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Edited Transcript of INT earnings conference call or presentation 25-Jul-19 9:00pm GMT

Q2 2019 World Fuel Services Corp Earnings Call

MIAMI Jul 30, 2019 (Thomson StreetEvents) -- Edited Transcript of World Fuel Services Corp earnings conference call or presentation Thursday, July 25, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Glenn Klevitz

World Fuel Services Corporation - VP & Assistant Treasurer

* Ira M. Birns

World Fuel Services Corporation - Executive VP & CFO

* Michael J. Kasbar

World Fuel Services Corporation - Chairman, CEO & President

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Conference Call Participants

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* Ariel Luis Rosa

BofA Merrill Lynch, Research Division - Associate

* Benjamin Joel Nolan

Stifel, Nicolaus & Company, Incorporated, Research Division - MD

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the World Fuel Services 2019 Second Quarter Earnings Conference Call. My name is Ash, and I will be coordinating the call this evening.

(Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to Mr. Glenn Klevitz, World Fuel's Vice President, Treasurer and Investor Relations. Mr. Klevitz, you may now begin the conference.

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Glenn Klevitz, World Fuel Services Corporation - VP & Assistant Treasurer [2]

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Thank you, Ash. Good evening, everyone, and welcome to the World Fuel Services Second Quarter 2019 Earnings Conference Call. I'm Glenn Klevitz, and I will be doing the introductions on this evening's call alongside our live slide presentation. This call is also available via webcast. To access this webcast or future webcasts, please visit our website and click on the webcast icon.

With us on the call today are Michael Kasbar, Chairman and Chief Executive Officer; and Ira Birns, Executive Vice President and Chief Financial Officer.

By now, you should have all received a copy of our earnings release. If not, you can access the release on our website.

Before we get started, I would like to review World Fuel's safe harbor statement. Certain statements made today, including comments about World Fuel's expectations regarding future plans and performance, are forward-looking statements that are subject to a range of uncertainties and risks that could cause World Fuel's actual results to materially differ from the forward-looking information. A description of the risk factors that could cause results to materially differ from these projections can be found in World Fuel's most recent Form 10-K and other reports filed with the Securities and Exchange Commission. World Fuel assumes no obligation to revise or publicly release the results of any revisions to these forward-looking statements in light of new information or future events.

This presentation also includes certain non-GAAP financial measures as defined in Regulation G. A reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures is included in World Fuel's press release and can be found on its website.

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

At this time, I would like to introduce our Chairman and Chief Executive Officer, Michael Kasbar.

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Michael J. Kasbar, World Fuel Services Corporation - Chairman, CEO & President [3]

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Thank you, Glenn. Good afternoon, everyone. Thank you for joining us today. I am pleased to report that our second quarter results demonstrated a continuation of the earnings momentum established in the first quarter of this year. We continue to be guided by the 3 pillars of our shareholder value creation strategy: sharpening our portfolio through efficient capital allocation to businesses with more predictable and sustainable profit streams; driving organic growth by reliably delivering differentiated energy solutions to our expanding customer base; and maintaining our commitment to continuous cost management in order to improve our operating leverage and provide greater value to the market.

Our improved year-over-year earnings performance, together with the favorable renegotiation of our credit facility, has significantly increased our liquidity. We now have greater financial flexibility to execute on our strategic initiatives and maintain our strength as a stable financial counterparty.

Once again, our aviation segment posted double-digit year-over-year percentage increase and operating income in the second quarter. The aviation team has done an exceptional job of improving supply chain efficiency and increasing asset utilization at our physical locations, while continuing to expand our network in response to the demand by many of our airline customers for reliable and cost-effective fuel delivery solutions.

Our government business, again, delivered strong results in Q2, demonstrating our continued ability to support complex requirements, relying on our long-established expertise in energy and logistics in geographically remote or challenging theaters of operations.

Solving energy management problems continues to drive our organic growth and differentiates us as a strategic partner fueling our customers' operations and growth. We commenced new operations at several locations in Europe and Latin America during the quarter. We continue to invest in development of customer-facing technology platforms that complement their fuel offering and facilitate our customers' trip planning and payment requirements.

