Logo of jester cap with thought bubble.

Image source: The Motley Fool.

World Fuel Services Corp (NYSE:INT)
Q1 2021 Earnings Call
Apr 29, 2021, 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 First Quarter 2021 Earnings Conference Call. My name is Joelle, and I will be coordinating this call this evening. [Operator Instructions]

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 -- Treasury & Investor Relations

Thank you, Joelle. Good evening, everyone, and welcome to the World Fuel Services First Quarter 2021 Earnings Conference Call. My name is Glenn Klevitz, and I will be doing the introductions on this evening's call alongside our slide presentation. This call is also available via webcast. To access this webcast or future webcasts, please visit the World Fuel Services Corporation 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 and Chief Executive Officer

Thank you, Glenn, and good evening, everyone. Thank you for joining us. I hope you're all well, and I hope you are as optimistic as I am about the medium and long-term future market opportunities. We opened the year with a strong first quarter, once again demonstrating the resiliency of a well-diversified portfolio. And considering current market conditions, all of our businesses performed well. Our balance sheet and cash flow has never been stronger. We believe we had a significant medium- and long-term opportunity to deploy capital in our North American C&I, meaning commercial and industrial, liquid fuel business and globally in fuel, gas, power, carbon and renewables to serve our aviation, marine and land customers and drive the energy transition.

As I mentioned last quarter, the work we have done over the last few years in talent, culture and leadership is having a positive impact. We are converging our organization and business solutions in line with the transitioning marketplace. Combining functions and the business itself is creating greater efficiencies and effectiveness as well as greater mobility and career opportunities for our global teams. Consolidating our global origination, fulfillment and support with our digital and sustainability competencies gives us a forward-ready business as the world emerges from this global health and economic crisis. We are already a globally diverse group, and the inclusiveness that convergence drives is accelerating value creation as our customers see comprehensive solutions and pathways to lower carbon footprints and supply chains.

We are maintaining the cost discipline achieved so far on operations as markets reopen. We have grown market share in our global land business with higher quality, ratable business activity. We see a long runway of growth opportunities in this space. And now, as we experience the world's growing commitment to sustainability, we view this as an incredible opportunity to tap into our ability to create innovative solutions. I am personally more excited and enthusiastic about our future prospects as a global team than I have been in years. We have been through our most challenging stress test ever, and our global teams performed flawlessly. We have never been tighter or more coordinated. Building a global, diverse and increasingly digital energy and logistics solutions business is not easy. So that is exactly what we have done.

And we are highly motivated to continue to build and leverage our platform. It's not easy to have global share of anything, but we have achieved that in two businesses, and we are well on our way to do that in our World Connect global land business, simultaneously creating lower carbon synergies for our global marine and aviation businesses. We are not only becoming more sustainable ourselves, but driving sustainability for the marketplace. We are truly helping to build the better tomorrow by accelerating the green and digital agenda within and for our partners around the world. It is hard to find an energy-related subject or a problem anywhere in the world that we cannot address in one way or the other. World Connect is the emerging brand for comprehensive energy solutions. And finally, more of our teams are getting fully vaccinated. And this is both raising optimism and providing opportunities for greater engagement with each other and the market. I look forward to your questions, but let me first hand you over to Ira for a review of our quarterly results.

Ira M. Birns -- Executive Vice President and Chief Financial Officer

Thank you, Frank, and good evening, ladies and gentlemen. I hope you are all doing well and finding ways to return to some sense of normalcy. Although the pandemic continues to present significant challenges across businesses globally, there has certainly been some encouraging developments, which has many of us a bit more optimistic about the prospects of increased levels of business activity. I am extremely proud of how well our team has performed in the face of a multitude of ongoing challenges. And our results this quarter are a testament to the value of our diversified business model, our expertise in the markets we serve and the dedication of our global team.

Before I walk through our first quarter results, please note that the following figures exclude the impact of nonoperational items, as highlighted in our earnings release, and the comparison period excluding operating results from multi-service that was sold at the end of the third quarter of last year. The nonoperational items for the quarter principally related to acquisition, divestiture and restructuring-related adjustments and expenses. To assist you in reconciling the 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. Now let's begin with some of the first quarter highlights. Adjusted first quarter net income and earnings per share were $21 million and $0.33 per share respectively. Adjusted EBITDA for the first quarter was $62 million.

