World Kinect Corp (WKC) 2003 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the World Fuel Services corporation fourth quarter conference call. This conference is being recorded Wednesday, February 25, 2004.

I would now like to turn the call over to Michael Mason of Allen and Caron. Please go ahead.

Thank you. Welcome to World Fuel Services conference call for the year ended December 31, 2003. As mentioned, I'm Mike Mason of Allen and Caron investor relations.

There are a couple items I would like to cover. Many of you received a copy of the press release announcing the company's results for fourth quarter and year end 2003. It was released at 8.00 A.M. Eastern standard time and covered by Dow Jones.

If you did not receive a copy, it is posted in the client section of our website at www.AllenCaron.com or call our New York office at 212-691-0807. It is posted on Yahoo finance.

You can access a replay of the conference by calling 800-633-8284. International callers should dial 402-977-9140 using conference ID number 21185507.

Also, this call is being broadcast live over the internet at Thompson's Financial www.firstcallevents.com. The internet replay will be available for seven days shortly at the end of this 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 limbed to the management of growth, fluctuations in world oil prices or foreign currency, major changes in political economic, regulatory or environmental conditions, the loss of key customers, suppliers or key members of the senior management, uninsured losses, competition, credit risks associated with accounts and notes receivable, and other risks detailed from time to time in the company's Security and Exchange Commission filings.

Actual results may differ materially from any forward-looking statements set forth herein.

With us this morning is Paul Stebbins, chairman and CEO. Paul will provide an opening statement addressing the company's progress and the call will move into the Q&A.

I would like to turn the call over to Paul.

Good morning, Mike. Thank you. Good morning. Thank you for joining us. With me today are Michael Kasbar president and Chief Operating Officer, Bob Tocci, president of the Marine Segment, Michael Clementi, president of the Aviation Segment and Frank Shea, Chief Financial Officer.

This morning we announced record earnings, $5.6 million or 50 cents per diluted share for the fourth quarter of fiscal 2003. This represents a 19% increase in net income over the comparable quarter a year prior.

For the year, we produced earnings of $21.9 million or $1.96 per diluted share. This represent as 21% increase in net income for the year after adjusting the previously announced nonrecurring charges in the year prior related to executive severance of the former chairman and a settlement of a debt.

Revenues, gross profit, and operating income increased 40%, 20% and 9% respectively in calendar 2003 compared to the prior year.

Our cash position at quarter end remains strong at $76 million, and our day sales out standing, a key indicator of the quality of our receivables, was 24 days in the quarter. 2003 was a trance formative year for World Fuel, and we are pleased with the results.

Not only did we deliver strong financial performance for our shareholders, but we made progress in advancing our business model and we stand well positioned for 2004.

In our Marine segment, the global team demonstrated their ability to respond quickly to the changing economic climate. As the shipping industry recovered through 2003, so did our overall results.

Trade volume, sales, gross profit and operating income were up this year as a direct result of the shift in industry fortunes and the highly focused initiatives of our sales force.

In 2004, we will continue to emphasize deeper penetration of global accounts and further account acquisition. We will also continue to evaluate acquisition candidates which have strategically valuable portfolios and income would be accretive to earnings. In the Aviation Segment was a year of significant development across the spectrum.

The corporate space, our alliance with Jefferson has resulted in over 375 new fuel customers for World Fuel. We have developed two new jointly branded fuel cards. One is Jefferson World Fuel cord to service Jefferson fuel customers and the other is a Boeing world card which represents an exclusive offering to owners of Boeing jets. Both have been received by the industry and firmly establish World Fuel as a leadings solutions provider for corporate fueling.

The alliance with Jefferson is successful. We continue to explore ways to create value in the international plight services business.

We had the large FBO chain in the United States and has continued to grow, and we are now supplying over 95% of their fuel or some 11 million gallons per month. We explore ways of our domestic and international collaboration and our wholly owned subsidiary ASIG.

On the fuel management front, we have continued to refine our service offering and have successfully landed a number of new accounts, most notably America west. The 8th largest purchaser of jet fuel in the United States.

Our strategic fuel procurement program which was announced December 1 and will comment March 1 is involved with sourcing and tendering fuel and logistics and inventory optimization, and the negotiation of fees as well as the development of price risk management strategy.

