Q3 2023 World Kinect Corporation Earnings Call

[music].

Okay.

Okay.

Thank you for standing by and welcome to work and that cooperation with third quarter 'twenty to 'twenty three 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 session.

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To remove yourself from the queue Press star one again.

You will be limited to one question and one follow up.

I would now like to hand, the call over to the Vice President Investor Relations also Ballard. Please go ahead.

Good evening, everyone and welcome to the World Class third quarter of 2023 earnings conference call, which will be conducted alongside our live slide.

Today's presentation also available via webcast.

The relations website I'd also note that the cost.

Yes.

Ladies and gentlemen.

Michael J.

Chairman and Chief Executive Officer.

Hey, good afternoon, Vice President and Chief Financial Officer.

Before we get started.

I'd 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.

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-K.

Filed with the Securities and Exchange Commission.

Well it 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.

This presentation also includes certain non-GAAP financial measures.

So the nature 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.

We'll begin with several minutes of prepared remarks, which will then be followed by a question and answer period.

I would like to introduce our chairman H E.

Okay.

Okay.

Thank you Melissa and good afternoon, everyone I've been spending a great deal of time over the last few months at industry conferences, and the offices of our customers around the world and engaging with our employees. It is clear to me that now more than ever the demand for world connect service is as strong as it's ever been.

Our broad base of customers and supply partners are grappling with an industry in flux from changing sustainability requirements and expectations to an increasingly prescriptive and disjointed regulatory environment.

For nearly 40 years, we have been providing energy solutions, creating value for both suppliers and customers and I don't believe I have ever experienced the more complicated operating environment for our industry than now.

Despite this we continue to execute on our mission to meet our customers' energy needs safely reliably and in the most efficient manner possible.

The third quarter demonstrated our ability to exercise financial discipline in managing within a higher interest rate in an inflationary environment. We continued to leverage our global operating platform as we saw the near full return of aviation demand, while heightening our focus on working capital management.

Our marine business delivered solid returns despite experiencing some weakness in a few physical locations in the west constrained credit environment, and our land business began to see our investments in sustainability bear fruit during the quarter. We expect a further stream of activity as we continue to build out our global capabilities.

Last quarter I shared with you our three pillar focus to accelerate growth and diversify earnings by maximizing efficiencies at our conventional businesses expanding our suite of energy management solutions and increasingly availability of renewable energy and low carbon fuels. This.

Strategy is exactly aligned to where our customers current needs are and where their future needs will be we will do this while optimizing our network of thousands of airports seaports card locks retail stations and distribution assets.

In Marine and aviation, we have built a highly competent and an efficient global platform with dedicated professionals and established processes. We're replicating this in our land business and expect it to be a material part of meeting our medium term, 30% operating margin target.

Simultaneously, we are sharpening our portfolio exiting noncore and low return businesses and reallocating capital for better returns.

This is recently evidenced by your addition of 'twenty card locks in the Midwest to further expand our U S land business.

And we continue to look for further accretive opportunities to grow our land in global sustainability businesses organically and Inorganically.

Speaking of sustainability that business produced an excellent result, this quarter and we continue to expect great theme things from our team sustainability knows no borders or segments and so we are hyper focused on bringing these solutions to customers across all of our businesses and continuing to.

All of our offerings to meet the current and future meet the needs of the marketplace.

Finally, we continued to embrace automation and I believe the recent advances in AI will be a game changer. We are already leveraging many of these tools and have been for a long time, we believe AI will improve our efficiency cost management and ability to drive top line growth.

Creating greater market value.

While improving the lives of our employees.

Before I wrap up I'd like to announce that we will be hosting an investor day in March of next year to discuss our corporate strategy in more detail, we'll be sharing more information at a registration link shortly.

I'll now turn over the call to IRA for a financial and business review of the quarter.

Thank you Mr Casbah.

Good evening everyone.

For starters. Please note that results for the third quarter reflect no adjustments to GAAP results.

Over the comparative prior year numbers do exclude the impact of certain non operational items, which are highlighted in our earnings release.

Reconciliations are is always on our Investor relations website and they're also in the webcast presentation.

Now, let's continue with the financial highlights on a consolidated basis total volume was 454 billion gallons, which was down slightly and consolidated gross profit declined 13% from last years third quarter, primarily due to lower gross profit in our marine segment, which benefited significantly from record prices and volatility.

<unk> in the prior year. This was partially offset by increased gross profit in our land segment.

I'll now provide some more detailed segment by segment.

Aviation volumes increased to $1 92 billion gallons in the quarter up 4% year over year due at another robust summer passenger travel season.

However year over year gross profit was down slightly to $126 million in the quarter.

We have been successful at achieving higher margins on recent commercial contract renewals considering the current interest rate environment. However, overall gross profit improvement was muted by both a reduction in inventory related profitability as a result of significant fuel price volatility during the quarter as well as our efforts to rationalize lower return business.

Activity.

Net result of our strategy as increased returns and enabled us to reduce aviation networking capital nearly $200 million year over year contributing to a reduction in interest expense.

As we look to the fourth quarter, while we expect a seasonal decline in aviation gross profit. This projected decrease could be mitigated or commercial passenger activity remained strong through the holiday season.

Turning to our land segment volumes were 155 billion, that's up 2% year over year, principally due to an increase in natural gas and power volume offset in part by lower volume in our commercial and industrial and retail business activities in North America.

Similar to the second quarter approximately one third of total reported land volume relates to our natural gas and power activities converted into gallon equivalents.

From a profitability standpoint land generated $121 $2 million of gross profit in the third quarter, that's up approximately 3% year over year, we saw an increase in profitability from our sustainability related service offerings, continuing the positive trends for this business that we have noted on prior calls specifically we experienced.

Growth in our renewable energy solutions business and continued strength in our power business in Europe.

Looking to the fourth quarter, we expect a modest year over year decline in gross profit considering.

The current pricing environment and market conditions.

And lastly, our marine segment volume of $4 1 million metric tonnes was down 16% from the third quarter of last year.

Third quarter results were lower than anticipated leading into the quarter principally related to weakness in a few physical locations more broadly we experienced some modest margin pressure, but overall business activity was stable.

