Earnings Call Transcript - WKC Q4 2025

Operator, Operator

Thank you for holding. Welcome to World Kinect Corporation's Fourth Quarter 2025 Earnings Conference Call. I will now turn the call over to Braulio Medrano, Senior Director of FP&A and Investor Relations. Please proceed.

Braulio Medrano, Senior Director of FP&A and Investor Relations

Good evening, everyone, and welcome to World Kinect's Fourth Quarter 2025 Earnings Conference Call, which will be presented alongside our live slide presentation. Today's presentation is also available via webcast on our Investor Relations website. I'm Braulio Medrano, Senior Director of FP&A and Investor Relations. With me on the call today is Ira Birns, Chief Executive Officer; Mike Tejada, Executive Vice President and Chief Financial Officer; and John Rau, President. And now I'd like to review our safe harbor statement. Certain statements made today including comments about our expectations regarding future plans and performance are forward-looking statements that are subject to a range of uncertainties and risks that could cause actual results to materially differ. Factors that could cause results to materially differ can be found in our most recent Form 10-K and other reports filed with the Securities and Exchange Commission. We assume no obligation to revise or publicly release the results of any revisions to these forward-looking statements in light of new information. This presentation also includes certain non-GAAP financial measures. A reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures is included in our press release and can be found on our website. We will begin with several minutes of prepared remarks, which will then be followed by a question-and-answer period. At this time, I would like to introduce our Chief Executive Officer, Ira Birns.