As we have discussed in the past, our objective in the fuel management model is to provide our customers whose core competence is the movement of goods with a highly focus and comprehensive fuel purchasing solution. Another important strategic development was announced December 18 and involves a fuel processing agreement with united airlines and Morgan Stanley's capital growth.

For many years, United Airline has operated as a fairly sophisticated fuel supply model under united aviation fuels corporation which supplied fuel to United main line service, express service and a number of third parties.

Under chapter 11, they were under pressure to improve cash related to fuel. They entered into a long-term contract with Morgan Stanley to fly united, express carriers and contracts with third-party airlines.

Under our agreement, Morgan Stanley supplies fuel in bulk to World Fuel who supplies the third-party contracts on behalf of united. This program which commenced January 1 has successfully validated our role in the supply chain as specialists and back office processing and led to discussions about further collaboration with Morgan and united going forward.

These developments with America West and United are significant on several levels. Firstly, they represent further validation of our outsource partnership model which is attracting increasing attention from the aviation community.

Secondly, increasing amount of volume we are able to supply on the back of the fuel management contracts is improving our overall supply costs which, in turn, has made us more competitive on our core reselling business.

Thirdly, it is validated processing as an important part of our service offering. We are excited about this expansion of our business model which has proven successful and poised for further growth.

The final news of the year was the announcement December 19 of our $100 million revolving credit with Merrill Lynch, Israel discount bank and commercial bank. Securing this line provided an opportunity to conduct an in-depth review of our financials as well as business model, and we are pleased to report that the offering was oversubscribed.

We could not be happier with the final list of participating banks and feel confident they will not only expand the franchise and grow with us in the years ahead.

2003 was a year of growth and transformation at World Fuel. We reorganized corporate operations, expanded our functional areas, added support and professional staff, embraced Sarbanes-Oxley as an opportunity to reengineer and validate our business processes, expanded our business model in Marine and aviation and fortified our bank line, continued to grow our franchise.

After many years of development Work, we opened an office in Russia to service carriers requiring fuel in the international markets. The company continues to grow, is stronger than it has ever been, and we are excited about the prospects for the future.

As we have said before, none of our success would be possible without the tremendous effort of our international team. We are grateful to each and every one of them and thank them for their contribution to our success. We would like to thank our shareholders for their continued support.

I will turn the call over for Frank Shea for a detailed review of the financials.

Okay. Let's go through the numbers starting at the top of the P&L for revenues. Total revenues were $706 million up 22% year on year from revenues of $577 million in the same quarter of 2002.

Marine Segment revenues were $423 million, an increase of $70 million, or 20%, compared to the comparable calendar quarter last year. This increase is due to hire volumes of Marine fuel sold.

The details are that quarterly unit volume of Marine fuel sold increased 19% while the quarterly average price increased 1%. However, due to a slight decrease in our broking business our total quarterly unit volume of Marine fuel increased by 7% to 4.4 million metric tons.

For the quarter just ended, our fuel reselling activities as compared to brokered volume, represented 53% of total Marine business activity, up somewhat from 48% in the same quarter a year ago.

In our aviation services segment, revenues totaled $283 million for the quarter just ended, an increase of $59 million or 26% over the comparable calendar quarter of 2002. This increase is due to a 20% increase in the number of gallons of aviation fuel sold and a 6% increase in the average price of that fuel.

In fact, we sold fully 273 million gallons during the quarter just ended compared to 229 million gallons in Q4, 2002. This increase in volume is the result of new commercial and government business, and increasing in our strongly growing fuel management business.

For calendar 2003, total revenues of the company were $2.7 billion, an increase of $764 million or 40% versus calendar 2002. In the Marine Segment, revenue increased by $354 million, or 28%, primarily due to a higher traded average price per metric ton as well as a modest increase in total business volume.

Aviation Segment revenue for calendar 2003 increased by $410 million, or 67% compared to 2002. This was due to a 54% increase in the volume of gallons sold, with an 8% increase in the average price per gallon of fuel sold. So much for sales.

