World Kinect Corp (WKC) 2004 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the the World Fuel services first quarter 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, please press the one followed by the four on your telephone. As a reminder, this conference is being recorded, Wednesday, April 28, 2004. I would now like to turn the conference over to Mr. Mike Mason from Allen & Caron. Please go ahead, sir.

Thank you. Good morning, and welcome to World Fuel Services results conference call for the first quarter ended March 31, 2004. As mentioned by Charmaine, I'm Michael Mason of Allen & Caron Investor Relations. Before we start this morning's call there are a couple of items I would like to cover. Many of you received a copy of the press release announcing the company's results for the first quarter ended March 31, 2004. It was released this morning at 8 a.m. eastern standard time and covered by Dow Jones at 8:06. If you did not receive a copy of the press release, it is posted nn the client section of our web site at www.AllenCaron.com or call our New York office at 212-691-8087 and we will email it to you right away. It is also posted on Yahoo finance.

You can access the replay of the conference for seven days by calling 800-633-8284. International callers should dial 402-977-9140, using conference ID 21193035. Also this call is being broadcast live 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 the 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 political economic, regulatory or environmental conditions, the loss of key customers, suppliers or key members of 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 Securities and Exchange Commission filing. 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 companys' progress and 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. Thank you very much. Good morning and thank you all for joining us. With me today are Michael Kasbar, President and Chief Operating Officer, Bob Tocci, President of our marine segment and Michael Clementi, President of our aviation segment and Frank Shea, Chief Financial Officer. This morning we announced earnings of $6 million or 52 cents per diluted share for first quarter of fiscal 2004. This represents a 13% increase in net income year over year. Revenues and operating income increased 39%, and 11% respectively, year over year. Gross profit, however was flat year over year reflecting the somewhat than normal higher gross profit reported in Q1 2003, which was associated with the war in Iraq. Our cash position at quarter end remains strong at $76 million, although this number was reduced as of April 2nd, by approximately $50 million due to the recently announced acquisition of the Tramp Oil group of companies.

The acquisition of Tramp was not only the most significant and exciting event of the quarter but was the largest acquisition in the history of World Fuel. Based just outside of London in the U.K Tramp is one of the most respected companies operating in the international marine fuel market. Founded 28 years ago, they now employ 85 people who operate from ten offices in ten countries. Their international team is comprised of highly skilled professionals who are top practitioners with many years of experience. Tramp's market focus has been different than from that of our other marine operations and we believe their portfolio represents an important strategic compliment to our existing business. Tramp will help to expand our global footprint, add depth to our global market position and further diversify our customer base and while we will look to integrate a number of back office business processes, systems and financial control functions immediately, Tramp has a strong management team and will continue to operate in the market as an independent brand. The acquisition of Tramp is consistent with our long standing strategy of identifying best in class companies whose geographic or market position compliment our own. We are proud to have the Tramp dream -- team join the World Fuel family, and are excited by the prospects for continued growth in our business.

We would also like to thank all of the members of the both organizations who worked so hard for many months to make this merger a reality. They are to be commended for their efforts. Moving to our aviation. In our aviation segment we continue to refine our service offering with a view towards solid execution. Our AmericaWest contract which commenced March 1, is off to a great start. Our relationship with United and Morgan Stanley continues to grow as we look to add new supply locations. In the corporate space, BASEOPS had a record quarter and our Jefferson joint venture produced its best results ever. They are collaborating to more deeply penetrate the international services market. In our core business our sales, the charter, cargo and passenger airlines continues to grow and expand internationally. We are very pleased with the steady development of our business model, in each major segment of the market. World Fuel is off to a good start in 2004. The economy seems to be taking a positive turn. Shipping rates, in general, remain strong and with the exception of some very large domestic airlines the aviation industry seems to be holding its own and in some cases thrive.

