Image source: The Motley Fool.
World Fuel Services Corp (NYSE:INT)
Q4 2019 Earnings Call
Feb 27, 2020, 5:00 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Ladies and gentlemen, thank you for standing by, and welcome to the World Fuel Services' 2019 Fourth Quarter and Full Year Earnings Conference Call. My name is Kevin and I will be coordinating the call this evening.During the presentation, all participants will be in a listen-only mode. After the speakers' remarks, there will be a question-and-answer session. Instructions on how to ask a question will be given at the beginning of the Q&A session. [Operator Instructions] As a reminder, this conference is being recorded Thursday, February 27th, 2020. 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 begin your conference.
Glenn Klevitz -- Vice President, Treasurer & Investor Relations
Thank you, Kevin. Good evening everyone and welcome to the World Fuel Services' fourth quarter and full year 2019 earnings conference call. I'm Glenn Klevitz and I'll be doing the introductions on this evening's call alongside our live slide presentation. This call is also available via webcast. To access this webcast or future webcasts, please visit the World Fuel Services' 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 will begin with several minutes of prepared remarks, which will then be followed by a question-and-answer period. As with prior conference calls, we ask that members of the media and individual private investors on the line participate in listen-only mode. At this time, I would like to introduce our Chairman and Chief Executive Officer, Michael Kasbar.
Michael J. Kasbar -- Chairman & Chief Executive Officer
Thank you, Glenn. Good evening everyone. Our global team executed very well in the fourth quarter, driving solid results and closing out the year having made further progress within our strategic plan. We sharpened our portfolio, we improved our returns, we improved operating leverage, and we drove cash flow. The aviation segment, yet again, posted a solid increase in year-over-year results in the fourth quarter, driven by a strong contribution from government-related activity, primarily attributable to sales to NATO, as well as growth in commercial activity in Latin America as we continue to expand our supply capabilities in that region. Supply chain optimization of our global network continues to position us as a highly valued and strategic partner, providing cost-effective tailored solutions, in many cases, uniquely capable of addressing our customers' requirements. And finally, we expect to close the previously announced UVair acquisition in March. UVair will perfectly complement our organic growth initiatives and provide additional momentum to the advancement of our global aviation platform.
Our marine segment posted yet another quarter of outstanding results, closing out a year that produced the strongest annual marine earnings since 2015. Our experienced and talented marine team did an exceptional job of assisting customers in managing their energy supply before the IMO 2020 low-sulfur regulations that took effect on January 1st. The diversity and global breadth of our supply relationships, our financial strength, and our technical expertise enables us to help our customers navigate the increased price volatility and product quality, availability, and logistics risk that have arisen as a consequence of the regulatory changes. The financial performance of our marine business in the fourth quarter is testimony to the value of our core reselling business and our growing network of strategic physical locations. Both activities complement each other and provide us with an unparalleled ability to manage risks and provide surety of supply. We obviously cannot accurately predict the timing or magnitude of fuel price movements, demand shifts or supply disruptions as markets react and adjust to regulatory changes, economic cycles, or external events, as the COVID-19 outbreak.
However, we remain confident in the resilience and commercial agility of our global marine and aviation business networks to adapt quickly to such dynamics, focusing always on servicing the marketplace, while managing risks, and of course, financial returns. Our land segment delivered earnings growth in 2019, while simultaneously exiting noncore business activities. Looking ahead to 2020, we continue to focus on growing our diesel, gas, power, and sustainability businesses and invest in both organic and strategic investment opportunities. Across all of our businesses, I continue to be pleased by the reception we received from our existing and new clients about our services and solutions. I am very proud of and energized by our entire employee base who have driven significant improvement in our financial and business performance over the last two years. World Fuel is an impressive story of transformation from its roots, not so long ago, and it continues to transform today. I have every expectation that together, we will create greater value to address the current and future needs and opportunities of today's changing marketplace and are 5,500 professionals around the world are focused on exactly that. We are pleased to announce the addition of Sharda Cherwoo to our Board of Directors. She recently retired as a senior partner at Ernst & Young after more than 37 years of service, where she launched and spearheaded EY's intelligent automation program and directed their investments in robotic process automation and digital transformation initiatives. We believe her experience in advising companies on digital transformation, automation strategies will be invaluable in helping us further advance our strategic initiatives to enhance our value proposition and drive greater scalability, and operating leverage. I look forward to sharing more information about our progress over the course of 2020. I will now turn the call over to Ira for a review of our financial results.