We generated another $103 million of operating cash flow during the first quarter and increased our net cash position to more than $210 million. Consolidated revenue for the first quarter was $6 billion, an increase of $1.3 billion or 27% sequentially, but still well behind the pre-COVID revenue levels, which is principally driven by the year-over-year decline in volume in our aviation and marine segments when compared to 2020. Our aviation segment volume was 1.1 billion gallons in the first quarter, essentially flat sequentially, but still well below pre-COVID activity levels. While cargo operations and business aviation activity remains strong, overall aviation volume remains significantly below prior-year levels, driven by continued softness in global commercial passenger aviation activity, principally given slower vaccine rollouts abroad.

In the U.S., we have been experiencing increased activity with TSA daily throughput back to nearly 65% of prepandemic levels. But despite some modest improvements in parts of Europe in the first quarter, continuing restrictions in most of Europe and Asia will likely prolong the broader recovery until vaccination rates accelerate in these regions. Volume in our marine segment for the first quarter was 4.2 million metric tons, flat sequentially and down 13% from the strong prior year results we generated where the new IMO 2020 regulations were implemented last January. Our land segment volume was 1.3 billion gallons or gallon equivalents during the first quarter, that's down 6% year-over-year, but up 2% sequentially, principally driven by increases in our World Connect natural gas operations as well as some seasonal improvement in the U.K. Land volumes have now rebounded to 97% of first quarter 2019 prepandemic levels.

Consolidated volume in the first quarter was 3.6 billion gallons, up slightly on a sequential basis, but down year-over-year, again, related to the items already mentioned. Consolidated gross profit for the first quarter was $192 million. That's a decrease of 18% compared to the first quarter of 2020 with an increase of $26 million or 16% sequentially. Our aviation segment contributed $77 million of gross profit in the first quarter, down 15% year-over-year, but up 9% sequentially. Year-over-year, in addition to the COVID-related profit declines from depressed commercial passenger aviation activity, the decrease was also related to the decline in government-related activity associated with the continued drawdown of troops in Afghanistan. These declines were partially offset by higher average margins from a more profitable core business mix.

As we look ahead to the second quarter, aviation gross profit should increase sequentially, principally driven by the continuing recovery in domestic commercial passenger activity, partially offset by a further decline in our government business in Afghanistan. As I am sure you are aware, earlier this month the U.S. and NATO announced its final withdrawal from Afghanistan by September, and therefore we expect further declines in this business activity over the balance of the year. The marine segment generated first quarter gross profit of $25 million, that's down 57% year-over-year, but up 12% sequentially. In addition to the pandemic-related impact, the year-over-year declines were principally driven by the strong results we saw in the first quarter of 2020, again related to the IMO transition to very low sulfur fuel oil. But as we forecasted on last quarter's call, marine gross profit increased sequentially relating to strong results from our physical operations.

As we look ahead to the second quarter for Marine, based on what we've experienced through the first few weeks of April, we expect Marine gross profit to increase sequentially, driven by improvement in our core resale business activity. And as we look to the latter part of the year, there's an increasing likelihood that cruise lines will begin sailing again, providing opportunities for additional improvement in the fourth quarter and into 2022. Our land segment delivered gross profit of $89 million in the first quarter, up 5% year-over-year when excluding the profitability related to the multi-service business from last year's results and actually up 24% sequentially. As we anticipated, we experienced solid sequential improvement in our U.K. heating oil business, driven in part by lockdowns for most of the quarter, but we also generated additional profitability during the quarter related to improved performance in our U.S. natural gas supply activities that was principally driven by the extremely cold weather in parts of the U.S. in February.

Looking ahead to the second quarter, we expect the traditional seasonal decline in land gross profit, which will be further impacted by the strong natural gas product contribution in the first quarter. We believe the land segment has many opportunities ahead, from global sustainability initiatives to potential infrastructure bill spending, which would all benefit our commercial and industrial fuels business as well as our natural gas power and sustainability activities. We continue to manage our operating expenses prudently. Core operating expenses, which excludes bad debt expense, were $146 million in the first quarter, down $29 million or 17% from the first quarter of last year. Looking ahead to the second quarter, operating expenses, excluding bad debt expense, should be generally in line with the first quarter in the range of $144 million to $148 million. We had debt expenses in the first quarter with $3.6 million, down both sequentially and year-over-year and down materially from the elevated levels in the second and third quarter of 2020.

