World Kinect Corp (WKC) 2004 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the World Fuel Corporation's Third 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 "1" followed by the "4" on your telephone. As a reminder, this conference is being recorded, Wednesday, October 27, 2004.

I would, now, like to turn the conference over to Jesse Deal. Please go ahead, sir.

Thank you. Good morning, and welcome to World Fuel Services results conference call for the third quarter, ended September 30, 2004. As mentioned by Myra, I'm Jesse Deal of Allen & Caron Investor Relations. Before we start this morning's call, there are a couple of items I'd like to cover.

Many of you received a copy of the press release, announcing the company's results for its third quarter ended September 30, 2004. It was released this morning at 8:00 AM, Eastern, and was covered by Dow Jones at 8:18, Eastern. If you did not receive a copy of the press release, it is posted in the "Clients" section of our website, at "www.allencaron.com," or you may call our office in New York at 212-691-8087, and we will email it to you right away. It should also be posted on Yahoo! Finance.

You can access a replay of the conference call through November 3rd by calling 1-800-633-8284. International callers should dial 402-977-9140, using conference ID number 21211674. Also, this call is being broadcast live over the Internet, at Thomson Financials "firstcallevents.com." The Internet replay will also be available through November 3rd, shortly after 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 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 SEC 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 then the call will move into Q&A. I would now like to turn the call over to Paul. Good morning, Paul.

Good morning. Thank you, Jesse. 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; Frank Shea, Chief Financial Officer.

This morning we announced record earnings of $7 million, or $0.59 per diluted share for the third quarter of fiscal 2004. This represents a 26% increase in net income and a 19% increase in earnings per share over the comparable quarter a year prior. Revenues and gross profit increased 142 and 31%, respectively year-over-year, and our cash position at quarter end was $57.5 million. Cash flow from operations improved by $9 million in the quarter. Frank will deliver a detailed review of the financials in just a moment, but first I'd like to make a few comments on the state of the market and our overall business.

The third quarter presented the company with a number of internal and external challenges worthy of review. Higher crude prices, the continued insurgency in Iraq, further financial upheaval in the domestic airline industry, general skittishness on Wall Street and the continued integration of Tramp as well as preoccupation with 404 attestation presented the company with a very full plate. Our ability to navigate these various issues and still a deliver strong result tested our resolve while validating the underlying strength of our business model.

In the marine space. we started Q3 facing higher prices, depressed margins and a more competitive landscape, while, internally, we continued to focus on the integration of the Tramp group. Having passed the initial phase of integrating systems and reporting functions, we had two major objectives for Tramp in Q3. The first was to better calibrate the ratable operating cost for the group going forward in all areas, including compensation. The second was to increase our global focus on leveraging commercial opportunities. We have achieved both objectives and could not be more pleased with things we're perceiving.

Tramp has proven to be a highly complementary fit to the marine and aviation segments, and we are pleased with their overall contribution to results. The overall shipping market remains strong. By and large, our customers are enjoying record profitability and a promise of continued strong rates has largely offset any general concerns about the impact of high fuel prices on receivables. From a risk perspective, we feel very good about the overall market and our specific account portfolio. More significantly, we've begun to see a slight rebound in margin and an increasing number of opportunities to leverage our position in the market. We expect this trend to continue in Q4.

In our aviation segment, we saw continued growth in volume and profitability across all sectors of the market. However, as has been much discussed in the press, high fuel prices have had a devastating impact on most airlines, and further eroded the financial viability of some of the large flag carriers. But while fuel prices continued to stress airlines in every segment, the general upheaval in the industry has also created opportunities for many of our customers, as well as for World Fuel.

Cargo and passenger traffic is up, and load factors are running at very high levels. For the first time in three years, the US jet fuel demand has returned to pre-9/11 levels. On the supply side, oil companies are more concerned than ever about credit and the challenge of back office processing. Our ability to aggregate demand, expand our self-supply model and leverage our purchasing has enabled us to continue to diversify our portfolio, enhance profitability and reduce our risk. High prices require continued vigilance, though we are confident that we can continue to aggressively manage credit risk while expanding ratable volume and profitability into next year.