Ira Birns, CEO

Thank you, Braulio, and good afternoon, everyone. As I begin my first earnings call as CEO, I'd like to say how honored I am to step into this role at a defining moment for our company. We entered 2026 with a strong foundation in place and clear opportunities ahead. I'm truly energized and excited by the opportunity to lead the company into its next chapter, one grounded in accountability, aligned leadership and a commitment to consistent execution and long-term value creation. As we previewed last quarter, we welcomed Mike Tejada to the role of Chief Financial Officer, shortly before my appointment to CEO. I am joined today by Mike whose deep expertise in financial management and operational transformation has already proven instrumental as we sharpen our portfolio, enhance efficiency and create additional value for our shareholders. I'm also joined by John Rau, recently appointed President and the commercial leader of our Aviation, Marine and Land segments. John is an experienced leader with a deep understanding of our business. His focus on operational excellence and disciplined commercial execution continues to strengthen our platform and better positions World Kinect to deliver sustainable growth. And over the past several weeks, I've had the opportunity to engage deeply with our leaders and many of our employees across the company. Those conversations have been energizing and have reinforced the shared commitment to simplicity, clarity and increased transparency. Our team understands the changes we're making. They believe in where we're headed, and they are excited about contributing to the next chapter of World Kinect. That level of alignment and engagement gives me tremendous confidence in our ability to execute and deliver on our commitments. Beyond our internal audience, I've also met with external stakeholders to pressure test our thinking and better understand where we can optimize our business and drive additional value for our shareholders. While these discussions are ongoing, they have already reinforced that a unified performance mindset, a disciplined approach to capital allocation and most importantly, a sharpened focus on portfolio management are critical to driving strong results. As a result, we've been deliberately reshaping World Kinect, simplifying our business model, concentrating our portfolio on businesses that deliver more attractive and predictable returns, allocating capital with a clear ROI mindset and strengthening our financial discipline to create a clearer path to sustainable success in a dynamic and evolving industry. These actions are building a more resilient, future-ready company that serves customers with excellence and is positioned to deliver sustainable value for our shareholders. With a renewed focus on our core business and meaningful momentum underway, we are confident that 2026 will mark the start of a new era for World Kinect. With this clarity, the fourth quarter marked several pivotal milestones in our transformation and portfolio repositioning. In Aviation, we successfully closed the acquisition of Universal Weather and Aviation's Trip Support Services business, expanding our capabilities in flight support and strengthening our role in global aviation services. This business fits squarely within our core strengths and complements our global fuel distribution network. Integration is underway following our proven M&A playbook in aviation focused on operational excellence and disciplined execution. I just returned from Europe where I witnessed firsthand the enthusiasm for the opportunities we see to expand our on-airport footprint, which we believe will unlock further growth potential in this region. In land, we have taken action to meaningfully reshape the portfolio and narrow our focus to better align with our long-term return objectives. I will share related details with you in a moment. Meanwhile, as we look ahead, our land business will focus on our North American operations anchored around higher margin and more ratable cardlock and retail activities as well as natural gas. When combined, these businesses create the foundation on which we will continue to build and enable us to successfully drive longer-term land-based growth. To put this in context, for many years, our role in the convenience store fuel distribution space has been focused on supplying fuel to site operators under long-term agreements, many of which are locked in for as long as 15 years, driving solid ratable profitability. While opportunities for growth here remain, we now see meaningful room for additional growth through a new pathway in which we own or lease the site and manage the fuel operations ourselves, while partnering with an independent operator who runs the convenience store. This approach increases our margin, reduces upfront capital incentives and credit risk and opens a much larger growth opportunity in the convenience store fuel distribution space. In turn, we expect to drive synergies over time as we leverage this new model that more closely aligns our cardlock and retail business activities. Ultimately, we expect the targeted changes we are making and the broader strategic shift across our land segment to enhance returns and significantly improve profitability in 2026, while also providing increased transparency regarding the business' long-term growth potential. Summarizing the actions we have taken to reshape the land portfolio. In Europe, we made the decision to exit our power, energy management and related sustainability service businesses, steps that now shift our focus almost entirely to North America and our core businesses that have proven to deliver more consistent profitability and returns. In North America, as part of our ongoing efforts to streamline our portfolio and further sharpen our strategic focus, we have also recently entered into an agreement to sell our tank wagon delivery and lubricants businesses to Diesel Direct, a national mobile fueling business based in Stoughton, Massachusetts. We expect to close this transaction during the second quarter of '26. In terms of the transportation model for our remaining core land business in the U.S., we have also made the decision to fully outsource our transportation requirements to drive additional operating efficiencies. We expect this transition to also reduce capital requirements going forward, ultimately allowing us to redeploy resources towards higher-value opportunities. It's also very important to recognize that as a result of the strategic changes we've made, we plan to redeploy associated capital into core areas of our business that deliver stronger and more consistent returns. Mike will share additional details on the proceeds from the exits as well as related one-time charges. Overall, we are making meaningful progress in optimizing our portfolio. The actions we've taken have simplified our business, reduced complexity and positioned our land segment for more consistent and predictable performance. Our strategy is now very clear, build a more focused and efficient company that delivers stronger longer-term returns as we continue strengthening our core businesses through 2026 and beyond. Let me now quickly turn to a summary of our fourth quarter results. Overall, our performance fell short of where we expected it to be for a couple of reasons. While aviation results were up year-over-year, benefiting from the Universal acquisition, margins in our core fuels business were impacted by a somewhat more competitive market environment during the quarter. In addition, weaker land performance was driven principally by underperformance in the lower return lines of business we are in the process of exiting as part of our broader portfolio repositioning. The good news is that our core business in land, cardlock, retail and natural gas performed generally as expected during the fourth quarter. Mike will provide additional details during his prepared remarks. While our fourth quarter and full year '25 results fell a bit short of expectations, the strategic actions we are taking, particularly within our land business, represent a meaningful operational transformation and an inflection point for our business. It is important to note that a portfolio transformation like this doesn't happen overnight. While much of our attention in 2025 is focused on our strategic repositioning, the majority of the work is now largely behind us. Our 2026 outlook reflects our strong conviction that the structural changes in place reduce competing priorities, thereby simplifying the business, enabling greater focus on growth in our core businesses and positioning us for more consistent performance as we move through the year. With that, I'll now pass the call over to Mike for his first inaugural review of our financial results.

