World Kinect Corp (WKC) 2004 Q2 法說會逐字稿

Ladies and gentlemen thank you for standing by and welcome to the World Fuel Services Corporation second quarter results conference call. During the presentation all participants will be in a listen only mode. Afterwards we'll conduct a question and answer session. At that time if you have a question please press the (1) followed by the (4) on your telephone. As a reminder this conference is being recorded today, Thursday, August 5, 2004. I would like now to turn the conference over to Mr. Mike Mason. Please go ahead Mr. Mason.

Thank you. Good morning and welcome to World Fuel Services results conference call for the second quarter and first six months ended June 30, 2004. As mentioned by Daniel, I'm Mike 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 its second quarter ended June 30, 2004. It was released this morning at 8:00 a.m. Eastern Daylight Time, and was covered by Dow Jones at 8:02 a.m. If you did not receive a copy of the release it is posted in the client's section of our website at www.allencaron.com or you may call our New York office at 212-691-8087 and we will email a copy to you right away. It is also posted on Yahoo Finance. You can access a replay of the conference for seven days by calling 800-633-8284. International callers should dial 402-977-9140 using conference ID number 21203917. Also, this call is being broadcast live over the Internet at Thompson Financial's First Call Events at www.firstcallevents.com. An Internet replay will 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 forwarding 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 filings. Actual results may differ materially from any forwarding 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 then the call will move into Q&A. I would now like to turn the call over to Paul. Good morning Paul.

Thanks Mike. Good morning and thank you for joining us. With me today are Michael Kasbar President and Chief Operating Officer, Bob Tocci, President of our marine segment, Michael Clementi, President of our aviation segment, and Frank Shea, Chief Financial Officer.

This morning we announced earnings of $6.9m or $0.58 per diluted share for the second quarter of fiscal 2004. We are very pleased with this result which represents a 26% increase in net income and a 19% increase in earnings per share over the comparable quarter a year ago. Revenues and gross profit increased 113% and 23% respectively year over year and our cash position at quarter end was $65m. Our global team has delivered a strong result, and we thank them. Frank will deliver a detailed review of the financials in just a moment, but first I'd like to take a moment to say a few comments on the state of the market and our overall business.

The second quarter has been a busy time for World Fuel and our primary focus has been the successful integration of the Tramp Group of companies. A team of individuals from Tramp and World Fuel has worked very hard to integrate the financial and back office systems of Tramp into World Fuel. The successful completion of this first major phase of integration sets the stage for the balance of the year which will focus on a number of commercial initiatives and leveraging the strengths of the entire company.

Tramp has made a significant contribution to the company's overall results and has filled an important strategic niche in our global marine business. Looking forward we are confident that Tramp will provide an important complement to our core marine offering and management team. As we look at the overall marine market we see a relatively strong shipping market tempered by high fuel prices and a generalized concern about the durability of the economic recovery. Of course more than any other single factor, China's growth rate features heavily in the calculus of future shipping activity and there is a sense that the aggressive pace set in 2004 will be difficult to replicate in 2005. In Europe the prospects for growth are far less robust, while the US market is something of a wild card pending the election. Without question the global economic climate has been good for the marine industry and ship owners are enjoying a relatively flush period. In fact, so much so that it has actually increased the competitive landscape for World Fuel.

Higher oil prices and a newfound willingness to extend credit to a healthy shipping market have refocused short term interest in the market. We view this as a near term phenomenon and believe the financial and strategic focus on return on capital employed in the oil industry will continue to concentrate interest in crude oil and other high return businesses and not the fragmented downstream market in which we operate. Moreover any downturn in the shipping market will trigger a wholesale move to reduce exposure and costs.

In our aviation space we have seen continued strong growth and the addition of new customers across a broad spectrum of activity in the cargo, charter, passenger and corporate markets. The mix of business and quality receivables in this sector continues to improve as we help our supply partners rationalize their portfolios, de-risk their exposure and reduce their cost of processing. This quarter we have continued to validate our fuel management business and its ability to drive economies of scale while helping us optimize results across our entire portfolio. Moreover, we are confident in our ability to continue to grow our position in the corporate market where we have enjoyed solid results from our Base Ops Division in Houston as well as our strategic alliance with Jefferson.

