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The fuel provider's CFO used a combination of good timing, conservative cash management, and a balance-sheet focus to avoid getting burned by rising oil prices and the falling economy last year.
Sarah Johnson, CFO.com | US
May 26, 2009
Ira Birns brought a treasurer mindset to the CFO post at World Fuel Services nearly two years ago. And since that time, he has managed to convince the fuel provider's global team to take what some may consider a contrarian view during this down economy. "We're not saying yes to every piece of business that comes along," says Birns. Moreover, the Miami-based company has risked some long-held customer relationships by renegotiating credit terms.
With those risks, however, have come rewards in the form of profits and freed-up cash in a liquidity-tight environment. Indeed, the company which generates $18.5 billion in revenues annually is sitting on $386 million in cash and improved its days working capital number to three days last year, compared to 11 days in 2007, according to the 12th annual CFO/REL Working Capital Scorecard, which will appear in the June issue of CFO magazine.
Birns has promised to discuss World Fuel's improved working capital management at the CFO Core Concerns Conference in Boston next month. In the meantime, he acknowledged in an interview with CFO.com earlier this month that getting employees outside of the finance department to focus on strengthening the company's balance sheet hasn't been easy.
Here is an edited version of our most recent interview with Birns, who became World Fuel's CFO in 2007, after a stint as treasurer at Arrow Electronics, where he had worked for 18 years.
How has your company fared during the economic downturn?
The industries we serve — mainly the aviation industry — were some of the hardest hit. We made a lot of the right moves, which set us up in a very strong financial position when everyone else was kind of falling apart. We became much more focused on the balance sheet at an early enough time so that once things got really ugly, we became what I refer to as a counterparty of choice. It became an almost unbelievably valuable position for us to be in with our suppliers and our customers. And we wound up having the most profitable year we've ever had. [Editor's note: World Fuel recorded $105 million in net income for fiscal year 2008.]
Why have you focused on the balance sheet?
In hindsight, everyone realizes that if they hadn't focused on it, they should have. Working capital is a very integral part of our business. One of the key value propositions is that we provide fuel to customers on credit. As the price of oil started approaching record levels last year, we needed more and more working capital, and more and more cash to run our business. We made a lot of proactive moves before crude oil reached $147 a barrel, which was the peak. These included focusing on customers that were high risk and walking away from some business. We looked at customers that were given way too many days to pay us under our contract terms. We went back to the table and reduced those terms for every single customer to something that made a lot more sense for us. As prices continued to rise, we were reducing the incremental working capital requirements. [Editor's note: World Fuel cut its days sales outstanding from 36 days in 2007 to 13 days last year, according to the CFO/REL scorecard.] At the same time we were increasing our margins so that we got what we believe to be a reasonable return, and that in turn generated more profitability, which turned into cash.
Was working capital more top of mind for you last year because of your background as a treasurer?
I don't want to say anything negative about anyone with a controller background, but this particular company may have gotten lucky in hiring a CFO who had been a treasurer for a long time, considering the circumstances they faced shortly after I got here. Maybe I was a bit more focused on it also because Arrow Electronics was very working-capital intensive and required a strong balance sheet to excel. A lot of other people have been involved, but I played a major role in pushing forward some of the proactive moves we made early last year.
How did you get the rest of the organization on board?
We reeducated the commercial side of the business in terms of: What's a balance sheet? Why is it important? We started compensating people on things like return on working capital. People who had never had any formal link to the balance sheet — such as salespeople who were getting compensated only on their ability to generate gross profit dollars — all of the sudden had to manage the balance-sheet side of the equation as well. So selling to someone and collecting in 20 days, versus selling to someone and collecting in 60 days, had a very different outcome for [salespeople] in 2008.
Will you keep such an incentive program going when the economy improves?
I think there always should be some form of balance-sheet component to an incentive scheme. Prices have come way, way down. We generated $570 million in cash over the last three quarters. Our working-capital investment is a whole lot smaller than it was a year ago. We didn't walk away from [the older] measures, but you don't want to revert back to the position you were in before this all started, which would eliminate all the progress you made. However, we dialed back ... you still have a portion of your incentive program tied to return on working capital, but it may not be the same percentage as it was last year.
How did your company balance focusing on "high-quality customers" with the pressure of not losing business during a tough economic time?
It's very tough. There was an this immediate reaction by salespeople that any type of move we tried to make would result in losing all the business these guys had worked to build over 20 years. We said, look all the more reason for you to walk in and say, "We're friends, we've done business for a long time, you read the Wall Street Journal, you watch CNBC. You know what's going on in the world; it's changed and we can't possibly continue doing business with you on the same terms." In some cases, the margins were way too low [for us to] make anywhere near a reasonable return. In some cases, such as in the Far East, we had to say, "Hey, you're paying us in 50 days, and we've got to pay for that fuel in 15 days. We can't carry 35 days for the few pennies a gallon we're making off this relationship, so you've got to pay us in 30 days now."
Those must have been uncomfortable conversations.
There was a tremendous fear that [these changes] would result in bloodshed. To be honest, maybe I was a little nervous too. But I said, "It's either that type of bloodshed or the type where the bank comes to your door and says, 'Close up shop. We're not giving you any more money.'" I had to choose between arguably the lesser of two evils although it didn't come anywhere close to that situation. In the end, one reasonably sized customer who had always been a bit of a pain the neck anyway got upset and decided to cut ties with us. By the way, although they are not at the same level of activity with us, they have since returned. Aside from that, while there was a bit of complaining and screaming on occasion. But just about every other customer we did business with to a great extent appreciated the fact that we would be willing to provide them with credit when a lot of other people they had dealt with stopped.
