Ladies and gentlemen, thank you for standing by, and welcome to the World Fuel Services 2019 Third Quarter Earnings Conference Call. My name is Kevin, and I will be coordinating all this evening. [Operator Instructions]. As a reminder, this conference is being recorded. 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, Kevin. Good evening, everyone, and welcome to the World Fuel Services Third Quarter 2019 Earnings Conference Call. I'm Glenn Klevitz, and I'll be doing the introductions on this evening's call alongside our live slide presentation. This call is also available via webcast. To access this webcast or future webcasts, please visit the World Fuel Services 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 I get started, I'd 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'll 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.

Good evening, everyone. Actually, for me, it's good morning as I'm calling in from Singapore, where I am attending the Global Maritime Forum Annual Summit. This summit is a gathering of marine industry leaders who have come together to discuss challenges facing the maritime industry and exploring how the industry can drive positive change for business and society. This year's summit is especially timely, considering the significant changes on the horizon as the marine markets prepare for IMO 2020, which is now only 2 months away, as well as the sustainability goals being set for 2030 and 2050. Moving on to our third quarter results, our global team executed extremely well, which drove very strong operating results in the third quarter, significantly ahead of our results in the third quarter of last year. This is evidence that our heightened focus on driving organic growth while remaining focused on costs and returns is paying off. Our aviation segment again delivered strong results, driven principally by growth in profitability from our government operations in Afghanistan. Our core commercial business also delivered solid results in its seasonally strongest quarter, while our business aviation activity also remained strong. Our business aviation operations will be further bolstered by the addition of the recently-announced UVair acquisition, which we now expect to close in early 2020. Getting back to Marine, our Marine segment generated strongest results in nearly 5 years, driven by seasonality and a tight high sulfur fuel oil market in Singapore, which was generally the result of supply disruptions caused by the oilfield attacks in Saudi Arabia. While these conditions seem to be moderating, the potential for market volatility and rising prices for low sulfur fuel oil, which will become the principal fuel used by the shipping industry come January, could provide similar profit opportunities…

Thank you, Mike. Good morning to you, and good evening to everyone else on today's call or webcast. We delivered solid financial results in the third quarter, as Mike's already mentioned. Benefiting from our core strategies of organic growth, continuous cost management, and sharpening our portfolio to drive enhanced returns. before I get into the details, let me share some highlights with you. Adjusted EBITDA for the third quarter was $118 million. That's an increase of $13 million, or 13% compared to last year. We have now delivered year-over-year increases in adjusted EBITDA for 10 consecutive quarters, and our trailing 12-month adjusted EBITDA has increased to a record $4.1 million. Adjusted earnings per share for the quarter was $0.77, an increase of 22% compared to the third quarter of last year. And lastly, our balance sheet remains strong, aided by $33 million of operating cash flow during the quarter. Consolidated revenue for the third quarter was $9.3 million. That's down 11% compared to the third quarter of 2018. This year-over-year decrease in revenue was principally driven by the decline in volumes in our Marine segment as well as a 19% year-over-year decline in average fuel prices. Our Aviation segment volume was 2.2 billion gallons in the third quarter, an increase of 4% year-over-year and 1% sequentially. Volume in our Marine segment for the third quarter was 5.5 million metric tons, which is down 400,000 tons, or 8% compared to the third quarter of last year, but up 400,000 tons sequentially. The sequential volume increase principally related to increased demand in Asia, driven by recent market volatility. Our Land segment volume was 1.35 billion gallons, or gallon equivalents, during the third quarter. That's effectively flat year-over-year but up 2% sequentially. Total consolidated volume for the third quarter was 5 billion gallons,…

[Operator Instructions]. And our first question is from Kevin Sterling with Seaport Global Securities.

Obviously, your Marine business has shown quite the improvement this quarter. Can you tell, is any of that IMO 2020 related? I know you mentioned the drone strikes and the volatility that caused, and obviously you guys do well when there's chaos and volatility. But is there any way to parse that, like hey, we did get some benefit from IMO 2020?

Well, the comments that we shared, we wanted to get that out there because I know that that's on everybody's mind. To add a little bit of color, like you know, I'm calling from Singapore. So if there's any sort of funny noise, please let me know, any case. Does it sound okay?

Yes, you do, Mike.

Yes, you sound -- I can hear you [indiscernible].