Elsewhere on the strategic front we are pleased to report growth in our other key alliances with Signature Flight Support and the United Airlines Morgan Stanley agreement. As we look at the overall aviation industry we still see major transformation in the works. Below cost carriers are having an increasingly significant impact on the domestic and international front. Major carriers are still struggling with reorganization, restructuring and the search for a viable long term business model. High fuel prices have had a significant negative impact on costs and further highlighted the need for airlines to embrace and implement a programmatic approach to financial risk management in the area of fuel. The oil companies are concerned about risk and the cost of processing, while customers are demanding a more robust service offering to help them proactively manage their strategic procurement needs. We expect this trend to continue.

As we look forward to the second half of 2004 we will be focused on working with the Tramp team and refining our product and service offering to help our global supply and purchasing customers design and implement a comprehensive and programmatic approach to price risk management and strategic fuel procurement. While the war in Iraq, the impending elections in the US, and the prospect of a major terrorist attack have added an extra element of uncertainty to the market we remain confident of our ability to deliver consistent performance and long term value to our shareholders. We appreciate your continued support. I will now turn the call over to Frank for a review 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 second quarter of 2004 were $1.4b, up $731m year on year from revenues of $646m in the same quarter of 2003. Marine segment revenues were $765m, an increase of $347m or 83% compared to the comparable calendar quarter last year. This increase in marine revenues is primarily due to higher volumes of marine fuel sold, which higher fuels volumes are primarily the result of the April 2004 addition of the Tramp Oil Group of companies to World Fuel Services. Our quarterly unit volume of marine fuel sold increased 83% year on year while the quarterly average price increased by less than 1% compared to last year.

Regarding our marine brokerage business, the unit volume of marine fuel brokered decreased by 10%. Thus, for the quarter just ended our total quarterly unit volume of marine fuel resold plus brokered fuel increased by 38% compared to Q2 2003 to a total of 6.0m metric tons. Our fuel reselling volume for Q2 2004 as compared to brokered volume represented 68% of total marine business activity, up from 51% in the same quarter a year ago, reflecting the addition of the Tramp Oil business.

In our aviation services segment, revenues totaled $613m for the quarter just ended, an increase of $384m over the $229m in revenues we had in the comparable calendar quarter of 2003. This increase in revenues was due to a 118% increase in the number of gallons of aviation fuel sold year on year and a 23% increase in the average price of that fuel. In fact, we sold in total 507m gallons during the quarter just ended compared to 233m gallons in Q2 2003. This increase in volume is mainly due to both new fuel management business as well as new commercial business. Also contributing to our revenue increase was the consolidation of PAFCO, our aviation joint venture with Signature Flight Support. This change in accounting stems from the recent accounting pronouncement called Fin #46 consolidation of variable interest entities, and it represents $47m in additional revenue. Prior to the consolidation of PAFCO beginning in Q1 2004, we only recognized our share of profits of PAFCO as other non-operating income.

For the first half of 2004 the total revenues of the company were $2.3b, an increase of $985m or 76% versus the same period a year ago. In the marine segment revenue increased by $429m or 53%, which was due to higher volumes of marine fuel sold. At the same time average fuel prices decreased by 5% in the first half of 2004 versus H1 2003. Aviation segment revenue for the first six months of 2004 increased by $557m from $489m for the same period in 2003. This was due to a 92% increase in the volume of gallons sold and an 11% increase in the average price per gallon of fuel sold. Also contributing to our first half 2004 revenue increase was the consolidation of PAFCO, our aviation joint venture with Signature Flight Support, which represented $91m in additional revenue. The explanations for the higher volumes of marine and aviation fuel sold in the first six months are consistent with those comments provided earlier regarding quarterly revenues.

Enough of revenues, let's move on to gross profit. Our gross profit for the second quarter of 2004 was $31.5m, an increase of $6.0m, or 23% compared to Q2 2003. The marine segment gross profit increased 15% to $15.6m compared to the same quarter last year. This increase is fully due to the April 2004 addition of the Tramp Oil Group of companies. However, marine gross profit per metric ton of fuel sold in the quarter just ended decreased 36% from the comparable quarter a year ago. This lower per metric ton margin reflects a year to year shift in the mix of business that primarily relates to last year's war activities.

