Ladies and gentlemen, thank you for standing by, and welcome to the World Fuel Services Second Quarter 2022 Earnings Conference Call. My name is Michelle, and I will be coordinating the call this evening. 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.

Thank you, Michelle. Good evening, everyone, and welcome to the World Fuel Services Second Quarter 2022 Earnings Conference Call. This is 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 those forward-looking statements in light of new information or future events. This presentation also includes certain non-GAAP financial measures as defined in Regulation G. A reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures is included in World Fuel's press release and can be found on its website. We'll begin with several minutes of prepared remarks, which will then be followed by a question-and-answer period. At this time, I would like to introduce our Chairman and Chief Executive Officer, Michael Kasbar.

Thank you, Glenn. Once again, the resilience of our business portfolio and the agility of our people drove a strong outcome in the second quarter. As we mentioned last quarter, super backwardation impacted commercial aviation, which continued throughout the second quarter. But we pivoted quickly as we indicated we would, materially reducing this risk going forward, and our business aviation activity generally performed well. Conversely, high prices and continued volatility were extremely favorable for our Marine business, where we achieved record results. Our marine team did an extraordinary job of servicing our clients and managing the business. And finally, our land business performed well across the board with Flyers Energy, U.K., Brazil and our World Connect business, all delivering solid results. As I've said many times, we see the energy transition as a global imperative and are focused on continuing to expand our suite of energy and digital solutions to deliver critical support to our customers, suppliers, and stakeholders in meeting net zero objectives. There has been a significant increase in demand for renewable energy. And in response, we continue to build out our platform in key areas such as renewable fuels as well as wind and solar energy solutions. We have been at the forefront of sustainable aviation fuel for many years, delivering about 30 million gallons to date. And during the second quarter, we became an authorized branded distributor of Neste's sustainable aviation fuel, commonly referred to as SAF. With this relationship, we were able to bring SAF to Paris Le Bourget Airport in France last month. We also recently partnered with wpd Europe, a developer and operator of wind farms and solar parks in 28 countries on a wind project in Finland, where we will manage the wind farms' power output. These are only a few of the many examples of how we are participating in the energy transition and transforming our offering with innovative energy and digital solutions. Whether our customers need help developing a carbon reduction plan, devising strategies to reduce energy use, or sourcing renewable energy, our broad offering of sustainable solutions is available to support these critical initiatives. We're proud of our team at World Connect and are excited about the growth opportunities this offers across all of our businesses in the future. While the macro environment is fraught with a confluence of market and geopolitical risks and a more active regulatory dynamic, I believe we are positioned better than ever to profitably grow our global energy and logistics business in core conventional activities and build greater value growth and return in sustainable businesses and offerings, including those I just mentioned. Our focus has always been and will continue to be delivering a complementary set of products and services that delivers value for our customers, suppliers, and partners, with an increasing number of digital solutions. I am enormously proud of our global team and the grit they have shown over the last few years and continue to demonstrate as we further fortify our global diverse energy solutions offerings. We are encouraged and animated by the continuing opportunities and runway we see for our business. Before I turn over the call to Ira for a financial review of the quarter, I want to give a very special thanks to Jeff Smith and our digital and business teams for their tremendous effort and teamwork in shutting down our last of 22 data centers, which will make us a cloud-first business. This will increase our resiliency and give us virtually unlimited scalability. Ira, why don’t you take it from here?