Decreased volumes and lower average fuel prices led to a marine gross profit of $35 million, which is down 54% from the prior year when bunker prices and market volatility, we're at record or near record highs.

While gross profit is down from last year's record levels Marine working capital efficiencies remain exceptional with no real net working capital investment regardless of the market price environment.

For the fourth quarter, we expect a modest sequential increase in gross profit and while marine margins should remain well ahead of historical averages. We expect marine gross profit to be down year over year. Again. This is due to the comparison to the fourth quarter of 'twenty, two when bunker prices and market volatility were considerably higher.

Our total consolidated operating expenses were $208 million in the third quarter below the guidance range provided last quarter and down 6% from last year's third quarter.

Looking ahead to the fourth quarter, we expect consolidated operating expenses will be in the range of $205 million to $208 million, representing a modest sequential decline.

For the full year operating expenses should be generally flat year over year. After several years of year over year increases excluding the 2020. One COVID-19 years. This is a testament to our heightened efforts in managing expenses in the face of inflationary economic environment and where we are.

Main focus on making significant progress towards our 30% operating margin target over the course of 2024.

In terms of working capital I already mentioned, our focus on working capital at the segment level, but our team has done a great job driving record efficiencies in this area across the business.

Considering the current interest rate environment, we have talked about improving margins, but at the same time. We have also significantly increased our working capital efficiencies, which has driven our consolidated net trade cycle to a record low. This obviously has contributed to strong cash flow generation, which has also enabled us to further reduce interest expense.

Speaking of interest.

All of these efforts allowed us to reduce interest expense, which came in within our guidance range for the quarter at $29 million, that's down 12% sequentially and 16% year over year.

As we look ahead to the fourth quarter, we expect interest expense to be relatively flat sequentially, but again, it should be down significantly year over year.

Our effective adjusted effective tax rate for the third quarter was 23% somewhat higher than our 21% rate for the first half of the year for the fourth quarter, we expect our tax rate to be generally consistent with the third quarter, resulting in a full year tax rate of approximately 22% to 23%.

In terms of cash flow, we have continued our strong performance this year, adding an additional $80 million of operating cash flow this quarter, bringing year to date operating cash flow to $267 million.

And our average annual operating cash flow over the past five years has now been nearly $300 million fueling our ability to employ our flexible capital allocation framework.

Our guiding principles for capital allocation priorities remain consistent.

Courting the growth of our business, both organically and through strategic investments, while also returning capital to our shareholders through buybacks and dividends, which have totaled $76 million year to date.

With an eye on delivering increased shareholder value.

So in summary, we delivered solid results in the third quarter with another $100 million plus quarterly EBITDA contribution are emerging sustainability business continues to be a strong contributor in our land segment.

While our marine profitability clearly declined from the record highs of 2022, our team continues to manage this business very efficiently.

Our broader focus on working capital across the business has contributed to strong year to date operating cash flow of $267 million. While also mitigating interest expense and this higher interest rate environment.

And we remain intently focused on driving profitable growth and carefully managing expenses to ensure we drive even stronger results as we look towards 2024 and beyond.

That's it for me I'd now like to turn the call back over to our operator to open the call to Q&A. Thank you.

Thank you Sir as a reminder to ask a question you will need to press star one one on your telephone again Thats Star one wanted to ask a question to remove yourself from the queue. You May press Star one one again.

Please standby, while we compile the Q&A roster.

Our first question.

Comes from the line of Pavel <unk> of Raymond James.

Thanks for taking the question, let me start with aviation.

Since the startup.

Prices in the Middle East.

Three weeks ago, we've seen a lot of disrupted airline activity in the region can you talk about your exposure to that regional market and is there any effect on the business outside of the aviation segment.

Thanks <unk>.

<unk>.

Our business is global as you know.

And.

The.

The impact.

It has been.

Operator: Thank you for standing by and welcome to World Kinect Corporation's third quarter 2023 earnings conference call. At this time, all participants aren't able to listen to only mode.

Very very modest.

<unk>.

So on our demand.

Within that region. So that's not.

Operator: After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one one on your telephone to remove yourself from the queue, press star one one again. You will be limited to one question and one follow up.

Our major operating location as you know we are doing business worldwide.

But the impact on our aviation activity has been.

De Minimis.

Elsa Ballard: I would now like to hand the call over to the vice president investor relations. Elsa Ballard, please go ahead and welcome to World Kinect's third quarter 2023 earnings conference call, which will be presented alongside our live slide presentation. Today's presentation is also the ability of webcast on our investor relations website and also about our vice president of investor relations.

And then the other impacts in terms of the marketplace.

We have also been de Minimis.

Terrific and tragic.

You know that.

Uh huh.

Sure.

And it's the whole scenario there is.

Been contained.

And Thats, obviously represented in terms of the market's reaction to it.

Unknown Executive: Please come and call today, Michael Kasbar, Chairman and Chief Executive Officer, and Ira Birns, Executive Vice President and Chief Financial Officer. Before we get started, I'd like to review our State Parker statement. Certain statements made today, including comments about our expectations regarding future plans and performance, are full of looking statements that are subject to a range of uncertain needs and risks that can cause actual results to materially different factors that could cause results to materially different to be founded on most recent born 10K and other reports filed with the securities and exchange commissions.

So.

No no meaningful impact to the business.

Okay good to hear.

Same question I asked three months ago.

And you've been kind enough to share this number in the past.

What percentage of <unk>.

Net revenue or EBITDA is at this point coming from.

Low carbon and renewables.

Okay.

Unknown Executive: There will be no obligation to revise or publicly release the results of any revisions to these four looking statements in like a new information or future events. This presentation also includes certain non-gap financial measures, or reconciliation of these non-gap financial measures to their most directly comparable gap financial measures to the securities that are patchally and can be found on our website.

Thanks for the question, which you asked last quarter consistent with.

The answer last quarter the way we.

All those pieces together I.

I think I told you last quarter that it was approximately 10% of GP and 10% of EBITDA that includes our power and gas activities in sustainability.

Related solutions.

I would say this quarter that number has actually gone up slightly it's a little over both of those numbers are a little over 11% so up about one 5% from last quarter.

Unknown Executive: We will begin with a step with several minutes of prepared remarks, which will then be followed by a question and answer period.