All right, no problem. So, look, it was a combination of a number of different things. Certainly as we've said before, disruptions don't disrupt like they used to because you've got an over-supplied market. However, in this scenario, you had a confluence of issues that all occurred at about the same time. Refiners started to switch to producing low sulfur fuel. They're getting prepared for 2020. As you can imagine, owners and operators want to be buying high sulfur fuel for as long as possible in '19 before they switch over to the materially more expensive low sulfur fuel. So the drone strike limited a little bit of the -- well, more than a little bit of high sulfur heading to Singapore, and train flows are a little bit different these days. So all of that really occurred at the same time, creating a steeply [indiscernible] market, and you had a number of different folks scrambling for a few things. And we have a little bit of our own physical supply and our own inventory, and then, of course, our own risk management position. So all of those activities created more opportunity and value-add for us helping our clients find product. So what will happen on a go-forward basis remains to be seen. The price increasing is going to put pressure on credit lines. Our balance sheet is looking very healthy, and it's always been conservative. That's the number one, is balance sheet trumps almost everything that we do. And the credit I think is going to continue to be something that people are going to look to us for. Certainly, the quality is going to be an issue. We've got a deep technical group. That was really our point of differentiation years ago, where quality was the way that…

That was very helpful, appreciate that. If I could maybe -- I know you don't want to go on, but maybe I can ask another question around IMO 2020. And I get the idea of chaos and volatility, supply shocks, and if there's -- if you just don't have the fuel available, how you guys benefit from that. But if I think back 10 years ago during the Great Recession, and there was oil price volatility if I recall, more and more of your customers did hedging, and that's a benefit for you guys, too. And so, if we see price spikes, is it the thought that you may see more hedging opportunities from your customers? Customers come to you, look to do hedging. Am I thinking about that right, just trying to compare what may happen now versus when we saw significant price volatility?

Absolutely. No, you're right on the money, Kevin. We've got a sophisticated derivative practice. We've been doing it since 1988. And certainly it's something that we use for our own risk management, because we're managing a material amount of inventory and we don't take speculative positions. So there will definitely be I think opportunities for folks. You are going to see aberrations and symmetries in the marketplace, and many folks have done that already. And we think that there will be a greater opportunity for us to provide risk management services for folks who want to have more predictable pricing. So 100% we will be seeing that come back, and we're happy because we're pretty good at that. And so we will be seeing that as a bigger part of the next, without question.

And for my last question, just kind of a little housekeeping. And Ira, maybe this is for you. You talked about your bad debt expense spiking in the third quarter due to a carrier bankruptcy. Do you anticipate that level to come back down in Q4, or do you expect it to be elevated in Q4 or we may not see a return to more normalized levels in 2020?

Thanks for the question, Kevin. No, I would certainly hope and expect that that number would come back down to more normal levels in Q4. A big chunk of the Q3 piece related to one specific bankruptcy. We're not planning on any additional bankruptcies in Q4. We do our best job to avoid those when they do happen, but once in a while they kind of come out of nowhere. But with respect to your question in Q4, it's very likely that we would return to more normal levels. Just anything could happen. But based on what we know today, we would expect to be back to the $2 million, $3 million level, so to speak, that you're used to seeing in the past on a quarterly basis.

Your next question is from Ben Nolan with Stifel.

I do have a couple questions. The first is -- well, good quarter. Congratulations. On the Aviation side, the government side of the business you called out as something that was especially good in the quarter. Has there been any material change there? How are you thinking? And this is always one of those things that comes up seems like every year, or at least every so often that it's hard to say whether that government business is going to be repeated, or whatever, but here it is again being sort of a driver for the Aviation business. Any extra color that you might have around how you're thinking about that and what specifically benefited you in the quarter.

Yes, I'll start, Ben, and Mike may choose to chime in. I mean, nothing overly significant to report aside from the fact that that business has remained strong for us. Third quarter is generally the strongest season of activity in the region, Afghanistan in particular. This year was no exception. When you look at our year-over-year performance, a part of the improvement, or a big part of the improvement, actually, was driven by supply chain improvements over the course of the year. So we've been able to get better pricing, which has helped improve profitability. So we didn't see a significant change in volume year-over-year, but we generated more profitability. So the color is the same over the long-term. This is a contract that doesn't have any guaranteed minimum levels of activity. It's demand-based. We should report that I think last time we talked about this was a couple years ago when we renewed our contract, and we mentioned that margins were lower than they had been in the previous contract. We've since clawed some of that back with improved supply dynamics, but we've also just extended. So the 2 years are up in December, and if you remember, we had 3 1-year extensions to that contract. And we have now gotten the extension through the end of 2021 at a minimum. But as you put it, Ben, you just never know, right? So we have hundreds of people in Afghanistan doing a phenomenal job day in and day out. But we don't necessarily control the level of activity in any way. So as you look towards 2020, we hope another great year, but if there are troop withdrawals or any other type of material changes, that could impact that part of our business in the long run. I'm sorry, when I said the extension at the end, I'm a year ahead. Mike's a day ahead. I'm a year ahead. We got the extension through the end of 2020, and then there are additional extension possibilities under the contract for 2021 and 2022 down the road.