In our aviation group gross profit increased 33% to $15.9m compared to Q2 2003. This increase was primarily due to new commercial business. Also contributing to the increase in gross profit was the consolidation of our joint venture PAFCO as previously discussed which represented $726,000 in additional gross profit. Our gross profit margin for Q2 2004 was 2.3% versus 3.9% in Q2 2003 and 3.0% in the first quarter of 2004. Marine's gross profit margin of 2% in the quarter just ended represents a decrease from the 3.3% of Q2 2003 and 2.5% from the first quarter of 2004. The explanations for the decline in our marine gross margin are consistent with those mentioned a few moments ago while discussing marine gross profit. Aviation's gross profit margin also decreased from 5.2% a year earlier and then 3.5% in Q1 2004 to 2.6% in the quarter just ended. In more useful terms, our gross profit per gallon of fuel sold was $0.031 for the quarter just ended as compared to $0.051 in the same quarter a year ago and $0.040 in the first quarter of 2004. This decline in gross margin was primarily due to strong volume growth in our low margin fuel management business. For the first six months of 2004 the company's gross profit was $58.4m, an increase of $5.6m or 11%. The company's gross profit margin was 2.6% versus 4.0% for the comparable period a year ago. The causes for the increase in our gross profit and decrease in our gross profit margin in the first half of 2004 are consistent with the quarterly explanations provided earlier.

Next in our financial review are operating expenses, which for the second quarter of 2004 were $21.7m as compared to $19.7m for the same quarter in 2003, an increase of $2.0m or 10%. The increase in operating expenses was primarily due to increases in salaries and wages and in other operating expenses which were entirely due to the additional operating expenses of the newly added Tramp Oil companies.

Partially offsetting these additional operating expenses of the Tramp Oil Group of companies were decreases in salaries and wages of $713,000 and in other operating expenses of $270,000. The decrease in salaries and wages was mainly due to a reduction in the accruals for potentially achieved corporate level performance based incentive comp payouts. The decrease in other operating expenses was primarily due to the acceleration of the amortization of computer software in the second quarter of 2003, partially offset by increases year to year for insurance costs for independent directors' compensation and for business travel, due in part to the integration of Tramp Oil.

For the first half of 2004 total operating expenses were $40.9m, an increase of $781,000 or 2% as compared to the same period a year ago. The increase in total operating expenses for the first six months of 2004 reflects the additional operating expenses of our newly acquired Tramp Oil Group of companies. Excluding the Tramp Oil expenses, salaries and wages decreased by $562,000, the provision for bad debts decreased $1.9m and other operating expenses increased $224,000. The key factors in the decrease of salaries and wages and the increase in other operating expenses for the first half of 2004 versus H1 '03 are the same as were discussed a few moments ago in relation to quarterly results. The year on year first half 2004 decrease in provision for bad debts expense is a reflection of the additional higher credit quality, lower margin fuel management business in 2004 versus 2003. Additionally, in 2003 we recorded bad debt expenses relating to the receivables write offs for two international airlines that filed for bankruptcy in that year.

Continuing with our P&L review we come to income from operations, which for the quarter two 2004 was $9.8m as compared $5.8m for the same quarter in 2003, an increase of $4.0m or 70% year on year. Our marine segment earned $5.7m in income from operations in the quarter just ended, an increase of $646,000 or 13% compared to Q2 2003. This increase was primarily due to the additional operating income provided by the Tramp Oil Group of companies. Our aviation segments income from operations for this year's second quarter was $7.0m, an increase of $2.3m or 49% over the comparable quarter last year. This improvement resulted from growth in our gross profit due to increased business volume as well to the previously discussed consolidation of PAFCO, our aviation joint venture, partially offset by higher operating expenses.

For the quarter just ended our operating income provided by our business segments was partially offset by $3.0m of corporate overhead, which is a decrease of $1.1m from Q2 2003. The decrease in corporate overhead was primarily due to the acceleration of the amortization of computer software in Q2 2003. For the first six months of 2004 income from operations was $17.5m an increase of $4.8m, or 38% compared to the same period in 2003.

Perhaps this is a good time to review our segment ROA ratios. Our operating return on marine segment assets for the quarter just ended was 8% versus 13% in Q2 2003. Whereas in our aviation segment we had an operating return on segment assets for the quarter just ended of 17% versus 14% last year.

