World Kinect Corporation (NYSE:WKC) Q4 2023 Earnings Call Transcript
World Kinect Corporation (NYSE:WKC) Q4 2023 Earnings Call Transcript February 22, 2024
World Kinect Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Thank you for standing by, and welcome to World Kinect Corporation's Fourth Quarter 2023 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. [Operator Instructions] I would now like to hand the call over to VP Investor Relations and Communication, Elsa Ballard. Please go ahead.
Elsa Ballard: Good evening, everyone, and welcome to the World Kinect’s fourth quarter and full year 2023 earnings conference call, which will be presented alongside our live slide presentation. Today’s presentation is also available via webcast on our Investor Relations website. I'm Elsa Ballard, VP of Investor Relations and Communications. With me on the call today is Michael Kasbar, Chairman and Chief Executive Officer; and Ira Birns, Executive Vice President and Chief Financial Officer. Before I get started, I would like to review our Safe Harbor statement. Certain statements made today, including comments about our expectations regarding future plans and performance are forward-looking statements that are subject to a range of uncertainties and risk that could cause results to materially differ.
Factors that could cause results to materially differ can be found in our most recent Form 10-K and other reports filed with the Securities and Exchange Commission. World Kinect 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 measures. A reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measure is included in our press release and can be found on our website. We will begin with several minutes of prepared remarks, which will then be followed by a Q&A period. At this time, I would like to introduce our Chairman and Chief Executive Officer, Michael Kasbar.
Michael Kasbar: Thank you, Elsa, and good afternoon everyone. As we plan for our upcoming Investor Day in a few weeks, I've been reflecting on where we have come from and where we are going. We all know the last ten years have seen tremendous volatility in energy markets, commerce, geopolitics and even natural disasters. Throughout this ten year period, our customer base, particularly airlines and shipping companies, experienced significant financial stress. I'm proud to say that our company went through this period with tremendous skill, financial stability and stewardship in the face of massive turbulence. Our team has navigated through these challenges and consistently mitigated risk while managing the impacts of market disruption on our customers and suppliers, demonstrating both our expertise and reliability as a counterparty.
Today, we have a materially different business profile with a higher quality of earnings and a more predictable and synergistic portfolio. So resiliency, focus, momentum and leverage are the words that resonate with me when I look back and look forward. And that's why I remain more enthusiastic and optimistic about our future than ever before. I believe we are better positioned with our common operating model, common business processes and seasoned leadership team. We have the force multiplier of a focused and aligned global team intent on leveraging our core distribution platform that we have spent decades developing and refining. Our core distribution platform buys, moves and sells energy directly and through a network of partners around the world to commercial, industrial and governmental entities.
We have deep domain expertise in global aviation and marine and we are rapidly developing similar global expertise in land-based businesses and products, which represent a larger market opportunity. To be clear, we don't refine the products, but we do refine the service. Our global platform has been stress tested in unforeseeable ways and is demonstrably more resilient and wiser. We have incorporated our experience and learnings from these events into our operating model, becoming an ever stronger financial and commercially responsible counterparty. With each test, we are better equipped to address the next market challenge, delivering greater value to the marketplace and investors. From our humble beginnings as a broker and simple reseller and secondary finance company to the global industrialized distribution business we are today, World Kinect is a story of transformation and our evolution and mission continues.
Our aviation and marine segments are mature global businesses, our decades of experience have enabled us to establish the sophisticated core distribution platform we operate today that delivers consistent performance. Our land business is evolving to resemble the aviation and marine distribution model, gaining momentum as we define and align our core national and global platforms. The wins are coming more regularly because our team is more focused on institutionalizing standard methodology across people, assets, processes and tools. We have enriched the land leadership team by combining homegrown talent steeped in the understanding of our core model with proven talent from acquired companies as well as experienced industry professionals to deliver value to customers and suppliers.