Jose-Miguel Tejada, CFO

Thank you, Ira, and good afternoon, everyone. I am grateful to be here today for my first earnings call as CFO during a significant transition for the company. I've collaborated with Ira and our leadership team for many years. Now, my focus is on providing greater transparency about our performance and a clear outlook on long-term value creation. Before we review our results, I want to briefly discuss our use of non-GAAP measures. Based on Ira's comments, 2025 was a pivotal year for World Kinect. Throughout the year, we intentionally reshaped our portfolio by moving away from noncore and underperforming activities and concentrating on businesses that offer improved operating leverage, cash flow, and returns on capital. Consequently, our GAAP results this quarter reflect the additional steps we've taken to enhance the quality and sustainability of our future earnings. Reconciliations can be found on our Investor Relations website and in today's webcast materials. Total non-GAAP adjustments in the fourth quarter were $325 million, or $296 million after tax. The most significant adjustment was $247 million in noncash intangible and other asset impairments, mainly from our land segment. These impairments were primarily due to our choice to exit businesses that did not meet our return thresholds or align with our long-term strategy. We also reported an additional $77 million in restructuring and exit-related charges during the quarter, mainly associated with these land exits and broader transformation initiatives we've discussed before. While most of the financial impact from our portfolio repositioning is behind us, we anticipate some remaining nonrecurring exit-related costs in the first half of 2026 as we finalize the remaining transactions and activities wind down. Importantly, these actions largely complete the repositioning of the land portfolio that began in late 2024, positioning us in 2026 with stronger earnings and better visibility. Now, let's look at our operating results, excluding these non-GAAP adjustments. On a consolidated basis, our fourth quarter volume was 4.2 billion gallons, a 5% decline from the previous year. For the full year, volume was 16.9 billion gallons, down about 4%. Our fourth quarter gross profit was $235 million, which is a 9% decrease year-over-year and slightly below guidance, primarily due to lower profit contributions from our land business. For the entire year, consolidated gross profit totaled $948 million, an 8% drop from 2024, reflecting year-over-year declines in marine and land gross profits of 21% and 22%, respectively, partly offset by strong growth in aviation. Now, let's go through each segment for more detail on the quarter and the full year. In Aviation, fourth quarter volumes were 1.8 billion gallons, down 5% year-over-year, reflecting a more disciplined approach to achieving appropriate return levels. Full year aviation volume was 7.1 billion gallons, slightly lower than the previous year. Despite the reduced volumes, fourth quarter aviation gross profit rose about 8% year-over-year to $130 million, mainly due to the profit contribution from the Universal Trip Support acquisition completed in November. Overall, however, our core fuel business results were a bit weaker than expected, affected by increased competitive pressure impacting our margin, as we had been running above Historical averages for much of the year. For the full year, aviation gross profit amounted to $526 million, also an 8% increase year-over-year. Looking ahead to 2026, we expect first quarter aviation gross profit to rise year-over-year, thanks to the benefits from our Trip Support acquisition and ongoing organic growth internationally, which we believe will offset continued competitive pressure. Aviation remains a key part of our portfolio, supported by a robust global network and expanding service capabilities. In terms of Land, fourth quarter volumes dropped 9% year-over-year, and for the full year, land volumes totaled 5.6 billion gallons, down 8%. These declines were primarily driven by exit activities, as we intentionally reduced exposure and exited underperforming and noncore businesses. Fourth quarter land gross profit was $71 million, a 32% decrease year-over-year and slightly below expectations, primarily due to unfavorable market conditions affecting certain noncore businesses and the immediate effects of our strategic exits. For the full year, land gross profit was $298 million, a 22% drop, largely due to unfavorable market conditions in our European power business and parts of our North American liquid fuels business. Additionally, as part of our exit activities, we recently agreed to sell our North American tank wagon delivery and lubricants businesses. While we recorded associated noncash impairment charges of $85 million in the fourth quarter, we expect this transaction, when finalized, to return approximately $100 million of capital through sales proceeds and working capital recovery. Going forward, our land focus will be primarily in North America, concentrating on three core areas: cardlock, retail, and natural gas. This adjusted business model currently reflects 5 billion gallon equivalents, with $2 billion coming from natural gas, a high-volume but lower-margin business. We anticipate some residual nonrecurring exit-related activities continuing into the first half of 2026 as we focus on completing remaining exits and assisting our customers during this transition. While we expect year-over-year decreases in full year volumes and gross profit for our refocused land business, we also forecast a substantial increase in adjusted operating income, resulting