World Kinect Corp (WKC) 2003 Q3 法說會逐字稿

Ladies and Gentlemen, thank you for standing by. Welcome to the World Fuel Services Corporation third quarter 2003 results conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. At that time, if you have a question, you will need to press the "1", followed by the "4" on your push button phone. As a reminder, this conference is being recorded, Wednesday, October 29, 2003. I would now like to turn the conference over to Mr. Michael Mason of Allen & Caron Investor Relations. Please go ahead.

Thank you. Good morning and welcome to World Fuel Services Corporation Conference Call for the third quarter ended. September 30th, 2003. As mentioned by Robert, I'm Mike Mason of Allen & Caron Investor Relations. Before we start this mornings call, there are a couple of items that I'd like to cover. Many of you have received the copy, the press release announcing the company's results for the third quarter 2003.

It was released this morning at 8:00 a.m., Eastern Standard Time and was covered by Dow Jones at 8:13 am. If you did not receive a copy it, is posted in the client section of the Web site at www.allencaron.com or you may call the New York office at 212-691-8087. We'll e-mail it right away. It's also posted on yahoo finance. You can access the replay of the conference for 7 days by calling 800-633-8284. International callers should dial 402-977-9140, using conference ID number, 211-633-64. Also, this call is being broadcast live over the over the Internet at Thomson financials, www.firstcallevents.com.

The Internet replay will also be available for seven days shortly after the end of the call. Additionally, I have been asked to make the following statement. With the exception of historical information, this conference call may include forward looking statements that involve risks and uncertainties including but not limited to quarterly fluctuations in results, the management of growth, fluctuations in world oil prices or foreign currency, major changes in clerical economic regulatory or environmental condition, the loss of key customer, suppliers or key members of senior management.

Credit risks associated with the accounts and notes receivable and other desks detailed from time to time in the company's Securities and Exchange Commission filings. Actual results may differ materially from any forward looking statements set forth herein. With us is Paul Stebbins, Chairman and CEO. Paul will provide an opening statement addressing the company's progress. Then the call will move into the Q & A. I would now like to turn the call over to Paul. Good morning, Paul.

Good morning, Michael and thank you. Good morning, everyone and thank you for joining us today. With me are Michael Kasbar, President and Chief Operating Officer, Bob Tocci, President of our Marine Segment, Michael Clementi, President of Aviation Segment and Frank Shea, Chief Financial Officer.

This morning, we announced earnings of $5.5 million or 49 diluted cents per share for the third quarter of fiscal 2003. This represents a 24% increase in net income year over year after adjustments for non-recurring charges in the comparable quarter a year prior. Revenues, gross profit and operating income increased 28, 22, and 28% respectively year over year.

Our cash position at quarter end remains strong at $65.5 million, and our day sales outstanding, a key indicator of the quality of our receivables were 24 days. Our strong performance this quarter can be attributed to several factors. The first is an improvement in the overall economic environment. This is positively impacted activity in both our key markets aviation and Marine.

Earnings reports in the airline sector have generally been good, and the shipping industry has enjoyed a return to a more robust level of freight rates. Both are good indicators which bode well, not only for general business activity, but also the financial well being of our customers. We continue to be well positioned to help them manage their exposure to a volatile and ever changing fuel market.

A second factor impacting results has been increased volume in each business segment. Brokerage and traded volumes are up in Marine and we have experienced unit growth in each of the core aviation markets. Fuel management, cargo, charter, passenger, corporate, and supply to fly carriers in these markets. Moreover, we continue to demonstrate as we have over the years that World Fuels is well positioned in the market to provide value to our international supply partners looking to strengthen their downstream operations and reduce the cost of marketing, processing and exposure to risk.

A third factor is the impact of our efforts led by Michael Kasbar to reorganize the company along functional lines. As discussed in prior conference calls, we embarked on a process this year to populate the organization with new talent and concentrate functional expertise to drive effectiveness and efficiency. These officials have direct cross-segment ownership in marketing and supply, credit in risk management, technology, administration, financial operations, training, and performance measurement and review. This has enabled the company to begin the process of rationalizing costs and leveraging best practices across segment lines. These initiatives coupled with our work on Sarbanes-Oxley has allowed us to accelerate business processing re engineering and realize productivity gains across the company productivity gains across the company.