Ira M. Birns -- Executive Vice President & Chief Financial Officer
Thank you, Mike, and good evening, ladies and gentlemen. Throughout the year, we communicated our plan to deliver profitable and more ratable growth, continue to drive greater operating leverage and evaluate all of our lines of business to ensure we remain focused on our core competencies. I am pleased to report that we executed very well on many of these initiatives and produced a very strong result for 2019. Before I get into the details, here a couple of highlights. We delivered more than $1.1 billion of gross profit for the year, that's up 9% year-over-year. Our full year adjusted EBITDA increased nearly $50 million and exceeded $400 million for the first time, and we generated $229 million of cash flow from operations. Consolidated revenue for the fourth quarter was $9.4 billion, down $630 million or 6% compared to the fourth quarter of 2018. The year-over-year decrease in revenue was principally driven by lower average fuel prices during the quarter as well as the year-over-year reduction in marine volume, offset in part by a year-over-year increase in aviation volume.
For the full year, revenue was $36.8 billion, that's a decrease of $2.9 billion or 7% compared to 2018. Our Aviation segment volume was 2.2 billion gallons in the fourth quarter, up 160 million gallons or 8% year-over-year, principally related to our core aviation operations. For the full year, aviation delivered volume of 8.5 billion gallons, up 300 million gallons or 4% compared to 2018. Volume in our Marine segment for the fourth quarter was 5.1 million metric tons, that's down one million metric tons, or 17% year-over-year. For the full year, volume in our Marine segment was 20.9 million metric tons, that's down 2.8 million metric tons or 12% year-over-year. The year-over-year volume decline for the fourth quarter and the full year, both related to the portfolio rationalization we have discussed over the course of 2019. Our Land segment volume was 1.4 billion gallons or gallon equivalents during the fourth quarter, an increase of approximately 70 million or 5% compared to the fourth quarter of 2018. The year-over-year increase in quarterly volume was driven by growth in our Kinect Energy Services business. For the full year, volume in our Land segment was 5.5 billion gallons or gallon equivalents that span $140 million or 3% compared to 2018. The decline in Land segment volume was principally related to our efforts to reduce non-core, low-margin supply and trading activities in North America during 2018 and into 2019. This decline was partially offset by growth in our Kinect business.
Total consolidated volume for the fourth quarter is five billion gallons or gallon equivalents, that's a decrease of approximately 40 million gallons or 1% year-over-year. And lastly, total consolidated volume for the full year was 19.5 billion gallons or gallon equivalents, that's a decline of approximately 580 million or 3% year-over-year. While volumes were down slightly year-over-year, our strong results reflect the ongoing improvement in business execution, driving record adjusted EBITDA and an improved return on capital for the year. Please note that the following figures exclude the impact of pre-tax, non-operational items in the fourth quarter as well as non-operational items in periods previously reported as highlighted in our earnings release. The non-operational expenses in the fourth quarter, principally related to a gain on the sale of a non-core business within our Land segment. This gain was principally offset by restructuring-related items relating to severance costs and the impairment of certain IT assets. To assist all of you in reconciling results published in our earnings release, the breakdown of the non-operational items can be found on our website in our last slide of today's webcast presentation. Consolidated gross profit for the fourth quarter was $287 million, an increase of $22 million or 8% compared to the fourth quarter of 2018. Our Aviation segment contributed $140 million of gross profit in the fourth quarter, that's an increase of $10 million or 8% compared to the fourth quarter of 2018. Year-over-year increase in aviation gross profit for the quarter was the result of continued strength in government-related activity.