Our marine segment continues to deliver strong earnings comparisons, consistent with the trend established in the first quarter of 2018. The earnings growth has primarily resulted from a heightened focus on segmenting and satisfying demand that represents greater value to the customer, concentrating on enhancing fuel supply capabilities in specific geographies where customers are experiencing supply challenges.

Following strong performance in Q1, core resale margins remain solid in Q2. We remain committed to deploying capital prudently while remaining focused on financial returns, counterparty risk exposure and cost management. Our continued focus on cost management has contributed to reduced operating expense ratios in both Q1 and Q2. We maintain a cautiously optimistic view regarding the opportunity represented by the compliance challenges facing our customers with the adoption of the IMO 2020 sulfur cap standards. Our substantial financial capability, technical capacity and extensive cross-segment supply and logistics capabilities position us exceptionally well to address our customers' requirements, leading up to and in the wake of the new regulatory environment.

During the second quarter, we launched an initiative to converge our land liquid fuels and our Kinect Energy management businesses to deliver more comprehensive and valuable set of solutions to our commercial and industrial customers. We have a tremendous opportunity to pull together our scale and breadth to globalize and grow our land business at an accelerated pace.

In addition to combining our commercial and industrial liquid fuel, gas, power and sustainability offerings, we continue to sharpen the portfolio with the objective of redeploying our financial capital and talent to our businesses that satisfy end-user demand and are simultaneously more predictable and durable.

Q2 represented the sixth consecutive quarter in which our commercial and industrial business has posted comparative organic growth. And our Kinect businesses recorded double-digit profit growth compared to the prior year, and government-related activity remains strong, offsetting the negative impact of a warm spring in the U.K. and a decline in North American supply and trading results.

The ongoing expansion of our strategically important commercial and industrial fuel operations and the momentum of our global Kinect gas and power activity confirm that our strategy is increasingly relevant in navigating a changing energy marketplace. Our global land segment remains on track to grow at double-digit rates this year and is supposed to continue increasing our value as a strategic partner to existing and prospective customers.

Our MultiService global payment solutions business turned another solid quarter, recording yet another double-digit earnings gain, reflecting a continued increase in transaction volumes and demonstrating the scalability of our processing platform. The MultiService team continues to onboard and ramp new customers, which will further leverage the installed multi-tenant payment infrastructure.

Before turning the call over to Ira, I'd like to thank our over 5,000 team members for their professionalism and dedication. Our people are indisputably our competitive advantage, and their focus on our strategic objectives has never been clearer. I'll pause now and ask Ira to review our financial results.

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Ira M. Birns, World Fuel Services Corporation - Executive VP & CFO [4]

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Thanks for pausing, Mike. Good afternoon, everyone. We delivered solid financial results in the second quarter and continued to execute on our core strategies of continuous cost management and sharpening our portfolio to drive enhanced returns.

Before I get into the details of the second quarter, some of the highlights are as follows: Adjusted EBITDA for the second quarter was $98 million. That's an increase of $14 million or 17% compared to last year. We have now delivered year-over-year increases in adjusted EBITDA for 9 consecutive quarters, and our trailing 12-month adjusted EBITDA has increased to a record $388 million. Adjusted earnings per share for the quarter was $0.58, an increase of 23% compared to the second quarter of last year. And lastly, our balance sheet remains strong, aided by operating cash flow generation during the quarter of $125 million. We repurchased $65 million of common stock during the quarter, and, as previously announced, increased our dividend by 66%.

And as we announced earlier this week, we have amended and extended our bank facility, further improving our liquidity profile, providing us with additional financial flexibility to continue investing in our business and returning capital to our shareholders.

Consolidated revenue for the second quarter was $9.5 billion, down $700 million or 7% compared to the second quarter of 2018. The year-over-year decrease in revenue was principally driven by the decline in volumes in our marine and land segments as well as the 12% year-over-year decline in average fuel prices.

Our aviation segment volume was 2.1 billion gallons in the second quarter, an increase of 50 million gallons or 3% year-over-year and 173 million gallons or 9% sequentially. Volume in our marine segment for the second quarter was 5.1 million metric tons, which is down 775,000 tons compared to the second quarter of last year and effectively flat sequentially. The volume reduction year-over-year principally related to the exit of certain low-margin business activities in Asia, which we have mentioned for the past several quarters.