Let's move to gross profit. Our gross profit for the fourth quarter 2003 was $23.4 million, an increase of $699,000, or 3%, compared to 2002. The increase in gross profit is attributable to the Aviation Segment, which more than offsets a small decrease in the Marine Segment.

Specifically, the Marine Segment gross profit decreased 4% to $9.9 million compared to the fourth quarter of 2002.

In our aviation group, gross profit increased 9% to $13.4 million compared to Q4 '02. Our gross profit margin for Q4 2003 was 3.3% versus 3.9% in '02.

Marines gross profit margin of 2.4% in the quarter just ended decreased over 2002's comparable gross profit margin of 2.9%. This decline in the Marine gross margin was due to competitive purchases as well as shifts in our business mix.

Aviation's gross profit margin also decreased from 5.5% a year earlier to 4.8% in the quarter just ended. In more useful terms, our gross profit per gallon of fuel sold was 5.0 cents for the quarter just ended as compared to 5.4 cents for the same quarter a year ago.

The continued decline in our aviation gross margin was due to a strong volume growth in our lowest margin business, the fuel management business. For calendar 2003, the company's gross profit was $101 million, an increase of $17 million, or 20%.

The company's gross profit margin was 3.8% versus 4.4% for calendar 2002. Decrease in our gross profit margin for calendar 2003 was attributable mainly to the Aviation Segment and the cause for this decrease is consistent with the quarterly aviation margin explanation.

Next, our operating expenses, which for the fourth quarter 2003, were $16.3 million as compared to $15.9 million in the same quarter in 2002, an increase of $384,000, or just 2%.

The increase in total operating expenses was due to an increase in salaries and wages. The major plus factors were new hires to support our accelerated business expansion and the payments plus accruals for achieved and potentially achieved performance based incentive comp payouts.

This last factor, crude but not fully earned accounts for the largest part for the increase in salaries and wages.

For calendar 2003, total operating expenses were $74 million as compared to $64 million for calendar 2002, an increase of $10 million or 15%. This increase reflects increases in all three categories of operating expenses. Salaries and wages, the provision for bad debts, and other operating expenses.

The major factors causing the $7.2 million increase in salaries and wages were new hires to support our business expansion and payments is accruals for achieved and potentially achieved performance based incentive comp payouts.

The $3.4 million increase in the provision for bad debts in 2003 over 2002 was largely to replace in our general allowance for the write-off of receivable from the year 2000, that have previously been fully and specifically reserved for.

The $3.7 million increase in other operating expenses was primarily related to business process improvement projects and overall business expansion, as mentioned a few moments ago, as well as to hire operating costs in such areas as travel and entertainment, rent, depreciation, insurance, and telecommunications.

Continuing on with our P&L Review, we come to income from operations, which for Q4 '03 was $7.1 million as compared to $6.8 million for the same quarter of 2002, an increase of $315,000, or 4.6% year-over-year. Our Marine Segment earned $4.2 million in income from operations in the quarter just ended, which was relative consistent with Q4 of 2002.

Our Aviation Segments income from operations was $6.1 million an increase of $1.2 million or 25% over the comparable quarter last year. For the quarter just ended, our additional operating income provided by our Aviation Segment was largely offset by $838,000 of higher corporate overhead.

The explanations for the increased corporate overhead are consistent with those I mentioned when discussing operating expenses.

For calendar 2003, kin come from operations was $27 million as compared to $20.2 million for calendar 2002. An increase of $6.8 million or 34% year-over-year. Two-thirds of this increase resulted from the 2002 executive severance charges of $4.5 million related to the retirement of our former chairman of the board.

This is probably a good time to review our segment ROA ratios. Our operating return on Marine Segment assets and Aviation Segment assets for the quarter just ended were the same as they were in Q4 '02. The Marine Segments ROA was 9% and the Aviation Segments ROA was 18%.

The next stop on our P&L is net nonoperating income which for the fourth quarter 2003 totaled $316,000, as compared to net nonoperating expense of $182,000 during the same quarter a year earlier. This variance was due to the recognition of foreign exchange gains for the 2003 as opposed to he have ex losses for '02.

For calendar 2003, net nonoperating income was $628,000 as compared to net nonoperating expense of $1.9 million for calendar 2002. Included in 2002 was a nonrecurring charge of $1.6 million in connection with the collection of a court ordered judgment against Mr. Morehead relating to his default regarding his obligation to purchase shares in earth care company.

