All right. Appreciate everybody coming to this afternoon's fireside chat for World Kinect WKC. World Kinect was here last year under a different name; we'll get to that. Ira Birns, CFO. We'll have some questions from the audience towards the end of the half hour. So Ira, maybe let's just start with that kind of bit of history that I referenced. The company rebranded in the past year; just kind of talk about what's changed.
Well, look, we're, we're still selling a lot of fuel around the world, but we're beginning to do more things for our customers and even new customers beyond liquid fuel. So, symbolically, while in parts of our business we still use, you know, World Fuel as a, you know, business units that are, that are delivering fuel, we, we wanted a name that was more representative of the longer-term story going forward, a little bit of a play on words where we're connecting our customers with their futures in terms of their sustainability initiatives and, and energy transitions. We've, we've been using that name in that part of our business for several years, so it was just a natural to adopt that name more broadly going, going forward.
Okay. So we'll, let's start with the core business of, you know, conventional petroleum fuel, and aviation is most, you know, the largest slice of your sales mix. How has, just sort of zooming out, how's that recovered with everything that's gone on, you know, obviously COVID, post-COVID, and all of the macro issues? I mean, that seems like that slice of the pie is doing quite well.
It is. I mean, that business is fantastic. We had an absolutely fabulous year, I would say, in 2023. If you go back to COVID, you know, part of your question, obviously passenger activity disappeared for a while, no surprise to anyone. None of us were going anywhere near an airport. But there were a lot of folks going to airports that were pilots of cargo aircraft or delivering cargo to the airplane. That business, that part of the business did phenomenally well for obvious reasons, I would assume, during COVID. What's happened over the last, you know, year or two is aviation passenger activity has continued to recover. It's fully recovered from where it was pre-COVID, and actually exceeded—in certain areas exceeded pre-COVID levels everywhere but many parts of Asia and some pockets in Europe, like Scandinavia.
But the rest of the world is back, for all of those of us that now have gone back to airports. I don't know the last time you walked through an airport that wasn't ridiculously crowded with long lines at every gate, and at all the food courts. So, those, you know, those two have flip-flopped a bit, but of course, net-net, better position for us because we do a whole lot more on the passenger side than on the cargo side. And then on the business aviation part of the business where we're fueling and providing services to smaller aircraft, that business actually recovered first from COVID, is when people dared go back on an airplane if they had the means.
They were much happier not having to go to the regular airport and getting on a private aircraft that had a lot less restriction, more security, etc., and that business has done really well. We had actually bought a business called UVair. We're gonna talk a little bit more about that next week at our Investor Day event in New York City, literally, you know, not to be cute, you know, 20 minutes before the official start of COVID. So, we closed that deal. A couple weeks later, everything got shut down and it was generating, you know, literally zero revenue. But fast forward, you know, a few years, that business has been performing phenomenally well, along with the rest of that part.
As you can imagine, we're providing more than just fuel in that space because there's more of a thirst for services where a large commercial airline will manage a lot of those services themselves. So that, that's really come on strong. We've seen a bit of weakness beginning in the second half of 2023 into the early part of this year on the charter side. I think that space really overexpanded. There were a lot of deals in that space and, there's a limit to the size of that audience. But aside from that, you know, the overall landscape has shifted for us from pre-COVID to today. We had a large military contract pre-COVID that was principally benefiting our aviation business that obviously disappeared when the troops left Afghanistan.
But ironically or interestingly enough, if you look at our margins today, our margins are even a little bit stronger than where they were when we had that business because we have a much greater mix of higher margin, lower cost, higher return, smaller aircraft type business. And then there's our, you know, one last piece, Pavel, our growth that we've seen in our what we call our operated locations, which are mainly in Europe, where we're the guy at the airport fueling the airplane, which is not something we do everywhere. But if you take an airport that I mentioned, you know, earlier today with Elsa, like, like a Nice, we have the little fueling trucks and the storage and the employees at the airport, we're doing the fuelings.
So there's a bit more of infrastructure cost, although that's fairly minimal from my perspective, but much higher margin than when we're the reseller at an airport. That business also died during COVID, but Europe's taken off, especially, you know, last summer, last spring, you know, to date. That market's been really hot and we performed exceptionally well, and had very, very strong growth year-over-year in 2023, in that part of our business. So, you know, aviation is a great business for us. We've had a lot of experience. Our margins are really strong in that business because we're able to optimize our footprint over time and just the, you know, phenomenal team effort around the world in that space.
Great detail on aviation. I appreciate that. Let's talk about marine. Not as rosy a picture, right? Volumes were down double digits in 2023 in that segment. It almost felt like marine's in a recession even though the global economy is not in a recession. So why the disconnect there?