Looking forward, we are committed to further expansion in our key market areas. Out-sourcing provide you international shipping fleets to continue development of an increasingly the Robust fuel management offering and deeper penetration of the corporate fuel and flight services market were based out and our alliance with deficit in billing business jet, and continued focus on our core commercial business. We also will continue to evaluate a significant number of acquisition opportunities within the transportation and fuel industries, and explore strategic alliances with companies we view to be best in class.

As we review the quarter and look to the future, the most consistent driver of results has been and will continue to be improved execution by our global team. Over the past several conference calls, we have discussed the transformation of our business model, our ability to establish proof of concept in various markets and the success in driving a variety of strategic initiatives.

Realizing each of these goals is a function of the company's ability to execute our business plan on a worldwide basis. We are proud of our team and their collaborate efforts which are truly the essence of our success both now and in the future. 2003 promises to be a very good year for World Fuel, and we thank you for your continued support. I will now turn the call over to Frank Shea for a detailed financial review, after which we will welcome questions. Frank.

OK Let's go through the numbers and let's start at the top of the P&L with revenues Total revenues for the quarter ended September 30, 2003, were $652 million, up 28% year on year from revenues of $511 million in the same quarter of 2002. Marine segment revenues were $399 million, an increase of 59 million or 17% compared to the comparable quarter last year. This increase is due both to higher Marine fuel prices and higher volumes of Marine fuel sold and brokered. The quarterly average price increased 7% while the quarterly unit volume of Marine fuel sold increased 11%.

Our total unit volume of Marine fuel reselling, plus brokering business increased by 9% to 4.4 million metric tons. For the quarter just ended, the fuel reselling activities as compared to broker volume, represented 49% of total Marine business activity, up slightly from 48% in the same quarter a year ago. In our aviation services segment revenues totaled $253 million for the quarter just ended an increase of $83 million or 49% over the comparable calendar quarter of 2002. This increase is due to a 47% increase in the number of gallons of aviation fuel sold, and a 1% increase in the average price of that fuel.

In fact, we sold fully 255 million gallons during the quarter just ended compared to 173 million gallons in Q3, 2002. This large increase in volume is the result of new commercial business, as well as increases in both our bulk business activities, and in our new and strongly growing fuel management business. For the first nine months of 2003, total revenues for the company were $2 billion, an increase of $635 million, or 48% versus same period a year ago. In the Marine segment, revenue increased by $284 million, or 31%, primarily due to a higher average price per metric ton traded as well as a slight increase in total business activity.

Aviation segment revenue in the first nine months of 2003 increased by $351 million or 90% compared to the same period in 2002. This was due to a 73% increase in the volume of gallons sold and a 9% increase in the average per gallon price of fuel sold So much for sales. Let's move on to gross profit. Our gross profit for the third quarter of 2003 was $24.5 million, an increase of $4.4 million or 22% compared to the third quarter of 2002. Marine segment gross profit increased 33%, to 10.8 million compared to quarter 3, 2002. In our aviation group, gross profit increased 15%, to 13.7 million, compared to the previous year's third quarter.

Our gross profit margin for Q3, 2003, was 3.8% versus 3.9% in the same quarter last year Marines gross profit margin was 2.7% in the quarter just ended, and it represents an increase over the comparable quarter of 2002's gross profit margin of 2.4%. Aviation's gross profit margin decreased from 7% a year earlier to 5.4% in the quarter just ended. In slightly different but more useful terms, our gross profit per gallon of fuel sold was 5.4 cents, for the quarter just ended which is 1.5 cents lower than the figure for last year's third quarter. The decline in our average gross margin was due to strong volume growth in our lowest margin businesses, namely, our bulk sales in our new in the last 12 months fuel management business.