Of course both industries face the challenge of managing higher fuel prices, further highlighting the importance of having a robust price[inaudible] management program. World Fuel will continue to add value to its customer, by helping them construct useful solutions in this area. And our global supply partners continue to rely on our strong balance sheet to give them the comfort they seek in evaluating counterparty risks in an ever changing market. We are pleased with the first quarter results and excited about our prospects for thisyear. I will now turn the call over to Frank Shea for details of the financials. Frank.

Okay, let's go through the numbers. Starting at the top of the P&L with revenues. Total revenues for the first quarter of 2004 were $912 million, up 39% year on year from revenues of $658 million in the same quarter of 2003. Marine segment revenues were $479 million, representing organic competitive growth of $81 million or 20% compared to the comparable calendar quarter last year. This increase in revenues is all due to higher volumes of marine fuels sold, that is the average price of fuel sold decreased. The details are that quarterly unit volume of marine fuel sold increased 37% while the quarterly average price decreased 12%. Since our unit volume of marine fuel brokered was relatively unchanged our total quarterly unit of marine fuel resold plus brokered increased by 18%, to 4.5 million metric tons.

For the quarter just ended our fuel reselling activities as compared to our brokered volume represented 57% of total marine business activity, up from 49% in the same quarter a year ago. In our aviation services segment, revenues totaled $433 million for the quarter just ended an increase of $173 million or 66% over the comparable calendar quarter of 2003. This increase in revenues is due to a 66% 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 in total 377 million gallons during the quarter just ended compared to 228 million gallons in Q1 of 200 3. This increase in volume is primarily the result of both ne commercial business, as well as our fuel management business growth. Also contributing to the revenue increase was the consolidation in the first quarter of 2004 of Pathco our aviation joint venture with signature flight support. This change in accounting stems from the recent accounting pronouncement called FIN number 46, Consolidation of Various Interest Entities.

Prior to the consolidation of Pathco in Q1 '04, we only recognized our share of the profits of Pathco in other non-operating income. Enough to revenues let's go to the gross profit. The gross profit for the first quarter of 2004 was $27 million, a slight decrease of $380,000 or 1% compared to 2003. Specifically, marine segment gross profit decreased 17%, to $11.8 million, compared to the first quarter of 2003. The lower gross profit for marine is primarily due to a lower than last year, but not a particularly low, gross profit per metric ton of fuel sold in Q1 of '04. In our aviation group, gross profit increased 15% to $15.1 million, compared to last year. This increase was primarily due to new commercial business. Also contributing to the increase in gross profit was the consolidation of our joint venture Pathco as previously discussed.

Our gross profit margin for Q1 of 2004 was 3% versus 4.2% in Q1 of 2003 and 3.3% in the fourth quarter of 2003. Marine's gross profit margin of 2.5% in the quarter just ended represents a decrease from 2003's comparable quarterly gross profit margin of 3.6%. This decline in our marine gross margin was largely due to the higher than normal level of gross profit per metric ton earned in 2003, the Iraq war quarter, as well as to shifts in the business mix. Aviation's gross profit margin also decreased from 5% a year earlier to 3.5% in the quarter just ended. In more useful terms our gross profit per gallon of fuel sold was 4 cents 4.0 cents for the quarter just as compared to 5.8 cents a year ago. This decline in gross margin was primarily due to the strong volume growth in our low margin fuel management business. Next in our financial review our operating expenses, which for the first quarter of 2004 were $19.3 million, as compared to $20.4 million in the same quarter of 2003, a decrease of $1.2 million or 6%.

The decrease in total operating expenses was due to a lower provision for bad debts, partially offset by slightly higher salaries and wages which were up 2%. As well as increases in other operating expenses which were up 6.5%. The factor in our higher salaries and wages expense were accruals for achieved and potentially achieve performance-based incentive comp payouts. The increase in other operating expenses was primarily due to acquisition costs incurred and expensed in Q1 '04 related to the previously announced Tramp Oil acquisition that occurred earlier this month. Continuing with our P&L review, we come to income from operations which for Q1 '04 was $7.7 million, as compared to $6.9 million for the same quarter in 2003, an increase of $792,000 or 11% year over year. Our marine segment earned $4.4 million in income from operations in the quarter just ended, which is a slight decrease of $214,000 or 5% from Q1 2003.

