 million to $19 million in the first quarter 2020.
Because of various impacts, which I will describe in a moment our actual effective tax rate was only 1.5% in the fourth quarter, that's compared to 29.7% in the fourth quarter of 2018, which is obviously way below what we anticipated or projected going into the fourth quarter.
Excluding these impacts our normalized effective tax rate in the fourth quarter would've been approximately 31%.
The principal driver of a significant reduction in our effective tax rate related to the base erosion in anti abuse tax regulations issued this past December.
As a result, we were able to apply these regulations and significantly reduce our related tax expense for the fourth quarter and the full year 2019, which should also provide us with some continuing benefit in 2020 and beyond.
We also realized the benefit of some additional discreet items in the fourth quarter, which resulted in a further reduction in our fourth quarter and full year effective tax rate.
The full year, while our normalized effective tax rate was also approximately 31% our actual effective tax rate after considering the items just mentioned it was only 23.7% compared to 29.4% in 2018.
As we look forward to 2020, when combining the benefit related to the latest space erosion in at the abuse tax regulations with our progress on tax planning opportunities you have increased confidence that our full year effective tax rate in 2020 will be below 30%.
Although our total accounts receivable balance was $2.9 billion at year end up approximately $150 million compared to 2018, our overall net trade cycle. It was effectively flat at eight days a testament to our continued focus on solid working capital management across our businesses.
And we generated cash flow from operating activities of $60 million in the fourth quarter and $229 million for the full year contributing to a reduction in debt further strengthening our balance sheet overall liquidity position.
And free cash flow is nearly $150 million for the year, representing our highest level of free cash flow since 2016.
Through our stepped up efforts to return additional value for shareholders, we repurchased $65 million of common stock during the year, we increased our quarterly dividend by 67%.
Although organic growth and strategic investment opportunities will always be our top priorities. We will also continue to look to return value to our shareholders through buybacks and dividends.
So in closing 2019 was a strong year for world fuel, we delivered solid gross profit adjusted EBITDA and operating cash flow. We use some of the cash generated to reduce debt, but also to increase share repurchase activity and fund our increased dividends.
Our focus on driving greater operating leverage is working contributing to increase in our operating income margin by 600 basis points since the end of 2017.
Our marine business has rebounded materially from a lows of 2017 with a 20% compound annual growth rate in gross profit over the past two years, while operating expenses in marine only grew at a 5.5% rate.
Estimates of the great job, our marine team has done managing both ends of their PML.
As we look to 2020, despite growing global economic uncertainty our team will remain laser focused on continuing to advance our strategy for long term profitable growth.
With our strengthened liquidity profile, we have a balance sheet with more than sufficient room to invest and will therefore continue to look for strategic investment opportunities such as Uva there over the course of the year and we look to continue to allocate capital to buybacks and dividends to drive greater value for our shareholders I would now like to turn the.
Call back over to our operator to open it's up for QNX. Thank you.
Thank you if you would like to register a question. Please press the number one followed by the number four on your telephone keypad, you willing or three Tom prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration. Please press the number one followed by the number three so again for questions. It's one that for a new keybanc.
Right.
Our first question is from Ken Hoexter with Merrill Lynch. Please go ahead.
Hey, great good afternoon, and Iran. Michael.
Glenn.
Maybe you could just talk a bit about the marine business and the talk about the sustainability of the gross profit given given the environment and your thoughts maybe as we go past that first quarter end and thoughts on the outlook there.
Hey, Ken Thanks, App so.
You know the we got some benefit with the disruptions and somebody just since in three and four and.
I think we haven't seen you know how this is going to shake out into a regular run rate now you'll you'll see some of the scrubber activity in some of the delays there, but more of the market is going to be spread.
In our to lower price.
Continuing to burn.
Hi sulfur.
So certainly.
The clients.
That's fair benefiting from our sourcing and logistics.
We've done a good job and read at group has done a good job in terms of.
Shifting the portfolio from a risk perspective, now there's still some out there but.
I'm not going to say, it's going to revert to norm I think that we've got a new plateau there but.
I Wouldnt.
I wouldn't count on.
Into 2020.
This being the run rate I think.
Organizations that an excellent job in terms of managing costs and return on working capital. So certainly we had a new level at the marine team has done an excellent job. So I think we feel good about it but.
That's not a guarantee.
So I think cabin, you're going to see a higher base.
But I'm not sure that you're going to see ill repeat performances at three and four.
Great and then maybe just talk about IRA you just ended with kind of the cash.
The improved balance sheet low one why I think it's like 1.1 died net debt EBITDA now so.
So as we've seen that in a while with improved kind of payables low low fuel price, which which then add I guess shrinks that that payables.
Or receivables level. So maybe just talk about what opportunities you see in the market do you see lots of acquisition opportunities are there certain.
Segments do you want to get bigger in marine now that you're seeing that business turnaround is it a focus on aviation are still growing land, maybe just talk about what you do with the cash and your thoughts on the market in this environment.
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I'll start I'm sure Michael will want to chime in so.