Our land segment volume was 1.3 billion gallons or gallon equivalents during the second quarter. That's down around 100 million gallons or 7% compared to the second quarter of 2018, but also flat sequentially. The year-over-year decline in land segment volume was principally related to our continuing efforts to reduce noncore, low-margin supply and trading activities in North America.

Total consolidated volume for the second quarter was 4.8 billion gallons or gallon equivalents, a decrease of approximately 250 million gallons or 5% year-over-year.

Please note that the following figures exclude the impact of pretax nonoperational items in the second quarter as well as such items in periods previously reported, as highlighted in our earnings release. These nonoperational items principally represent restructuring and acquisition-related costs. To assist all of you in reconciling results published in our earnings release, the breakdown of the nonoperational items can be found on our website and on the last slide of today's webcast presentation.

Consolidated gross profit for the second quarter was $269 million, an increase of $22 million or 9% compared to the second quarter of 2018. Our aviation segment contributed $140 million of gross profit in the second quarter, an increase of $13 million or 10% compared to the second quarter of 2018. Year-over-year, the increase in aviation gross profit was principally the result of continued strength in our core commercial and government-related activities. Looking ahead to the third quarter, we expect a strong quarter in aviation, driven principally by seasonal growth in our core commercial business and international fueling operations. Our marine segment generated second quarter gross profit of $36 million. That's an increase of $6 million or 20% year-over-year. Our team continues to execute well, with core margins and returns remaining well above the prior year.

Looking ahead to the third quarter, we expect a sequential increase in marine gross profit, principally due to seasonal activity, which we have now experienced for the past few summers. Our land segment delivered gross profit of $92 million in the second quarter, an increase of $2 million or 3% year-over-year. When compared to last year, the principal drivers of the increase relate to growth in government-related activity, our Kinect business as well as growth in our MultiService payment solutions business. This was partially offset by a decline in North American supply and trading results as well as weather-related weakness in the U.K.

Gross profit in our MultiService payment solutions business hit $20 million in the second quarter. That's an increase of $2 million or 10% compared to the second quarter of 2018, reflecting the continued strength of the growing MultiService business model.

Looking ahead to the third quarter for land, we expect sequential improvement in Kinect, retail and commercial and industrial business activity.

Operating expenses in the second quarter, excluding bad debt expense and nonoperational items, were $188 million. That's an increase of $8 million compared to the second quarter of last year. While total operating expenses were higher on a year-over-year basis, we remain on track to meet our goal of a 250 basis point year-over-year improvement in our operating expense ratio.

In the third quarter, we expect operating expenses, again, excluding bad debt and any nonoperational items, to be in the range of $185 million to $189 million. Adjusted EBITDA was $98 million in the second quarter, up $14 million or 17% from the second quarter of 2018. Again, this represents the ninth consecutive quarter of year-over-year improvement in adjusted EBITDA. Additionally, our trailing 12-month adjusted EBITDA was $388 million, as I mentioned earlier, in the second quarter, and that's another record result.

Adjusted income from operations for the second quarter was $78 million. That's up $13 million or 20% year-over-year. Second quarter interest expense was $20.2 million. That's up $2.3 million compared to last year, principally due to higher average rates during the quarter compared to the second quarter of 2018.

Considering the impact of the lower costs associated with our new bank facility as well as the forecasted decline in interest rates during the third quarter, I would assume interest expense in the third quarter to decline to somewhere around $19 million.

Our adjusted effective tax rate in the second quarter was 34.3%, up from 28.8% in the second quarter of last year. We continue to navigate the many complexities that tax reform has introduced to our business, which has significantly increased our effective tax rate compared to previous pretax reform. While we remain focused on identifying opportunities to reduce our effective tax rate going forward, for the balance of the year, we expect our tax rate will still be in the range of 32% to 36%.

Adjusted net income for the second quarter was $39 million. That's an increase of $7 million or 23% when compared to the second quarter of 2018. And again, adjusted diluted earnings per share was $0.58 in the second quarter, and that's up 23% year-over-year.

Our total accounts receivable stood at $2.7 billion at quarter end. That's effectively flat sequentially, but down $200 million when compared to the second quarter of last year. The year-over-year decline was principally related to the volume declines in our marine and land segment as well as the decline in fuel prices over that period.