from exiting underperforming land businesses and streamlining our cost structure. Notably, our operating margin in the land business should significantly increase and align more closely with our target of 30%. In Marine, fourth quarter volumes were approximately 4.1 million metric tons, flat year-over-year, while full year volumes saw a 5% decline. Fourth quarter marine gross profit grew 2% year-over-year to $35 million due to strong performance in specific physical locations, though full year gross profit fell 21% due to a sustained low fuel price and market volatility. Despite these challenges, Marine is positioned to deliver attractive returns with minimal capital investment and will be well-placed for when market conditions improve. As we approach the first quarter, we expect consolidated gross profit to decrease from the prior year and sequentially, primarily due to exit activities in the land segment. Regarding operating expenses, adjusted operating expenses in the fourth quarter reached $186 million, down 6% year-over-year, largely due to reduced incentive compensation and the exit of certain businesses in our Land segment. For the year, adjusted operating expenses fell about 7% to $718 million, reflecting not just performance-related compensation effects but also our ongoing commitment to efficiency. Moving forward, we expect continued benefits from the strategic repositioning of the Land segment and ongoing investment in our platforms to enhance customer experience and operational efficiencies. Additionally, we aim to improve operating leverage using advanced analytics and AI tools. For the first quarter of 2026, we expect operating expenses to decline compared to the prior year and sequentially when accounting for residual exit-related activities, driven mainly by a better cost base in land and our restructuring efforts. These benefits will be partly offset by additional operating expenses linked to our Universal Trip Support acquisition. Net interest expense for the fourth quarter was $26 million, in line with estimates. During this quarter, we amended and extended our $2 billion senior unsecured credit facility to November 2030 with a one-year extension option. This improved facility enhances our pricing and flexibility, reinforcing our strong liquidity position as we execute our strategy. Our adjusted effective tax rate for the quarter was 29%, resulting in an adjusted effective tax rate of 20% for the year, consistent with our guidance. Before addressing cash flow, I'd like to mention a crucial change in how we will provide financial guidance this year. In 2026, we will continue giving insights into anticipated quarterly segment performance while transitioning to provide full year adjusted EPS guidance. We believe this approach better reflects our business management practices, accounts for seasonality and market fluctuations, and offers investors a clearer framework for evaluating our performance. Given everything we have discussed and the market conditions and changes referenced in the fourth quarter, we expect first quarter EPS to decline compared to the previous year and remain relatively steady sequentially. However, we anticipate adjusted EPS for the full year 2026 to be between $2.20 and $2.40, indicating strong year-over-year growth and the benefits of our portfolio actions and disciplined execution. Regarding cash flow and capital allocation, in the fourth quarter, we generated $34 million of operating cash flow and $13 million of free cash flow. For the full year, operating cash flow was $293 million, slightly exceeding our expectations, while free cash flow was $227 million, surpassing our annual targets. Combining this with 2024, we generated $419 million of free cash flow, exceeding our long-term goals. Strong cash generation allowed us to return capital to our shareholders. In the fourth quarter, we repurchased $40 million of shares, bringing full year repurchases to $85 million. Total capital return through dividends and buybacks in 2025 was $126 million. Additionally, our Board has recently approved a $150 million increase in share repurchase authorization. After year-end, we executed another $75 million in share repurchases, demonstrating our confidence in the business and our disciplined capital allocation approach. As we look ahead, I would like to emphasize a few key points. Aviation is the cornerstone of our portfolio, achieving strong results in 2025 while broadening our international reach and service offerings. Though we anticipate increased competitive pressures compared to 2025, the core business remains robust and is positioned for sustainable growth. The Land segment made significant strides in 2025, simplifying its portfolio, resetting the earnings base, and enhancing long-term return potential. We foresee ongoing improvements throughout 2026 with stronger operating margins and a notable rise in operating income. Marine continues to show resilience, generating solid baseline returns and offering considerable upside when market conditions stabilize. Financial discipline is central to our operations, from cost management to capital allocation. Most importantly, we enter 2026 with a simpler and more focused World Kinect, clear priorities, and improved visibility into earnings growth. Our future focus will be on disciplined execution, strong cash flow generation, and continued progress toward our long-term margin and return objectives. As we operate a more streamlined portfolio, we will strive to enhance the transparency of our business model and our expectations at both the segment and consolidated levels. Now, I'll turn the call over to Latif for the Q&A session. Thank you.