Thank you, Mike, and happy birthday. Before I review our second-quarter results, please note that the following figures exclude the impact of non-operational items highlighted in our earnings release. These items principally include acquisition-related expenses and integration costs related to the Flyers Energy acquisition, which in aggregate were $1.4 million after tax in the second quarter. You can find the breakdown of the non-operational items on our website and on the last slide of today's webcast presentation. So I'm not sure I could think of a quarter historically which better demonstrated the resiliency of our business and the value of the diversity of our business model in this past quarter. Simply put, we delivered solid results even though our aviation business continues to be significantly impacted by severe market pricing backwardation throughout most of the second quarter given the principally contract-oriented nature of our aviation business. However, these volatile market pricing dynamics drove our spot-oriented marine business through record results, and our land segment, which on the back of the recent Flyers Energy acquisition has become a larger and more ratable piece of our broader business, delivered very strong results as well. Now let's continue with the financial highlights. Sustained high fuel prices and increasing volume drove consolidated revenue to a record $17.1 billion in the second quarter, up more than 140% year-over-year. And year-to-date, putting us just under the $31 billion in revenue that we posted for the full year in 2021. Volume again grew year-over-year across all our business segments, with commercial aviation passenger volumes recovering to approximately 85% of pre-pandemic levels. Adjusted second-quarter net income and earnings per share were $26 million and $0.41 per share, respectively. Adjusted EBITDA for the second quarter was $76 million, an increase of 31% compared to the second quarter of 2021, again, despite the significant negative backwardation-related impact on aviation results this past quarter. With regard to segment volumes, our aviation segment volume was 1.8 billion gallons in the second quarter, an increase of 33% compared to the second quarter of 2021. The year-over-year volume increase resulted principally from the ongoing recovery in commercial passenger activity. Volume in our marine segment for the second quarter was 4.9 million metric tons, an increase of 6% year-over-year. As evidenced in the past and then again during this past quarter, during times of elevated fuel prices, constrained credit, and rising interest rates, we become a more critically valued counterparty, which increases our success rate and contributes to profitable volume growth. Our land segment volume was 1.5 billion gallons or gallon equivalents during the second quarter. That's an increase of 19% year-over-year. The year-over-year volume increase was principally driven by volume associated with the Flyers acquisition. Consolidated gross profit for the second quarter was $253 million. That's up 37% year-over-year and represents the highest level of quarterly gross profit since the first quarter of 2020. In terms of aviation gross profit, the fundamentals of our aviation business remain strong, with commercial passenger aviation continuing to recover from the pandemic and businesses in general aviation and cargo activities all posting solid results versus last year. However, the segment's second quarter gross profit declined to $53 million, which is down 40% year-over-year, driven principally by the impact of severe market pricing backwardation and to a lesser extent, the exit from Afghanistan last year. As a reminder, we began experiencing the impact of severe pricing backwardation in the latter half of the first quarter. Again, this is when future forward prices began trading significantly below spot oil prices. During the second quarter, backwardation became increasingly severe and continued through much of the quarter. Our team has now successfully renegotiated sufficient customer contracts to minimize related risk going forward. While still backwardated, market conditions we experienced in the second quarter have now reverted much closer to historical norms. As we look ahead to the seasonally strong third quarter and with the backwardation issue generally behind us, we expect aviation gross profit to rebound significantly, with results expected to be up year-over-year despite the discontinuation of the Afghanistan business last year. The Marine segment performed extraordinarily well, benefiting from record-high bunker fuel prices, increased levels of price volatility, as well as the credit-constrained marketplace. This resulted in quarterly gross profit of $78 million, an increase of 244% year-over-year and the highest level of marine quarterly gross profit in the history of the company. Kudos to the global marine team for such absolutely fantastic performance with solid results across all sectors and geographies. For the third quarter, we expect marine results to again materially exceed the prior year. However, with bunker fuel prices somewhat lower quarter-to-date, it is unlikely that the third quarter will be as strong as the second quarter. Our land segment delivered gross profit of $122 million in the second quarter. That's up 66% year-over-year, principally as a result of the recent Flyers acquisition, which continues to outperform our expectations. Additional highlights included strength in our U.K. operation, which delivered strong results in what has traditionally represented a seasonally low quarter for them and year-over-year growth in our commercial and industrial and retail activities. Our World Connect business also continues to perform well with a growing suite of products and services to support our customers' decarbonization efforts, and with a robust pipeline of related investment opportunities, there are clearly more growth opportunities ahead in this space. Land gross profit should be up materially year-over-year in the third quarter, driven by the impact of Flyers, but also continued growth in our broader land business, but should experience a sequential seasonal decline, principally driven by our U.K. operations. Core operating expenses were $197 million in the second quarter. That's up 5% sequentially, principally driven by higher operating expenses associated with increased business activity during the second quarter. We expect core operating expenses to be in the range of $198 million to $204 million in the third quarter. Bad debt expense in the second quarter was $2.6 million. We continue to manage our accounts receivable exceptionally well as volume growth and higher fuel prices have increased the size of our overall receivables portfolio to a record level. Adjusted EBITDA was $76 million in the second quarter, representing an increase of 31% year-over-year. Despite the aviation backwardation impact, this was our best quarterly performance since the pandemic began. Our interest expense was $25.9 million in the second quarter, significantly higher than recent run rates, principally related to rapidly rising interest rates as well as increased borrowings under our credit facility and increased activity under our trade finance facility, both associated with growing volumes and high fuel prices throughout the quarter. Based upon the current interest rate environment and funding requirements, we expect the level of interest expense to be in the range of $24 million to $27 million in the third quarter. Significant foreign exchange volatility during the second quarter also resulted in a few million dollars of foreign exchange losses during the quarter. Moving on to tax. Over time, we have been required to establish tax valuation allowances in jurisdictions where cumulative losses precluded our ability to utilize certain deferred tax assets. This was exacerbated by the pandemic. Coming out of the pandemic, as profitability has been increasing in many of the countries where such allowances were necessary, it should enable us to reverse these allowances over time. In the second quarter, one such reversal drove our quarterly tax rate down significantly and was the principal contributing factor leading to a negative effective tax rate for the quarter. For the third quarter, our effective tax rate should return to a more normalized mid-20s level. And for the full year, inclusive of any allowance reversals, we expect our effective tax rate to be in the range of 17% to 20%, which is down from 26% in 2021. Despite a 14% sequential increase in average fuel prices and higher volumes during the quarter, we generated operating cash flow of $43 million. As a result of our efforts to expand the size of our banking facility while also increasing the capacity of our trade finance facilities, our liquidity position remains strong, supporting our growth initiatives for the second half of the year and beyond. We repurchased just over 1.5 million shares of our common stock during the second quarter, increasing year-to-date repurchases to more than 2 million shares, and we have now repurchased nearly 15 million shares over the past 10 years, demonstrating our continued commitment to drive additional shareholder value through both buybacks and dividends. In summary, despite the backwardation-related challenges in aviation, we delivered solid results in the second quarter. Core aviation activity continued to rebound from the pandemic. Our marine business delivered absolutely fantastic results, and our land business, including Flyers Energy, also had a very strong quarter. In addition to our core fuel, natural gas, and power business activities with expanding renewables offerings and a growing suite of additional carbon reduction solutions offered by World Connect, we are very excited about the future. All of our customers around the world are at some stage of their decarbonization journey, and our product and service offerings in support of their sustainability efforts should provide growing opportunities for us going forward. We also continue to maintain a strong balance sheet with a solid liquidity profile, providing sufficient capital to support organic growth and value-creating investments while also returning capital to our shareholders again through share repurchases as well as dividends. With that, I'd like to turn the call back over to our operator, Michelle, to start the Q&A session. Thank you.