You know, a lot, a lot of reasons. You gotta, you know, the components of the business that we're most familiar with that we play in are, you know, container, tanker, and cruise. So there's a lot of interplays there between the impact of rates on activity. So rates go through the roof, activity gets squeezed.
You're talking interest rates?
I'm talking tanker rates as an example.
Tanker rates as an example. Sorry.
Yeah. Interest rates are another factor that I'll get to. That's more personal to our business. So, you know, you've had the impacts of rates that have gone up, gone down, gone sideways. Container space has gotten a little weaker with less product coming out of China as an example, as that activity's moderated a bit. So, there've been, you know, a lot of factors that affected the macro market. The one shining star in that part of our business is cruise that have come roaring back. A lot of new product coming online in 2024. If any of you try to book a cruise, it's almost impossible to find a cabin, even with more ships.
The largest ship of the world just pulled into Port Miami several weeks ago, you know, the Icon of the Seas in the Royal Caribbean family. So that, you know, that's been really strong. If you look at our volume as compared to some of the macro, you know, industry numbers, some of that stunted growth or drop-off that you described is purposeful. Meaning, in this interest rate environment, we're not looking to grab more volume for the sake of bragging about grabbing more volume. It's all about trying to optimize the best possible outcome from a return and profitability standpoint. So we've raised our internal hurdle rates, which means there are certain pieces of business that just don't make any sense to us in this interest rate environment. So that's contributed to our lack of growth story in marine.
Now, as I think we predicted in the third quarter, I think we got through pretty much all of that cleansing by the end of September, and therefore we actually saw a volume increase, reasonably. In the fourth quarter, I think we'll see a little more growth in 2024, because now it's, you know, back to business and not worrying about the business you wanna give up and focusing 110% of your energy on the business that you're trying to pick up. Some of our physical locations have been improving a bit. We don't have many, but there is a piece of the marine business that's more physical. Algeciras location's been upgraded, you know, dramatically. That's a shining star for us in Europe. We've invested some money there and that's certainly gonna drive more throughput.
It's not gonna be a high growth story. The way I would describe marine, marine is a business that uses next to no capital. So our net working capital in marine at the end of 2023 was negative. So it's not competing with aviation or we'll get to land next, or it's not competing with either one of those for capital. We've got a healthy margin profile, the average operating margin, the way we define it over the last five years in that business is 42%. So it's always gonna throw off cash. In some years that may not be a huge number, but in a year like 2022 when there was a ridiculous amount of volatility, even though we weren't growing volumes, our profitability multiplied fourfold from 2021 and we generated a lot of cash in that business.
So I call that, you know, bonus EBITDA, if you will, right? When there's high volatility and prices are going through the roof, the one business that certainly benefits, is marine, again, even without the benefit of volume. I think you maybe want to talk about the Red Sea a little bit as well.
Yes. So this is probably more of a just kind of interesting anecdote, you know, than a kind of huge profit driver. But you referenced this on the earnings call, you know, a few weeks ago. You know, I think a lot of our audience is aware of what's been happening with the Houthi rebels in Yemen, attacking ships in the Red Sea, all kinds of disruptions to marine traffic through the Suez Canal. So what is World Kinect's solution to all of that?
Well, like, you know, this whole situation is, you know, driven up rates and, and, you know, increased, you know, voyage times, right? Because you've gotta take, you can't use Waze to get from point A to point B most efficiently. You're, you're traveling much longer distances to avoid the craziness, you know, in the Red Sea. There was another ship that got hit yesterday, on top of the, you know, the fertilizer ship that, that just started sinking the other day. You know, where do we come into play? We're, we're a fuel provider to many of these shipping companies that may be passing through regions like that. We're, we're not just the provider. We're also a thought partner. So, you know, what do I mean by that?
Fueling a marine is interesting because each individual fueling is a lot of money compared to fueling an aircraft, right? It's exponentially more 'cause the amount of fuel those ships could take on. So there, we're always a resource to come to for not only the best price, but where do I fuel, which contributes to the price factor. But there's also an efficiency issue, right? Every port has different port fee structures. Every port has different waiting times. And if you're chartering a vessel, that's a considerable amount of money on a daily basis. If you gotta wait around two days to get fuel, that's an inefficiency that you wanna avoid. So the Red Sea situation is a great example of where someone may turn to us to help think through, okay, now I've gotta take an alternative route.