How else has your relationship with customers changed?
We used to evaluate credit purely on customers' financial statements and maybe their payment history if they were already a customer. Now we send people out to visit the customers whose banks have become really conservative and stopped providing them with the financing they had in the past, or [to prospective clients whose] customer base is changing rapidly. We spend more time focusing on: Who's your bank? What's going on with your banking relationships? Who's your customer base? Can we go out and visit your customers? How are they performing? You learn a lot by asking those questions.
Did you hire new people to deal with this increase in monitoring?
We have more people to do a lot of the things I described. We had an excellent risk management/credit management team, but they were pretty lean and mean and couldn't fully do everything they needed to do, plus hop on airplanes every day. So we now have 25 people who live and breathe credit on a day-to-day basis. A good number of those people will regularly be in and out of airports visiting with our [larger] sized customers around the world. What you tend to find out over a lunch or sitting in someone's conference room is a whole lot more valuable than if you're reading their financial statements that are six months old.
Have you been able to get your strategy heard more throughout the organization than you would have than in the past because of the downturn?
Early on, it was like, "Who is this guy Ira from Miami? He doesn't understand our business. He just got here." But amazingly, after a few months went by, the salespeople realized it didn't have the negative impact they thought it would. And they saw what was happening around them — competitors disappearing. All of the sudden there was a tremendous amount of respect for what the guys in Miami that forced them to do business to a certain way. And that's paid a lot of dividends. Now when the CFO or CEO has something to say, [the staff] is a whole lot more interested in listening and trusting that maybe these guys know what they're talking about after all.
What would need to happen for you to change your conservative approach to your cash-management strategy?
Our number-one goal is to preserve that asset — cash — and not necessarily try to maximize the yield on it. We learned that lesson the hard way a couple of years ago when a commercial paper investment of ours went south and we had to take a $2 million hit. We're always analyzing what opportunities may be not be as risky as they seemed six months ago. Then again, the difference in returns in this interest-rate environment are so small that even if we made some changes in our investment philosophy, we wouldn't be talking about generating millions of extra dollars of interest income. In some cases, we were shying away from almost every bank out there in terms of putting any meaningful balances on deposit. With the whole TARP situation, everyone knows where every bank really stands. As that [situation] improves, we may find ourselves getting a little more aggressive. However, we will never be aggressive in terms of investing cash because that's not our business. If we're lucky enough to have some cash on the balance sheet, we're always going to be very conservative in how we manage it.
Has the credit crisis affected your access to capital?
Fortunately, we haven't needed to tap the capital markets. We already have a five-year [$475 million] facility locked-in from the end of 2007, so we've had fortunate timing. But last summer, when the price of oil was ... heading toward record highs, we were looking forward. We began running the business on the assumption that a barrel of oil would cost $200, even though many people were saying it couldn't go any higher. We embarked upon receivables financing during the time that major banks were imploding and no bank deals were getting done. We closed the deal on the last day of September, which was a surprise to many. HSBC led the deal [with the lenders agreeing to buy up to $160 million of World Fuel's trade receivables on a revolving basis]. It's sitting there unused, but at the time it was important for us to be well-protected in the event the crisis did continue.
Do you anticipate that the next time World Fuel is ready to buy a company, you may have to finance it differently because of recent changes in the credit markets?
Every time we buy a company or any time I've ever bought a company over the last 20 years, there have been a lot of factors that go into that decision. First and foremost is the balance sheet: Do I have the cash? Is liquidity readily available to pay for this? Very simply, if I do, that obviously makes the decision easy. But in some cases, the decisions are more strategic and aren't balance-sheet related. We bought a company [Texor Petroleum Co. for $104 million], last June, for example. Even though we didn't necessarily need to, we financed part of it with equity. We wanted the guys we were buying this business from — who were going to stick around and be part of our business — to have an equity stake in World Fuel. So we put a little less cash on the table, not to preserve the cash as much as to find a way to have [the executives] formally engaged in the success of the company they were joining.
Have you recently reconsidered your long-held assumptions about forecasting?
I have always been conservative, but I've probably become more so based upon what I've lived through the past 12 months. In some element of long-term forecasting, I'm going to assume the worst. Say I want to buy three companies, I'm not going to assume oil prices are going to stay where they are to determine how much liquidity I'm going to have. I'm going to think about what my liquidity position will look like if prices go up 25%, 50%, 100%, even 150%. And under those scenarios, would I still be paying cash for these acquired companies or not? I probably am pushing it even further in terms of draconian thinking in how much cash my business may require not only when forecasting but in managing the acquired business as well.
Would you say you're a pessimistic buyer?
It's not a pessimist view but a conservative view. Now that we're back at $50 a barrel, we just hit $60 earlier this week, I'm not living my life assuming that [prices will never triple again] because it can. We will do some forecasting and planning around that. There's more of that [preparation] going on because of the extraordinary movement and volatility none of us have seen over the past 12 months. A lot of people haven't taken [their planning] that far, and they're no longer here to talk to you because their businesses are gone.