Excluding the effect of this 2002 nonrecurring charge, the variance in nonoperating activities amounted to $1 million year-over-year. The explanation for the remaining amount of yearly variances as with the quarterly variance just noted a few moments ago.

Regarding taxes, our consolidated effective tax rate for the fourth quarter of 2003 was 24%, or an income tax provision of $1.8 million for the quarter just ended as compared to 29% and income tax provision of $1.9 million for Q4 '02.

Q4 2003's lower tax rate results from increased operating income in low tax foreign jurisdictions as well as lower statutory tax rates on certain types of foreign income. For calendar 2003, our effective tax rate was 21%, which is relatively consistent with calendar 2002.

We recorded an income tax provision of $5.7 million for calendar 2003 and $3.9 million for calendar 2002. However, included in 2002 was the recording of an income tax benefit of approximately $2.3 million related to our nonrecurring executive severance charges as previously discussed.

Excluding the income tax benefit on these nonrecurring 2002 items we would have recorded in 2002 an income tax provision of approximately $6.2 million and our consolidated effective tax rate would have been approximately 26%.

The explanation for the lower tax rate for the calendar year 2003 is consistent with that for the fourth quarter. Our net income after taxes and our diluted earnings per share for the quarter just ended were $5.6 million and 50 cents respectively. As compared to net income for the fourth quarter of 2002 of $4.7 million in diluted earnings per share of 43 cents.

For calendar 2003, our net income after taxes and our diluted earnings per share were $21.9 million and $1.96 respectively as compared to net income of $14.3 million in diluted EPS of $1.32 for calendar 2002. An increase of 53% for net income and 49% for diluted EPS. Included in the results for 9002 were the effects of nonrecurring items previously discussed.

Excluding the effect of the 2002 nonrecurring items, our net income after taxes would still have increased by $3.8 million or 21%, and our diluted earnings per share would still have increased by 30 cents or 18% year-over-year.

Finally, for the P&L we have a few key ratios. For the fourth quarter 2003 our ROE or return on equity was 15% or ROA or return on assets was 7%, both of which are relatively consistent with those for Q4 '02.

For calendar 2003, our ROE was 16% and our ROA was 7% as compared to an ROE of 12% and ROA 5% for calendar 2002, reflecting the 2002 nonrecurring charges.

Now, let us move to the balance sheet. As of December 31, 2003. Again starting at the top, our year-end '03 cash position was $76 million versus $58 million on December 31, 2002, an increase of $18 million.

Cash provided by operating activities of $26.7 million was partially offset by $3.2 million in dividend payments, $2.5 million in payments on the principal portion of the prior year's acquisition notes and $3.3 million in capital expenditures.

In addition, we received $726,000 from stock options exercised by employees and directors.

As of December 31, 2003, working capital totaled $106 million, and total assets were $358 million where at December 31, 2002, working capital was $82 million and total assets were $312 million.

Moving on to our most important asset, gross receivables. They increased from $188 million at December 31, 2002 to $202 million at December 31, 2003. Our allowance for doubtful accounts decreased slightly from our previous fiscal year end by $574,000 to $10.5 million.

During 2003, we provisioned $6.3 million and wrote off receivables totaling approximately $6.9 million. While on the subject of receivables, let us take note of our most important asset quality REO consolidated days outstanding. They were 25 days, which compares well with 29 days for the same quarter a year ago.

As for the other side of the balance sheet, total liabilities increased by approximately $25 million from our previous fiscal year-end, primarily due to increases in accounts payable.

Finally, at December 31, 2003, consolidated shareholders equity amounted to $148 million, an increase of $21 million over our previous fiscal year end.

Thank you for staying with me during this necessarily drawing detailed overview of our Q4 '03 numbers.

Before we go on to the question and answer period, let me turn the leadership back over to our chairman, Paul Stebbins.

Thank you, Frank. Great job. Let's go ahead and open up for Q&A.

Thank you. Our first question comes from the line of Joe Chumbler from Stephens, Incorporated. Proceed with your question.