The next stop on our P&L review is non-operating activities, which for the second quarter of 2004 was a net expense of $1.5m as compared to a net income of $482,000 during the same quarter in 2003. This year to year change was in part due to the integration cost of Tramp Oil, the impact of the consolidation of our aviation joint venture PAFCO as previously discussed as well as increased interest expense due to borrowings under our revolving credit facility for working capital requirements.

For the first six months of 2004 we recorded a net non-operating expense of $1.4m versus a net non-operating income amount of $229,000 during the same period a year ago. The explanation for the change in non-operating activities for the six month period is consistent with the quarterly explanation just provided a few moments ago.

Regarding income taxes, our consolidated effective tax rate was 18% for the second quarter of 2004 versus 13% for Q2 2003. We provided $1.5m for income taxes for the quarter just ended as compared to $820,000 for the corresponding quarter a year ago. The higher effective tax rate and the specific income tax provision for Q2 2004 primarily stem from changes in the proportions of operating income contributed by our various subsidiaries in different tax jurisdictions, each with their own effective tax rates. For the first half of 2004 our effective tax rate was 21% as compared to 17% for the comparable period last year. We provided $3.3m for income taxes during the first six months of 2004 as compared to $2.2m in H1 2003. The explanations for the lower tax rate for the first half of 2004 are essentially the same as those for the second quarter.

Our net income after taxes and our diluted earnings per share for the quarter just ended were $6.9m and $0.58 respectively as compared to net income for the second quarter of 2003 of $5.4m and diluted earnings per share of $0.49. For the first six months of 2004 our net income after taxes and our diluted earnings per share were $12.8 and $1.10 respectively as compared to $10.7m and $0.97 for the comparable periods in 2003.

Finally, for the P&L we have a few key ratios. Our return on equity or ROE was 17% for the second quarter of 2004 and 16% for the first six months of 2004, versus 16% for Q2 2003 and H1 2003. Our return on assets or ROA was 6% for both Q2 2004 and the first half of 2004 versus 7% for the comparable periods of 2003.

Now let us move on to the balance sheet as of June 30, 2004. Again starting at the top, our quarter end cash position was $65m, a decrease of $11m from December 31, 2003. In addition to cash used in operating activities of $40m we also acquired Tramp Oil for a net cash received payment of $23m, made a $1.7m payment in dividend payments, made $1.6m in payments on the principal portion of prior year's acquisition notes and spent $1.2m in capital expenditures. Offsetting these significant usages of cash were $50m in borrowings under our revolving credit facility and $6.3m received from stock options exercised. As of June 30, 2004 working capital totaled $161m and total assets were $563m, whereas at December 31, 2003 working capital totaled $106m and total assets $358m.

Moving on to our most important asset, gross receivables, they increased from $203m at December 31, 2003 to $379m at June 30, 2004. Our allowance for doubtful accounts increased slightly from our previous fiscal year end by $864,000 to $11.4m as of June30, 2004. During the first six months of 2004 we provisioned $2.2m and wrote off receivables totaling $1.4m. 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 23 days, which compares quite well with 24 days for the same quarter a year ago.

As for the other side of the balance sheet, total liabilities of $391m at June 30, 2004 represented an increase of approximately $182m from our previous fiscal year end. This increase resulted from the liabilities assumed from the Tramp Oil acquisition as well as from increases in accounts payable and accrued expenses of $53m and from borrowings under our revolving credit facility of $50m. Subsequent to June 30, 2004 we have repaid $40m of our borrowing under our revolving credit. Finally, at June 30, 2004 consolidated shareholders' equity amounted to $172m, an increase of $23m over our previous fiscal year end.

Thank you for staying with me during this necessarily dry and detailed overview of our second quarter 2004 numbers.

Now, before we go on to the question and answer period let me first turn the leadership of this conference back to our Chairman, Paul Stebbins.

Thank you Frank. Operator, let's open it up for questions please.

Thank you. Ladies and gentlemen, if you'd like to register a question please press the (1) followed by the (4) on your telephone. You'll hear a 3-tome prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the (1) followed by the (3). And if you're using a speakerphone please left the handset before entering your request. One moment please for the 1st question. Once again to register a question please press the 91) followed by the (4) on your telephone. Our first question comes from the line of Joe Chumbler from Stephens Inc., please go ahead.

Good morning, great quarter guys. Frank, I'm wondering if you could further quantify the non-operating expense in the quarter?