And our first question comes from the line of Ken Hoexter with Bank of America.

Michael, Ira, and Glenn, regarding the aviation backwardation, is this related to your inventory levels that prompted you to revisit the contracts? Ira, you mentioned that you have gone back to your customers and adjusted the contracts. Could you explain that process and where it has taken place? Additionally, you noted that you haven't observed the backwardation. Could you clarify the basic concepts around that?

The structure of our supply and customer contracts resulted in losses due to the unusual backwardation issue as we rolled inventory futures monthly. Coming out of the second quarter and into the third quarter, a significant number of those contracts rolled over on July 1, allowing us to renegotiate enough of them to largely eliminate the need for continued rolling. This left us with a more balanced position. Although the backwardation issue has improved significantly, going from $0.30, $0.40, and $0.50 backwardation to about $0.05, we have effectively mitigated that exposure. We do not anticipate facing a similar issue moving forward, as we no longer need to roll contracts, whether in a backwardated market or a normal long-term contango market where the curve trends upwards.

And then switching over to Marine. You had a huge gross profit per gallon. When I think about the record levels, looking at a kind of a $15 gross profit per metric ton, $15, $16. How should we think about that going forward? Is that something that we're done with the $7 level, given where fuel is? Will it stay in the teens at double digits? Or how should we think about that?