Congratulations on a great year, guys. Let me start on the Marine side. You had a nice shift to the resell business. What drove that and why didn't we see a better pickup in gross profit?

A couple things. As we shifted our model, our emphasis has been trying to build our outsource model and are partnering with the larger blue chip fleets.

What you see is we have been successful in achieving that and there has been a change in the mix of the business towards the resale side, but not like what was seen in our aviation states.

We're focused on a blue chip clientele and that has resulted in higher margins. The trend is positive as it speaks to durability of account base over time.

Okay. So maybe this year would you expect to see maybe more volume increase than gross profit expansion?

Again, I'm a little loathe to predict that. I'm not sure I can do it with accuracy or precision. That's the logical outcome as we penetrate some of the larger international fleets.

Overall, how would you assess the health of the global shipping industry now?

It's been pretty good. We've seen a lot of activity in both the container, dry bulk and the thing driving more anything has been the Chinese economy. That vacuum cleaner you hear is the huge economic engine of 8 and 9% growth in China which is sucking up huge amounts of raw material as well as oil, so much so it has changed the entire complex of the patterns.

I would say that we're going to watch with interest to see whether or not that could be sustained. I think generally speaking the industry analysts and there are people out there smarter than I am.

The analysts are predicting you will see growth in China through at least 2004 and maybe into 2005. From a ship owning point of view, that's good news.

That would help you more on the Marine side aviation?

It just happens to be in terms of the raw material airport that is not being transported by aircraft. Long-term China is an important market for aviation.

We have heard statistically intimated if you look at long-term aircraft projections for China and its growing economy, they are anticipating that 2200 new aircraft will enter the Chinese space in terms of the development of the Chinese carriers.

If that happens over the next 20 years, you're going to see a tremendous amount of growth.

China -- I think in the market is watching China with a combination of awe and caution to see if they can keep this going and what will be the residual fallout as it matures and develops.

It is not clear at this point and nobody can predict it with precision. We've watching it carefully. It speaks to both of our markets aviation and Marine. In terms of the short-term shipping trend. it is related to Marine.

Okay. Let me switch to the America West contract. Can you talk a little bit about how you expect the volume to ramp and the effect on aviation gross profits this year?

Yeah. As we've talked about before, the fuel management model is a strategic play. We're driving volume agree gags and the ability to impact the purchasing power across the entire portfolio.

In terms of real income streams, it is a very different model, as you know. It is a fee based structure. It isn't the traditional model we've had.

So we see that the volumes primary impact will ramp up effective March 1. That's when the contract begins to go into effect.

We're now in the midst of and have been ramping up in the last couple months, training, transfer of information, what have you. All of that has gone smoothly.

We feel good about having a March 1 kick-off date that will be positive and everything will go seamlessly. Those volumes will ramp up at that point.

Again, it is difficult to predict with precision what that is going to do to gross profit. We think it is positive. We know from a fee based point of view it makes money.

We're excited because it drives our strategic model which is all about moving supply back to the refinery and driving efficiency in our purchasing power. That's something that has a positive impact not just on America West volume because it is very good for the customer.

They get the benefit of that as well. It drives our model in a way that is very positive.

As we get into it with this kind of scale, we will have a better feel Q3, Q4 in terms of its true impact.

Thank you.

Our next question comes from Greg Eaton from Safeco Asset Management.

Talking about the America West contract and the fuel service and other fuel service contracts you'll have, you're getting a fee. The volume that America west is buying and burning is not running through your income statement, correct?

It is a buy and resell. We prepay the money and go out in our name and buy the fuel. That's an integral part of our model. That gives the act to drive efficiencies when we tender for fuel.

That's how it's been. That's how Jet Blue was. That's how it was for Midwest Express. This benefits the customer. If they are late, they don't get the benefit.

We're buying in large bulk chunks, drives efficiencies in the market. This is why the customer buys into the concept because they're getting better pricing in terms of their cost structure and getting transparency in terms of back office review, inventory optimization, pipeline, fee negotiations, all sorts of things.

From our point of view, we get the benefit of the cash. It is prepaid to us. There are a lot of reasons we think it makes sense to do it that way.

The cost of that fuel is in costs of goods sold?

That's right. It is running through our balance sheet. The model wouldn't work otherwise.