Our aviation segment's income from operations for this year's first quarter was $6.9 million, an increase of $1.8 million or 36% over the comparable quarter last year. For the quarter just ended our operating income growth provided by our aviation segment was partially offset by $822,000 of higher corporate overhead. The explanations for the increased corporate overhead is consistent with that which I just mentioned a few moments ago when discussing operating expenses. Perhaps this is a good time to review our segment ROA ratios. For the quarter just ended our operating return on marine segment assets decreased from 10% to 8%, while our return on aviation segment assets increased from 17% to 19%, as compared to Q1 '03. The next stop on our P&L review is net non-operating income which for the first quarter of 2004 totaled $175,000 as compared to net non-operating expense of $253,000 during the same quarter in 2003.

This variance was primarily due to the recognion of foreign exchange gains in 2004, as opposed to foreign exchange losses in 2003. Our income before taxes was $7.9 million for Q1 '04 as compared to $6.7 million for the comparable quarter in 2003, an increase of $1.2 million, or 18%. As for taxes our consolidated effective tax rate for the first quarter 2004 was 23%, for an income tax provision of $1.8 million for the quarter just ended, as compared to 21% or an income tax provision of $1.4 million for Q1 '03. Q1 2004's higher tax rate primarily resulted from changes in the proportion of operating income contributed by our various subsidiaries, operating in different tax jurisdictions each with their own effective tax rates. Due to the consolidation of our aviation joint venture, Pathco, as previously discussed, we recorded a minority interest charge of $109,000 for the first quarter of 2004 relating to our joint venture partner's share in the profits of that entity.

Our net income after taxes and our diluted earnings per share for the quarter just ended were $6.0 million and 52 cents respectively as compared to net income for the first quarter of 2003, of $5.3 million, and diluted earnings per share of 48 cents. Finally for the P&L we have a few key ratios. For the first quarter of 2004, our return on equity or ROA of 16% was the same as Q1 '03 and overall return on assets or ROA was 6% as compared to an ROA of 7% for the first quarter of 2003. Now let us move to the balance sheet, as of March 31, 2004. Again starting at the top. Our quarter end cash position was unchanged at $76 million. Cash inflows provided by operating expense -- ah -- operating activities of $858,000 and by stock options exercised by employees of $1.7 million, were offset by $828,000 in dividend payments, $1.6 million in payments on the principal portion of prior year's acquisition notes and $266,000 in capital expenditures. As of March 31, 2004, working capital totaled $116 million, and total assets were $440 million. Whereas of December 31, 2003, working capital totaled $106 million in total assets or $358 million.

Moving on to our most important asset, gross receivables, they increased from $203 million at December 31, 2003, to $256 million at March 31, 2004. Our allowance for doubtful accounts increased slightly, from our previous fiscal year-end by $149,000 to $10.7 million at March 31, 2004. During the first quarter of 2004, we provisioned $885,000 and wrote off receivables totaling approximately $736,000. While on the subject of receivables, let us take note of our most important asset quality ratio, consolidated days of sales outstanding, or DSOs. At the end of the quarter just ended consolidated DSOs were just 24 days which compared quite well with 26 days for the same quarter a year ago. As for the other side of the balance sheet, total liabilities of $283 million at March 31, 2004 represented an increase of approximately $74 million from our previous fiscal year-end. Primarily due to increases in accounts payable.

Finally, at March 31, 2004, consolidated shareholders equity amounted to $157 million, an increase of $9 million over our previous fiscal year end. Thank you for staying with me during this necessarily dry in detail overview of our Q1 '04 numbers. Now before we go on to the question-and-answer period, let me turn the leadership back to our Chairman, Paul Stebbins.

Thank you, Frank. Charmaine, we'd like to open it up for question-and-answers, please.

Thank you. Ladies and gentlemen, if you would like to register a question please press the one followed by the four on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdrawal your registration, please press the one followed by the three. If you're using a speaker phone, please lift your handsets before entering your request. One moment, please for the first question.