What's my how do I optimize my fuelings along the way with all those factors considered? And considering our global presence in marine, you know, we've got all that data at our fingertips. We could help you find the best price at the most effi sometimes maybe the second best price, but the port fees are a lot lower. You're gonna get out of there in, you know, 24 hours as opposed to 72. So we become even a little more valuable as a partner in a scenario like that when people are navigating not the unknown, but the unusual, right? It's a change and they haven't kinda thought about it in a long time. And, you know, I haven't visited that port in four years. Can I still get fuel there? Is a ship gonna fit? Are there berths available?
that's, you know, that's what we do for a living, right? We have all that information. So it's a singular example of what we could do for folks regardless of whether there's a conflict in a region or whether they're just trying to optimize in the ordinary course.
Okay. So we'll turn to ground. I mean, I think to a lot of people, fuels for ground transport are what we just think of on a, you know, daily basis, right? And given the role of kind of branded distributors, you know, the Valero and Murphy and Casey's, etc., in that space, can you just kind of compare and contrast what World Kinect's role is versus the retail distributors that, that people are familiar with?
Yeah. So you're probably more familiar with someone that owns and operates, you know, fueling stations like, you know, like a C-store examples that you shared, right? What we do more of, so one big part of what we do in land is if you own and operate 20 branded Exxon stations, you need to buy fuel from an Exxon branded distributor. Exxon's not gonna deliver the fuel to you directly. They appoint two or three, in most cases, branded distributors in a region depending upon the size of the market. You have to buy fuel from one of those providers. One of them is us for all the majors, not just BP, but Shell and P66 and Exxon, the list goes on. And those contracts, interestingly enough, are of a very long-term variety.
So some of them are, most of them are seven and 10 years. That's a long story in its own right. But once, once you negotiate that relationship, you're, you're partners for, for a very, very long time. So we're, we're providing fuel to the operator. The operator's selling the fuel. We're, we're just making a margin for making sure their tanks are full so they could run their business and optimize. That's been there forever. That's where we started in, in on the ground. We've grown that to, you know, thousands of locations being serviced. Over the years, we actually picked up some C-stores that we owned that was never deemed to be our core like it is for some of the other publicly traded players you mentioned. And we've, we've just we've sold those off and, you know, we don't own and operate, you know, any stations.
I think we have one in Gibraltar, but that's about it. So, along those lines, one of the things that's changed quite a bit in the last 24, you know, 30 months is through the acquisition of Flyers on, on the West Coast, there's another type of fueling station that's designed specifically for commercial traffic. And they're effective; they're called card locks for those of you that may not be familiar. They're unattended fueling stations where a trucking fleet is gonna direct their drivers. They give them a card. You can't pull out your Amex or Visa and drive up there with your car. You're not gonna be able to take on fuel. It's an efficiency tool for them. They're getting you know, the pricing that they're getting; in many cases, they're getting monthly billing with details.
It helps them manage their and analyze their spend as opposed to, you know, culling through an Amex bill. And so the scenario there is we're like Casey's except we're the unmanned Casey's, right? Because we don't have to hire people. We don't have a car wash. We don't have to sell cigarettes and beer and potato chips. It's just fuel. It's a faster in and out for the trucks. We make it a network available to them so they know all the locations they could visit within our network, try to match our network to a likely customer. Obviously or maybe not obviously, it's a much higher unit margin for us than delivering fuel to a convenience store that's making the sale themselves because we're basically playing that role.
It's a very low-cost operating model because you don't need any employees to operate it. It's all operated electronically. Tank replenishment, security. If a pump at a station that's used every six minutes on a given day has no activity for 15 minutes, there's an alert to someone to check to make sure that the pump is operational. If there's any doubt, someone's dispatched to make sure there isn't a problem. So it's all managed remotely.
If you make an acquisition in that space, which we did recently on a small scale, it's the simplest integration imaginable because you're just taking those new card lock locations, putting them on your network, just gotta make sure that you're keeping the tanks full and the customers come and you're, you know, you're generating more profitability with literally zero incremental expense or close to zero. That's a big part of what we're doing in land. That's where the customers are coming to get fuel either from our C-store customer or from ourselves at a card lock. The rest of the business is where we're delivering fuel to the customer using our own fleet or third parties depending on the market, mostly commercial and industrial customers of all different shapes and sizes.
Could be a construction site, a farm, a factory, a yard where Budweiser has, you know, 85 trucks that all need to be fueled overnight. So that's another part of that business. Unlike aviation and marine, that business for us is still principally U.S.-focused. We have a very small business in Brazil and we have a business in the U.K. that has that commercial industrial flavor to it, but also has a heavy tilt towards heating oil, which is our only business anywhere there's one small exception to that. It's our one of our only two businesses in the world where we actually have, you know, a B2C component because that heating oil is going to homes, homeowners, as well. The only other place we have a little bit of that is in Ohio. So that's pretty much the land business.