Michael Kasbar: At this time, I would like to introduce our chairman and Chief Executive Officer, Michael Kasbar. Thank you, Wilson. Good afternoon, everyone. I've been spending a great deal of time over the last few months at industry conferences in the offices of our customers around the world and engaging with their employees. It is clear to me that now more than ever, the demand for world-connect service is as strong as it's ever been. Our broad base of customers and supply partners are grappling with an industry in flux from changing sustainability requirements and expectations to an increasingly prescriptive and disjointed regulatory environment.

Okay and then.

Lastly on the Marine segment, so obviously a lot of international trade.

Headwinds just given the macro is there any evidence at.

At your disposal that marine volumes are stabilizing.

Well.

In terms of the market.

Yeah.

The.

Macro is certainly.

Softer.

Slow steaming is not an immaterial dimension to it both for economic reasons as well as you know.

Michael Kasbar: For nearly 40 years, we have been providing energy solutions, creating value for both suppliers and customers. And I don't believe I have ever experienced a more complicated operating environment for our industry than now. Despite this, we continue to execute in our mission to meet our customers' energy needs safely, reliably, and in the most efficient manner possible. The third quarter demonstrated our ability to exercise financial discipline and managing within a higher interest rate and inflationary environment.

Emissions management.

The overall impact of that I think is low single digit.

So it's certainly not robust.

And Thats had.

A modest impact.

On on the segment I think I may have some additional color to add to that yeah. In addition to what Mike had to say if you focus on us specifically.

Michael Kasbar: We continued to leverage our global operating platform as we saw the near full return of aviation demand while heightening our focus on working capital management. Benjamin. Our marine business delivered solid returns despite experiencing some weakness in a few physical locations and a less constrained credit environment. And our land business began to see our investments in sustainability bear fruit during the quarter. We expect the furthest stream of activity as we continue to build out our global capabilities.

Our comments recently in aviation one of the things we've done in marine over the last couple of years is rationalized some lower margin business that historically, we may have been doing for the sake of volume.

So.

Our volume numbers year over year impacted by both a bit more of that as well as the impact of.

The market itself I would say your question was is it stable I would say we're at a level now that is that is.

Michael Kasbar: Last quarter, I shared with you our three-pillar focus to accelerate growth and diversify earnings by maximizing efficiencies in our conventional businesses, expanding our suite of energy management solutions, and increasing the availability of renewable energy and low carbon fuels. This strategy is exactly aligned to where a customer's current needs are and where their future needs will be. We will do this while optimizing our network of thousands of airports, seaports, card locks, retail stations, and distribution assets.

<unk> with possibly some opportunities to pick up some additional volume next quarter.

I don't see it dropping materially more from the level that we.

That we found ourselves out in Q3.

Alright, Thank you very much.

Thanks Brendan.

Thank you our next question.

Comes from the line of Ken <unk> of Bank of America.

Hey, great. Good afternoon, Hey, Michael also.

Good good so.

Michael Kasbar: In marine and aviation, we have built a highly competent and efficient global platform with dedicated professionals and established processes. We are replicating this in our land business and expect it to be a material part of meeting our medium-term 30% operating margin target. Simultaneously, we are sharpening our portfolio, exiting non-core and low-return businesses, and reallocating capital for better returns. This is recently evidenced by our addition of 20 card locks in the Midwest to further expand our U.S, land business.

And youre getting a minute hang on.

Marine.

You noted a few locations. We are impacted is that all up and running now was that port strikes out Western Canada was it freight diversion because of the negotiations can can you talk about what was going on in the marine side and if it's resolved.

It is all generally resolved three three particular locations three different stories one of them had.

A disruption two of them had some short term disruptions and one of them had some had some other issues during the quarter, but I would say that that is 95% of that is now behind us.

Michael Kasbar: And we continue to look for further accretive opportunities to grow our land and global sustainability businesses organically and organically. Speaking of sustainability, that business produced an excellent result this quarter, and we continue to expect great things from our team. Sustainability knows no borders or segments, and so we are hyper-focused on bringing these solutions to customers across all of our businesses and continuing to evolve our offerings to meet the current and future needs of the marketplace.

And we don't expect to get impacted from any of those issues in a material way and in the fourth quarter.

Okay.

At something on at the site that stopped you from just <unk>.

No idea of what you would say if it wasn't the port strike stopping vessels was it something at locations that disabled you from something add to specific locations in Europe in one location in the U S.

That hampered tampered volume during the quarter okay.

So IRA we talked a lot over many years is this about right now is as <unk> question about the inflection is this about winning share with existing customers or is this the competitive market out there.

Michael Kasbar: Finally, we continue to embrace automation, and I believe the recent advances in AI will be a game changer. We are already leveraging many of these tools and have been for a long time. We believe AI will improve our efficiency, cost management, and ability to drive top-line growth, creating greater market value for us while improving the lives of our employees.

Has it changed at all obviously you have been <unk>.

We're gaining a lot of a lot of business over the years.

Competitors or or or.

People, providing service at the docks or at airports is.

This is a competitive business.

Still that you are seeing increasing consolidation or is this just we've got to wait for the market and then our customers take more.

Michael Kasbar: Before I wrap up, I'd like to announce that we will be hosting an investor day in March of next year to discuss our corporate strategy in more detail. We'll be sharing more information and a registration link shortly.

Volumes.

I mean, there's a little bit of both.

Obviously market conditions container to container market as I'm sure. You know is not certainly not its strongest level right now so part of it is us having a disciplined approach to returns so.

Ira Birns: I'll now turn over the call to Ira for a financial and business review of the quarter. Thank you, Mr. Cadbar. Good evening, everyone.

Again, we're not after growing volume for the sake of growing volume, we are trying to grow profitability and related returns.

Ira Birns: For starters, please note that results for the third quarter reflect no adjustments to gap results. However, the comparative prior year numbers do exclude the impact of certain non-operational items which are highlighted in our earnings release. Reconciliation are as always on our investor relations website, and they're also in the webcast presentation. Now, let's continue with the financial highlights. On a consolidated basis, total volume was 4.54 billion gallons, which was down slightly and consolidated gross profit to coin 13% from last year's third quarter, primarily due to lower gross profit in our marine segment, which benefited significantly from record prices and volatility in the prior year.