Our first question comes from the line of Joe Chumbler with Stephens Incorporated. Please proceed with your question. Thanks -- please proceed with your question.

Thanks, good morninging, guys.

Hi, Joe.

On the marine side, can you just talk a little bit about what's supporting the results there?

Sure. I would say we've increases of trading volume whihc are a good validation of what we saw in terms of the turn around of the shipping market and I would say that's the primary driver is increases in volume, volume on the he trade side.

Okay, and what about on the gross profit side on marine, profitability is a little better than I expected it. Does that appear to be sustainable or is there any anomalies in the quarter.?

No -- I mean it's hard to predict with complete precision, Joe, as you know but I would say there are no anomalies that we detect right now that are impacting it. So, you know, we'll see how it proceeds but I think we're feeling good about the general market conditions and what's happening in the international side with shipping.

Okay. And now on the Tramp acquisition, could you just talk about the business mix that you are acquiring? The resell versus the broker business and how you expect that to contribute to your results?

Sure. Tramp's entire business model is that of a resaler. They do not have a brokerage model. So it will fall now under the category of resold or traded volume. And in terms of how we see it integrating, Tramp historically has had a very well established name in the market. They've enjoyed a very good reputation; although of, what is is of particularly interest to our group is that they have targeted a slightly different segment in the market, both regionally and in terms of shipping sector. So we think it represents a good compliment to our existing business. One of the most important attractions to the acquisition is that it does not represent the overlap with our sort of current portfolio, if you will through the rest of the group is negligible. So we think it will fit in well and represent a good compliment to our overall blended portfolio.

Okay. And then just on the acquisition itself, how much did you put on the revolver?

I have to get that. I think -- did we borrow, I think 30, Frank. Yes, between 30 -- yeah. It was about $30 million, Joe. So, you know, again, it's reduced our cash position as I discussed in the opening line, but, again the structure of Tramp is basically we paid $83 million, for a company whose net assets were 77 million and 63 million of that is cash. So we feel pretty good how it lays out structurally.

Okay. Let me switch over to aviation real quickly. Can you break out the benefit to gross profit that came from the Pathco accounting adjustment?

We do. It's relatively small. Do we have that number handy at all.

It's less than 10%. It's like $700,000 in gross profits.

Okay.

Or excuse me 416.

416, I'm sorry, is the number, Joe.

That was the -- that was the contribution to gross profit?

Right. Now that we're consolidating it. You know it used to just be in other.

Okay.

It's actually more than that. Joe, I'm being corrected yet again. We're not used to reporting it this way but it's just over $700,000.

Okay. Let me talk about volume. It was prety much higher than I expected and I thought I had the UAL business factor in. Was there any new contracts or new business that came in the first quarter?

Yeah, I would say that just in the normal course of business we've added volume not only in our core business, where, you know, we continue to have great success, just in our core competencies, the cargo, the charter, the passenger business has grown. I would say there's no one specific huge chunk. It's really just been the steady ability of the sales force to continue to penetrate that market, both domestically and internationally. And I would say that's where a good chunk of the volume continues to grow but that's steady eddy. And then we've there some contributions from the fuel management but again as you said the United, there's nothing new there. It's -- as we talked about at the last call, we were integrating first and third party stuff and we continue to evaluate new locations with them.

Okay. And then just finally on AmericaWest I guess you've two months under your belt. Can you give us an update of how that's going?

Sure I would say that we're very, very, pleased. The team has done a phenomenal job in terms of executing and I would say AmericaWest is delighted with how that is is proceeding. It is -- it is really meeting and I would say exceeding all of the objectives they set out which was for them to begin to get a real, true sense of control over their entire spend, understand how the system was working and how their fuel program was working. The team has just done a great job and I would say we are delighted with the early read on how that's going. It's great news.

Okay and then finally what's your annualized run rate now in terms of gallons? And are you seeing any benefits as far as purchasing goes in the marketplace?