This is further evidence of the solid team effort in managing our receivables portfolio through this stage of the pandemic. Adjusted income from operations for the first quarter was $42 million, down 38% from last year but up 68% sequentially related to the segment activity that I mentioned previously. Adjusted EBITDA was $62 million in the first quarter, down 29% from 2020 and up 39% sequentially. Again, the year-over-year decline in income from operations and adjusted EBITDA was principally driven by the impact of the pandemic as well as benefits from supply imbalances and price volatility arising from the IMO 2020 implementation in the first quarter of 2020 for our marine business. First quarter interest expense was $8.7 million, which is down 44% year-over-year and approximately 20% sequentially. Total interest expense continues to benefit from lower average borrowings and interest rates.

At the end of the first quarter, we again had no borrowings outstanding under our revolver and ended the quarter in a net cash position in excess of $200 million. We expect interest expense in the second quarter to be approximately $9 million to $10 million. Our adjusted tax rate for the first quarter was 35.8% compared to 30.6% in the first quarter of 2020. At this time, we expect our effective tax rate to remain elevated in the near term, primarily due to the current mix of U.S. and foreign earnings as well as the continuing effects of guilty and valuation allowances on certain of our foreign entities. Our total accounts receivable balance increased significantly on a sequential basis to approximately $1.7 billion at quarter end, principally related to the 37% rise in average fuel prices from the fourth quarter. We remain focused on managing working capital requirements, which resulted in operating cash flow generation of $103 million during the first quarter despite a significant sequential increase in accounts receivable.

In closing, despite continued weakness in the commercial passenger aviation market, we delivered a solid quarter, driven principally by very strong results in our land segment. And we again delivered strong operating cash flow. With vaccination rates up significantly in the United States, we are encouraged by the recent trends we are seeing in domestic commercial passenger activity and are hopeful that other parts of the world will begin to catch up over the next several months. While we are appropriately inwardly focused over the first 12 months of the pandemic, during which time our team performed at a level of excellence for which they should all be very proud, we can now more clearly see the light at the end of the tunnel. And we are coming out of the pandemic with a strong balance sheet, actually a stronger balance sheet than where we started prepandemic.

This strong balance sheet, including $735 million of cash, provides us with capital to further grow our core business organically as well as the ability to capitalize on strategic investment opportunities which should drive scale and efficiencies, most specifically in our land and World Connect business activities. Our balance sheet liquidity and solid operating cash flow also provide us with capital to repurchase shares and fund dividends to further enhance shareholder value. In demonstration of our commitment to enhancing shareholder value, over the past two years we've repurchased $134 million of our shares, and we increased our cash dividend twice, most recently, a 20% increase during the first quarter. Thank you for your time. I would now like to turn the call back over to our operator, Joelle, for Q&A.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of Ken Hoexter with Bank of America. Please proceed with your question.

Ken Hoexter -- Bank of America -- Analyst

Great. Good afternoon. And kind of looking forward to this continued rebound which is looking great so far. But on the cash flow, typically a rising fuel environment negatively impacts free cash flow. You mentioned the robust free cash you're still seeing. What are your thoughts on cash flow going forward? And given the huge $700 million in cash, is there a likelihood you start to buy back sooner? And what should we expect from that? Thanks.

Ira M. Birns -- Executive Vice President and Chief Financial Officer

Sure. Thanks, Ken. So yes, as I said on the call, there was a -- as I said earlier, there was a 35%, 36% increase in average prices in the first quarter. And we managed through that very well. Part of it is mix of business currently. And part of it was our ability to sell some more receivables during the quarter under our receivables program. So you put all together, we had a really significant increase, and we had some recovery as well, and our net working capital barely moved. I'm not sure we can continue to replicate that every single quarter, but we're doing our best to manage working capital in our net trade cycle as effectively as possible.

So depending upon the rate of recovery in volumes, depending on what happens in price, that could have meaningful impacts on what our cash flow would be over the next several quarters. In terms of the cash, $735 million, I believe, Glenn, is a record for us for a given quarter. As we've repeatedly said, the first priority for us is investing in our business both organically and inorganically as there are a lot of opportunities in the pipeline today, most specifically in our land -- in many parts of our land business. But we'll also always include a portion of our capital to repurchase shares, again, principally to offset the dilutive impact of equity awards and also look at our dividend as well, which, as I mentioned, we increased in January.

Michael J. Kasbar -- Chairman and Chief Executive Officer

Just to add, Ken, on price. I think I mentioned this last time. It does have a salutary effect on our results because we're leveraging our underwriting, most notably in aviation and marine. So high prices, obviously, have a price to it, so to speak. But we do get some return on that because the value of our balance sheet and counterparty increases. So were that lower prices and stable prices, not so much. So there is the other side of the coin on that.