Your cash flow is perfect on that. You are getting prepaid?

That's correct. In that America west incident it is 100% prepaid. We are is sitting on the money. You in particular have history with the country.

As you think about we've transformed the model, it has change the business mix, change the business model and derisk the portfolio which we've done very well. We like this very much. It derisks us from the credit perspective.

It is allowing us to drive economies of scale in a market that's open and dynamic and allowing us to get value as we buy barrels back at the refinery gate which is exciting.

That's great. The United contract hasn't started yet?

It did effective January 1. We estimate the gallons involved is 90 million gallons. Part of the success of the United fuel corporation supply model is they were agree gating large amounts of volume with their main line lifts patterns and selling to third parties.

If they were to lose the volume, it would dilute the value of purchase value. We've been able to move in there and allow the contracts to continue with blue chip airlines they've had relationships with.

United is happy because we're in a position to do that. It allows them to get the benefit of the volume flow. We are in a position to efficiently manage it from a prospective and Morgan Stanley is happy.

We're handling the retail on the processing side. We found our niche for two big companies and we think that's very exciting.

Okay. That volume will also be similar in that it runnings to the top line in costs of goods sold. You are not being prepaid. It is a traditional customer?

Yeah. We have the absolute right to decline a customer if we don't think they're right. Morgan likes it because it drives volume.

Their rationale for doing this deal with united was, they're driving a much bigger play in terms of physical volume in the jet business. They're already an active player in the diesel market.

They're a large bank, trading company. They are not in a position to handle some of the more familiar nature of the retail interface, whether the customer servicing side or ticket collection or rationalizing the tickets or back office processing. That's a real nuisance.

They want to say I want to move 25,000 barrels and you take care of it. We never would have had occasion to meet Morgan in this capacity. I think they are pleased we can fulfill that role.

United has been able to maintain a competitive posture. It is interesting. We're excited.

Did you have to make a payment to United or Morgan Stanley to buy into this contract?

No. We were solving a problem for them.

Really? So you're just stepping in to these customers, then, essentially?

We're stepping in. We're doing it at a margin. We're not paying Morgan and united. We're stepping in and taking over contracts at a margin that allows us to make sure we can make some money off it.

There's a little bit of profit sharing if the system works well. We have some profit sharing on the united side. It is very small. It is sort of like a commission thing.

But not a big upfront one-time --?

No, not at all. In some ways, it is business as usual from our perspective. Again, think about it. It introduces us to a portfolio customer that wouldn't have been our traditional base, but is very exciting because we have entree into customers saying, this works well and World Fuel is being identified as the reason why they can continue to maintain the competitive posture in the market.

As you might imagine, there are plenty of places these customers are with that are outside the united network. We are looking forward to the opportunity to take these customers into other locations now that we have a relationship with them.

We never had that opportunity before. It is extra; -- A, it makes money. B, it is good in terms of validating our business model and creating a new dimension for our service offering in the space, in the aviation industry.

More importantly, it opens up customer relationships and a broader opportunity to service these customers than we've ever had before.

So I think that we're going to do $120 million in additional sales. This is a great opportunity for us.

I'll say. That sounds great. If I could talk about the other growth prospects for 2004. You mention an office in Moscow. Would you have an estimate of how many offices you would plan to grow into in 2004, new offices where you would do trading?

No. I don't. I don't have an estimate of other offices might be. It is not unlike what we've done in the past.

We have found the successful business model has been to spend a lot of time developing and understanding a sophisticated understanding of what drives these markets.

It was only when we really felt that we had kind of knew exactly what we could achieve did we plant a flag and open up an actual space as opposed to visiting and trying to manage it from afar.

As you might imagine, since the change from the Soviet Union to Russia, it has been enormous transformation in the Russian economy. We've had activity for many years.

I'll give you some perspective. When they broke up after the fall, one airline broke up into 350 different airlines. You cannot comprehend how much was going on in that one state-controlled entity.

Over the years, some have fallen by the wayside. You have a structure of about 250 airline which is are actively trading and 57 of those trade internationally.

We have been successful by having select relationships with a couple of those carrier that is have been sophisticate indeed their purchasing strategies, English-speaking personnel on board and more comfort with dealing in the international space.