Strong working capital management helped reduce our net trade cycle to 8.2 days this quarter, contributing to solid cash flow from operating activities of $125 million and even $109 million of free cash flow, and that's despite a sequential increase in average fuel prices during the quarter.

Our balance sheet remains strong as we further reduced our total debt balance, resulting in a reduction in our ratio of net debt to adjusted EBITDA to 1.2x, down from 1.9x in the second quarter of 2018. This has helped drive a 100 basis point year-over-year improvement in trailing 12-month return on invested capital.

As we announced earlier this week, we have further strengthened our liquidity profile and have extended the maturity of our revolving credit facility and term loans to July 2024. We increased the overall size of the facility from $1.6 billion to $1.8 billion, lowered our borrowing spread and commission fee and favorably renegotiated other terms, which further increases the available capacity under the facility today, while at the same time, reducing funding costs. The transaction was nearly 50% oversubscribed by our bank group, which is a true testament to the banking community's continued confidence in our long-term strategy. We remain very appreciative for all of their support.

Additionally, we have taken actions to further drive shareholder value. As I mentioned earlier, we repurchased $65 million of common stock during the quarter, which was the largest quarterly repurchase program we've ever had, and we increased our dividend by 66%.

In closing, I thought it would be valuable to make some comparisons back to the second quarter of 2017, as shortly afterwards we get more seriously focusing on restructuring activities and cost savings. So for starters, trailing 12-month EBITDA has increased from $295 million to $388 million or 32%, while at the same time, our overall working capital investment has actually declined by $32 million. This is all contributing to $373 million of operating cash flow over this past 2 years. And again, this excludes the impact of a recently adopted accounting standard, which impacted 2018 cash flow, which is no longer impacting our cash flow going forward. And our trailing 12-month operating expense ratio over that same 2-year period has declined 640 basis points from 77.7% to 71.3%, driven principally by our heightened focus on cost management.

Back to the second quarter of 2019, our business, again, performed well, with significant increases in year-over-year adjusted EBITDA, net income and earnings per share, and we, again, managed working capital well, driving $125 million of operating cash flow.

Strong cash flow performance, increasing EBITDA and this week's amendment and extension of our credit facility and term loan further strengthened our balance sheet, facilitating our ability to repurchase $65 million of common stock and increase our dividend by 66% during the quarter, while also providing greater financial flexibility to reinvest in our core business and more actively pursue strategic investment opportunities.

Thank you. I will now turn the call back over to our operator to begin the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Ben Nolan with Stifel.

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Benjamin Joel Nolan, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [2]

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Nice quarter, gentlemen.

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Michael J. Kasbar, World Fuel Services Corporation - Chairman, CEO & President [3]

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Thanks, Ben.

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Benjamin Joel Nolan, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [4]

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Yes. So I have 2 questions. Well, I'll stick to my one question and one follow-up. The first one relates to just sort of thinking strategically about the various businesses. Obviously, you've been able to grow -- organically grow the aviation business quite a lot. And at the same time, the volumes have been drifting down a little bit in both land and marine, but clearly, it's carving out lower margin volume in order to generate better profit out of the group, which is great. Just curious, as you think about those 2 businesses, in particular, going forward, is there an opportunity set to do something similar to what you have successfully been able to do in the aviation business? And that, are there business opportunities out there that you can organically grow at healthy margins in a similar cadence to the aviation? Or is that structurally not how things are going to shake out right now?

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Michael J. Kasbar, World Fuel Services Corporation - Chairman, CEO & President [5]

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Great question, Ben. And I think I've commented in the past, where I've said that our aviation business model and the manifestation of aviation and a little bit of the evolution of the entire company most notably exhibited within aviation, when our origins, as I've said in the past, we were essentially a bank. We were underwriting and reselling and basically a market maker in a fragmented market, dealing with risk management, obviously credit risk, but also price risk, and that was fantastic. It was a lot of fun, it was a great business, but things change. And we started the journey with aviation, moving from that third-party value-added reseller into inventory and then into distribution assets and then into services and technology. And that's worked out extremely well.

Marine, under John's stewardship, John Rau, and we started this in 2004 with physical supply in the U.K., moved to Latin America. So that journey, it has started with marine. And marine has had a lot of challenges. We all know more than most industries got hit in a lot of different ways. But we're very much on our way there. So that, I think, is good.