For the full year, aviation gross profit was a record $552 million, that's an increase of $44 million or 9% compared to 2018. We expect first quarter aviation profitability to be down year-over-year, principally based on a product quarter-to-date reduction in government-related activity in Afghanistan. We also expect to close the previously announced UVair acquisition in March. And while this will not have any meaningful impact on first quarter results, we remain excited about this transaction, which will further enhance our global business and general aviation platform. As stated, when we announced this transaction, we still expect non-GAAP accretion from this transaction to be $0.16 to $0.19 in the first 12 months, excluding any one-time acquisition-related expenses. Our marine segment generated fourth quarter gross profit of $57 million, that's an increase of $13 million or 29% year-over-year. This represents the highest level of marine quarterly gross profit since the fourth quarter of 2014. The significant year-over-year gross profit increase was principally related to strong results in core resale activity, driven in part by market volatility related to the new IMO standard and the transition from high sulfur to low sulfur fuel oil. For the full year, marine gross profit was $182 million, that's an increase of $33 million or 22% year-over-year. Our marine team did an outstanding job, driving increased profitability throughout 2019 by refining the core portfolio and a heightened focus on driving stronger returns.
Again, with the new IMO regulations now in place, we estimate that nearly 85% of marine fuel to be sold in the first quarter will be either low sulfur fuel oil or marine gas oil, that's up from approximately 55% in the fourth quarter. While the unit price for low sulfur fuel oil and marine gas oil have declined over the past several weeks, these prices remain substantially higher than the unit price for high sulfur fuel oil today. This should provide opportunities to again drive strong profitability in the first quarter, and we therefore, expect marine results to reflect significant year-over-year improvement, compared to the first quarter of 2019. I should mention that our first quarter expectations for both aviation and marine are not expected to be meaningfully impacted by the effects of the coronavirus, as the regions, which have been most notably impacted to-date do not contribute meaningfully to our overall profitability. We continue to monitor the situation closely. But again, as of now, any impact on first quarter results are expected to be immaterial. Our land segment delivered gross profit of $90 million in the fourth quarter, that's a $1 million or 1% year-over-year decrease, principally driven by a conscious reduction in supply and trading activity in North America, which was principally offset by growth in government-related activity and Multi Service.
A portion of land gross profit generated by Multi Service in the fourth quarter was $20.2 million, that's an increase of 7% year-over-year. And for the full year, gross profit from the land segment was $379 million, that's an increase of $13 million or 4% compared to 2018. Looking ahead to the first quarter, we expect profitability in the land segment to be generally consistent with a level of profitability generated in the first quarter of 2019. As I mentioned earlier, consolidated gross profit for the full year was $1.1 billion, that's an increase of $90 million or 9% and compared to 2018. Operating expenses in the fourth quarter, excluding bad debt expense, were $205 million, which is up 15% year-over-year. Fourth quarter operating expenses were higher than forecast on our last call, driven in part by approximately $8 million of unanticipated expenses, principally related to incentive stock compensation expense. $5 million of this increase resulted from a stronger than expected earnings per share performance in 2019, driven principally by an effective tax rate, which was significantly lower than anticipated. I will discuss taxes in more detail shortly. As we look to the first quarter, we expect operating expenses, excluding bad debt expense, to decline 5% to 7% sequentially to a range of $191 million to $195 million. Full year operating expenses, again, excluding bad debt expense, was $765 million, that's an increase of 6% year-over-year. While we did not hit our target to reduce our operating expense ratio by 250 basis points for the year, excluding the impact of the fourth quarter expenses I just mentioned, we would have hit our target. We have now reduced our expense ratio by nearly 600 basis points over the past two years, and we remain committed to continue driving improvement in this ratio in 2020 and beyond.
Adjusted EBITDA was $99 million in the fourth quarter, that's up $8 million and 9% for the fourth quarter of 2018. For the full year, adjusted EBITDA increased to $409 million, that's up $49 million or 14% from 2018 and up 17% compound annually since 2017. Year-over-year increase in adjusted EBITDA also provides us with additional financial flexibility and greater liquidity to support our organic growth initiatives and strategic investment opportunities. Adjusted income from operations in the fourth quarter was $75 million, that's up $7 million, or 10% year-over-year. And full year adjusted income from operations was $322 million, up $43 million, or 15% compared to 2018. Interest expense in the fourth quarter was $17 million, a decrease of $3 million compared to the fourth quarter of 2018, resulting from a decrease in overall borrowings, a decline in interest rates and the benefits of the improved terms under our recently amended and extended banking facility. I would assume interest expense to, again, be in the range of $16 million to $19 million in the first quarter of 2020.