Yes. On terms of run rate, I would say we're going to be, you know -- it's a moving target but it's hard to say. You know, we're going to be somewhere between 1.6 and 2 billion gallons but again, it's a little bit tough because things are coming in as we go along. And you had AmericaWest starting March 1, and you've got core business coming in. I can't give you with precision what that is Joe, but we're feeling pretty good about those levels. And in terms of our buying power, yes, you know, as we had discussed strategically we are pleased with the fact that the advent of the larger volume is allowing us to achieve better economies of scale in our overall purchasing exercise. So it's driving a good result throughout the entire portfolio.

All right. Thanks.

Sure. Thank you.

Ladies and gentlemen, as a reminder, to register for a question, press the one four. And our next question comes from the line of Greg Eaton with Safeco Asset Management. Please proceed with your question.

Thanks. Good morning, guys.

Hi, how are you. Sorry we got you up so early.

Okay, It is okay. First for Frank, I wrote really fast this time, but I didn't get everything. On the operating -- income from operations, could you repeat what the contribution was from the marine segment?

Sure. Sure, I can. I'm sorry, Greg. I had probably too much coffee this morning. Marine segment earned $4.4 million of income from operations. A slight decrease of 214,000 or 5% from Q1 2003.

Rrright, and aviation was 6.9 million or up 1.8 million.

Right. You got it.

And the difference between those two is -- and the consolidated 7.7 million is the corporate unallocated?

It's the corporate -- right, it's the corporate operating expense increase, which were for those factors I gave you, namely, the Tramp expense and the -- and the incentive comp.

Okay. Okay. Sticking with the marine business for a second you said -- I think you said that volumes were up, but prices -- the average price was down in the marine segment this quarter.

That's correct.

Down, I think 1% and the volumes were up 20%.

Mm-hmm. I just found that interesting since fuel everywhere else I hear about, fuel was kind of off the charts for this quarter. For so many uses of fuel.

You are thinking sequentially quarter to quarter? This is against first quarter last year.

We're up 4% over the sequential quarter, Greg.

I see. I see. Okay, right versus last year and the war effect. But it's still at a pretty high level then?

That's right. It's running at about $183 a ton. On average.

Okay. Okay. Turning to the aviation segment, on the UALcontracts, in the first quarter, could you estimate how much of the potential business that you think you could get out of the UAL relationship, you actually participated in by the -- during that quarter? And how much is is left to -- in terms of potential customers to glean from this relationship?

Sure. Let me break it down to a couple of components. You'll recall that when we discussed United, the first stage of the relationship had us to do with taking over assignments of third-party contracts, third-party sales to members of the Star Alliance and other airlines that worked with United to buy fuel in certain hub locations. And we took that over and some of those contracts still had many months to go, some were going to be renewed in very short order but we took them over sort of en masse. As we've been going along we've been very pleased to see that we've been successful in rolling over and renewing some of those contracts. So that was the good news. That was something we could not know for sure but we had good success in rolling them over. So I would say that we're on course and perhaps slightly exceeding what we expected to maintain with that first phase. It's unclear beyond that because we're still exploring the second phase which has to do with being able to help them supply in other sub-hub locations that is to say smaller airport locations outside of their main lifting patterns and we're beginning to refine that strategy with Morgan Stanley and United and we expect there'll be some further developments over the next couple of quarters.

Okay, so in terms of potential of the total revenue pie, then the biggest piece of it, you've already got? In this quarter?

I mean, I would say that the potential is as big as the current volume that we're handling but, again, it's going to roll out probably not as -- the first days were sort of a one-time chunk turnover. The rest is more evolutionary. So I think that we will also see, you know, continued volume growth in that initial phase because those third party contracts, we expect to continue to grow. And perhaps even do them in additional locations beyond where we currently have them contracted. So there is going to be the opportunity tore growth but I can't give you the precision on what that actual number will be.

I get the picture. I get the picture. If we could turn to the Tramp acquisition for a second.

Sure.