And I assume that some of the logistics benefit that you've been able to extract out, there's no reason to believe that those should not be replicable, going forward, right, that supply chain benefit is sticky?

It's a pretty volatile environment. There have been scenarios in the past of border closing and things like that that have caused us to bring in supply at less favorable terms. It hasn't happened in quite a while. But look, that's always a risk. We're not delivering fuel from Chicago [indiscernible], right? The fuel's going from Pakistan to Afghanistan. It's a little bit different. We're excellent at what we do, extremely complicated. But again, we don't control the overall volume of activity on a day-to-day basis. But no, in the short run, it's business as usual. Of course, due to the sensitive nature of the activity, we don't get a heads-up if demand requirements are going to come down all of a sudden. But we'll all know at around the same time when and if that happens. So, for now, we continue focusing on servicing that market very well, but also working really hard to grow the other parts of our business so that this piece of the business over time becomes a smaller part of our overall business worldwide.

The only color that I'll add, Ben, is I've said it before, but, first of all, we're very proud of the team. It's sophisticated logistics. It's very strategic. And we've had our Aviation logistics, our military petroleum logistics expertise has been instrumental in terms of expanding that to a number of different areas. So you'll see us with business continuity, emergency services, rapid response, any number of different capabilities. And as I've said before, it's akin to Formula racing for passenger car companies. So it really is beyond obviously the business activity itself. It is a very important and strategic part of what we do to what we've done and what we've leveraged, and the evolution from us being an underwriting and reselling company to a sophisticated global logistics partner for airlines, shipping companies, and our ground fuel clients around the world. So I just wanted to remind everybody and add that in, what that gives to us.

Switching gears a little bit for me to the balance sheet, noticed there was a little bit of an increase in inventories and a bigger increase in the other current assets line. I was curious if you guys are doing anything strategically there in terms of -- I don't know whether it's related to IMO 2020 and inventory building. I know that's happening by a number of people, or just more thematically carrying more inventory and how we should think about that. And maybe if you could give a little color on the bump in the other current asset line, as well.

Yes. On the inventory side, for starters, that number will move around quarter-over-quarter. And we have gotten a bit more physical in Aviation in particular post- the Exxon acquisition. But a lot of it, to be honest, is timing-related. Nothing substantially has changed in terms of our decisions on carrying, or it's something we don't necessarily carry inventory strategically. We carry inventory to support the book of business that we need to support. That mix between back-to-back and inventory will shift a little bit from time to time, but nothing really significant has changed in the past couple of quarters from an inventory perspective. It's a mix, a business mix and pricing dynamics from quarter to quarter. Other current assets, you've honestly stumped me. There's nothing significant that's in there. I believe it's simply a timing issue. But I could get back to you on that one.

And our last question comes from Ken Hoexter with Merrill Lynch.

Maybe let's hit the one part of the business you haven't hit yet, on Land. You had a big upturn in profits. You gave great detail on the Aviation and Marine. And you notice, Ira, Land was increased from commercial and industrial activity and Multi Service. Is that also seasonal acquisition benefits? Is something clicking here that's ramping up? I don't know whether it's station deliveries or the U.K. acquisition. And maybe just delve into Multi Service a bit more.

Sure. I'll start. Mike could add some color in terms of the qualitative. But in Land, look, we've got the two larger C&I commercial and industrial acquisitions we made 3 years ago. We got off to a slow start with one in particular. It's starting to catch up, and we've seen that business continue to grow. It's still smaller than we would like it to be, and that's where some of the strategic opportunities may come into play over the next several quarters. But we did see some uptick there. It's not Europe, as you mentioned. Europe -- remember, the summer is the weaker period for the European side of the Land business, so there's no significant movement there year-over-year. We hope to see a nice uptick sequentially in the fourth quarter if it's finally cold again in the U.K. in the winter. The Kinect business, which includes activity in both -- principally in the U.S. and Europe has continued to perform pretty nicely in the third quarter. The Nat Gas piece of that business -- remember, that's Nat Gas and Power -- had some relatively impressive growth as they continue building out the breadth of their customer relationships. So, there were pieces that did pretty well, and there were pieces that were relatively stable. We still need to achieve more operating leverage in land, and we're only going to achieve that with more organic growth combined with some strategic opportunities. We're very focused on capitalizing on. Multi Service continues to do really well. It's an impressive little business that continues to add customers, continues to drive efficiencies in its platform and has grown quite regularly now over the past several years. And again, they had another good quarter. They're converting on their pipeline of new opportunities. And our belief is that will continue indefinitely. Albeit a small piece of our overall business, it is certainly one of our growth drivers that we're very proud of.

