WORLD KINECT CORP Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Business Rebound: Land segment rebounded from Q2 weakness; Aviation had double-digit operating margin growth; Marine showed operating leverage from small market condition improvements.
• Strategic M&A: Acquired a tuck-in bulk aviation fuel distribution business, completed at the start of Q4 and expected to integrate by year-end, expanding the distribution network.
• Portfolio Refinement: Focus on refining the Land business portfolio to improve margins and returns, with plans to complete technology migration in North American liquid fuel business by 2025.
• Share Repurchases: Repurchased $28 million of shares in Q3, total year-to-date repurchases at $57 million, with a $200 million increase to share repurchase authorization.

Segment Performance

• Aviation: Volume down ~16 million gallons year-over-year, but excluding bulk fuel exit, volume up 4% year-over-year and 4% sequentially. Gross profit increased $3 million or 3% year-over-year, driven by core commercial business and a recent tuck-in acquisition expanding the distribution network.
• Marine: Volumes down 3% year-over-year, but gross profit increased approximately 7% due to strong performance in core resale business activities, including growth at physical locations.
• Land: Sequentially improved from Q2 but still down year-over-year. North American fuel and natural gas businesses improved from Q2, but Brazilian operations remained a drag, contributing to a 16% year-over-year decline in gross profit.

Guidance

• Consolidated Gross Profit: Expected to be in the range of $253 million to $260 million for Q4.
• Adjusted Operating Expenses: Expected $194 million to $198 million in Q4, generally consistent with Q3 and a 5% year-over-year decline.
• Interest Expense: Expected to be $23 million to $25 million in Q4, with full-year 2024 interest expense on track to be ~18% below fiscal year 2023.
• Tax Rate: Q4 adjusted effective tax rate expected in the range of 20% to 23%, resulting in full-year 2024 adjusted effective tax rate of 17% to 19%.
• Cash Flow: Focus on achieving positive cash flow in Q4 to finish the year strongly.

Risks

• Market Volatility: Impact on Marine business due to market conditions affecting margins.
• Tax Uncertainties: Variability in adjusted effective tax rate, with Q3 rate slightly higher than anticipated.
• Integration Risks: Potential challenges in integrating acquisitions, particularly in Land business portfolio refinement.

Question and Answer

• **Q: Any other Avinode-like monetization opportunities?

A: Focus on core activities, reallocating capital from non-core pieces to core business, and simplifying the Land story to improve margins and profitability.

• **Q: Path to 30% operating margin in Land?

A: Utilizing controllable levers like stopping underperforming activities, strategic M&A (e.g., cardlock business with high margins), and leveraging existing high-margin businesses within the portfolio.

• **Q: Observations on data centers' natural gas appetites?

A: Engaged in conversations with enterprise customers, particularly data centers, regarding backup energy solutions, leveraging existing capabilities in this area.

• **Q: Brazil and international Land operations?

A: Focus on North America due to larger market size and greater growth runway, but maintaining global logistics capability; niche international opportunities may be considered after North America focus is addressed.

• **Q: Marine physical presence development?

A: Developed physical presence with niche locations, effective distribution mix including inventory management and digital fulfillment, setting the company apart with optionality in fulfillment methods for customers