Who did you essentially buy from? Was the business owned by any of the employees who are currently operating it? Or who actually owned the business?

There were two owners one was the principal owner and founder, and guy name Chris Carlson who is a gentleman living in the UK. He founded the company about 30 years ago. Some 20 years ago he brought in a junior partner, if you will, who had come with tremendous financial background, as well as sort of a management background. Anyway of the two sellers, they both sold their interests but one of them has stayed on as the Managing Director of the company, which we're very pleased. This is the guy with a tremendous amount of seasoned experience, and it brings a level of continuity to the whole thing. We're very, very happy with. The primary selling shareholder is somebody who is now in their mid-60s. They spent their lifetime committed to building this business. They were looking to Monetize some of that value and to retire and he was somebody who built a very paternalistic and culturally strong organization and he wanted to make sure that it was in safe hands and that it got sold to someone who was committed to the business and would represent safe harbor for his employees who have grew up with him over the years.

We feel a lot of his motivation in selling to World Fuel is we represent a company that had very successfully integrated other cultures and we're very committed to the business, and we're very committed to keeping his people in the program. So I think that's what finally was the catalyst for Chris to sell. So he's very happy that it's gone to somebody who, you know is going to be committed to the business. It's a strong and young management team underneath the remaining shareholder there is a top flight of another sort of half dozen key management people around the global organization that we are very, very impressed with. These are really solid practitioners of their craft and they're people who really understand the business in great detail. So we feel delighted not only did Tramp, you know bring with it sort of a portfolio and a footprint around the world but they brought some real depth and we're delighted with that as well.

Those people underneath, the two owners, are they essentially stayed on with the company postacquisition?

Oh, yeah, no these are commercial operatives who are running, you know, the business day to day and supervise teams of traders. And are deeply involved in the business and, yeah, absolutely. They are all staying on.

That's -- that's -- that's great. You mentioned that the customer base was somewhat different and the market focus was different geographically. Could you expand on the difference between the two companies in general? For instance you said they are 100% trading as opposed to zero brokerage. Are they trading gross profit levels similar to yours? Greater than or less than in general? And why would that be?

Well, to be frank, we are reluctant to discuss some of that on the call for commercial and competitive reasons.

Okay.

There are there are lots of people who potentially listen to this so, I would say that some of that is commercially sensitive but I would say that we feel confident that they understand how to do the reselling business and they'll do a good job with margin in their various areas. They have both portfolios of customers in certain regions throughout Europe, the Mediterranean, and the Far East, they were not the target of our team. They are people that we've known for a long, long time and they've built up a loyal following of their own customers for many, many years. So they've been able to retain and protect, you know, that customer base and we think that it represents a good compliment. So we feel good about it going forward. And yes, we think we'll be able to make satisfactory margin and, you know, it should be good.

That's good to know. Will you be incurring any significant expenses in order to integrate the business?

We --

On a one-time basis.

We have built into the first quarter results a pretty good chunk of expenses I think there are some $300,000 that's attributed to the integration costs already. I would say on an ongoing business we certainly planned into the whole model that we have got, you know a whole plan for integrating the financial back office controls and I can't put a precise amount on it, but I would say that that, you know we'll be in the the three, four, $500,000 to continue to integrate back office, processing alignment control, what have you, but this is all factored into the acquisition. It's nothing out of the ordinary, there's no extraordinary cost that we anticipate.

That's good to know.

They've a pretty good system on their own, and what I would say is that all we're doing is refining and upgrading their ability to utilize the benefits of our larger and more structured international network so they will get the benefits of that and then it's simply making sure that we can coordinate carefully on all the control and back office processing stuff. So, again no, extraordinary things from a commercial management point of view. They have a very refined system and, in fact, they've got best practices we expect that we would be taking into our core group ourselves.

Good. Good. Okay, I will let someone else go. Thanks a lot, guys.

Thank you, Greg. Appreciate it.

Our next question comes from the line of Tony Wezo with Westfield Capital. Please proceed with your question.