I'll just jump in with a different one. Ira, on accounts receivable, just back on the balance sheet, seems like you've had a couple questions here. But you've made progress in different areas. You noted AR is down just because of the price of fuel. Is there anything to do in this environment, just given the economic backdrop, right, if things are weak, you had some bad debt? Is that something you look to rein in at all on a dollar basis? Or are you happy with levels you're at? Just wondering what your thoughts are I guess relative to the economy and what you usually do with your extension on day sales outstanding.

Yes. Day sales outstanding is not necessarily the issue. That's been very consistent. We have brought that down a little bit. But some of the things we've talked about, if you start with Marine as an example, some of that low-margin, higher-risk business, we've done a really good job in culling that. It wasn't necessarily a massive impact on accounts receivable. It was probably $50 million to $100 million over the last year. So we've lived through the high times and the low times in terms of the economic cycles. And we've always played a relatively conservative hand, if you will, in terms of managing the overall portfolio. And some cases, that means we've walked away from some margin opportunities because we thought the risk was too big. We've ramped up our credit insurance programs to mitigate against potential losses. But overall, I would say our portfolio is very healthy, probably healthier than it's been in a while. That doesn't mean that that eliminates the risk of what happened, for example, with one particular customer in the third quarter. So our team is doing a really nice job where issues are flagged. We're very quick to, at a minimum, ramp down the amount of credit we may provide for someone whose credit conditions have been negatively impacted for whatever reason. And so, I don't think there's any conscious effort to say we want to take that $2.7 billion down dramatically. It'll move up and down, as you noticed, based on fuel prices. That's a given. But we'll continue to monitor the portfolio day in and day out. And if there are more opportunities to exit lower margin business, especially in a low-margin business, or a low-return business that has significant amounts of working capital invested, receivables in particular, we're always going to do that. And I think we've gotten through a big chunk of that, I would say, so there's not a lot of that on the table today. So, if fuel prices didn't move over the next 6 months, I would expect our receivables balance would remain in a very tight zip code around that $2.7 billion number.

That's really helpful. And then, last from me, it's either Michael or Ira, I guess, just your thoughts on the competitive market. I mean, in the past, Mike, you mentioned OW earlier. Maybe just give an update on the state of your competitors, thoughts on your GP pricing in this rebound, or maybe just run through each segment what your thoughts are on the competitive positioning.

Well, I will make comments on some of the other stuff, but I'll answer this first. It's sort of interesting. We made our living in highly fragmented markets, and we created a certain amount of navigation. There was a good amount of availability. There was a lot tighter supply-demand equation. You've had a lot of location arbitrage. That certainly helped the derivative part of things. There's information arbitrage. But things have changed dramatically. When I look at World Fuel today and what it was 20, 30 years ago, what it was 5 years ago, the continuing transformation is quite extraordinary. And when you look at the marketplace, it's really no different. So, there's been a lot of consolidation on buyers and sellers. And we have thought of that as not necessarily beneficial, but we both have consolidated, and we've grown and we've scaled. It hasn't been always the smoothest road, but I think that's -- some part of the story is the fact that there's not that many companies that can actually scale. So, I think we've demonstrated our ability to scale and certainly protect the balance sheet. And you're seeing some progression. So volume's up sequentially in Land. It's up sequentially in Marine. And Aviation continues to tick, continue to penetrate, marketing gaining market share and grow faster than GDP. So I think those are all good indicators of the capability of the company. And we won't say the market's as competitive as it's ever been. You have credit card companies looking to get into healthcare and supply chain management. So there's a hell of a lot of convergence going on in the marketplace, and there's a good amount of convergence going on within World Fuel. So when you look at Land, Marine, and Aviation, you've got moving targets…

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

Well, thank you to all of our investors and analysts that have stayed with us and, importantly, to all the global World Fuel team. You guys are the best, and ladies and gentlemen, so thanks very much, and look forward to talking to everybody next quarter. Goodbye from Singapore.