As Russia continues to transform a broader population within that 57 carriers is now locking for help in the outside market and what we found by having a local presence is you are really in a position to speak Russian and continue to make them feel more comfortable with using our service as they venture out into the international market.

The other thing that's interesting is the supply side is changing dramatically. Anybody that's read a newspaper can see the emergence of the political stuff.

Eukos is a large company. These have a prominent presence in your. You see them branding gas station in the western United States. They are large.

They will play an important role as Russia emerges as an economy and the ability to help us source fuel is a significant part of our strategy.

That's something we weren't prepared to do earlier but I think we felt now it was time to do it. We've been doing business with various kinds of Russian carriers for about 13 years.

Our own view was that until such time as the economy had matured enough that we felt comfortable that we could go in and build a local presence. It is an office, a facilitating office.

It helps enhance what we were driving from our London office. We think the changes are exciting. We think there is now opportunity even in our first couple weeks of operation, it is evident it was a successful thing to do. We're pleased.

In terms of other areas, we are always looking at markets, at customers. We're looking for key people. The history of our company, which has been successful, is when we identify key talent in a particularly strategic market, we hire the talent and built an office around them.

That model has been successful now for 15 years. I think we'll keep that open mind as we meet people who we think understand our model, understand our culture.

They get what we're doing. Then we'll set up an operation based around those people. We'll look at other markets.

It isn't something we've gotten targets we're rolling out. It is people driven and market opportunity driven.

Good, good. Speaking of China earlier, how many offices do you have in China?

We have managed that from our Singapore operation. We do have representation there that helps us.

It is not unlike a lot of company that is weren't prepared to set up there until they figured out what the landscape was all about. You have an agent who helps you there.

We have Mandarin speaking Chinese operatives in our Singapore office who have been going to China for many, many years.

I was visiting China back in 1984 and doing presentations to the state shipping fleet. We've had marketing initiatives from our aviation and Marine companies throughout China.

At the very moment we are evaluating something again, person driven, person that might be perfect for the model. A very sophisticated guy, really understands the model, one of these tremendously interesting, young and hungry new Chinese generation of people that we think might be a good addition to our crew.

We've had occasion to know the person by meeting them at international conferences for a couple years and done business. We're looking at that now. I would say perhaps Beijing might be our next possible lotion.

Good. One last question for Frank. Could you repeat the operating segment, operating numbers. A little bit slower this time.

Give me a second. I'll get to it. I was going to make sure I gave you the same information as we had the last time. Income from operations.

Calendar. Do you want the quarter? I'll give you the calendar and go back to the quarter.

For calendar 2003, income from operations was $27 million. As compared to 22 million. The increase is 34% year-over-year.

Two-thirds of the increase results from the 2002 nonrecurring charges. One in particular. The executive severance charge of $4.5 million when our chairman retired. So that was the calendar.

For the quarter, the quarter for '03 was $7.1 million as compared to 6.8 for the same quarter in '02 and increase of 315,000 was 4.6%. Marine was 4.2 million and aviation was $6.1 million. Marine was relatively flat against the fourth quarter of '02. Aviation was up 25%, 1.2 million.

The difference between those two in total and the 7.1 is the corporate overhead?

Corporate overhead is -- yeah. $838,000. Of increase in corporate overhead year-over-year.

Got you.

Paul again. Just back in the China thing. I'm glad you brought it up. I would tell you that as you look around the world, China is a pretty exciting area for us. That economy is booming.

As I alluded to, we have evidence to suggest there will be 2200 large aircraft entering that market over the next 15, 20 years. We have been successful with some of the Chinese carriers as they've expanded their portfolio.

As a market, you've seen what's going on. We've talked about the Marine analytics with the GDP growth rate and driving change on the shipping side. We think there is promise there. We are highly focused on that.

It could be exciting what's going to happen in that market for us, particularly for our company where we are real genuine value for them. As we talked about in some past conference calls, we've been successful in terms of being a tremendous help to airlines going into places like Shanghai and what have you.

We are the guys who crack the code, all the local taxes, logistics and stuff. These are things we think will represent more opportunity as we go forward.

Great. I'm glad to hear it. Thanks a lot.