Ken Hoexter -- Bank of America -- Analyst

Great. So good job on the land. Marine was a bit soft. Aviation was in line. Maybe Ira or Mike, if you could just walk us through on the gross profit per gallon, the impacts there. Marine was down 50%, why such a sharp drop? And land down 10%. Is that now a good run rate? Obviously, up significantly sequentially. Is that because of the U.K.? And then aviation, what's the impact as commercial business rebounds?

Michael J. Kasbar -- Chairman and Chief Executive Officer

Well, once again, the credit equation, a combination of different things, higher quality credit, lower prices, not a whole lot of volatility, not as much demand on our credit or underwriting. So that sort of dynamic means that those value-added services are not getting pressed into the equation, so to speak. And that would apply, most notably to marine, but also to some extent on aviation. You've got a good amount of business mix within aviation. So that's going to vary. I mean, we're dealing with unusual times. So getting back to historic norms I think you're going to see a revert to mean when business activity starts to normalize, whenever that's going to be. In the meantime, it's a combination of the mix of business activity, most notably within aviation as you're not seeing international passenger cargo will come back so strong. So I think that's the end of my comments. I don't know if you had any other color. You want to add to that to, Ira?

Ira M. Birns -- Executive Vice President and Chief Financial Officer

Yes, one -- couple of highlights. So I'm not repetitive. On marine, remember, year-over-year, you're comparing to the extraordinary Q1, which is when the IMO implementation happened, and that would explain the substantial year-over-year decline, but the results aside from that is not that far off where we had been trending over the past few quarters. And as I said on the call earlier, for marine, that number has been moving up a bit in the first few weeks of April. In aviation, when you compare our margin to last year were up, that's principally, as Mike said, because of mix because we have way less -- lower margin, high-volume commercial passenger business and more of a mix is of cargo, business aviation, etc.

So that's contributed to year-over-year improvement in margin. And in the land business, you probably have multi-service in your numbers last year, which would affect that year-over-year comparison. Their margin in the first quarter in land was a bit higher, again driven by the really strong results in the U.K. and in that gas business. So from a trend standpoint going forward, aviation may trend down a little bit as the mix begins to shift toward more commercial passenger business, green, again, should be -- we're open to be up a little bit. And land should trend down a little bit again coming off the extraordinary results in the first quarter.

Ken Hoexter -- Bank of America -- Analyst

All right. Great. And then those are my two questions. My one follow-up quickly would be Afghanistan just in aviation. Can you describe how much is left in the results? I know you've got commercial that will rebound and offset some of that. But is there a way just we can counter with what is left in the number?

Ira M. Birns -- Executive Vice President and Chief Financial Officer

Yes. I can say that when you look to the second quarter, we'll be down to about 7% of gross profit, that remains coming out of that business. And based upon the announcements coming out of the White House and NATO, obviously that number will decline quite possibly to zero by the end of the year. So you've got the complement to two factors, right? That's most likely going to decline. There's still some funkiness on priming, and there may be some lingering activity. We don't know yet. And at the same time, you've got the core aviation recovery going on that likely will continue to improve that over the balance of the year. Again, the improvement, plus or minus, will be tied to what happens in Europe, for example, when that starts coming back. So on an overall basis, aviation should start trending up a little bit, maybe not as much as it otherwise would have if the Afghanistan activity continues. And by the way, that's 7%, just to clarify, in the second quarter. A little bit of that is in land, too. So that's a consolidated number. I would say, 5% aviation, 2% relates to land.

Ken Hoexter -- Bank of America -- Analyst

5% of aviation or 5% of total gross profit?

Michael J. Kasbar -- Chairman and Chief Executive Officer

Yes, we're [Indecipherable]

Ira M. Birns -- Executive Vice President and Chief Financial Officer

No, no, total -- 7% is the percentage of our total consolidated gross profit. Most of that, 80% of that is in aviation and about 20% of that is land.

Michael J. Kasbar -- Chairman and Chief Executive Officer

The only note I'll give on that, Ken, notwithstanding timing clearly through better or worse global tranquility, it's not going to break out anytime soon. So we're committed, we've been in the space for many, many years. So there is different locations. We do have activity, not to the extent of the concentration within Afghanistan but, so we will be seeing that. We already do have activity there. So in any case, and that's a business we continue to be committed to, it's good business. It gives us a great sort of capability that we leverage into our commercial activities. So that of course will be combined within our other business operations until such time that it becomes sizable that we would actually break it out.