And it's almost 2020. We've been sort of conservative because it's not like it's a surprise, both the -- certainly, the oil industry is pretty resilient and manages change pretty well. And the shipping industry, I think, is going to respond reasonably well to it. We feel cautiously optimistic about that. But we feel like we've got a good journey within marine, and we're on our way. Land is tremendously interesting. We started out physically within our land business and locally in terms of distribution in 2008 with our retail business and then moved into commercial and industrial business. We took a little bit of a departure into the commodity side because there were significant opportunities there, but those all changed with fracking and the bottom falling out in Q4 of '14 and Q1 of '15. So we repositioned. I mean that was kind of painful, but we're still not done. These things, unfortunately, take a little bit of time.

But the land model, we talk a lot about this in the company. And the word that we use is convergence. There's a lot of commonality. There are certainly differences within these end markets, but the foundational pieces of moving a molecule and the logistics, certainly, the underwriting, the risk management, we've set up centers of excellence. And both John and Mike Crosby have done phenomenal jobs of creating excellence within supply, and it's really not that different as you cut across the businesses and physical operations. So we're seeing some leveraging across all of these businesses, and it's just a matter of time. We're trying to pick it up as we transition and pivot and exit some businesses that are perfectly good businesses, but looking to get the focus on core business activities and leverage a common platform.

So thanks for the question because it gives me an opportunity to really talk about the longer-term journey of where we are going. And marine and aviation, we've got a significant position in aviation. We're one of a handful of companies that have a truly global offering. So we do have some market presence that the entire aviation team and the rest of the functional team that is very tightly engaged with them should be extremely proud of. And marine as well. I mean we're a major participant there. We're just a little further down the road on aviation.

Land is the dark horse, if you will. And that's coming on. It's been rough dealing that, but we are making progress and now putting together the diesel business with gas and power and renewables. And sustainability is kind of exciting, because it's an endless customer list. So we're still working out platforms, and all of that takes time and money, but the team has certainly come together, which is extremely encouraging.

So in any case, I don't want to take up too much time, but that is really the strategy. And there is commonality. We are leveraging the geographic footprint, the functional team is a common functional team. And in any case, I guess, I'll stop there. I don't know, Ira, if you've got anything you want to add to that?

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Ira M. Birns, World Fuel Services Corporation - Executive VP & CFO [6]

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No, I think that's wonderful as an answer.

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Benjamin Joel Nolan, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [7]

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So I take from that, that, yes, there are opportunities to profitably and organically grow the marine and land businesses over time. I know that maybe last quarter, or it was 2 quarters ago, you began talking a little bit again about the possibility of making acquisitions should the opportunity present itself, specifically targeting the land segment. I'm curious if you might be able to dive down a little bit within that. And first of all, say, that's still the thinking, and to the extent that it is, how should we think about what you guys view as a good fit? Is it just something that, as geographically, are there specific lines of business within land where you feel like you can really find value and are a good fit. But any color that you can give there.

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Michael J. Kasbar, World Fuel Services Corporation - Chairman, CEO & President [8]

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So thanks for that. So I think Ira commented in his script that we're reactivating. We took a pause, and I think he's commented on that in the past. We've sort of regrouped in terms of base camp before we start to scale again. And we're ready to do that. We're being thoughtful about what is the right fit, and of course, valuation. So we like the commercial and industrial business. It makes sense. I mean it's essentially what we do within aviation and marine. So there's a commonality within those spaces. We like the retail business in terms of its cash flow. That's in a little bit of a transition. But our commercial and industrial business, certainly, within the U.S., we started out in the Northwest and the Southeast and in the Midwest and the Mid-Con, continuing to build that out throughout the United States, makes a lot of sense to us. We'll -- we continue to look at this globally. There is an interface between our land and marine business and our land and aviation business. So there is a confluence there. You do have the marine industry. And certainly, 2020 is going to use a whole lot more diesel within the aviation industry. You're using diesel, gas and power at various different locations. The gas and power business, we like a lot. We'll continue to grow that.