And again marine is highly susceptible to the pricing environment as evidenced by the phenomenal results last year when crude when bunker prices at record levels.

So it's a little bit of both our guys are always after additional business with existing customers new business with new customers, but they have to hit their hurdle rates that we ascribed to them in order for that to make sense to all of us.

Those hurdle rates have increased in this interest rate environment, right, which again has resulted in us walking away from some business that maybe we might have entertained 18 months ago. So it's a combination of.

Ira Birns: This was partially offset by increased gross profit in our land segment and now provides some more detailed segment by second. Aviation volumes increased to 1.92 billion gallons in the quarter of 4% year over year, due to another robust summer passenger travel season. However, year over year gross profit was down slightly to $126 million in the quarter. We have been successful at achieving higher margins on recent commercial contract renewals considering the current interest rate environment.

Both of those factors that you described and then just to put a bit more on it Ken.

In my comments I talked about the efficiency of our platforms.

I think for sealing more confident in our ability to.

Ira Birns: However, overall gross profit improvement was muted by both the reduction in inventory related profitability as a result of significant fuel price volatility during the quarter, as well as our efforts to rationalize lower return business activity. The net result of our strategy has increased returns and enabled us to reduce aviation network and capital nearly $200 million year over year contributing to our reduction in interest expense. As we look to the fourth quarter, while we expect a seasonal decline in aviation gross profit, this projected decrease could be mitigated the commercial passenger activity remains strong through the holiday season.

We create efficiencies in our operations.

To be able to make us more competitive.

And that achieves the ability to.

Obtaining the returns.

As well as gaining market share as our network.

Chance and it has expanded greatly certainly then aviation and as we open up new locations in marine.

Creates greater opportunities.

In our land business.

You know I think is.

Got significant upside as well as sustainability so.

Those were the.

The comments that I referred to.

Earlier, so when we talk about growth its growth with a return.

Ira Birns: Turning to our land segment, volumes were 1.55 billion, that's up 2% year over year, principally due to an increase in natural gas and power volume offsetting part by lower volume in our commercial and industrial and retail business activities in North America. Similar to the second quarter, approximately one-third of polar reported land volume relates to our natural gas and power activities converted into gallon equivalence. From a profitability standpoint, land generated $121.2 million gross profit in the third quarter, that's up approximately 3% year over year.

And that's that's where we see the future.

Terms of grabbing density sharpening the portfolio being able to get operating leverage.

And in those areas and.

Managing managing the portfolio to achieve those outcomes of growth with a reasonable return.

I want to ask you a financial question thoughts on cash flow it used to be that when oil prices went up you were extending credit to your customers. When it was low you'd actually swim in the cash flow as you didn't need to extend day sales outstanding in your credit.

Ira Birns: We saw an increase in profitability from our sustainability related service offerings continuing the positive trends for this business that we have noted on prior calls. Specifically, we experienced strong growth in our renewable energy solutions business and continued strength in our power business in Europe. Looking to the fourth quarter, we expect the modest year over year decline in gross profit, considering the current pricing environment and market conditions. And lastly, our marine segment volume of 4.1 million metric tons was down 16% from the third quarter of last year.

It sounds like Youre seeing improving cash flows despite what we've seen a run up in fuel maybe just talk about the backdrop there for a second and a blended in with two questions right.

The thought on cash flow and then and then Youre, 30% margin target what do you need to happen to get there.

And maybe talk about the cash flow.

We don't often Pat ourselves on the back but.

In terms of the working capital story, our team should so and part of that look at it for the first time in many many years, we all know work.

Ira Birns: Third quarter results were lower than anticipated leading into the quarter, principally related to weakness in a few physical locations. More broadly, we experienced some modest margin pressure, but overall business activity was stable. Decrease volumes and lower average fuel prices led to a marine gross profit of $35 million, which is down 54% from the prior year when bunker prices and market volatility were at near record highs. While gross profit is down from last year's record levels, marine working capital efficiencies remain exceptional, with no real net working capital investment regardless of the market price environment.

Seven 8% funding environment versus one to two for many many years right. So.

Our team has been you know Mike I mentioned returns Mike mentioned returns already.

Part of focusing on returns is trying to get some more margin, which isn't that easy we were very successful at that in aviation This summer but.

That that doesn't completely mitigate.

The sharp rise in interest rates and the related increase in interest expense. So we're also focused on where we do business, who we do business with and how we go to market in terms of.

Ira Birns: For the fourth quarter, we expect the modest sequential increase in growth profit and while marine margins should remain well ahead of historical averages, we expect marine growth profit to be down year over year. Again, this is due to the comparison to the fourth quarter of 22 when bunker prices and market volatility were considerably higher. Our total consolidated operating expenses were $208 million in the third quarter, below the guidance range provided last quarter and down 6% from last year's third quarter.

Customer terms.

This compares to our terms on the supply side, how we how we drive more efficiencies in how much inventory we carry everyday so.

Great point that you raise despite the fact that.

Prices are relatively high by bringing our trade cycle down trade cycle. This quarter was less than two days.

Over the long run it's been in the very high single digits right. So.

By doing that we're able to generate a healthy amount of cash despite.

Ira Birns: Looking ahead to the fourth quarter, we expect consolidated operating expenses will be in the range of $205 to $208 million, representing a modest sequential decline. For the full year operating expenses should be generally flat year over year, after several years of year over year increases, excluding the 20 and 21 COVID years. This is a testament to our heightened efforts and managing expenses in the face of inflationary economic environment and we remain focused on making significant progress towards our 30% operating margin target over the course of 2024.

Our pricing environment, which increased.

Most of the third quarter.

Your next question will be could you maintain that salt answer that question and answers. We're trying really hard to maintain that in terms of the mix of business. We have in the religion, we have in terms of driving.

Driving returns every salesperson has our hurdle rate that they have to hit when they are going to market and they're going to achieve that by using a couple of levers. One is one of them is margin the other ones working capital.

And we've done that very well aviation.

Ira Birns: In terms of working capital, I already mentioned our focus on working capital at the segment level, but our team has done a great job driving record efficiencies in this area across the business. Considering the current interest rate environment, we have talked about improving margins, but at the same time, we have also significantly increased our working capital deficiencies, which has driven our consolidated net trade cycle to a record low. This obviously has contributed to strong cash flow generation, which has also enabled us to further reduce interest expense.