A question for Frank. Frank, I guess we saw a nice increase in gross margin dollars sequentially, but if I look at salaries and wages as a percentage of that, they also went up substantially and I guess the question I ask is why wasn't there a little more leverage there and maybe can you explain that?

I don't -- you get the incentive comps, you just have some of the -- I mean, the increase I was talking about in salaries and wages this time is basically accrual. So, you know, it's just simply looking forward at what we ought to be accruing because it's either earned or partially earned, as I said, and these are just the incentive comp formulas that we use for our -- the people that are really producing the revenue -- you know, the revenues and the profits in the first place.

Right. But why on a percentage basis is it higher? You know, if you had 37% last quarter, it kind of went up to slightly over 38% this quarter.

I mean the formulas, frankly are complicated. It's just leads and lags. You're only talking about a very small percent. I mean, I think that's normal variation, myself.

Yeah. Okay. Can you also take a minute to maybe explain what's in "other" and what the jump there was?

I'm sorry, I didn't hear that.

"Other" in your operating expense line item. And what -- and what's in that number?

The acquisition costs is in there and that was the 300,000 that Paul just mentioned. These are expenses incurred -- these are internal expenses, therefore, not capitalizeable.

Right.

And they ought to be, as we have, expensed them in the quarter in which they. But these are internal expenses incurred mostly travel, to simply do all the due diligence and the other things that are required in making an acquisition happen.

Mm-hmm.

That was the -- that was the bulk of the increase.

Okay. Maybe I'm misunderstanding this but it's an 8 million line item in your P&L.

You're talking about what's the total amount of expense? The total amount of expense, in other operating expenses is all the supports -- it's -- it's rent, electricity, telecommunications, it's all the support stuff. If that's what you're asking. I'm sorry, I'm sorry, Tony. Is that the question?

I guess, you know, just, again, trying to get a feel for, you know, why maybe there's -- as, again, as gross margins expand, same as my last question, you can see a little bit leverage there, in fact, you know, again, on a percentage basis that kind of went up and if the answer is because you were pretty active doing acquisitions then that makes sense.

Okay. Good. Good.

Thank you.

You're welcome.

We have a follow-up question from the line of Greg Eaton with Safeco Asset Management. Please proceed with your questions.

Thanks as long as we are on the subject of the other operating expenses I guess I kind of ask all of my companies this question. What do you see yourselves incurring in 2004? Can you segregate costs, just for compliance with Sarbanes-Oxley? Is it a meaningful number? Is some of that in the first quarter? I hear from some of the people, especially the smaller companies like yourselves, it's a meaningful number when you think about it compared to all the other expenses, because it's so -- it's such an onerous thing.

Sure there's no doubt there's also a lot of people doing surveys in general on this. There's no doubt there's at least a few to a number of hundreds of thousands of dollars of additional expense. For instance, insurance expense has gone up because of Sarbanes. Audit expense is going up because of Sarbanes and, in fact, we are spending money on improving our processes; however, we've used Sarbanes to basically make ourselves more efficient. We do the Sarbanes work we're doing internally to be ready for our 404 attestation. By going about it in a business process reengineering mode, so we use it to essentially drive efficiencies and drive process improvements at the same time we're documenting our controls.

Okay. So you were incurring costs in compliance with getting ready for the 404 in the first quarter? You're already in that process.

Yeah, we are. We -- we - it's part of the process, I mean -- if you count the people we spend, we're not spending it on externals in the first quarter, meaning consultants; although, with he have in the past.

Mm-hmm.

It's a couple hundred thousand dollars is the answer.

And Greg, I mean I think our view is that we're going to continue to spend that until we have been through the attestation and hopefully what we anticipate is that if you look forward over the next year or so, as we get to the business process reengineering we're giong to yield some efficiencies out of all this. So we're franly hoping that all of the investment that we're making in compliance is actually going to turn out to be something that drives efficiencies throughout the company worldwide. So hopefully it will do us a favor.

I hope so because I'm hearing it's costing everyone a lot of money.