Operator, Operator

Our first question comes from Ken Hoexter of Bank of America.

Ken Hoexter, Analyst

Ira, Mike, and John, welcome to everyone in new positions. It's great to hear you're simplifying the business and providing clarity. Ira, could you start by discussing the acquisition of Universal Trip? Please share details about revenue scale and operational income volumes. Additionally, regarding the sale of the tank wagon business, could you explain the expected impact on volumes and revenues as we move into the second half? Let's kick that off.

Ira Birns, CEO

Good to hear your voice, Ken. Thanks for the questions, and thanks for being here. Starting with Universal, keep in mind that it's a service business, so there's no volume, and the approximate gross profit for that business, which I believe we shared when we closed the deal, is about $70 million. We had a couple of months in 2025 because we closed at the beginning of November. Therefore, year-over-year won't necessarily reflect the full $70 million, but the actual impact on 2026 will be around $70 million. Regarding the exits, I'll let Mike provide a high-level overview on that.

Jose-Miguel Tejada, CFO

Yes. I mean we're shedding about 1 billion gallons worth of volume between all our exits. Related to the Diesel Direct transaction, that we're receiving about $100 million between cash proceeds and return of working capital. So we should be in a pretty good position. We did take some noncash impairment-related charges in the fourth quarter, but we are much better positioned for the go forward. In terms of profit contribution, everything, I think these exits in totality are positioning us much better going forward, and we will obviously exceed expectations as we move forward.

Ira Birns, CEO

Yes. So Ken, just to follow up. So the exits in totality, right, power, energy management and sustainability services in Europe and then the piece that Mike just talked about, unfortunately, they weren't really delivering much of anything in terms of operating profit, they were tying up capital. They involve more capital investment if we really wanted to have a chance to grow those businesses in a meaningful way. And we were just dedicating a lot of attention to those areas, which I would generally define as noncore. So it made a lot of sense to make the move. As Mike mentioned, it's got a bigger impact on volume than it does on profitability. It will bring back capital, increase our returns and most importantly, allow us to focus on the parts of that business that we've talked to you the most about over the years, right, retail and then more recently, cardlock after the Flyers acquisition. Those two pieces of the pie will become the cornerstone of that business, and that's where we think we have some real growth opportunities. We're already delivering solid margins and returns. And as I mentioned in my prepared remarks, there are some new opportunities in that space to enable us to pursue growth that we really hadn't thought about several years ago. It will be easier for us to explain that business to you. I know if you go back a few years, there were 15 different pieces of the pie. And now it will principally be three. There's a couple of smaller inconsequential pieces. But almost the entire business, once we're out of these activities that we're exiting, will be cardlock, retail and natural gas.

Ken Hoexter, Analyst

So Mike, in your presentation, you talked about changing to just annual guidance, staying away from quarterly. But before when you had the European business, there was always the big move of European land, right, the U.K. land. There was seasonality in the first quarter and fourth quarter. How should we think about it now as you exit these businesses? Is it going to be more ratable, more balanced? Is it something we won't see through 1Q, 2Q because of the pending sales and we'll see it in the back half? Maybe just as an initial thought, as you just give that annual guidance, how we should lay that out?

Jose-Miguel Tejada, CFO

Yes, Ken. For land, the seasonality aspect has somewhat diminished due to the recent U.K. land sale we had. Although the impact wasn't substantial, it did contribute to a further reduction in predictability. It will take some time to establish a consistent run rate in land moving forward. However, the overall seasonality situation in land has improved. The primary seasonality factor for the company now pertains to aviation, particularly with flight demand. That should offset the considerations for land.

Ira Birns, CEO

Yes. I'll add to what Mike said, Ken. One of the points you were hinting at is our longstanding discussion about heating oil in the U.K. In the absence of cold weather, we experienced fluctuations, and cold weather would lead to a seasonal increase in land. That aspect has changed. We now have natural gas, which has some seasonality, with higher sales in the winter than in the summer, although it's not as significant as the heating oil situation was. Additionally, aviation tends to have its strongest quarters in the second and third quarters. We still experience enough seasonality, starting with our weakest quarter of the year, building up in the second quarter. Generally, the third quarter has been our strongest period in aviation, which is the largest segment, and then we see a decline in the fourth quarter. This trend should continue despite the removal of some factors that previously contributed to seasonality.