Ira M. Birns -- Executive Vice President and Chief Financial Officer

Great. Appreciate that. Thanks, Michael.

Operator

Our next question comes from the line of Ben Nolan with Stifel. Please proceed with your question.

Ben Nolan -- Stifel -- Analyst

Yes. So first of all, I appreciate the breakout on the Afghanistan stuff there. That was helpful. I wanted to stick with aviation for a moment, if I could. And obviously here in the U.S. we're seeing a lot more passenger air freight moving and people on vacations and that kind of thing. But as you said in the prepared remarks, you're not necessarily seeing that in other places around the world, like Europe and Asia. I was curious if you might be able to break down sort of what your business mix is, how much of what you do is domestic here versus other parts of the world? And how do you think through sort of what that means with respect to the cadence of normalization?

Ira M. Birns -- Executive Vice President and Chief Financial Officer

Yes. That's a lovely question, Ben, from a standpoint of looking at that at different points in time. Historically, 70% plus of our aviation business would be commercial with something close to 50-50 split between North America and parts of the world. But that's varied over time. That's probably pretty close to where we've trended historically. Now you have different type of business, though, right? I would say the piece of business internationally, on average, would be higher-margin because that's where we have more of a physical presence, again driven by our Exxon related acquisition a few years back, we're operating in over 100 airports today where we have infrastructure, and we're not "just the man in the middle". That type of business, which hasn't come back yet because of all the lockdowns and restrictions in Europe is generally higher-margin where the domestic larger volume type customers and that type of business in the U.S. is generally at the lower end of the margin spectrum, right? So you may be 50-50 on volume, but you have an increasing amount of profitability over the last few years coming from our international operations.

Ben Nolan -- Stifel -- Analyst

Okay. That's helpful. And then secondly for me, sort of a similar question, but as it relates to land. And especially as we look back into the last quarter, it was a pretty good number, especially without a multi-service in there. And some of that, I think, is, as you say, U.K. normal seasonality, but then there was also the natural gas business which helped by weather and everything else. At this point, how much of the land business is natural gas? That's kind of my question. And how much of what we saw in the first quarter might have been just sort of weird weather versus what is a normal run rate?

Ira M. Birns -- Executive Vice President and Chief Financial Officer

Yes. It's still been running at a relatively small level on a run rate basis of land's overall profitability. There was probably an extra $7 million or $8 million of profitability beyond the norm that contributed to land results in the first quarter. If you back that out and look at the results, short of that we still had somewhat better than normal Q1 again because of the strength in the U.K.

Ben Nolan -- Stifel -- Analyst

Right. Okay. That's great. And then I guess for my follow-up or third question or however. On the marine side, hopefully, I think, in July they'll start running cruise ships again. Can you maybe talk to how big of a deal that is to the marine business? I know, obviously, you guys are located right there in the cruise side of the world, right? But how much of the business is cruise? Or maybe more importantly, how much of that gross profit is ordinarily derived from the cruise business for you guys?

Ira M. Birns -- Executive Vice President and Chief Financial Officer

Yes, historically -- good question, that's only been about 10% of our grain profitability over the years. Now it's accelerated a bit as we added some new locations in the year or so, year or two prior to COVID, maybe it's 11%, 12%, but it's somewhere between 10% and 12% historically. So it's enough to have a few million dollars of profitability on a quarterly basis going forward when that does come back. And it seems like it should start coming back around the end of the year. Now just because you're sailing in the fall, if that's going to happen, the number of ships sailing are going to be nowhere near where they were prepandemic day one. So it's going to be a relatively slow ramp for that business, unfortunately, for them. I'm sure they're happy, they're all happy to be getting on the seas again even if they're not running at 100% of their capacity.

Ben Nolan -- Stifel -- Analyst

Sure, sure. Alright well that is my question. Appreciate it. Thanks guys.

Operator

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

Michael J. Kasbar -- Chairman and Chief Executive Officer

Well, thanks, everyone, for listening in. And thanks to all of my colleagues around the world. You're doing a great job. It's great to work with you every day. Thanks, everybody. And we'll talk to you next quarter.

Operator

[Operator Closing Remarks]

Duration: 35 minutes

Call participants:

Glenn Klevitz -- Treasury & Investor Relations

Michael J. Kasbar -- Chairman and Chief Executive Officer

Ira M. Birns -- Executive Vice President and Chief Financial Officer

Ken Hoexter -- Bank of America -- Analyst

Ben Nolan -- Stifel -- Analyst

More INT analysis

All earnings call transcripts

AlphaStreet Logo

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.