For the first nine months of 2003, the company's gross profit was $77.3 million, an increase of $15.9 million or 26%. The company's gross profit margin was 4%, versus 4.6% for the comparable period a year ago. The cause for the decrease in our gross profit margin for the first nine months of 2003 is consistent with the quarterly aviation margin explanation I just gave. Next on our financial tour, our operating expenses which for the third quarter of 2003 were $17.4 million, as compared to $19 million in the same quarter of 2002.

Operating expense for the third quarter of 2002, included, executive severance charges of $4.5 million primarily related to the retirement of our former chairman of the board. Excluding the effect of the Q3, 2002 executive severance, our operating expenses increased $2.8 million year over year. This increase reflects increases in all three expense category, salaries and wages, the provision for bad debts, and other operating expenses.

Major factors causing a $1.7 million increase in salaries and wages were new hires to support our accelerated business expansion, the front end cost of the number of business process improvement initiatives, and payments and accrue, were achieved, and potentially achieved performance based incentive comp pay outs. Accrued but not fully earned, incentive compensation accounts for the largest part of the increase in salaries and wages. The increase in the provision for bad debts of $730,000 primarily resulted from the high higher level of write off this year versus last year.

The $407,000 increase in other operating expenses, was primarily related to the business process improvement and business expansion initiatives mentioned a few moments ago, as well as to hire overall operating costs, such as depreciation and professional fees. For the first nine months of 2003, total operating expenses were $57.5 million, as compared to $48 million, for the same nine-month period a year ago. Excluding the effect of the Q3, 2002 executive severance, our operating expenses increased $13.9 million year over year. The major increase in operating expenses for the first nine months of 2003 were due to the factors that were largely consistent with those for the quarter.

Continuing on in our P&L review, we come to income from operations, which for Q3 2003, was $7.2 million as compared to $1.1 million for the same quarter in 2002. Excluding the effect of the Q3, 2002 executive severance, our income from operations increased $1.6 million, or 28% year over year. Our Marine segment earned $4.4 million in income from operations in the quarter just ended, an increase of $1.8 million or 67%, compared to the quarter three, 2002.

Our aviation segments income from operations for this year's third quarter was $6 million, an increase of $1.4 million or 30% over the comparable period last year. For the quarter just ended, our additional operating income provided by our Marine and aviation segments was partially offset by our higher corporate overhead, the details of which I have just reviewed a few moments ago, in some detail when discussing operating expenses.

For the first nine months of 2003, income from operations was $19.9 million as compared to $13.4 million for the same period of 2002. Excluding the effect of the Q3 2002 executive severance, our income from operations increased $2 million or 11% year over year. This is a good time to review segment ROA. ratios. Our operating return on Marine segment assets for the quarter just ended was 11% versus 6% in Q3 2002, whereas in the aviation segment, we had an operating return on segment assets for the quarter just ended of 18%, versus 20% last year.

The next stop on the P&L review is net non-operating income, which for the third quarter of 2003 totaled $83,000, as compared to net non-operating expense of $1.5 million during the same quarter a year earlier. Included in Q3 2002 was a non-recurring charge of $1.6 million in connection with the collection of the court judgment in our favor against Mr. Moorehead. Excluding the effect of the Q3, 2002, non-recurring charge, our non-operating income-increased slightly by $43,000 year over year. Regarding taxes, our consolidated effective tax rate for the third quarter of 2003 was 24%, for an income tax provision of $1.7 million for the quarter just ended, as compared to a net tax benefit of $1.2 million for the corresponding quarter last year.

During the third quarter of 2002 we recorded income tax benefits totaling approximately $2.3 million for the executive severance and the non-recurring charge as previously discussed. Excluding the income tax benefit of these non-recurring Q3, 2002 items, we would have recorded an income tax provision of approximately $1.1 million, and are consolidated effective tax rate would have been approximately 20%. This higher quarterly effective tax rate primarily relates to changes in the specific levels of earnings subject to tax at different rates around the world.

For the first nine months of 2003, our effective tax rate was 20%, as compared to 17% for the comparable period last year. We have provided $3.9 million for income taxes for 2003, as compared to $2 million for the same period in 2002. Excluding the tax benefit of the non-recurring 2003/2002 items, we would have provided approximately $4.3 million in 2002, and our effective tax rate would have been approximately 24% for 2002. The lower tax rate for the nine month period results from income tax benefits that stem from US operating losses, at a tax rate of approximately 35%, an increased operating income in lower tax foreign tax jurisdictions, as well as lower statutory tax rates on certain types of foreign income for the nine month period.