Perhaps the most vexing challenge we have faced this quarter has been the enormous distraction created at all levels of the company as we push to complete 404 attestation. The financial costs are significant, and while some of the charges can be attributed to onetime fees related to the first formal push, it is unfortunately clear that much of the cost promises to continue ongoing as 404 attestation becomes a living reality of business life year-in and year-out into the future. Needless to say, we are not the only company working within this new regimen, and we are working hard to achieve a favorable outcome. But the process is onerous, and it has proven particularly distracting in Q3 and will be continue to be so through Q4.

As we finish out the year, we will remain focused on several key areas, moving towards a more complete commercial integration of the Tramp group, working with PricewaterhouseCoopers to complete 404 attestation process and stabilizing our cost structure while we improve profitability. We remain committed to steady ratable growth in our space, and we believe we are very well positioned for the balance of 2004 and into 2005. We appreciate your continued support and I will now turn the call over to Frank.

OK. Let's go through the numbers. Starting at the top of the P&L with revenues. Total revenues for the third quarter of 2004 were $1.6 billion, up $927 million year-on-year from revenues of $652 million in the same quarter of 2003. Marine segment revenues were $844 million, an increase of $445 million compared to $399 million for the comparable calendar quarter last year.

The average price of marine fuel increased only 8% from the third quarter of 2003 to Q3 2004. And so the increase in marine revenues in the quarter just ended is largely due to higher volumes of marine fuel sold. These higher fuel volumes are the result of the April 2004 addition of the Tramp Oil group of companies into World Fuel Services, as well as it's due to organic growth in World Fuel.

Our quarterly unit volume of marine fuel sold increased 97% year-on-year. Regarding our marine brokerage business, the unit volume of marine fuel brokerage decreased 6% compared to Q3 2003. Thus, for the quarter just ended, our total quarterly unit volume of marine fuel resold plus brokered increased by 45% compared to the third quarter of 2003, reaching a total of 6.3 million metric tons. Our fuel reselling volume for Q3 2004 as compared to brokered volume represented 67% of total marine business activity, up from 49% in the same quarter a year ago, reflecting the addition of the Tramp Oil business.

In our aviation services segment, revenues totaled $735 million for the quarter just ended, an increase of $482 million over the $253 million in revenues we had in the comparable calendar quarter, namely Q3 of 2003. This increase in revenues is due to a 118% increase in the number of gallons of aviation fuel sold year-on-year, and a 33% increase in the average price of that fuel. In fact, we sold in total 556 million gallons during the quarter just ended, compared to 255 million gallons in Q3 2003. This increase in volume is mainly due to both new fuel management business, as well as to new commercial business volume.

Also contributing to our revenue increase was the consolidation of PAFCO, our aviation joint venture with Signature Flight Support due to an accounting change in Q1 2004. Prior to the consolidation of PAFCO, we only recognized our share of the profits of PAFCO as other non-operating income.

For the first nine months of 2004, the total revenues of the company were $3.9 billion, an increase of $1.9 billion, or 98%, versus the same period year ago. In the marine segment, revenues increased by $874 million or 72%, which was due to higher volumes of marine fuel sold. During the same time, average marine fuel prices actually decreased by 1% for the first nine months of 2004 versus the first nine months of 2003. In other words, marine fuel prices have remained remarkably steady through 2003 up until September 30, 2004.

Aviation segment revenues of $1.8 billion for the first nine months of 2004 represent an increase of just over $1 billion from $742 million for the same period in 2003. This was due to a 101% increase in the volume of gallons sold, and a 19% increase in the average price per gallon of fuel sold, a much larger average price change than in our marine markets.

Also contributing to our first nine months of 2004 aviation revenue increase was the consolidation of PAFCO, our aviation joint venture with Signature Flight Support. The explanations for the higher volumes of marine and aviation fuel sold in the first nine months are consistent with my comments provided earlier regarding quarterly revenues.