We're a reflection of the marketplace. So the conversations that we have with our clients, they're interested in our capability with LNG. The price of that is extremely competitive now. There's a significant amount of LNG activity. So our expertise in terms of understanding natural gas makes a lot of sense. So I think we've intelligently pivoted to these markets. We got into that in 2012 when shipowners and trucking companies wanted CNG and LNG solutions and we didn't understand those, so we found a fine company, U.S. Energy in Minneapolis, and we like it so much. We've put a bunch of other companies together in Bergen, Norway, a great group of people, and then put a few others together, and it's now the Kinect Energy Group. And we've decided to put those together because it's a common -- with our C&I business because that's a common customer, and they've got common needs, everybody's interested in sustainability. Not a whole lot of people understand their gas or power bill or the different ways to deal with risk management and some of the energy conservation. So we have tremendously competent and capable people. We like those businesses a lot.

So there's good organic opportunities and inorganic opportunities within land. There's some in marine, but there's a lot in land. And it's really about intelligently putting those together to figure out how are we buying time and capability. And at the end of the day, it's really competencies and talent.

So I think we're a whole lot smarter in terms of how to do that. And we're just trying to be thoughtful in terms of how we put it together. So we will do that. We've actively said that over the last couple of conference calls. But that will happen. We'd like to speed it up, I can tell you that. But we've got a lot of people working on it.

So is there any other color you want to add to that?

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Ira M. Birns, World Fuel Services Corporation - Executive VP & CFO [9]

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So the only thing I would add trying not to be repetitive is if you consider the actions we took with the bank transaction this week, taking advantage of strong market conditions, this is something we had to do, but we're able to achieve better pricing, and it's always good to extend out the life of a low-cost capital facility, like the bank facility we've enjoyed for many years. Our cash flow has become more ratable. We had really solid cash flow this quarter. So if you take Mike's comments and you combine it with the fact that our balance sheet has been strong for quite some time, but our liquidity profile has gotten much stronger, which gives us a lot more firepower to consider jumping back into the market while allowing us to invest and return capital to shareholders as we did with the buyback this quarter and still have more than sufficient liquidity to run the business and deal with the risk of rising fuel prices, et cetera.

So all around, it's an opportune time for us to find the right opportunities.

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Benjamin Joel Nolan, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [10]

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Great. I appreciate it. And I'll split this one and hopefully, it's a real quick answer. In that vein, what's the right size? What would be an ideal target?

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Ira M. Birns, World Fuel Services Corporation - Executive VP & CFO [11]

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I don't think it's -- Mike may correct me. I don't think there's a right size. I will take a moment to share my personal views that something really, really small, it takes about as much effort as something really big. But it's really tough to tell. It's more about strategic fit than size.

So I think you could put a bracket on the low end of a relatively small number, single-digit millions of EBITDA, but it's very tough to put a bracket on the high end. I guess it really depends on what's out there. And our affordability now is a higher number on the upper-end bracket than it may have been a while back, which would provide more opportunities for synergies than some of the smaller transactions we've done in the past. And again, if you combine that with just being a lot smarter and learning from the transactions in the past and where maybe we didn't achieve the synergies that we should have, there's a lot of incremental value if we could find something more meaningful in size. But it's really tough to put an actual number on that.

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Michael J. Kasbar, World Fuel Services Corporation - Chairman, CEO & President [12]

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I would like to just add more color to that. We've got, certainly the capability and certainly the appetite for the right sizable type of acquisition that is within the core, that fits with the right valuation, certainly would be interesting as a way to accelerate different parts of the business, and certainly, within land.

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Operator [13]

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Our next question comes from the line of Ari Rosa with Bank of America.

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Ariel Luis Rosa, BofA Merrill Lynch, Research Division - Associate [14]

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Pretty comprehensive answers. Love to hear that. So to start out, I wanted to touch on just kind of what you're seeing in terms of global growth and some of the impact of the trade wars. It seems like you guys would be a little bit exposed to that, but it doesn't seem like it's impacting your business too much. So maybe you could just give us some thoughts on what kind of conversations you're having with your customers and what you're seeing there?