<unk> has improved most significantly I mentioned $200 million reduction in their working capital year over year Marine has been selling at that for a long time and marine we are generally match funded meaning we don't really have much inventory and receivable and payable days balance out almost.

Almost perfectly.

Yeah.

So theres no real working capital in marine or land still has a lot of different pieces to the puzzle, but even there we've seen some improvement.

Ira Birns: Speaking of interest, all these efforts allowed us to reduce interest expense, which came in within our guidance range for the quarter at $29 million, that's down 12% sequentially and 16% year over year. So we look ahead to the fourth quarter, we expect interest expense to be relatively flat sequentially, but again, it should be down significantly year over year. Our effective adjusted effective tax rate for the third quarter was 23%, somewhat higher than our 21% rate for the first half of the year.

So that's put us in.

Better positioned to giving us a better giving us a better shot.

To drive improved cash flow performance, even in a higher price environment in terms of the <unk>.

The operating margin target.

We I mentioned, maybe it's not the greatest thing to brag about that our expenses should be flat year over year, but we haven't done that in many many years. So it's a start.

We're focusing on every single line item on the P&L.

Ira Birns: For the fourth quarter, we expect our tax rate to be generally consistent with the third quarter, resulting in a full year tax rate of approximately 22 to 23%. In terms of cash flow, we have continued our strong performance this year, adding an additional $80 million of operating cash flow this quarter, bringing year-to-date operating cash flow to $267 million. And our average annual operating cash flow over the past five years has now been nearly $300 million, fueling our ability to employ our flexible capital allocation framework.

I can probably go on on this one for a half hour because I'm passionate about it but.

Really looking at it optimizing reducing unnecessary costs.

In many G&A categories. For example, we've already seen some successes there, but we have one of our best finance people that we've moved into our it function.

Focus on every dollar we spend in and a function that so there's a lot of money right to be more effective there and my finance team is focusing on being more effective our HR team is focusing on driving efficiencies as well.

Ira Birns: Our guiding principles for capital allocation priorities remain consistent, supporting the growth of our business both organically and through strategic investments, while also returning capital to our shareholders through buybacks and dividends, which have totaled $76 million year-to-date, or with an eye on delivering increased shareholder value.

Part of how we get there is also <unk>.

Land.

Finally, catching up to aviation marine in terms of their operating efficiencies.

We're still a bit behind but post Flyers acquisition.

We're getting closer and closer to a fully integrated organization in North America and that should also contribute over the next 12 18 months to improved operating efficiencies.

Ira Birns: So in summary, we delivered solid results in the third quarter with another $100 million plus quarterly EBITDA contribution. Our emerging sustainability business continues to be a strong contributor in our land segment. While our marine profitability clearly declined from the record highs of 2022, our team continues to manage this business very efficiently. Stanley. A broader focus on working capital across the business has contributed to strong year-a-date operating cash flow of $267 million while also mitigating interest expense in this higher interest rate environment. And we remain intently focused on driving profitable growth and carefully managing expenses to ensure we drive even stronger results as we look towards 2024 and beyond.

That's a big accomplishment for us we didn't make that much progress this year, but we think we'll make more significant progress next year and then into 'twenty five on that one.

I want to hand, it off to <unk>, because he's been patiently waiting, but I presume that the last thing there means you've smoothed out some of that seasonality that you used to have to talk about with Europe.

First quarter fourth quarter or does that still there a little bit with the <unk>.

Really I was I was looking at an annual run rates. What I was just thinking about that that we have smooth that out a bit more because land now has stronger quarters from fires generally.

In in the quarters, there were softness for us before.

Ira Birns: That's it for me.

Operator: I'd like to turn the call back over to our operator to open the call to Q&A. Thank you. Thank you, sir.

And at the end of the day that that U K weather dependent business by the way. It's the beginning of October and everyone's wearing shorts in the UK. So starting out to be weaker than you would hope, but the weather may change, but that's become a much smaller piece of the pie.

Operator: As a reminder, to ask a question you will need to press star 1-1 on your telephone. Again, that star 1-1 to ask a question. To remove yourself from the queue, you may press star 1-1 again.

And we smoothed it out with.

Operator: Please stand by while we compile the Q&A roster.

With <unk>.

Considerably more volume and profitability in the second and third quarters. It post Flyers acquisitions, so, yes, theres less of that as well. Thanks IRA Thanks, Michael Thanks Alan.

Pavel Molchanov: Our first question comes from the line of Pavel Malkinov of Raymond James. Thanks for taking the question.

Thanks Shannon.

Thank you.

Once again to ask a question. Please press star one one on your telephone again Thats Star one one on your telephone to ask a question.

Michael Kasbar: Let me start with aviation since the start of the crisis in the Middle East. Three weeks ago, we've seen a lot of disrupted airline activity in the region. Can you talk about your exposure to that regional market and is there any effect on the business outside of the aviation segment? Thanks, Pavel. You know, our business is global, as you know, and the impact has been very modest from our demand within that region.

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

Thanks, Brian and let me just start by saying thanks to Ken for sticking to two questions I appreciate that.

Yes.

I do have a few though.

The first is well first of all just to clarify on what Ken was asking.

With respect to working capital so at least aspirational.

If.

As we look into the fourth quarter.

Fuel prices remain relatively constant.

There shouldnt be any give back with respect to that working capital correct. It should just.

Effectively be with what your cash flow from operations would be network in Canada is that fair.

Michael Kasbar: So, that's not a major operating location. As you know, we're doing business worldwide, but the impact on our aviation activity has been diminished and then the other impacts in terms of the you know, that, you know, incident and the whole scenario there is, it's been contained and that's obviously represented in terms of the market's reaction to it. So, no meaningful impact to the business.

Okay.

Yes.

Yes.

At the end of the day, we're doing everything we can to generate cash again in the fourth quarter.

Pavel Molchanov: Okay, good to hear.

Obviously, that's somewhat dependent on what may happen to price in November and December if hypothetically prices went through the roof that makes that a little more difficult.

Despite what I just said.

If prices are.

This is relatively relative Zip code they've been relatively.

Common constant over the last few weeks if it stays the water stay calm.