Aviation and marine have 10%-ish market share globally. Our land business is less than 2% market share in the United States and zero, rounded anywhere else in the world. So the opportunity set there is unlimited. Obviously, we have to make the right decisions in terms of what markets we're going after, what margin profiles we're looking at. The Flyers cardlock business has helped move our average unit margin up 20-some-odd%, to over $0.07 a gallon from what had been historically $0.05 because we've mixed in a much higher-margin business and it's helping us move our operating margins in the right direction as well. So, that business has the most work we have the most work cut out for us to get that business to where it needs to be, but it also means it's the greatest opportunity for us over the next few years.
Before we go to Q & A, I just wanna touch on sustainability. I know this is gonna be a big topic at the Analyst Day.
Huge.
next week. So maybe just to whet people's appetites, when you sell a gallon of renewable diesel versus fossil diesel or sustainable aviation fuel versus fossil jet fuel, do you make more money?
Today, yes. So you have the issue of scarcity of supply, slightly less scarcity of demand, meaning there's not a tremendous amount of demand, but where there is demand, the customer knows how difficult it is to get their hands on the fuel because not much is being produced anywhere in the world today. So in that current, you know, macroeconomic setting, you're achieving a much higher margin. It's, you know, economics more than anything else, right? So we're not selling much, but we're, you know, we're making a reasonable amount of money on a very small amount of volume just because the margin is so much higher. The question is, how does that become a bigger number in terms of net revenue contribution? You need more supply.
Ultimately, when supply and I don't know when that's gonna be becomes way more plentiful, that margin differential's gonna start declining rapidly. But we're nowhere near that. So for now, it's trying to, you know, maximize opportunities. We, we landed a, a new customer recently, that's procuring a, a reasonable amount of that, that product that's adding that added some real, you know, gross profit for us in the fourth quarter that will contribute this year as well. But it's onesie, twosies, not tens, twenties, hundreds of stories like that. But that'll develop over time. We, we sell more renewable diesel on the West Coast. That margin differential's smaller because there is more product available, but it-it's also, you know, a higher margin in the short term. So all those things will normalize over time.
SAF will take a really long time to normalize because I don't see supply increasing dramatically. I don't think Pavel does either anytime soon. Something like renewable diesel, you know, will get to parity a lot faster because, there, there's you know, there's clearly more opportunities for, you know, more rapid growth in supply with all the majors starting to focus on producing as much of that as they can.
Time for a few questions. Questions? Got one here from.
Yeah. Just wanna touch on your thoughts around M&A, especially as it relates to kind of overseeing that overall effectiveness?
Well, if you wanna start there, that's the most complicated, right? So we're providing, in addition to things that we just talked about like SAF and renewable diesel, if you put that to the side, right, we've got a growing suite of products and services focused on our customers, our historical fuel customers and a new suite of customers as well as they're evolving as their energy needs are evolving and they're thinking about how they drive sustainability efforts in their shops, they have different needs. They have growing needs, right?
So we're trying to figure out where we best fit and where we could add the most value and where we have the right to win because in many of those areas, we have a lot of comp kind of newborn competition 'cause everyone wants to be in this game, right? So we've been growing it organically. We've made a couple of acquisitions over the years that have contributed, including a business called Bergen in Norway that we bought, you know, 10 years ago. That's contributed to the growth in our power business as an example. So we're offering a lot of what we call energy management services, renewable energy solutions, looking to invest, to your point in M&A. The cool thing, the glass half full, as Pavel knows, there's hundreds, if not thousands, of opportunities to look at.
If you wanna look at the opportunities that are actually making money, hundreds to thousands, you know, two hands, right? It drops down to a really small number. Probably a little more than two hands, maybe four hands. So you got to be really careful and 'cause we don't have a massive balance sheet, right? So, I think the valuations have peaked. They've come down slightly in some cases, not all cases. So it's a bit of a needle in a haystack of trying to find what we think makes sense at the right valuation, where we think it'll drive some accelerated growth for us, build that story. We have a seasoned corp dev team that only focuses on that space. They came out of one of the investment banks that were where they were doing sustainability-related deals.
That's all, us women, you know, Jo and her team focus on. You know, there's a pipeline, but it's not gonna develop overnight. A, because we're inherently conservative. B, 'cause we're inherently cheap. We're trying to, you know, find the right opportunity, the right value. That'll take time. We'll, we'll find, I believe, more opportunities over the next couple of years as valuations come down to earth and we develop a greater common understanding internally of where we really think the right investment should be.
All right. We will have a breakout session downstairs right after this. Ira, thank you very much.
Thanks, everybody. Appreciate it.