That's how we will achieve the cash flow, returns and growth we know exists in this business. A foundational component of our land segment consists of fuel distribution to retail gas stations and c-stores. We have continued to expand our footprint by adding almost 300 new retail sites in 2023 to our customer base, most under traditional long-term contracts, which is a testament to our reputation in the space and the deep relationships with the supplier brands we represent. Next is our Cardlock network. Cardlock is being unmanned retail stations for refueling light commercial vehicles. We also serve commercial and industrial consumers, otherwise known as C&I, to which we distribute fuel and lubricants as well as power and natural gas. And that strong established and market leading core distribution platform is complemented by a growing sustainability and renewable energy business.
We are focused on increasing the availability of renewable energy and lower carbon fuels. We play an important role in facilitating the development of renewable solutions by bringing financing, logistics, marketing, technical knowledge and a myriad of services to facilitate the lower carbon solutions the market needs by supporting these pioneering innovators and startups that are solely focused on their mission. We also continue to expand our suite of complementary energy management solutions across our other three business lines, deepening our relationships with customers and suppliers, with services like renewable energy solutions and emissions reporting, and helping our customers achieve lower carbon and net zero goals. These are essential services that our customers need to better run their operations and they have a high attachment rate to our other offerings.
All of these are part and parcel of the energy transition in progress today and growing into the future. We are selecting the areas that are important to our customers and leverage our core distribution model. The strategy is exactly aligned to our customers’ current and future needs. We are not only serving our customers conventional energy needs today, but also enabling their energy management strategy going forward. While still a small percentage of our overall business, our renewable and energy management offerings continue to grow and will represent a greater contribution to revenue, profitability and the industry over time. And while the solutions we are providing to our customers are specialized, much of what we do is operationally common across our business activity.
The vast majority of our business is derived from our core distribution model, our critical and unique ability to satisfy both customer and supplier needs. We are buying, moving and selling the molecules and electrons that our customers need to transport their passengers and manufacture and distribute their products. As an example of the value of the World Kinect network, we are assisting a number of our clients with alternative fueling options in response to the recent disruption to trade in the Red Sea. This is similar to the COVID period where dislocations in normal transportation patterns meant our customers had to rely more on our expertise and global supply capabilities. We saw the benefits of our core distribution platform in 2023. Although we experienced non-recurring financial impacts in the fourth quarter, which Ira will cover in his comments, we delivered solid core operating results with healthy adjusted EBITDA.
This was on the back of especially strong growth within our aviation segment, which not only rebounded for the extreme backwardation in the prior year, but also benefited from improved operating leverage. Marine came off a record year in 2022 when bunker prices and market volatility were considerably higher, but still performed very well in 2023. And while our land business in North America experienced some weather related challenges that affected results in the first half of the year, we drove continued growth in our natural gas, and power and renewable energy, solutions activities. And integration of the Flyers team and platform when combined [Technical Difficulty]
Operator: Ladies and gentlemen, please remain in your line. We are experiencing technical difficulty. Please remain in your line. And thank you for your patience. Ladies and gentlemen please remain in your line your program will begin – will continue momentarily. We are experiencing technical difficulties. Please remain in your line. Ladies and gentlemen, please remain in your line. We are experiencing technical difficulties. Please remain in your line. And thank you for your patience. Ladies and gentlemen, please remain in your line. Your program will continue momentarily. We are experiencing technical difficulties. Please remain in your line. Thank you for your patience. Please continue to hold. Your program will continue momentarily.
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Elsa Ballard: Hi, we're back. We’re ready to reconvene. Thank you.
Michael Kasbar: Yes. Okay, well, welcome back. Sorry for the technical difficulties. I think I’ll just pick up where I’m pretty sure we left off. So, we’ve been speaking to you about our medium-term adjusted operating margin target for the past few quarters. But there’s only a piece of the story. As the global demand for energy continues to grow, we’re intending to increase our market share, improve our operating efficiency, and continue to extend our value deeper into both our customer and supplier value chains as we’ve been doing for some time now. We’ve got a greater level of confidence or ability to execute. We’ve got a much sharper focus and I can feel the momentum building. And the demand for our services is as strong as it’s ever been.