We should be able to deliver some additional cash flow in the fourth quarter. Okay.

Sure.

I wanted to also ask you this.

And our strategic evolution.

To focus on and have been building up some of these areas that are a little bit.

Further or adjacent to or at least some of the traditional things that you've been doing.

Michael Kasbar: Same question I asked three months ago. You've been, you know, kind enough to share this number in the past. What percentage of net revenue or EBITDA is at this point coming from... Low Harbin, and Renewal Pills? Pavel, thanks for the question. What you asked last quarter, consistent with the answer last quarter, the way we pull those pieces together. You know, I think I told you last quarter that it was approximately 10% of GP and 10% of EBITDA.

I am curious if there as you look at that portfolio are there are there holes in it or are there areas that are going to need capital.

As you look forward do you feel like you can grow.

In that footprint and accomplish what you want to accomplish.

With a capital light effort.

Good question, Dan and.

<unk>.

It depends.

No.

It's.

Our mix of business mix of a number of different things. So it's on power and gas we're.

Michael Kasbar: That includes our power and gas activities and sustainability related solutions. I would say this quarter, that number has actually gone up slightly. Both of those numbers are a little over 11%. So up about, you know, one one and a half percent from from last quarter.

We're providing advisory brokerage some merchant activity some balancing activity there some risk management.

So that runs the full spectrum.

Michael Kasbar: Okay, and then lastly on the marine segment, so obviously a lot of international trade headwinds just given the macro. Is there any evidence at your disposal that marine volumes are stabilizing? Well, in terms of the market, you know, the macro is certainly softer. You know, slow steaming is not an immaterial dimension to it. Both economic reasons, as well as, you know, emissions management, the overall impact of that, I think, is, you know, low single digit.

And then on the carbon side in the renewable energy services side.

It would be a power agreements it would be environmental certificates.

It would be onsite solar advisory so a number of those are very balance sheet friendly.

And have eminent scalability.

Our intellectual capital activities.

It's a beautiful thing because.

Everyone needs to do something more or less with their sustainability initiatives.

And a lot of them don't necessarily have a plan, it's rather complicated so.

We're able to help them navigate that.

And also carryout the implementation so some of those activities certainly are using some balance sheet capabilities, we're quite adept at understanding how to manage that and work within the borders of our balance sheet.

Michael Kasbar: So it's certainly not robust. And that's had, you know, a modest impact, you know, on on the segment, I think I may have some additional color to add to that. Yeah, in addition to what Mike had to say, if you focus on us specifically, similar or comments recently in aviation, you know, one of the things we've done a marine over the last couple of years, is, you know, rationalize some lower margin.

And we've done that reasonably well.

So it just depends on what part of that sustainability business activity.

Michael Kasbar: And business that historically we may have been doing for the sake of volume. So we, you know, our volume numbers year over year impacted by both a bit more of that as well as the impact of the market itself. I would say your question was, you know, if it's stable, I would say we're at a level now that is that is stable with, you know, possibly some opportunities to pick up some additional volume next quarter. You know, I don't, I don't see it dropping materially more from the level that we, that we found ourselves at in Q3.

So certainly the merchant side and gas and power work differently.

Unknown Executive: All right.

But our participation model windows.

Pretty robust.

And we're judicious in terms of how we participate in the merchant side of that but we certainly understand that and the capability of understanding those molecules and electrons we've got deep domain expertise.

Unknown Executive: Thank you very much.

Unknown Executive: Thank you.

So it's step by step, but there is many parts of <unk>.

The area.

That.

Are not tapping our balance sheet.

Okay.

I appreciate that Mike.

Ken Huxter: Our next question comes from the line of Ken Huxter of Bank of America. Hey, great. Good afternoon. Hey, Ira, Michael, Elsa. Good. So, Ben, you'll, you'll get in a minute. Hang on. Marine, you noted a few locations were impacted. Is that all up and running now? Was that port strikes out west in Canada? Was it freight diversion because of the negotiations? Can you talk about what was going on on the marine side and if it's resolved?

And then and then lastly for me I.

<unk> was a little bit surprised or it was curious if maybe if you could.

Talk me through how youre thinking about share.

Share repurchases I mean, the shares have been somewhat soft although the results here are reasonably good maybe not record setting, but not bad and.

Ken Huxter: It is all generally resolved three, three particular locations, three different stories. You know, one of them had a disruption, two of them had some short term disruptions and one of them had some, had some other issues during the quarter, but I would say that that is 95% of that is now behind us. And we don't expect to get impacted from any of those issues in a material way in in the fourth quarter. What was that?

Yeah.

Doesn't it doesn't seem like that's being reflected very well on the shares and then.

As a consequence of that also in the convertible price as well as another alternative.

It seems to me, though that is much lower hanging fruit in terms of capital deployment then.

And then my.

Making investments outside of the firm or acquisitions.

Can you maybe talk me through how you think about that and sort of where you sit with respect to the deployment of capital between.

Buybacks.

The other things.

Michael Kasbar: Something on at the site that stopped you from, I just have no idea what you're saying. If it wasn't the poor strike stopping vassals, was it something at locations that disabled you from? It was something at two specific locations in Europe, in one location in the US that hampered, hampered volume during the quarter.

Okay.

Always a fun question to answer for you then.

So we always carefully evaluate safety.

The optimal timing for any share repurchase the op amount of purchases as part of our overall capital allocation framework right. As you as you will remember, we recently repurchased over $2 2 million shares or $50 million worth of stock just in June.

Ira Birns: So, Ira, we've talked a lot over many years, is this about right now, to the public's question about the inflection, is this about winning share with existing customers, or is this the competitive market out there? Has it changed at all? Obviously you've been aggregating a lot of business over the years, competitors or people providing service at the docs or at airports. Is this a competitive business, still that you're seeing increase in consolidation, or is this just we've got to wait for the market and then our customers take more volumes?

When we issued our convert.

But anyway look additional buybacks are always a consideration.

Alongside.

Our capital allocation decisions going towards organic growth inorganic opportunities, albeit great point that hit the.

The multiples on those are a lot higher right now.

As well as dividends right. So.

All I can say is it's always a consideration we don't necessarily choose a fixed dollar amount at the beginning of the year. It depends on the world around us and where we see opportunities in either the stock or.