Our net income after taxes and of diluted earnings per share for the quarter ended were $5.5 million or 49 cents respectively as compared to net income for the third quarter of 2002, of $747,000 in diluted cents per share of 7 cents. Excluding effects of the non-recurring Q3, 2002 items discussed, our net income after taxes increased $1.1 million or 24%.

Our diluted cents per share increased 8 cents year over year. For the first nine months of 2003, our net income after taxes and diluted earnings per share were $16.2 million and $1.46 respectively as compared to $9.6 million and 89 cents for 2002. Excluding the effects of the non-recurring Q3, 2002 items as previously discussed, our net income after taxes increased $2.9 million or 22%, and our diluted cents per share increased 23 cents year-over-year.

Finally, for the P&L, a few more ratios. For the third quarter and first nine months of 2003, our R.O.E. or return on equity was 16% and the R.O.A. or overall return on assets was 7% as compared to an R.O.E. of 3% and R.O.A. of 1% for the same quarter a year ago and for the corresponding nine months of 2002, an R.O.E. of 11% and R.O.A. of 5%. The 2002 ratios reflect the effects of the non-recurring Q3, 2002 charges.

Now, let us move on to the balance sheet as of September 30, 2003. Again, starting at the top, our cash position was $65.5 million versus 57.8 million on December 31, 2002. Usage of cash during the first nine months of 2003 included $2.5 million of payments on the principle portion of prior year's acquisition notes, $2.4 million for dividends, and $2.6 million for capital expenditures.

These outflows were largely offset by the cash provided by operating activities, by employees and directors exercise of stock options and net borrowings and the bank resolving credit facility. As of September 30, 2003, working capital totaled $103 million and total assets were $326 million, whereas on December 31, 2002, working capital totaled $82 million and total assets were $312 million.

As regards to receivables, our most important asset, gross receivables decreased from $188 million at year end 2002 to $179 million at the end of the quarter just completed. Nonetheless, our allowance for accounts increased slightly from the previous fiscal year end by $598,000, to $11.7 million. During the first nine months of 2003, we have provisioned $5.5 million for bad debts and wrote off receivables totaling approximately $4.9 million.

This is a good time to take note of our most important asset quality ratio, consolidated days of sales outstanding, or DSO's. At the end of the quarter, just ended, DSO's were just 24 days, which compares quite well with 31 days for the same date a year ago and 29 days at December 31, 2002. As for the other side of the balance sheet, total liabilities in particular are -- total debt increased by approximately $2.6 million, from our previous fiscal year end, namely due to net bore roars of $5 million under the resolving credit facility offset by principal payments of notes to prior year's acquisitions.

Finally, at September 30, 2003, consolidated shareholders' equity amounted to $143 million, an increase of $15 million over the previous fiscal year end.

Thank you for listening patiently during the necessarily dry and detailed overview of the Q3 2003 numbers. Before we go on to the question and answer period, let me first turn the leadership of the teleconference back over to our chairman, Paul Stebbins.

Thank you, Frank. Let's go right ahead into the questions.

If you have a question, press the "1" followed by the "4" on the push button phone. You will hear a free tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, do so by pressing "1" followed by a "3". If you are using a speakerphone, pick up your handset before entering your request. If you have a question, press the "1" followed by a "4". One moment, please, before the first question.

The first question will come from the line of Joe Chumbler from Stephens. Please go ahead.

Good morning, guys. Great quarter.

Thank you.

Brian, just a quick numbers question on the balance sheet. It looks like prepaid expenses was up $6million sequentially. Could you address the increase there?

There's no one standout item in prepaid accounts, so I'm at a slight loss, except for prepaid fuel. We will sometimes take discounts when we're buying fuel. We can take a pre-- we can take a prepaid discount and that is probably the biggest item in there representing the increase.

OK. So, you guys are not capitalizing any new costs there?