We have a question from the line of Ben Segal from Winchester Capital.

Good morning. Can you comment on the increase of inventories? I jumped on the call late. I don't know if you mentioned that item.

Ben, this is Frank Shea. The increase in inventories is due to the fact we are buying more wholesale. We sometimes will buy jet and move it up through the pipeline. It takes a couple weeks to get to some of the places we supply. That's fully hedged inventory. We get, basically, advantageous by doing it that way.

You did a great job. Thank you.

Our next question is a follow-up question from Joe Chumbler. Please proceed.

I want to follow up on the operating expense line. We saw corporate come down throughout the year. I'm wondering if the current quarter's expense level is what you expect in '04?

The answer, Joe, is that operating expenses -- what I measure is the efficiency ratio, which is operating expenses as a percentage of gross profits. It's been running 70, 75% the last couple quarters.

We're in the groove. That's what it has been averaging as we scale up. Eventually we hope to make improvements. Through some of these programs that we've initiated and which continue as we talk and, basically, is an ongoing thing.

When you're scaling up volume as we have, it is harder to, at the same time, achieve efficiencies because you're busy with the scale-ups.

My thinking is it is in the right range. We expect it to be in that range for at least the immediate and foreseeable future.

With the America West contract ramping up, you don't expect to see a significant increase in corporate in the second quarter?

This is Paul. We don't. We feel we've got scaled up on the side to do that. These are large investments in corporate structure. It is more in the servicing side.

We're beginning to see the benefit of the economies as we grew the Jet Blue and Midwest Express.

Some of that is in place. It is not a one for one. We can build a larger scale of business through an existing cost base.

We are feeling good about that. I think we have the ability to take that to scale without significant increases in the overhead side. Just generally, it is the vigilance is the price of liberty. We monitor that. We are trying to grow and reinvest in this business model.

We think we have a lot of opportunity. Cost is part of that. It is efficient management, having discipline internally and watching it.

Thanks.

Our next question comes from the line of Mort Langer from Langer Partners.

The stock price has done well. It hasn't reflected the powerful fundamentals as a company. In my opinion, I think it might be because of inadequate dividend and I will liquidity in the stock. Can you address that?

Sure. Thanks, Mort. It's Paul. There are a couple things.

Let's talk about the dividend first. From our perspective, we are in a mode where it is management's disposition that there is sufficient opportunity in our growth model to deploy a large amount of cash into getting us to the flex level, and while we are still testing the tolerances of that over this next year, our disposition has been not to want to go ahead and spend it on the dividend.

That's not to say we won't consider that. Right now, given some of the things that are going on in our business models on the aviation and Marine space, it is our view there will be opportunities to successfully deploy those funds in the business and get a significantly better return than if we were to give it out as a dividend.

So that's our disposition at that point. Obviously, we'll be guided by our shareholders ultimately. That's our management judgment at this time, is it's better spent invested in the business. We have a lot of confidence that we can do that.

With regard to liquidity, again, we do get questions about that. We've never been persuaded that a stock split or any of these things is particularly useful. It is a little bit cosmetic. Again, we have to be guided by our shareholders. About 70% plus of our share holding base is institutional.

We've had this conversation with some of the large holders. There's never been any indication that they thought a split would do anything that was useful. They saw it as sort of a cosmetic move that we didn't need.

However, obviously, if our share holding community made that a high priority, we would take it under consideration.

At this point in time, we have no particular need to do a secondary offering, to get other shares out there, although that's not to say we wouldn't give that consideration were there to be an opportunity that we felt gave us the proper justification.

We would look at a mezzanine deck before a secondary. I don't know whether that helps you, Mort. It is management's job to decide that we have a lot going.

There is a landscape of opportunity. We feel the money is better deployed being reinvested in the business.

Liquidity is not something our shareholders are pushing. You are a shareholder, I presume. Others will be guided by the feedback.

Appreciate the response. Thank you.

At this time, there are no further questions. I will turn the call back to you Mr. Stebbins. Please proceed.

We appreciate you joining us today and being participants in the success of our company. We are pleased with the year. We look forward to the next call. Thanks for being here.

That does conclude the conference call for today. We thank you for your participation and we ask that you please disconnect your lines.