Or or other opportunities outside of the business that may be a bit more expensive on a pure kind of economic analysis, but could drive strategic value to us over the long term.

Ira Birns: There's a little bit of both. Obviously market conditions, the container market, as I'm sure you know, is certainly not at the strongest level right now. So part of it is us having a disciplined approach to returns. So again, we're not after growing volume for the sake of growing volume, we're trying to grow profitability in related returns. And you know, again, marine is highly susceptible to the pricing environment is evidenced by the phenomenal results last year when, when, when bunker prices hit record levels.

So we.

We have to always.

Provide available liquidity and financial flexibility for those types of investments as well. So the end of the day, we're trying to allocate effectively between all of those levers to drive the best possible shareholder outcome, but while also maintaining the appropriate level of financial flexibility. So that's probably the best.

Ira Birns: So it's a little bit of both. Our guys are always after additional business with existing customers, new business with new customers, but you know, they have to hit the hurdle rates that we ascribed to them in order for that to make sense to all of us and those hurdle rates have increased in this interest rate environment, right, which again has resulted in us walking away from some business that maybe we might have entertained 18 months ago.

Answer I could give you on that one.

If you had do well.

Turning to press on that for a second if you had to sort of look at where we are right now today at today's share price and then also sort of where relative valuations are for some of the.

Potential targets there are out in the market how does it how does it stack up based on that.

Ira Birns: So it's a combination of both of those factors that you described. And then just to put a bit more on it, I can, you know, in my comments, I talked about the efficiency of our platforms and I think we're feeling more confident in our ability to create efficiencies and operations to make us more competitive. And that achieves the ability to obtain the returns as well as getting market share as our network expands and has expanded greatly, certainly in aviation and as we open up new locations in marine that creates greater opportunities.

This moment would you say.

On a relative basis of course.

Am I supposed to say this council rooms that are our multiples are ridiculously low as you would say.

The stock opportunity is really to keep at that.

A key factor, but that isn't everything right when youre, comparing where are you going to invest your next dollar right. So short now.

On a relative basis two different periods in our history.

It certainly is more attractive than it was that doesn't mean that that that translates into every available dollar of cash.

Should go to buying back shares right. We still we still have to consider other opportunities as part of our again, it's part of our strategic initiatives trying to drive further growth and scale <unk> is still listening in and our sustainability related businesses. There's a lot of synergistic opportunities in land and Mike alluded to with small one.

Ira Birns: And, you know, our land business, you know, I think is got significant upside as well as sustainability. So those were the comments that I referred to earlier. So when we talk about growth, it's, you know, growth with a return and that's that's where we see the future in terms of grabbing density, sharpening the portfolio, being able to get operating leverage, you know, in those areas and managing, managing the portfolio to achieve those outcomes of growth with a reasonable return.

That we completed recently.

In North America, that's a really simple bolt onto the card lock business.

They would say at the end of the day.

That's a pretty a pretty solid investment right now considering.

It comes with literally no cost income.

Because it's such an easy integration. So yes. So on average it is a better time today than that EMEA had been at other at other periods in the past.

Ira Birns: Tom. I want to actually have financial question, you know, thoughts on cash flow. It used to be that when oil prices went up, you were extending credit to your customers, when it was low, you'd actually swim in the cash flow as you didn't need to extend sales at standing and your credit. It sounds like you're seeing improving cash flows despite what you know, we've seen a run up and feel maybe just talk about the backdrop there for a second.

You would argue it's more being more seriously considered but it's being more seriously consider alongside.

Longsight other other opportunities as well.

Okay.

Alright, well I'll leave it there I appreciate it thank you.

Yes.

Thank you.

Now I'd like to turn the conference back to micro <unk> for closing remarks, Sir.

Well I'd like to thank our investors for your support as always and.

Also like to thank our over 5000 world connect teammates.

Ira Birns: And I'll blend it in with two questions, right? So the thought on cash flow and then and then you're 30% margin target. What do you need to happen to get there? And maybe talk about that, you know, we don't often, you know, pat ourselves on the back, but in terms of, you know, the working capital story, you know, our team should. So, and part of that look at this, you know, we're for the first time in many, many years, we all know we're we're in a, you know, seven, eight percent, you know, funding environment versus, you know, one to two for many, many years, right?

And the outstanding work that you do every day is what makes US who we are so thank you very much and look forward to talking to everyone.

Next quarter take care Bye bye for now.

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

Ira Birns: So, our team has been, you know, Mike, I mentioned returns, Mike mentioned returns already, you know, part of focusing on returns is, you know, trying to get some more margin, which isn't that easy. We were very successful at that in aviation this summer, but, you know, that, that doesn't completely mitigate, you know, the sharp rise and interest rates and the related increase interest expense. So, you know, we're also focused on where we do business, who we do business with and how we go to market in terms of[inaudible] I mean, you've smoothed out some of that seasonality that you used to have to talk about with Europe and, you know, first quarter, fourth quarter, or is that still there a little bit with the I was really, I was, I was looking at an annual run rates, you know, when I was thinking about that, but we had smooth that out a bit more because, you know, land now has stronger quarters from fires generally in, in the quarters that were softest for us before.

Okay.

[music].

Okay.

Okay.

[music].

Ira Birns: And at the end of the day, that, that UK, whether depending on business, by the way, you know, it's the beginning of October and everyone's wearing shorts in the UK, so starting out to be, you know, weaker than you would hope, but, you know, the weather may change, but that's become a much smaller piece of the pie, and we've smoothed it out with, with, you know, considerably more volume and profitability in the second and third quarters. It post pliers acquisition.

Ira Birns: So yes, there's less of that as well. Thanks, Iris. Thanks, Michael. Thanks, Oscar. Thank you. Once again, to ask a question, please press star 1-1 on your telephone. Again, that's star 1-1 on your telephone to ask a question.

Benjamin Nolan: Our next question comes from the line of Ben Nolan of Stiefel. Thanks, one, and let me just start by saying thanks to Ken first, taking the two questions. I appreciate that.

Ira Birns: The, I do have a few though. The, the first is, well, first of all, just to clarify on what Ken was asking with respect to working capital. So, at least aspirationally, if, as we look into the fourth quarter, if fuel prices remain relatively low, relatively constant, there, there shouldn't be any give back with respect to that working capital, correct? It should just, you know, effectively be what, what your cash flow from operations would be in that working capital.