No, we're not capitalizing them, we're simply putting them on the balance sheet as, you know, prepaid fuel and in some cases deferred tax assets, which that's -- that's all that's going on there.

OK. And then the other expense, you know came down quite a bit sequentially and you mentioned I guess some of Michael Kasbar's work. Can you just talk a little more about what other expenses are going to look like going forward?

Well, we have got quite extensive program in expense management, and so it affects virtually all areas. It certainly is -- it affects our travel and our entertainment and our telecommunications and our insurance and our rent and a whole variety of items. Our view is that we can pay for a good part of the increase we have had in some of our added --you know, our added staff will in fact pay for themselves through gains in operating efficiencies over the course of the next couple of quarters.

OK. Let me just kind of step back big picture in the Marine segment. I'm wondering, is, you know just going ahead 12 months looking ahead, is 5% volume growth in marine and maybe a higher gross profit per metric ton, is that achievable and what would it take to get there?

Well, Joe, as you know, we don't -- it's very difficult for to us predict with any accuracy and as a matter of policy, we don't. But I would say that we feel good about the current shipping market, and you know, as we have indicated in my comments, the global team has been executing very well. You know, we feel that we are able to deliver a result that was, you know, margins that are in the historical ranges, and right now, the market climate is favorable for some continued growth. So -- but I cannot tell you whether it's going to be 5% or whether specific margins are going to increase, I just cannot tell you that at this stage.

OK. So I guess a more general question would be, you know, you have had a nice improvement in your gross profit per metric ton, but volumes are kind of flat year to date. Is it safe to say that, you know you still haven't fully realized the benefit of the recovery in the shipping industry?

I would say there's probably a little bit of truth in that. You know we're just now in the last quarter beginning to see the real rebound in some of the freight rates and some of the increased activity. That takes a little while to filter through and realize itself in actual changes in our volumes which did in fact as you noted in my opening comments increase both in brokerage and reselling volumes.

So, we feel, I would say cautiously optimistic about that. It's a mature market as you know we don't look for radical leaps in any change, but I would say that the success of the model has been that we have drilled much more deeply -- we are in the process of drilling more deeply into our account base.

We feel that we got a model that is very, very good and has carved out a distinct niche in the competitive landscape and we are feeling good about executing on that. I would say it's the discipline of blocking and tackling, organizing our global team, focusing on marketing, drilling deeper into our existing portfolio and taking a larger part of the market share over time. But that's a slow process. It's not a quick kill, instant, you know, radical increase.

All right. OK. And then on aviation, just to follow up on that, could you talk about, it looked like maybe there was a new commercial --new commercial business in the quarter, and is it possible that you could begin to expand margins in that segment going forward?

Yes. The way I would break that out is that as you know, if you look at the 70,000 foot view, our strategy going back the last couple of years has been to move away from a one -- you know, a one-shoe model where it was highly focused on a certain class of customer and a certain region and to go geographically global and also create proof concept in a variety of different segments across the entire spectrum of aviation traffic.

And in fact, I would say that the results reflect our success in establishing proof of concept in each of the silos. We are seeing growth in each and every one. the thing that is perhaps more gratifying to the aviation is that while we have changed the overall mix of business to include management, drilling deeper into the corporate space.

We have continued to see steady growth and new customers and new business in our more traditional cargo and chartered areas and that is gratifying because it is a better class of customer generally and we are maintaining solid margin in that area. now the overall blended average of course as you know is impacted by the fuel management unit. the inputs of the fuel management volumes which are tend to be larger but more compressed margin but we're very pleased to see core growth in what was our core space in cargo and charter globally in every major market and we will be able to hang on to solid margin in those areas. So we are very pleased about that trend.

OK. And then finally just on the acquisition Frank, can you give details about what opportunities are out there and the challenges that you have encountered, in finding something that works this year?

Sure. We -- I would be reluctant to go into too much detail, but I would say that as a general proposition it's been our policy to continue evaluating opportunities and they're both in our aviation and in our marine space.