It's going to be a little hard to-I think you'll get that detail on Monday in the Queue. But there's nothing particularly unusual in it. You've got the normal interest income, interest expense, and you've got an FX loss, unrealized loss on open contracts.

How much is that?

It was about-let me think-I'll have to just look that up, just a second. [$12m]

Our next question comes from the line of Lisa Village [ph] from Silver Capital, please go ahead.

Hi, I also was curious about the non-operating expense, the $1.5m that you talked about. The integration-I assume that's not recurring-the integration costs of Tramp are finished at this point?

No, they're ongoing. But the fact is, yes, the expenses are going down.

Okay, can you give us a sense of what the interest expense might be for the rest of the year, given the change in the debt?

Well, no I don't, because it's hard to predict how much usage were are going to have, because it has to do with the volatility of oil prices and the amounts of business we do, how much business we're doing on what types of terms. It has to do with a lot of the very tactical aspects of the business. As you see, we had $50m outstanding at June 30 and here we are just a little while later and it's down to $10m. So it can vary quite a bit.

Okay. Can you explain the costs associated with the PAFCO consolidation?

Explain the costs?

Yes.

No, there's really nothing to explain, it's just simply, it was consolidated and all the different entries that they had in their various, in the various categories simply got added in. I've given you the numbers for it, but other than that it's pretty straight-forward.

Okay, thank you.

And we have a follow-up question from the line of Joe Chumbler, please go ahead.

Hey Frank, I missed the FX impact. Was it $1m?

Yes, that's correct.

And why is that below the operating line?

Well, you have to do, it has to do with a conversion from pounds to dollars on an FX contract.

So it's tough to predict but it could be a recurring income or expense item going forward.

No, I mean, there are occasionally unrealized FX gains and losses, but that one is not likely at all to be repeated.

Okay. Let me just switch to marine segments specifically. Are you guys dialing back your business at all due to the higher prices?

Well, it's a consideration Joe, and I think that historically vigilance is the price of liberty in this game, as they say. High prices certainly focus our thoughts, it is the name of our game, our assets or our receivables, and we watch it carefully. I would say that that sort of caution, or that vigilance is tempered by the fact that it's going fairly go by shipping market, but obviously at $44 or $43 or $45 oil, it's going to have an impact on the cost structure of our customer base, and in a relatively robust market they do well, and they sort of take it on board and they absorb that shock. Were there to be any material change in the shipping industry in terms of trade, obviously we would be watching that more carefully, because it does limit our ability to extend credit lines and what have you. But I would say that we've been walking this strange sort of offsetting penalties of a robust shipping market but also high prices, and we're just watching it very carefully.

Okay. And then on aviation. Can you just talk about other contracts that may be out there, and is there anything limiting your growth in aviation volumes, say, platform, or capital.

Yeah, I would be very reluctant to talk about specific things that we're working on just because of the competitive nature of them, and I would say that with regard to things like fuel management, which are the larger chunks, I think we've discussed before in the forum that these are long and relatively slow sales cycles, they require a lot of education, a lot of collaboration with the customer, the require a lot of in-depth preparation and review. They're not quick kills, so they tend to be sort of one at a time. Now, the reason that we take that approach is that it requires a high level of focus, it requires the entire organization to be working on sort of a custom tailored offering for the particular customer. And so we want to maintain the quality of that offering and make sure that we execute, because this is a business model that we've been developing over the last sort of two years. So I would say that from the point of view of, we're taking it slow as she goes to make sure that each one that we take on board, we can really maintain the quality level and execute well. Yes it does require some continued refinement of our back office processing capabilities, because it speaks to the issue of scale. I wouldn't say that those are radical changes, but there is the discipline of making sure that we're appropriately staffed and that the systems are up to speed, so that as we dial in these new customers we can service them to the level that they expect. But I wouldn't say there's any particular demand on the capital side at this stage. But obviously if we were to do quite a few more, then we might revisit that question.

Okay, and then just on the balance sheet Frank, are you comfortable with the capital structure, and what would you like the balance sheet to look like year end as far as cash on hand goes?

I think I expect cash to be at levels not dissimilar to the average over the last few quarters, 3-4 quarters. To my way of thinking, we've got a good and strong balance sheet, that despite the substantial growth, we've been able to maintain conservative ratios. And I think we've got sufficient resources to continue as we've been going. So, I don't see any major shifts in the balance sheet over the rest of this year.