Ira Birns: Is that fair? Yeah, I mean, yeah, at the end of the day, we're doing everything we can to generate cash again in the fourth quarter. You know, obviously that's somewhat dependent on what they happen to price in November and December. If the prices went through the roof, that makes that a little more difficult, you know, despite what I just said, but if, you know, prices are, you know, in, you know, this relatively relative zip code, they've been relatively calm and constant over the last few weeks. If it stays, the water stay calm, you know, we should be able to deliver some additional cash flow in the fourth quarter.

Michael Kasbar: Okay, so I wanted to also ask, you have this strategic evolution and trying to focus on and have been building up some of these areas that are a little bit further or adjacent to at least some of the traditional things that you've been doing. I'm curious if there, as you look at that portfolio, are there, are there holes in it or are there areas that are going to need capital as you look forward?

Michael Kasbar: Do you feel like you can grow in that footprint and accomplish what you want to accomplish? with a capitalite effort. Good question, Ben. And, you know, it depends. So it's, you know, a mix of business mix of a number of different things. So it's on power and gas, we're providing advisory brokerage, some merchant activity, some balancing, you know, activity there, some risk management. So that runs the full spectrum. And then on the carbon side and the renewable energy services side, it would be, you know, power agreements, it would be environmental certificates, it would be on site solar advisory.

Michael Kasbar: So a number of those are very balance sheet friendly and have, you know, eminent scalability, you know, their intellectual, you know, capital activities. You know, it's a beautiful thing because, you know, everyone needs to do something more or less with their sustainability initiatives. And a lot of them don't necessarily have a plan. It's rather complicated. So, you know, we're able to help them navigate that, both with the advisory, the knowledge base, give them a plan, do an assessment, and also carry out the implementation.

Michael Kasbar: So some of those activities certainly are abusing some balance sheet capabilities where, you know, quite adept at understanding how to manage that and, you know, work within the borders of our balance sheet. And, you know, we've done that reasonably well. So it just depends on what part of that sustainability, you know, business activity we have. So certainly the merchant side, you know, and gas and power work differently. But our participation model in those is pretty robust and where judicious in terms of how we participate, you know, in the merchant side of that.

Michael Kasbar: But we certainly understand it and the capability of understanding those molecules and electrons, you know, we've got deep domain expertise. So it's step by step, but there's, you know, many parts of the area that, you know, are not tapping the balance sheet.

Michael Kasbar: Okay. I appreciate that, Mike.

Ira Birns: And then lastly for me, I was a little bit surprised or was curious that maybe you could talk me through how you're thinking about share repurchases. I mean, the shares have been soft, although, you know, the results here are reasonably good. Maybe not records setting, but not bad. And, you know, it doesn't seem like that's being reflected very well on the shares. And then the consequence of that also in the convertible price as well as another alternative.

Ira Birns: It seems to me, as though that is much lower hanging fruit in terms of capital deployment than making investments outside the firm or acquisitions. Could maybe talk me through how you think about that and sort of where you sit with respect to the deployment of capital between.., bybacks and other things. Well, always a fun question to answer for you, Ben. We always carefully evaluate, say, the optimal timing for any share repurchase, the optimal amount of purchases is part of our overall capital allocation framework.

Ira Birns: As you will remember, we recently repurchased over 2.2 million shares or $50 million worth of stock just in June when we issued our convert. But, you know, like additional buybacks are always a consideration alongside our capital allocation decisions going towards organic growth, inorganic opportunities. I'll be a great point that the multiples on those are a lot higher right now as well as dividends. So, all I could say is it's always a consideration.

Ira Birns: We don't necessarily choose a fixed dollar amount at the beginning of the year, depends on the world around us and where we see opportunities in either the stock or other opportunities outside the business that may be a bit more expensive on a pure kind of economic analysis. But could drive strategic value to us over the long term. So, you know, we have to always provide available liquidity and financial flexibility for those types of investments as well.

Ira Birns: So, the end of the day, we're trying to allocate effectively between all those levers to drive, you know, the best possible shareholder outcome, but while also maintaining, you know, the appropriate level of financial flexibility. So, that's probably the best answer I could give you on that one.

Ira Birns: So, if you had to, I'm going to press on that for a second, if you had to sort of look at where we are right now today, at today's share price, and then also sort of where relative valuations are for some of the, you know, potential targets there are out in the market. How does it stack up based on, you know, this moment, would you say? On a relative basis, of course, am I supposed to say this in a council room that, you know, are, are, are multiple is, are ridiculously low, so you would say, you know, you're, you know, the stock opportunities really cheap, but that, you know, that's, that's a key factor, but that isn't everything right when you're comparing where are you going to invest your next dollar, right?

Ira Birns: So, sure, now on, you know, on a relative basis to different periods in, in our history, you know, it's, it certainly is more attractive than it was. That doesn't mean that, that, that translates into, you know, every available dollar cash should go to, you know, buying back shares, right? We still, we still have to consider other opportunities, part of our, you know, again, as part of our strategic initiative is trying to drive, you know, further growth and scale, you know, favela is still listening in, in our sustainable related businesses, there's a lot of synergistic opportunities in land, Michael alluded to, small one that we completed recently in, in the, in North America, that, that's a really simple bolt onto the card lock business, where they would say at the end of the day, you know, we're, you know, that that's a pretty, pretty solid investment right now, considering, you know, it comes with literally no cost and only income, because it's such an easy integration.

Ira Birns: So, yes, on average, it is a better time today than that it may have been, you know, at other, at other periods in the past, and it, you know, it's more being more seriously considered, but it's being more seriously considered alongside, alongside other other opportunities, as well.

Benjamin Nolan: Okay, all right. Well, I'll leave it there. I appreciate it. Thank you.

Michael Kasbar: I would now like to turn the conference back to Michael Kasbar for closing remarks, sir. I'd like to thank our investors for your support as always. And I'd also like to thank our over 5,000 World Kinect keymates, the outstanding work that you do every day is what makes us who we are.

Operator: So thank you very much and look forward to talking to everyone next quarter. Take care. Bye bye for now.

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