And all through the change, our focus has remained constant. Our mission was then and still is now to meet our customers’ energy needs in the most efficient manner possible and to provide our supply partners with the world’s most reliable distribution platform. We work every day to improve access to and ensure the surety of energy supply through our core distribution platform. I look forward to sharing more about our strategy and our outlook at our upcoming Investor Day, but what you should take away is that we are better positioned than ever to drive sustainable long-term growth with a favorable market position and a clear strategy to capture opportunities across our three businesses. Before I turn the call over to Ira for a review of our financial results, I want to thank my 5,330 colleagues who work every day to ensure the success of our customers, suppliers and company, and to our investors, thank you for your support and we look forward to seeing you on March 13 in New York City.
Ira?
Ira Birns: Hey everyone, thank you, Michael, and good evening, and considering the unfortunate delay, I will try to speak as quickly as in New York or possibly could. I’m going to begin by reviewing a number of non-GAAP adjustments in the fourth quarter, which aggregated $87 million, or $67 million after-tax. Complete reconciliations of GAAP to non-GAAP financial measures are included in our earnings release, today’s presentation and on our IR website. The largest of the non-GAAP adjustments was a $49 million charge related to an erroneous bid in the Finnish power market, which we had disclosed when it occurred in November. In our role as a market access provider for both producers and commercial customers of electricity in Finland, we submit a routine daily bid to Nord Pool, which is a commercial power market in the Nordic region, which effectively represents the net of related consumer demand and producer production on a given day.
On November, we inadvertently submitted a daily bid for an amount substantially greater than intended. Once we became aware of the error, we made immediate efforts to mitigate the impact, including a request that Nord Pool delay or rerun the related bidding process. When it became apparent that Nord Pool would not take action to mitigate the effects of this obviously erroneous bid, we quickly covered the associated positions fulfilling all related market obligations. This incident was unique and isolated. The result of several independent and exceptional circumstances, all of which together translated to an extraordinary and unfortunate result. We have carefully assessed and reviewed our internal processes and have implemented additional measures to minimize the risk of a similar incident occurring in the future.
We also recorded additional non-GAAP adjustments in the fourth quarter. These included asset impairments of $32 million related to the write-down of two investments, the rationalization of non-core business activities, including some of which have been discontinued, as well as a further rationalization of our global office footprint, which began during COVID. Additionally, we incurred costs associated with workforce restructuring activities as we continue driving greater efficiencies in our business. These restructuring activities combined with the rationalization of our office footprint and certain non-core business activities all resulted in immediate cost savings. We understand that in aggregate, these adjustments amount to a large sum. However, aside from the charge related to the Finnish bid, we believe all of the other items help to further simplify our business, enabling us to focus more clearly on growing our core conventional business and our sustainability related activities.
Total fourth quarter non-recurring cash outflows related to all of these non-GAAP adjustments was approximately $50 million, and again, the details are included in our earnings release and on our website. Now let's turn to our fourth quarter and full year financial highlights. And as a reminder, the following results exclude the impact of all the items that I just walked through. On a consolidated basis, total volumes of 4.5 billion were essentially flat year-over-year. Adjusted gross profit was down 1% to $280 million from the fourth quarter of 2022, primarily due to lower profits in our marine and land businesses, partially offset by strong results from our aviation business. And looking at the full year, volume of 18 billion was down approximately 2% with adjusted gross profit at $1.1 billion, up 2% from last year.