Because of various impacts, which I will describe in a moment, our actual effective tax rate was only 1.5% in the fourth quarter as compared to 29.7% in the fourth quarter of 2018, which is obviously way below what we anticipated or projected going into the fourth quarter. Excluding these impacts, our normalized effective tax rate in the fourth quarter would have been approximately 31%. The principal driver of the significant reduction in our effective tax rate related to the base erosion and anti-abuse tax regulations issued this past December. As a result, we were able to apply these regulations and significantly reduce our related tax expense for the fourth quarter and the full year 2019, which should also provide us with some continuing benefit in 2020 and beyond. We also realized the benefit of some additional discrete items in the fourth quarter, which resulted in a further reduction in our fourth quarter and full year effective tax rate. For the full year, while our normalized effective tax rate was also approximately 31%, our actual effective tax rate after considering the items just mentioned, is only 23.7% compared to 29.4% in 2018.
As we look forward to 2020, when combining the benefit related to the latest base erosion and anti-abuse tax regulations with our progress on tax planning opportunities, we have increased confidence that our full year effective tax rate in 2020 will be below 30%. Although, our total accounts receivable balance was $2.9 billion at year-end, up approximately $150 million compared to 2018, our overall net trade cycle was effectively flat at eight days, a testament to our continued focus on solid working capital management across our businesses. And we generated cash flow from operating activities of $16 million in the fourth quarter and $229 million for the full year, contributing to a reduction in debt, further strengthening our balance sheet and overall liquidity position. And free cash flow was nearly $150 million for the year, representing our highest level of free cash flow since 2016. Through our stepped up efforts to return additional value to our shareholders, we repurchased $65 million of common stock during the year, and we increased our quarterly dividend by 67%. Although, organic growth and strategic investment opportunities will always be our top priorities, we will also continue to look to return value to our shareholders through buybacks and dividends.
So in closing, 2019 was a strong year for World Fuel. We delivered solid gross profit, adjusted EBITDA and operating cash flow. We used some of the cash generated to reduce debt, but also to increase share repurchase activity and fund our increased dividend. Our focus on driving greater operating leverage is working, contributing to an increase in our operating income margin by 600 basis points since the end of 2017. The our marine business is rebounding materially from the lows of 2017 with a 20% compound annual growth rate in gross profit over the past two years, while operating expenses in marine only grew at a 5.5% rate. A testament to the great job on our marine team has done managing both ends of their P&L. As we look to 2020, despite growing global economic uncertainty, our team will remain laser-focused on continuing to advance our strategy for long-term profitable growth. With our strength and liquidity profile, we have a balance sheet with more than sufficient room to invest and will, therefore, continue to look for strategic investment opportunities, such as UVair over the course of the year, and we look to continue to allocate capital to buybacks and dividends to drive greater value for our shareholders.
I would now like to turn the call back over to our operator to open it up for Q&A. Thank you.
Questions and Answers:
Operator
Thank you. [Operator Instructions] Our first question is from Ken Hoexter with Merrill Lynch. Please go ahead.
Ken Hoexter -- Merrill Lynch -- Analyst
Hi. Great. Good afternoon, Ira and Michael, and Glenn. Maybe you could talk a bit about the marine business and to talk about the sustainability of the gross profit, given the environment and your thoughts maybe as we go past that first quarter and thoughts on the outlook there?