Well, for a good part of the second quarter, Ken, in this crazy pricing environment, bunker fuel was on average $1,000 a ton. You may remember when we had the IMO regulations kick in and people converting over to the more carbon-friendly fuel; that was trading somewhere under $500 a ton, somewhere between $400 and $500. We've never seen $1,000 a ton before. We've always said that because marine is principally a spot business, unlike aviation, which is heavily contract-oriented, as market price moves, you could reset your go-to-market strategy daily, hourly, by the minute. And there's a pretty tight correlation over the long term between the underlying price of the commodity and our margins in that business. Therefore, with prices at record highs, it's not surprising that our margins would have been so much stronger. So to your second question, it really depends on your views or market expectations of where pricing may go. Prices are still high. They're off a little bit. I would say they're down 5% to 10% from the average levels in the second quarter so far in Q3. So that's part one. So it's tough to forecast. One of the things I mentioned in my prepared remarks is we don't expect to repeat Q2 because of the extraordinary dynamics. But we're still going to have significant year-over-year growth as the market still remains tight. And as Glenn reminds me, Part 2 to the story is in an environment like this, where the underlying commodity is $1,000 a ton, again, at record levels, it makes it a bit tougher for certain players in the market to compete because you need a strong balance sheet. And you need more capital to support your own working capital requirements at these levels. And we being the big 900-pound gorilla with a solid balance sheet, we wind up generally outperforming in those scenarios. We generally become a much more valued counterparty because we're out there providing the amount of credit that our customers require, and they value that more than they normally do in an environment where prices are so significantly high.

And then one more for...

Go ahead, Michael.

It is. I couldn't think of anything better to do.

Yes, I receive earnings season on my birthday, which is this weekend. Ira, in this environment, how do you view cash? You bought back a significant amount of stock this quarter and anticipated generating more cash flow with these higher prices. However, you also increased your accounts receivable as you provided more credit with those prices. Could you share your thoughts on the current environment and how you're managing cash flow? Or perhaps Michael could discuss potential opportunities.

Regarding the cash-related question, we utilized some cash in the first quarter as prices began to rise, which was generally unavoidable. Our business grew year-over-year, and prices increased concurrently. In the second quarter, although prices rose significantly, we managed our balance sheet effectively, allowing us to generate cash. This was partly due to our strong marine segment performance. Looking ahead, we didn't generate a large amount of cash, but we did achieve $43 million in operating cash flow. If prices stabilize or decline, it presents an opportunity to generate even more cash since we won't need to increase our working capital further. So far this quarter, prices have decreased slightly, and while it's uncertain if this trend will continue, we anticipate improving cash flow in the second half of the year compared to the first half, returning to a more normalized quarterly cash flow level. With our strong earnings, we expect this figure to be better than it was during the pandemic when earnings were low. We anticipate solid cash flow in the second half unless the market takes another unexpected turn and prices jump by 20%, which would complicate cash generation. However, in a more stable pricing environment, we expect to generate more cash in the third and fourth quarters than we did in the second quarter.

And our next question comes from the line of Ben Nolan with Stifel.

And yes, happy birthday there, Mike. I happen to know that all the smartest people in the world were born in July. So happy birthday. I just wanted to sort of level that, if I could, for a second, just to make sure that I understood everything correctly. The aviation business you’re expecting for the third quarter to be at least as good as it was last year. And then the other two businesses better, in some cases, substantially better than they were last year. Is that correct? So gross profit across the board should be - you're expecting to be meaningfully higher than it was a year ago in the third quarter. Is that fair?

Year-over-year, absolutely.

Okay, I wanted to confirm my understanding. I'm curious about a few things. Firstly, I noticed the interest expense is significantly higher. I understand there’s increased working capital, as mentioned with Ken. Is the working capital primarily driven by the marine business? Given that, are you effectively passing the cost of capital onto your customers more in that sector compared to the others, or am I misunderstanding that?

Ben, you need to remember that there is a banking aspect to our operations. We serve as a financing source for many of our customers. Therefore, in a high-interest rate environment, we benefit in that area, even though it may pose challenges in other respects. I'll let Ira provide more details on that.

Yes. Continuing from what Mike said, the main amount of cash required to operate in this high price environment, along with the additional investment in working capital, primarily comes from marine, although aviation contributes as well. The land sector is less affected due to its tighter cash flow and lower investment in working capital. To Mike's point, while our interest expense increased, it remains relatively small compared to the rise in marine profitability. It’s significant in the ordinary course since it's about $10 million up sequentially. As you mentioned, it's driven by higher average borrowings and increased volume in a high price environment, with prices up nearly 15% in Q2 compared to Q1. Following the Fed's recent moves, our average borrowing costs have likely risen about 150 basis points since Q1, after a long period of nearly zero rates. I don’t think this will last too long, although for now, the interest expense from Q2 will likely persist for the rest of the year. Glenn is diligently working to minimize it, but it's not expected to drop significantly. Nonetheless, as Mike noted, acting as somewhat of a bank is indirectly aiding higher margins in various parts of our business since we are making those necessary working capital investments.