I would say that we have qualified and reviewed, you know, several, and what we have found is that when you look the at the price, and relative to accretive ness and overall long-term I.R.R. for the money spent, we were better off sticking to the internal growth plan. So we continue to evaluate each one of these opportunities in a conservative and what we think is a prudent manner we don't have any need to go out and buy a bunch of volume. It has got to have real value.

We think there are also going to be opportunities perhaps outside of the traditional space that are core to the transportation and oil industry, but are perhaps not in our traditional, bunker brokerage and reselling space. That is something that represents an interest to us, and we're beginning to qualify some of those opportunities, but I'm reluctant to go into too much detail at this point in time.

But I would say the success of our model and the success we have had drilling deeply into the barrel both in aviation and marine has introduced a variety of opportunities to go outside perhaps our exclusively traditional reselling and brokerage business.

All right, Thank you.

The next question will come from the line of John Pinnedle (ph) from Hermitage Capital. Please go ahead.

Good morning. What a great quarter you have, Paul.

Thanks, John. Wish you appreciate it. A couple of things. One is, you can give -

A couple of things. One is, can you give me an idea of all of this cash flow you have, $20 million, $25 million-plus of cash, what are you thinking about in the way of an acquisition. Will you buy stock back. Are you going to increase the dividend if it comes to one point. That's the first question.

Right. Yes. I would say that as you know, and if I -- at the risk of repeating some of the things we have discussed in previous calls the first thing that we think about when we evaluate that level of cash is deployment in the business.

And what happens is that we enjoy a tremendous competitive advantage right now by virtue of the cash position because it allows us to move very quickly when there is volatile price movement. You may recall in one of our previous quarters this year, we were able to move within a very short period of time and put over $25 million immediately into the business on the back of price increases.

This is a huge competitive advantage relative to our traditional competitive landscape. It's something that the suppliers love because they know we can move very quickly to move into the market and take volume. So, we -- in a sense, there is a rationale for keeping our powder dry.

The other thing that I would add to that is that to the extent that the model changes, there may be some opportunities that we're looking at where the traditional sort of buying on 30 days, selling on 30 day model changes and transforms where because of our ability to move in much larger volumes, the bulk side of our business allows -- is a model where you would be paying on shorter terms but still extending credit.

That would also use cash as a considerably good return. As we evolve into that model, we are reluctant to just sort of give in to all of the cash and find out that we need it in the business. I would say that the other thing we're looking at as alluded to in the question with Joe Chumbler.

We are actively evaluating interesting opportunities and interesting moves even within the core business, both of which would use cash. Until we fully vetted and qualify this opportunity, we would be reluctant to dividend back out or buy back shares or another use. It's our intention to use in the business.

We also find that as we scale up the business model and we change our business model to accrued processing, and a sophisticated processing model as being a value proposition, servicing fuel management and other parts of the business, this may require some further investments in CAPEX, particularly in the area of technology.

That's a possible use of the cash. You know, if in the future, and I think have said this before, if it turns out that we end up being, you know, completely unimaginative guys and have no creative ways to use the cash in the business, then yes, logic predicts at some point, the shareholders are going to demand that we buy back shares or div dent it out. But I don't think we're at that stage at this point.

I don't have to worry about you not being imaginative. I know that's not going to happen.

let's say we're looking at this year, whether you want to comment, $1.95, can you give any guidance next year, to the model that works out to 2.20, and if that's the case, do you all have a poison pill in here? Because I have always worried about someone coming along and taking a swipe at this thing and we not getting the real benefit of where I think this thing can go over the next few years.

So, well there are a couple of comments. Number one, we don't comment on earnings predictions at all. We're very confident in the business model. I think you can see from the results, we're delivering evidence to suggest that we we're going to be right on track.

We run a conservative shop and we would rather, you know, undersell, over deliver. But, that aside, I would say with regard to somebody taking a swipe at us, I mean, I guess I don't control the global marketplace and I guess, you know, anybody could decide to do that, however, there are certain things that mitigate against that.

You know, one, this is a fairly discrete business model that is not something that is so easy to just jump into and take over. Think that anybody who understands our business model understands that our balance sheet is very important to driving our business model. It's not as if somebody can come in and just strip out the money and decide they're going to do something.