This is primarily due to a 36% increase in profitability year-over-year in our aviation business, which had a fantastic year, rebounding solidly from 2022, partially offset by lower profits in marine and land. Now some additional details segment by segment, both for the fourth quarter and for the full year. Within the fourth quarter, aviation volumes were 1.78 billion gallons, down 1% year-over-year, impacted by the lower return business activity we shed, generally offset by rateable higher return business. Despite the modest decline in year-over-year volumes, fourth quarter gross profit was $131 million, an increase of 19% year-over-year, driven primarily by the achievement of higher returns amidst the elevated interest rate environment. While full year aviation volume of 7.3 billion was up only 3% was also impacted by the rationalization of certain lower return business activity.
Aviation full year gross profit was extremely strong, rebounding from the prior year which was impacted by steep backwardation, but also benefiting from the achievement of higher returns amidst the elevated interest rate environment and solid growth at our last half mile airport operating locations, principally in Europe. Full year gross profit increased 36% to $486 million for aviation. One last comment on the achievement of aviation's higher returns. We not only achieved such returns by improving margins, which contributed to the significant increase in gross profit, but also by significantly improving working capital efficiency over the course of 2023, contributing to solid cash flow generation, which I will separately address shortly. As we look to the first quarter, while aviation results should experience a seasonal decline from the fourth quarter, we expect a year-over-year increase in gross profit, again driven by our team's continued focus on optimizing returns across our commercial and business in general aviation platforms.
For the land business, while fourth quarter volumes increased 5% year-over-year to 1.62 billion, adjusted gross profit declined 9% to $105 million, due principally to some margin pressure in the U.S. and a lower contribution from the UK, which experienced unseasonably warm weather for much of the fourth quarter. These declines were offset in part by increased gross profit from our natural gas activities as well as increased profitability related to our renewable energy solutions activity. For the full year, land volumes were up slightly at 6.2 billion, driven by increased volume again associated with our natural gas activities, mostly offset by lower liquid fuel volumes, principally due to extreme weather conditions which significantly impacted demand in the early part of last year.
Adjusted gross profit for land declined 6% to $448 million, again driven by the extreme weather conditions as well as some margin pressure in our broader commercial and industrial business in the latter part of the year. And similar to the fourth quarter, these declines were partially offset by healthy improvements in our natural gas business as well as continued growth in both our power and renewable energy solutions activities, where we continue to find opportunities to expand relationships with customers as their energy transition journeys and related needs evolves. As shared in previous quarters, the percentage of land volume associated with our nat gas and power business was 37% for the fourth quarter and 34% for the full year. That's up from 32% and 30% in 2022.
This is in addition to our continued focus on distributing cleaner liquid fuel products such as renewable diesel. Overall, these numbers demonstrate our broader focus on cleaner sources of energy for a growing suite of customers throughout the world. Looking to the land's first quarter, while gross profit is expected to be up modestly, the story is effectively opposite of what I described for 2023 with commercial and industrial liquid fuels rebounding from the weather related weakness experienced in last year's first quarter, partially offset by an expected reduction in natural gas activity driven in part by severe cold weather related market disruptions in mid-January. And lastly in marine, fourth quarter volumes were 4.3 million metric tons, down 8.5% year-over-year, but up 6% from the third quarter when as previously noted, we believe we reached a bottom from a volume perspective.
Year-over-year, lower volumes and bunker prices coupled with a decline from higher volatility levels in the fourth quarter of 2022 were the primary drivers of the 21% reduction in gross profit to $44 million. Full year, marine volume declined 12% to 16.8 million metric tons and gross profit declined to $173 million, down 33% year-over-year. We’ve discussed this over the course of last year, but it’s worth reiterating lower profitability again was due to a comparison to an extraordinary year in 2022 for marine, which was positively impacted by exceptional volatility and record bunker fuel prices. While marine gross profit declined year-over-year, the business performed very well considering the significantly lower price environment where similar to aviation, marine further improved capital efficiency, contributing to solid returns for the year.