It's nice to have a luxury greater than I believe we've ever had before in terms of the strength of our balance sheet and available capital that we have in right 1.1 times that EBITDA as our lowest level and in quite some time, which provides us with significantly more liquidity to go out invest in our in our organic.
Business, which we try to do everyday is intelligently as possible, but also to look outside in terms of strategic opportunities.
It's tough to nail down exactly where that next opportunity maybe because there are opportunities across the businesses that we participate in obviously.
In the inland, we started growing our our diesel or commercial and industrial business with the acquisitions of APPM PAPCO a few years ago, there's certainly more opportunities to build out that business even further.
And then our connect business, which is principally been power and Nat gas, which is our really our newest activity that still to meet in the earlier stages of development.
Not a major contributor to the bottom line, yet, but there are lots of opportunities to drive that business further both organically and through making some intelligent investments and then even as you alluded to marine or aviation.
As you as you noticed when we did to deal with Exxon a few years ago.
We've been willing to get a little more physical there that deal has worked out really well for us for now.
Providing fuel at over 100 airports around the world.
Something that we hadn't done five years ago.
And and then there are adjacent sees as well whether it be technology or service businesses that complement the fuel offerings that we have.
That extends outdoor value chain for our customers. So theres a lot I think we've gotten a bit smarter and a bit more proactive as opposed to historically being maybe two reactive win.
Focusing on M&A, So we're building out our pipeline.
In a very in a very careful way and there are lots of opportunities that we're focused on right now and we're hopeful that we'll be able to start executing on a couple of those in in the near future.
No no further to try and lastly.
All right.
Yes.
I'm sorry.
Okay that further comments, but no further comments.
So my last one it is.
He is on the restructuring charges why we're still seeing them IRA you mentioned the you didn't meet the target this year on the cost side because of.
Some of the different.
Things added back in the fourth quarter on the incentive comp.
But what what's what are the restructuring charges and do they do they end at some point.
Well actually the game. So it's a good question because you can't keep our restructuring open forever. So positive the formal restructuring that we're talking about talking about for quite a while efficiently and is it the year end or ended at year end.
The principal item that impacted us in the fourth quarter was the write off of.
Or impairment of certain IP assets that are no longer useful considering the direction, we're taking on the ITC side.
There were a little bit of cost beyond that but that was 80, 90% of of that restructuring number. Fortunately in Q4, we had a actual pick up related to the sale of the non core business said that offset all of that so our net.
Adjustments, if you will netted out to zero this fall on different lines on the PML.
So.
Going forward leasing the short term.
You won't see you won't see any restructuring charges in the first quarter. It doesn't mean that will never have restructuring activity again, but we're effectively through that restructuring that's now gone on production and a half years.
Great. Thanks for the time, but.
Thanks Kim.
So again to register questions Press. The one followed by four keypad. Our next question is from the known with Stifel. Please go ahead.
Right.
Yes, Hi, this is Frank Donte Entre Ben.
A question on the UBI Air acquisition, it seem to take a little longer I guess I'm, we were anticipating to get through the regulatory side.
Is there any concern of kind of getting too big.
It running into a market share problem and the aviation side.
I guess, even on the other businesses it doesn't seem like different marine or our land, but maybe there's something.
And the aviation.
Yes, we're still very small percentage of the overall market. So theres still a good amount of runway there. Despite the fact that we've got reasonable presence.
It's still fairly sizable market, where sizable independent player and reps the largest independent player, but as a percentage of the overall market, it's still quite small.
That's true for all our businesses early yet I mean, even even in marine which may be is 10%.
Theres still a lot of room to to roll.
Okay. That's helpful.
And then on capital allocation side.
You had mentioned.
2019, there was about $65 million of share buybacks.
But I think all that was done in the second quarter.
With the kind of where the shares are trading today, it seems to be back where you liked it I.
I guess from a from a capital allocation perspective.
Is that something that you did you guys are looking at more seriously and if so what kind of.
Size and speed would you be able to react on on something like that.
All question the stock prices, where you like it comment but that will.
I'm not sure we're very happy with what's going on the market around us I think what I can do is repeat what I said I call I think were.
Certainly a lot much more open to.
Using buybacks to complement our historical dividend program.
And while we won't be in the market doing that everyday from time to time, we've shown they were willing to invest some more in share repurchases.
Q never tell you exactly when that may or may not have happened there all sorts of factors that will impact that decision, but certainly when we think of capital allocation we now.
We now pencil in.
Certain amounts for for both buybacks and dividends, where we hadn't done that historically.
Okay.
That's all that's helpful. Thanks very much.
There are no further questions I'll turn the call that.
Well, thanks, very much to all of our investors and supporters and I'm sure plenty of.
Our colleagues on the phone so look forward, we feel like we're ready to roll markets Crazy, but we've done we've done well in the past in down markets. So we.
And we feel that.
And now we're prepared for in a market conditions as the type of company. We are so look forward to speaking with you again and.
Not too far away, so take care and have a great day.
That does conclude your conference call for today. Thank you for your participation in that that you. Please disconnect your lines.
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