It doesn't work. It doesn't happen. We have projections internally that would ward off sort of, if you will, you know, meddlesome or adventuristic type approaches but, you know it's not something that we feel highly concerned about at this time. At this time.

Thanks, guys. A great quarter, again.

The next question will come from the line of Greg Eaton from Safeco Asset Management.

Thanks. Good morning, guys. Paul, could you talk about the employee head count given the rise in salaries. What is the head count look like for this quarter versus last year, and the -- do you plan on ramping that up further in the next few quarters, to fulfill the growth plans?

Greg, hello. It's Mike Kasbar. Just going back to previous question, you know, on expenses, and head count, right in our, we're at 409 people. Some of that has come through acquisitions, some of it has been through, adding some corporate names, getting those functional areas going. Right now, I think we have finished largely, you know, much of what we set out to accomplish.

I don't see any rapid growth internally. Certainly acquisition to bring a fair number of people. You know, on the expense side, I think the one thing that is very important to remember is the way we have set up the organization is the largest part of that expense is performance pay, so, you know, one of the very positive things that we have about the company is that our expenses go up and down depending on the results of the company. You will see the expenses increase as the results increase.

We obviously need to look at the rate of growth. Right now, we're doing a lot of investment. We have had an investment spurt and we think that was appropriate for what we're trying to achieve and what we see in front of us to prepare for that. And get a lot of global managers to deal with what we, you know, see as some growth opportunities in the company.

The other part of it is some new facilities, certainly Sarbanes-Oxley and some of the other regulations, you know, have created some expenses, and you know, you may be seeing increase in bad debt, but on a go-forward basis circumstance we feel positive about our going to control, that part of our business, and we have added some people, you know, in that key functional area. I think, frank, on the prepaid piece

Actually, the full amount of the increase in prepaid expenses had to do with the prepayment --was simply buying fuel, using prepayment -- getting prepayment discounts.

Good use of cash, actually.

Was buying fuel. So, therefore, you were opportunistic in your buy?

Exactly.

OK, that answers that. If I could go on to another question, if I may, could you just give some background and color to the fuel management business and what changes you may have seen in that business this quarter versus last quarter. Did you add new customers or significantly increase the business with the customers in the fuel management business?

We have had both increases in insisting customers and we have had an increase in the number of customers, both are contributing to the increase in volume in that segment and we anticipate further growth going forward.

Very good. Last question you mentioned Sarbanes-Oxley. I'm hearing various numbers from various people that I ask this question of as to how much it's actually costing them to be a public company, to have to comply with Sarbanes-Oxley because of the -- all of the rigamarole it entails. Do you have a general statement about what you think it's costing you incrementally?

We have spent probably to date a few hundred thousand dollars, maybe about 3 or 4 out of pocket to date. But frankly, we won't fully know the cost of audit is going up. The cost of insurance will continue to grow up.

We're still negotiating with various and sundry parties for how this will get managed. So, whose what's the total cost of Sarbanes-Oxley? Probably somewhere between a $0.5 million and a million per annum. You have to recognize, too, that we have used Sarbanes-Oxley as an aggressive tool to make our operations tighter and tougher and better managed and more efficient.

Some of it will actually generate through our, you know, business process re-engineering that we are doing on the back of Sarbanes, will actually generate savings. So, the gross cost before benefits achieved, through Sarbanes, through the implementation of prom programs through Sarbanes-Oxley, the gross cost is a half million to a million per annum additional costs.

This will show up in audit insurance and professional services. We had increased insurance costs and now with the head of administration, that gives as you greater grip on that, and the approach on Sarbanes was to aggressively be ahead of the S.U.V. and use that to drive business process efficiency. So, we have taken as positive an attitude as can be taken on it.

Thanks for answering my question.

OK, Greg.

If there are any additional questions, please press the "1", followed by the "4" at this time.

Gentlemen, I'm sure there are no further questions. Please continue.

OK. Thanks to everybody for joining us today, and we'll look forward to talking you to at the end of the fourth quarter. Take care. Thank you.

Ladies and gentlemen, that does conclude our conference call for today. We thank you for your participation and ask that you please disconnect your line.