Okay, thanks.

As a reminder if you'd like to register a question, please press the (1) followed by the (4) on your telephone. And our next question comes from the line of John Christianson [ph] from Kane Anderson Rudnik Investment Management [ph] please go ahead.

Looking at the sum of accounts receivable and inventories. They've been all but $40m funded by accounts payable at year end. And at June 30 that difference has tripled to $120m, and I'm wondering if this is because Tramp is more capital intensive? I'm wondering if it's seasonal affect. I wondering if it's just payments are due-could you help me understand?

As our business has expanded, the quick answer I guess it has more to do with aviation than marine. And it simply means that in the aviation business, as our volumes have expanded, we sometimes buy more fuel in what I might call a wholesale market, with shorter terms, so that you end up with both inventory and receivables, but down below in the payables and accruals they are paid faster, and being carried by bank debt rather than by trade debt. Now, to the extent that that happens, this is part of the reason why several quarters ago we increased our, well three quarters, back in the end of the 4th quarter last year, we increased our revolving credit to $100m, was to be able to accommodate a wider range of differences between trade terms in different markets as well as between receivables and payables. As well as the inventory. As you see, the inventory level has gone up, so obviously that has to be carried.

Can I view this as sort of a tactical move on your part reflecting what prices are for commodities and credit?

This is Paul Stebbins. There's a strategic advantage to it because as we shipped our model and we looked to where we're going in the future, we are buying more product in the bulk market as Frank said, on a wholesale basis. And that does allow us a lot more flexibility in terms of our cost structure and how we're able to price a variety of contracts. So I would say that while there's not going to be a wholesale overnight shift to that model, certainly we believe that in that area of buying in the bulk wholesale market and putting in inventory for ourselves, there are an increasing number of opportunities to basically drive our overall cost of product down. So it does have a strategic component and we will be looking at that sort of opportunistically. And I would say that you may see some trending in that direction overall.

You mentioned earlier that the oil companies had become more competitive in the market with high commodity prices. I'm just wondering, if you look at the opportunity for you to gain share, where are those opportunities? Are they from the major oil companies getting out of that business? Is it from more acquisitions from Tramp? Is it the move from the resale business to the broker business? Is the fuel management business creating different appetites by the customers? And how far along in this process are we?

The answer is yes, all of the above. Everything that you just enumerated, and I must, I might add, I haven't met you, but you did a pretty good job of enumerating some of the factors that we-they all play into this. There are many different components to it, but for all of those reasons, we think there will be opportunities to take market share.

And how far through this process do you believe we are?

I would say, in terms of a beginning and an end, I don't know where we would be, but I would say we're nowhere near the end. I think that this is a constant evolution. There are several dynamics, you've got a complete transformation in the way strategic procurement is being done in the industry, which we are the beneficiaries of that we think there is considerable upside in that general area, because it is the same old adage that you've got large companies trying to do a lot more with a lot less, in a highly fragmented and relatively difficult market to reach. So we believe that our business model of adding value to those customers and helping them make sense of that complex market is continuing and growing and the model is transforming and fuel management, for example, is a direct reflection of that desire to partner with specialized expertise in the area of procurement. And we think that that rend is growing and there has been trade publication discussion of that as well as just the general consensus in the industry that that is the growing trend. On the oil side, it's always been sort of a selling curve, obviously the oil companies, as a general statement throughout the world are in this business, but we've got a change in the overall nature of appetite. If you look at what's going on, there is a focus on return on capital, there is a focus towards more of the upstream side. This isn't some revelation, I think it's just the fundamental economics of where they can generate their best returns. And so they operate opportunistically in these markets, but the downstream market is highly fragmented and it is cost intensive. So I would say long-term that trending favors us because the oil companies don't want to lose the volume in these markets, but they'd like to de-risk their exposure. So they're looking to us to partner with them to be a de-risking agent, we become an aggregating agent, we consolidate volumes for them, and we rationalize their cost of processing, and reduce it, so I would say that there's plenty of room to grow on all of those fundamental macro trends.

Thank you.

Our next question comes from the line of Jim Larkens [ph] from Wasatch [ph] please proceed.