I think that it's true, but it also depends on where you were coming from. I think our team takes some pride in the fact that we had, you know, a pretty good commitment to good process already. So the Sarbanes thing did not come as the onerous shock that is much talked about and in fact I think we saw it as being something to embrace and it was complimenting what we were trying to drive from a business process review. So , I mean yes, there's expenses. We don't like it. Would I -- you know, would I rather not have to spend it? Of course.

I think at the end of the day, I think we're more concerned about just sort of the ongoing escalation and the inflation in audit fees and insurance costs and all the other stuff that's gone into just being part of the public company living in a fish bowl. It's just part of the new reality but it drives up all the costs. So from that perspective, those are the things that if we have anything that we sort of, you know, bristle a little bit at, it's just that we are -- this entire initiative has created a new market and it's just something you have to do. You can't tell your auditors not to audit. You can't tell your insurance company to go away. So, it's just a reality.

I see. I see. Okay I will. Leave it at that. Thanks.

Thanks, Greg.

We have a follow-up question from the line of Joe Chumbler. Please proceed with your question.

I wanted to follow up on the marine side. Are we starting to see some sort of seasonality in that business, towards the of first quarter?

No. Not really. You know, shipping in our estimation, Joe is much more a function of economic cycles than it is from seasonality from our perspective.

Okay. And then just to follow-up on the salaries and wages, is most of that driven by the marine segment?

Well, I mean, it's about -- no, I wouldn't say that it's concentrated in the marine segment. It's -- it's at both corporate marine and aviation.

Okay. And then the performance accruals, do those occur throughout the year or are they concentrated in any one quarter?

No, no, they are throughout.

Okay. Thanks.

Yep.

I guess that's it Charmaine. Hello?

The next question comes from the line of Morton Langer with Langer Partners. Please proceed with your question.

Hi. How much of the "other" expense is non-recurring, as it's related to the acquisition of Tramp and the next question is: When do you feel the positive effect of Tramp contributing to the company?

Well, the 300,000 that we talked about that happened in this quarter is a sunk the cost. It had to do with the initial integration stuff. There'll be other costs throughout the year as we continue to integrate but of course from our perspective, I think it just meets an ongoing operating rhythm, you know, as the company's existed prior to our acquisition. So we feel good about that. We don't see any other big shocks to the system. And, I'm sorry what was the next --

When does Tramp begin to --

Oh, I'm sorry, I beg your pardon, I just lost the... Yeah, within ths year. Absolutely we expect to see the positive impact you know effective, you know, right now.

Okay.

We just did it April 2nd but it would -- it due start to show up in the second quarter and into the third and fourth.

And more so in the third quarter.

I think you're going to see more of it in the third and fourth just as we get everything settled in but that's typical. And the reason we say that is just from our experience from past acquisitions and just the realities of getting everything kin of bedded down and working on a rhythmic way. It takes a little while to just work that out but we feel pretty good that you're going to see it immediately.

So in one sense, the acquisition costs are were sort of more up front. [inaudible] and going forward.

Yes to some extent it is. Again as we said earlier we don't expect any radical, big huge shock additional cost. There is an ongoing cost as we talked about over the next rest of the year just speaks to again, making sure that we've got all the back office controls, the system integrations, whatever all of those things that are just the normal, you know, usual routine course of doing business. But it's internal costs.

I don't think he quite understood. I mean the acquisition became effective April 1.

Right.

So all of the internal costs we had to do to do the due diligence, had to be expensed.

Right and [inaudible] $300,000.

That's why the 300,000 is up. In the first quarter alone, this is when we get used to each other, you know there'll be some minor distractions. So that the real level of earnings that it will contribute is much better to take a look at it in the third and fourth quarter.

Great. Thanks so much. Thank you.

Thanks.

Sir, there are no further questions at this time. I will now turn the call back to you.

Thank you. We appreciate all of you joining us today. If there are any further questions, of course we welcome those calls offline to myself, Frank or the team and thank you for joining us today. We'll look forward to speaking to you at the end of the second quarter.

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