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Michael J. Kasbar, World Fuel Services Corporation - Chairman, CEO & President [15]

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Okay. So we're pretty diverse in terms of geography and in terms of marketplace, and our supply chains are pretty evolved. So generally speaking, we have capitalized when there's been disruption. You can't always guarantee that, and the whole world is a little bit different. Disruption doesn't disrupt like it used to. So far, we haven't really experienced anything. And I wouldn't expect that we've got a big exposure. We've got the pretty diversified business model. And we don't have deep concentrations in commercial locations or any concentration in commercial clients. So that -- we've always had a diversified orientation. So I don't really think that we've got any exposure. Certainly, no known exposure in terms of trade. Anything can happen in the crazy world that we live in, but it's not like we're manufacturing, we have 80% of our manufacturing in China or some heavy concentration with our commercial activity in certain areas. So trade wars is not something that we spend a whole lot of time thinking about.

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Ariel Luis Rosa, BofA Merrill Lynch, Research Division - Associate [16]

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Understood. Fair enough. If I could switch to the -- to what you guys are doing with the buyback. Obviously, the buyback activity in the quarter suggests you guys think that your stock is still undervalued. Do you think that's fair? Is there -- in terms of how you're thinking about the buyback, is it just going to be methodical based on free cash flow? Or are you guys going to look to be a little more opportunistic there?

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Ira M. Birns, World Fuel Services Corporation - Executive VP & CFO [17]

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Yes. Great question, again, Ari. It's Ira. I would say there that, if you think of what I mentioned a couple of moments ago, our cash flows being more ratable, our liquidity profile has improved, our first choices have always been investing in the business and focusing on strategic opportunities, which, again, we have taken a pause there for a while. But we're getting -- our shoes are getting a bit bigger, our capital availability is growing. And yes, I mean, we wouldn't have bought the shares that we did in the quarter if we didn't think they were undervalued.

So there's no guarantees that we'll be doing that every day, but we're more thoughtful of using, let's say, a greater portion of our capital to do things like that, increase the dividend, buy back shares than we may have done in the past. And that's, I think, that's something that we've given a lot of serious thought to, which led to the buyback during the quarter. So Mike, I don't know if you have anything to add...

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Michael J. Kasbar, World Fuel Services Corporation - Chairman, CEO & President [18]

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Asset class, as far as I'm concerned, it's really...

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Ira M. Birns, World Fuel Services Corporation - Executive VP & CFO [19]

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One -- I'm sorry, one thing I'll add to that. I just asked Mike there because I lost my train of thought. I don't know if this is an advertisement for World Fuel, but tax reform, obviously, has played a trick on our P&L, right? As I mentioned earlier, our rate is significantly higher, we can't do anything about that for now than it was, which has impacted EPS. I know, most of all, you guys focus on our valuation on EPS basis.

Ironically, over the last couple of years when the tax rate went up significantly, our EBITDA has grown fairly dramatically, right? It's up almost $100 million, as I mentioned earlier, over the last couple of years. So what that's created is a disparity. Since everyone is still focused on EPS, our EBITDA multiple has dropped to between 5 and 6 as basically a kind of an innocent victim of the EPS impact of tax reform.

So I don't know what that means for everyone. That's why we continue to talk about EBITDA and EBITDA growth, because we do think from an EBITDA multiple perspective, we remain seriously undervalued, I would say.

But we do understand the EPS element of the equation. And obviously, we're trying to drive that number in the right direction as well. We just had headwinds with the impact of tax reform. So I thought it was important to note that too.

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Ariel Luis Rosa, BofA Merrill Lynch, Research Division - Associate [20]

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So that's a great point, Ira. And if I could just maybe get a follow-up on that point before getting to my final question. So could you talk about what activities you guys are doing to actively bring down your tax rate or maybe get more of that cash flow to flow through instead of having to pay to the government?

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Michael J. Kasbar, World Fuel Services Corporation - Chairman, CEO & President [21]

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Do you have 45 minutes, Ari?

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Ira M. Birns, World Fuel Services Corporation - Executive VP & CFO [22]

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That's a great question and with very complex and lengthy answers. Even in the second quarter, the tax law -- tax reform-related laws are still changing, right? So we're in a new regime. We're still in a state of flux. Our organizational structure worldwide was designed for pretax reform world as opposed to post tax reform, right?