Thank you. Could you just make a few comments about gross profit dollar per gallon, or per ton, and how that fluctuates with the commodity process. Or does that fluctuate with commodity process? Or should we think of it more as a fixed fee per gallon or per ton that should be relatively stable over time?

Thanks Jim, I appreciate that, thanks for the question. I would say that as a general statement it's more steady over time. As you know the price of oil moves very quickly and we are not priced in terms of margin as a percent of anything. So I would say that it is more relative stability over time, and again, it's just continuing to refining our ability to generate a lower cost of goods, which has to do with our self-supply models on the things that we talked about in the previous question. But at the end of the day it's also partly business mix, because our ability to buy more in the wholesale market and change our mix of pricing and reduce our cost of goods has allowed us to be more competitive with a broader and a more diversified mix of business. And so we think that's exciting. But in terms of actual margins, we see a certain amount of ratability, and we do think about it per unit. We don't discuss that in the tale here, because of competitive reasons, but I would say that your general directional statement is true.

And can you just give us a little bit of color. I wasn't really around with the story during the war period a year ago. Can you explain a little bit of why the war had an impact upon gross profit dollars?

Yeah, I would say that what happens id you've got a whole lot of activity that is generated on the back of those kinds of markets. And not only does it cause a lot of chaos in the near-term trading arbitrage between markets, because everybody's trying to second guess what's going to happen, what the impact will be on prices, and you get a lot of anxiety associated with those markets from a purchasing point of view, because you don't know from day-to-day whether you're going to wake up to yet another surprise, and therefore there's sort of a lot of confusion as to price clarity. So it creates some volatility and we do benefit [from] that. But at the end of the day it also creates opportunities to provide solutions for these customers, because we're the ones that are helping them get some transparency, and we help them manage their risk and it helps them think about price risk management. There are a lot of things associated with the war support effort. You're moving troops, you're moving goods, there are commercial aircraft and ships that are being seconded into support roles, and that creates kind of short-term opportunistic market opportunity that's driven by the fact that all of a sudden some guy's aircraft is moved out of commercial trade into South America and he's being now told under some civilian air reserve program to fly some mission down the Far East, whatever. These things happen, they tend to come in sort of spikes, they're herky jerky, and that's why it causes some near-term opportunity both on margin and business mix.

And then, just on the PAFCO it's impact on the non-operating expenses. Was the PAFCO stuff one-time in nature or will it always flow through the non-operating line from here on?

It will because it used to be accounted for as I mentioned in my comments, on a net equity basis, but we switched because of Fin #46 to consolidated basis. So now it's just simply being considered as part of our operations and you see therefore in 'Other Income Expense' will be the minority interest.

Jim, this is Paul. Just quickly. The brief history on PAFCO you may or may not recall. We had done a 50/50 joint venture with Signature Flight Support. PAFCO had been set up for them to consolidate the distribution of fuel for their various locations around the country, and it was kind of an aggregating purchasing center. But to qualify for some of the federal exemption taxes they had to be in the commercial reselling business to kind of offset volumes and qualify for tax. What they found though is that introduced a level of risk into their overall business model that the parent company back in the UK was not particularly happy with, and it made them in a position where they wanted to maintain the benefit of their exemption status without losing commercial position. So we bought 50% of the company which allowed them to keep tax statuses, but we were taking 80% of the return. Now, fast-forward to today, this is just a change in the way that we account for it. But that's why [inaudible] that it was always treated the way it was before, and now with the change in the rules we're just treating it the way we are. But the business model is unchanged, and it continues to grow, and actually it's been a very, very good alliance with Signature, they're very pleased, we're very pleased, they're growing, we're growing, it's been a good business model.

Okay, great. And then on the FX losses, help me understand why this can't be a recurring item. I think if foreign exchange or hedging, losses or gains, and obviously you've lost something here, but I assume you gained something somewhere else, and so, should I think of this as something that will come and go depending on where currencies are? Was there some one-time contract that will not be repeated again, that took place this quarter?

It was an unrealized gain, it's just simply, number 1, and number 2 it was a singular transaction, so it's not likely to be repeated.

Okay, all right. Thanks guys.

As a reminder once again, if you'd like to register a question please press the (1) followed by the (4) on your telephone. And we have no further questions at this time. I'll return the presentation for your closing remarks.

Great, thank you everybody for joining us today, and we'll look forward to speaking to you after the 3rd quarter. Take care.

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.