Ken Hoexter, Analyst

Great. I have a couple more questions. Can you elaborate on the impact of managing your own fuel while working with independent operators who run the convenience stores? Also, it seems you anticipate more competitive pressure in aviation. Is this a new normal or a shift in business that is contributing to that increase?

Ira Birns, CEO

I'll start with the first question. The hybrid model is becoming more popular in the U.S. convenience store market. We remain committed to the model we've discussed for years, but we also see new opportunities for business growth that weren't as feasible with our previous distribution model. We can take an ownership stake or lease a site and position ourselves accordingly. Interestingly, this can actually lead to better cash flow since entering long-term arrangements often involves upfront incentive payments that we recoup over the length of the contract, unlike in the older model. We also own the fuel, allowing us to achieve a higher margin. This model offers good cash flow, but it might not significantly increase our working capital due to solid credit terms in that area of our business. It opens up avenues for growth that we haven't explored much in the past. We're carefully assessing the assets to ensure the economics are sound and that we achieve the desired returns. We have already launched several locations under this model, and the initial results are promising. Regarding aviation, while I wouldn't exactly call it a new normal, we may be experiencing a temporary new status quo. We're continuing to see similar trends this quarter. The margins remain strong, and there are also emerging opportunities to expand to new locations that could help mitigate some margin pressures from competition. Our team is actively searching for airport locations to add to our portfolio, which would boost volume. I believe there are still many opportunities ahead, but I can't predict whether our fourth-quarter experience will be the same in Q1 and Q2. Currently, we are seeing similar trends, and we'll monitor developments as the year unfolds. Typically, a significant portion of aviation contracts renew around mid-year. As we navigate this process, similar to an RFP process for contracts going from mid-2026 into 2027, we will have more clarity on our margin outlook once those negotiations are finalized. There are plenty of opportunities out there, but we want to cautiously acknowledge that competitive pressures exist.

Ken Hoexter, Analyst

All right. And if you'll indulge me, I'll toss one more and just to wrap it up. But the marine business, I think you talked about waiting for a rebound. Is that incumbent upon shipping volumes? Is it trade lanes? Given the dynamic and changes in the container market right now, what are you looking for on a rebound there?

Ira Birns, CEO

Thanks for your questions, Ken. I appreciate it. Regarding the Marine business, the situation remains consistent. There are always macro factors that could be beneficial. Historically, the main macro factors impacting our P&L in the Marine sector have been price and volatility. Currently, we are in a relatively low price and low volatility environment. I would describe this business as stable, with opportunities to leverage changes in the right direction. Factors such as trade lanes could provide some assistance. Many elements could create opportunities in this area. However, the most significant influences have always been price and volatility, and we are still at the lower end of the historical price range. Therefore, we do not anticipate any significant changes in '26. If there are any, it would be an upside to our guidance.

Operator, Operator

I would now like to turn the conference back to Ira Birns for closing remarks. Sir?

Ira Birns, CEO

Thank you, Ken, for your questions, and thank you to everyone else for being here today. Although we've faced some challenges in recent years, I am genuinely excited and confident about our company's current direction, especially given the strategic changes we have implemented. As we have talked about, our business model is now simpler and more focused, which allows us to concentrate on our strengths and utilize our top-tier global platform to consistently provide fuel and related services across transportation and energy distribution markets. This industry is continually evolving, as are our customers' needs. World Kinect has consistently helped clients manage risk, volatility, and operational complexity with reliability and insight. With our streamlined portfolio and a renewed emphasis on disciplined execution, we are positioned better than ever to address these demands. Before we wrap up, I want to express my gratitude to all our employees worldwide for their dedication and support, especially during a year of significant change. Their focus, professionalism, and commitment are fundamental to our success. We look forward to keeping you updated on our journey as this important year continues. Thank you once again for joining us, and we will see you in April. Have a great day.

Operator, Operator

This concludes today's conference call. Thank you for participating, and you may now disconnect.