So now you have to carefully reevaluate that structure and see what opportunities may exist to be more efficient, obviously, driving profitability, as I believe I mentioned in the past. More profitability in the U.S. is a clear winner to help bring the rate down. So part of our strategy of investing organically and even through M&A is, for now, very U.S.A.-centric because we get that extra value of positively impacting our global effective tax rate.

But beyond that, there are so many nuances to tax reform that are really complicated. We've got a great team internally and externally that are spending a good portion of their time or a large portion of their time focusing on those types of opportunities. Unfortunately, they just will never transpire or become available to us overnight.

And more likely, if we are going to start seeing some meaningful benefit, it will be in 2020. Glenn reminds me that as part of the new bank deal that we did this week, we now have capabilities to borrow in many countries outside of the U.S., and we potentially could use that to also facilitate some improvements in terms of driving our tax rate in the wrong direction -- in the right direction. Sorry.

So we'll update you. And I think as the next couple of quarters come along, I think we should have more intelligence on what 2020 could look like. Unfortunately, I think 2019 is still going to be in the -- generally the same ZIP code as to where we were this quarter. So yes, good question as well.

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Ariel Luis Rosa, BofA Merrill Lynch, Research Division - Associate [23]

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Makes a lot of sense. We'll be on the lookout for that. And then just if I could squeeze one more in, related to IMO 2020, it seems like there's more complexity related to the services that you're going to have to provide to customers. Maybe you could give a little color on kind of how much advanced activity is required to accommodate those customers. And then if you expect that you'll see higher returns as a result of that, just given the higher level of complexity and potentially higher fuel costs.

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Michael J. Kasbar, World Fuel Services Corporation - Chairman, CEO & President [24]

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Well, there's going to be more planning and logistics and quality control. Not every fuel is going to be available at every location. And you're going to see some amount of experimentation, perhaps, both buyers and sellers. So it's -- I think one of the things we're expecting is that there is going to be more interaction. There may be more frequent fueling. They're certainly going to be -- the market wanting to leverage external expertise. We certainly have a lot of it. One of our calling cards, way back when, from the '80s, and we still have it, it was a way that we differentiated us, and I'd like to say that we were a leader in the industry in terms of technical capabilities. So there's certainly going to be that.

There will be different sourcing and logistics and a lot of advisory. So that will give an opportunity for additional value add. So I think that it's generally a positive because there's going to be a greater demand for our services.

All remains to be seen. It's not like it's a surprise and it happened overnight. This thing was years with advance notice. So we feel like we're extremely well prepared and well positioned. And certainly, by virtue of our land business and sourcing distillate and then with our Kinect business in terms of LNG, we've got a tremendous amount of internal capability.

So I'm not sure what else I could say in terms of giving color, it all remains to be seen in terms of how it's going to shake out, but we feel prepared, and it should generally be positive for us.

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Ariel Luis Rosa, BofA Merrill Lynch, Research Division - Associate [25]

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So directionally, can you give any commentary on kind of how those conversations are progressing with customers in terms of what preparations are in place? And then maybe some order of magnitude or some scale of what the higher profitability looks like if, in fact, there will be higher profitability from that type of business?

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Michael J. Kasbar, World Fuel Services Corporation - Chairman, CEO & President [26]

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So the discussions have been carrying on for quite some time. And we're pretty engaged with our customers that have a need, and we're interacting with them with different tools and products and services. So that engagement is pretty strong. And we're pretty happy with that. We've been surprised in terms of some of the resources that, I don't know if surprise is the right word, but we've been leveraging different parts of our organization, and our customers have been leveraging different parts of our organization. So that's fantastic. We're getting a lot of collaboration across the organization. So that's a very good thing.

In terms of the quantum, it's really too early to tell. And certainly, I would be reckless to sort of give you any guidance on that. I can't really do it.

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Operator [27]

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Mr. Kasbar, there are no further questions at this time. I will now turn the call back to you for any closing remarks.

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Michael J. Kasbar, World Fuel Services Corporation - Chairman, CEO & President [28]

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Well, I want to thank our shareholders for the support that you've given us over the years, and certainly, new shareholders that are finding us as an interesting place to put your investments, and very much to the team. We've got the best team in the world. So thank you. Thank you so much. It really makes working in World Fuel both interesting, a challenge and something worth waking up to. So let's keep it rolling. And look forward to talking to everyone next quarter.

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Operator [29]

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That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.