Michael J. Kasbar -- Chairman & Chief Executive Officer
Hey, Ken. Thanks. So we got some benefit with the disruptions and some of the adjustments in three and four. And I think we haven't seen how this is going to shake out into a regular run rate yield. You'll see some of the scrubber activity and some of the delays there, but more of the market is going to be spread at a lower price and still continuing to burn high sulfur. So certainly, the clients that are benefiting from our sourcing and logistics, we've done a good job -- done a good job in terms of shaping the portfolio from a risk perspective. There's still some out there. But I'm not going to say it's going to revert to norm. I think that we've got a new plateau there, but I wouldn't count on -- into 2020 this being the run rate. I think the marine organization has done an excellent job in terms of managing costs and return on working capital. So certainly, we're at a new level, the marine team, who's done an excellent job. So I think we feel good about it, but that's not a guarantee. So I think you're going to see a higher base but I'm not sure that you're going to see repeat performances of three and four.
Ken Hoexter -- Merrill Lynch -- Analyst
Great. And then maybe just talk about, Ira, you just ended with some of the cash, the improved balance sheet, low one, I think it's like 1.1 times net debt-to-EBITDA now. So if those, we've seen that in a while with an improved kind of payables, low fuel price which then adds, I guess, shrinks that payables or receivables level. So maybe just talk about what opportunities you see in the market? Do you see lots of acquisition opportunities? Are there certain segments? Do you want to get bigger in marine now that you're seeing that business turn around? Is it a focus on aviation are still growing land? Maybe just talk about what you do with the cash and your thoughts on the market in this environment?
Ira M. Birns -- Executive Vice President & Chief Financial Officer
Yes, I'll start, and I'm sure Michael will want to chime in. So it's nice to have a luxury greater than, I believe, we've ever had before in terms of the strength of our balance sheet and the available capital that we have. And you're right 1.1 times net debt-to-EBITDA is our lowest level in quite some time, which provides us with significantly more liquidity to go out and invest in our organic business, which we try to do every day as intelligently as possible, but also to look outside in terms of strategic opportunities. It's tough to nail down exactly where that next opportunity may be, because there are opportunities across the businesses that we participate in. Obviously, in land, we started growing our diesel or commercial and industrial business with the acquisitions of app and PAPCO a few years ago. There is certainly more opportunities to build out that business even further. And then our Connect business, which has principally been power and net gas, which is our really our newest activity, it's still in the earlier stages of development, not a major contributor to the bottom line yet, but there are lots of opportunities to drive that business further, both organically and through making some intelligent investments.
And then even as you alluded to marine or aviation, as you noticed, when we did the deal with Exxon a few years ago, we've been willing to get a little more physical there. That deal has worked out really well for us for now, providing fuel at over 100 airports around the world, something that we hadn't done five years ago. And then there are adjacencies as well, whether it be a technology or service businesses that complement the fuel offerings that we have that extends out our value chain for our customers. So there's a lot. I think we've gotten a bit smarter and a bit more proactive as opposed to historically being maybe too reactive when focusing on M&A. So we're building out our pipeline in a very careful way. And there are lots of opportunities that we're focused on right now. And we're hopeful that we'll be able to start executing on a couple of those in the near future.
Michael J. Kasbar -- Chairman & Chief Executive Officer
No further comments.
Ken Hoexter -- Merrill Lynch -- Analyst
Excellent.
Michael J. Kasbar -- Chairman & Chief Executive Officer
Kenneth carry on, I am sorry.
Ken Hoexter -- Merrill Lynch -- Analyst
Okay. I though know you said, further comments, but no further comments. So my last one is just is on the restructuring charges. Why we're still seeing them, Ira, you mentioned that you didn't meet the target this year on the cost side because of some of the different things added back in the fourth quarter on the incentive comp. But what are the restructuring charges? And do they end at some point?
Ira M. Birns -- Executive Vice President & Chief Financial Officer
Well, actually, the deal, it's a good question because you can't keep our restructuring open forever. So the formal restructuring that we talk -- talking about for quite a while, officially ends at year-end or ended at year-end. The principal item that impacted us in the fourth quarter was the write-off of or impairment of certain IP assets that are no longer useful, considering the direction we're taking on the IT side. There were a little bit of cost beyond that was 80%, 90% of that restructuring number. Fortunately, in Q4, we had a actual pickup related to the sale of a non-core business that offset all of that. So our net adjustments, if you will, netted our to zero, that it still on different lines on the P&L. So going forward, at least in the short term, you won't see any restructuring charges in the first quarter. It doesn't mean that we'll never have a restructuring activity again, but we're effectively through that restructuring that's now gone on for about two-and-a-half years.