Right. Okay. That makes sense. The last one for me, and I'll turn it over. But increasingly, there is concern about the possibility of a recession. And I think that hit all equity markets, and I assume that's probably hit your own equity price a bit. Can you maybe talk me through how you think the company is positioned? How elastic or inelastic you might be to the potential of a recession? Or if you think that as it relates to World Fuel that the company is different now than maybe it had been in previous cycles?

Certainly, the credit side of the equation, I think if COVID didn't demonstrate our risk management, I don't know what will. We sailed through it, I guess, is probably not the right word. It was certainly not sunny days. But so I think that's pretty well known. And then the variability of our cost piece. We've concluded a number of different things in terms of platform. We've got a significantly greater volume of activity going through the platform. So our ability to modulate on expense and looking at volume and margin, I think we're in a far better place now than we ever have been before. A lot of our systems' build-out has been concluded. Teams are in place. So the ability to dial back in a number of different areas, I think, are significantly greater now. It's taken a long time to get to that point. But I think we're all feeling confident. We're feeling pretty poised with all the things that we've been through with everything that the market has thrown our way, a recession sounds like a light drizzle. So I think that this is an organization and the team that has been fire-tested, fire-tempered. So I think we know what to do. And for those companies that may be a bit stressed, we know how to support them as well. So if anything, as one of our investors was mentioning to Ira, there's a company that's built for turbulence. So we know how to operate in all sorts of different market environments. So I don't know, Ira, if you have more you want to add?

I believe the first half of 2020 serves as an excellent illustration. That period marked a significant recession, where business essentially came to a halt. We effectively managed the drop in volume and profit by quickly adjusting and reducing costs. Our response was almost immediate. While we couldn't completely prevent the decline, we certainly did our best to cut variable and even some fixed costs. This has been evident in previous recessions as well. Additionally, a recession typically leads to decreased activity, which reduces our working capital needs, providing some relief. Glenn Stafford would point out that this is one positive aspect of such an environment. Interestingly, although we haven’t been overly acquisitive except for the Flyers deal, we maintain a strong balance sheet and are actively seeking sensible opportunities across our businesses, such as land, the Connect platform, and sustainability initiatives. Many companies have overspent in the past couple of years, inflating valuations. A recession might humble these valuations, potentially creating better opportunities for us in the coming quarters. Historically, we’ve achieved solid results relative to recessions, and our team is exceptionally agile. While a drop in demand is beyond our control, we remain a highly valued partner, especially in this credit-constricted environment, and I believe our value increases during recessionary periods.

And also likely to have lower prices, which will also be salutary for cash flow.

Cash flow, right.

Mike, you were just talking about the Flyers acquisition. I know that when you had done that, there were aspirations of possibly finding other adjacent bolt-ons in similar business areas, but expanding the geographic footprint. Any update on how you're thinking about that?

So playing off of what I just said, Ben, yes, we're still thinking about that. There are a lot of opportunities that we're looking at. With all due respect to some of those people, many of them have continued to have extremely high aspirations from a value perspective until very recently. So that has resulted in maybe less activity or no activity in the last few months than we would have hoped, but I think that may change. There are several things we're looking at now that would be complementary to Flyers and the broader land business. So hopefully, we'll be able to execute on a few of those over the next few quarters. We continue, as Mike and I have both emphasized a bit more on this call, to grow the suite of products and services we have supporting our customers with their energy transition journey. There are a lot of opportunities there, frothy valuations in that area as well. Hopefully, those are about to become a bit more reasonable, and we're certainly looking to organically grow that business but to find strategic opportunities to accelerate the growth of that exciting piece of our business as well.

I would like to hand the conference back over to Mr. Michael Kasbar, for any further remarks.

Well, thank you to all of our investors on the call, and especially to the team, our global team. We've got the best global team, and we've been through a lot. It feels good to be here, and we're excited about the future. We've got a great global platform, a great suite of products, and great support from our customers and suppliers, partners. So we feel very lucky. Thank you very much, and we look forward to reporting back in a quarter. Stay healthy, stay well.

This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great evening.