Looking to the first quarter, we are expecting marine to be flat to up slightly from the fourth quarter with margins holding steady, but expect a decline in profitability from the first quarter of 2023 when volatility levels still remained high. Now let’s turn to adjusted consolidated operating expenses, which were $207 million in the fourth quarter consistent with our guidance range last quarter. This is up only 2% year-over-year and for the full year these expenses were effectively flat compared to 2022, again demonstrating our continued efforts to manage expenses tightly despite a highly inflationary macro environment for much of the year. For the first quarter, we expect operating expenses will be the range of $199 million to $203 million, down sequentially driven in part by the cost reduction actions taken during the fourth quarter.
Again, we remain committed to enhancing operating efficiencies as evidenced by recent actions. We increased our operating margin to 26% in 2023 and we remain focused on achieving our medium-term operating margin target of 30% by continuing to drive cost efficiencies in our business by also further sharpening our portfolio of business activities. This will enable us to continue to simplify our story, while achieving increased profitability and greater shareholder returns. Fourth quarter interest expense was $32 million, slightly above the high end of our guidance range, driven principally by funding costs associated with the unanticipated non-recurring cash outflows during the quarter, but it was down $3 million from the fourth quarter of 2022.
As we look ahead to the first quarter, we expect interest expense to remain generally flat with the fourth quarter, representing another year-over-year decline. And with expected interest rate declines over the course of the year, we should benefit from further reductions in interest expense as the year progresses, contributing to an expected several million dollar decline in interest expense compared to 2023. Our effective – adjusted effective tax rate for the fourth quarter was 21.1% and our full year adjusted effective tax rate was 21.7%, both slightly below guidance. Looking forward to 2024, we expect our adjusted effective tax rate will be in the range of 23% to 27%, up a few percent from 2023, which benefited in part from the reversal of certain valuation allowances, many of which became necessary during the pandemic.
And despite the one-time cash outflows that we experienced during the fourth quarter, we still generated $5 million of operating cash flow, bringing year to date operating cash flow to a solid $271 million, further supporting our strong liquidity profile, which provides us with the capital we need to invest in organic business activities, fund strategic investment opportunities and return capital to our shareholders through buybacks and dividends. Speaking of buybacks and dividends, these totaled $94 million in 2023 and include the additional repurchase of just over 500,000 shares for $10 million during the fourth quarter. Our capital allocation priorities remain consistent, supporting the growth of our business, while carefully managing balance sheet leverage, while also increasing shareholder value through buybacks and dividends.
I look forward to discussing these priorities with you as Mike indicated at our upcoming Investor Day on March 13. So in closing, we generated $386 million in adjusted EBITDA, driven principally by a strong rebound in aviation results, generally offset by a significant decline in marine profitability from the record results they achieved in 2022. While our land and liquid fuels business activities were negatively impacted by weather related challenges in the first half of the year, this was partially offset by solid improvement in our nat gas and renewable energy solutions activities. We delivered $271 million of operating cash flow for the year despite again unanticipated non-recurring cash outflows in the fourth quarter, further strengthening our balance sheet with net debt to adjusted EBITDA at only 1.5x at year end, providing us with significant financial flexibility to continue investing in our core business, while also remaining focused on identifying the right strategic investment opportunities for us that could accelerate growth and operating leverage in our core platform.
Speaking of operating leverage, again we improved our adjusted operating margin to 26%, with a continued focus on driving additional operating efficiencies towards our medium-term goal of 30%. And one last time, I look forward to seeing all of you, or most of you at our upcoming Investor Day event on March 13, where again our goal will be to help simplify our story, talking about what we have done best for decades, as well as some of our newer sustainability related activities and how they fit into our core operating model and maybe most importantly, share our views for the exciting growth opportunities we expect looking forward. Thank you. And I will now turn the call back over to our operator to finally begin our Q&A session. Operator?
Operator: [Operator Instructions] Our first question comes from the line of Ben Nolan of Stifel. Your question, please, Ben.
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