Ken Hoexter -- Merrill Lynch -- Analyst
Great. Thanks for the time, guys.
Ira M. Birns -- Executive Vice President & Chief Financial Officer
Thanks, Ken.
Operator
[Operator Instructions] Our next question is from Ben Nolan with Stifel. Please go ahead.
Frank Galanti -- Stifel -- Analyst
Yes. Hi. This is Frank Galanti on for Ben. I had a question on the UVair acquisition. It seemed to take a little longer, I guess, than we were anticipating to get through the regulatory side. Is there any concern of kind of getting too big, running into a market share problem in the aviation side? And I guess, even on the other businesses, it isn't seemed like if a marine or land, but maybe there's something to be said in the aviation.
Michael J. Kasbar -- Chairman & Chief Executive Officer
Yes. We're still a very small percentage of the overall market. So there's still a good amount of runway there, despite the fact that we've got a reasonable presence. It's still a fairly sizable market where a sizable independent player and rest, the largest independent player, but as a percentage of the overall market, it's still quite small.
Ira M. Birns -- Executive Vice President & Chief Financial Officer
That's true for all of our businesses, really.
Michael J. Kasbar -- Chairman & Chief Executive Officer
Yes. I mean, even in Marine, which maybe is 10%, there's still a lot of room to roll.
Frank Galanti -- Stifel -- Analyst
Okay. That's helpful. And then, on capital allocation side. You'd mentioned 2019, there was about $65 million of share buybacks, but I think all of that was done in the second quarter. With kind of where the shares are trading today, it seems to be back where you liked it, I guess, from a capital allocation perspective. Is that something that you guys are looking at more seriously? And if so, what kind of size and speed, which you'd be able to react on, on something like that?
Ira M. Birns -- Executive Vice President & Chief Financial Officer
I'll question the stock price is where you like to comment, but we'll leave it there. I'm not sure we're very happy with what's going in the market around this. I think what I can do is repeat what I said on the call. I think we're certainly a lot -- much more open to using buybacks to complement our historical dividend program. And while we won't be in the market doing that every day from time to time, we've shown that we're willing to invest in share repurchases. You never tell you exactly when that may or may not happen. There are all sorts of factors that will impact that decision. But certainly, when we think of capital allocation, we now pencil in sort of amounts for both buybacks and dividends, where we haven't done that historically.
Frank Galanti -- Stifel -- Analyst
Okay. That's all I had. That's helpful. Thanks very much.
Operator
There are no further questions. I'll turn the call back to you.
Michael J. Kasbar -- Chairman & Chief Executive Officer
Thanks very much to all of our investors and supporters, and I'm sure plenty of our colleagues on the phone. So, look forward, we feel like we're ready to roll. Markets crazy, but we've done well in the past and down market. So we feel that we're prepared for market conditions, that's the type of company we are. So look forward to speaking with you again and not too far away. So take care, and have a great day.
Operator
[Operator Closing Remarks]
Duration: 34 minutes
Call participants:
Glenn Klevitz -- Vice President, Treasurer & Investor Relations
Michael J. Kasbar -- Chairman & Chief Executive Officer
Ira M. Birns -- Executive Vice President & Chief Financial Officer
Ken Hoexter -- Merrill Lynch -- Analyst
Frank Galanti -- Stifel -- Analyst
"corp" - Google News
February 28, 2020 at 12:01PM
https://ift.tt/2uG3gdm
World Fuel Services Corp (INT) Q4 2019 Earnings Call Transcript - Motley Fool
"corp" - Google News
https://ift.tt/2RhVoHj
Shoes Man Tutorial
Pos News Update
Meme Update
Korean Entertainment News
Japan News Update
Bagikan Berita Ini
0 Response to "World Fuel Services Corp (INT) Q4 2019 Earnings Call Transcript - Motley Fool"
Post a Comment