That's enough on revenues. Lets move on to gross profit. Our gross profit for the third quarter of 2004 was $32 million, an increase of $7.5 million or 31%, compared to Q3 2003. The marine segment gross profit increased 52% to $16.4 million, compared to the same quarter last year. This increase was primarily 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 18% from the comparable quarter of 2003. This lower per metric ton margin reflects greater market competition as well as the lower margins often associated with steadily protracted high fuel prices.

In our aviation group, gross profit increased 14% to $15.6 million compared to Q3 2003. This increase was primarily due to growth in our commercial aviation fueling business. Also contributing to the increase in aviation gross profit was the consolidation of our joint venture PAFCO as previously discussed. Our consolidated gross profit margin for Q3 2004 was 2.0% versus 3.8% in Q3 2003. This gross profit margin for the quarter just ended was a slight decrease from the 2.3% of the previous quarter Q2 2004.

Marine's gross profit margin of 1.9% in the quarter just ended represents a decrease from the 2.7% of Q3 2003 and the 2.0% in 2004 quarter. 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 5.4% a year earlier and then 2.6% in Q2 of 2004 to 2.1% in the quarter just ended. In the conventions in our industry the gross profit per gallon of fuel sold was 3 cents per gallon for the quarter just ended, just as it was in the second quarter of 2004 as compared to 5 cents per gallon in the third quarter of 2003. Decline in the aviation gross margin was primarily due to strong volume growth in our high volume major airline commercial and fuel management business.

For the first nine months of 2004, the company's gross profit was $90.4 million, an increase of $13.1 million, over 17%. The company's gross profit manager was 2.3% versus 4.0% for the comparable nine months a year ago. The causes for the increase in our gross profit and decrease in our gross profit margin in the first nine months of 2004 are consistent with the quarterly explanations provided just shortly ago.

Next in our financial review are operating expenses, which for the third quarter of 2004 were $23.4 million as compared to $17.4 million in the third quarter of 2003. An increase of $6.1 million or 35%. The increase in operating expenses was due to increases in salaries and wages of $4. 4 million and in other operating expenses of $2.7 million partially offset by a decrease in the provision for bad debts of $969,000.

The increases in operating expenses were in part due to the additional operating expenses of the Tramp Oil companies. Also contributing to the increase in operating expenses were higher accruals for performance based incentive compensation and new hires. Additionally, we had expense increases over Q3 2003 in descending order of importance in professional fees, insurance costs, telecommunications expense, bank charges, payroll taxes, rent, amortization of loan fees and business travel. Several of these expense increases are due in part to the Tramp Oil integration process.

The decrease in the provision for bad debt expense is a reflection of the improved credit quality and lower write-off experience in both our marine and our aviation receivables portfolios in 2004 versus 2003. For the first nine months of 2004, total operating expenses were $64.3 million, an increase of $6.8 million or 12% as compared to the same period a year ago.

The increase in operating expenses was due to increases in salaries and wages of $5.4 million and in other operating expenses of $4.1 million, partially offset by a decrease in the provision for bad debts of $2.7 million. The explanations for the changes in operating expense for the first nine months of 2004 are consistent with the quarterly explanations just provided.

Continuing on with our P&L, review, we come to income from operations, which for Q3 2004 was $8.6 million as compared to $7.2 million for the same quarter in 2003. An increase of $1.4 million or 20% year-over year. Our marine segment earned $5.3 million in income from operations in the quarter just ended, an increase of $887,000 or 20% versus Q3 2003. This increase was primarily due to the additional operating income provided by the Tramp Oil Group of companies.

Our aviation segment income from operations for year's third quarter was $6.5 million, an increase of $474,000 or 8% over the comparable quarter last year. This improvement resulted from growth in our gross profit due to increased business volume as well as 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 $3.2 million of corporate overhead, which represents a slight increase of $100,000 from the Q3, 2003 figure. For the first nine months of 2004, income from operations was $26.1 million, an increase of $6.2 million or 31% 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 5% versus 11% in Q3 2003, whereas in our aviation segment we had an operating return on segment assets for the quarter just ended of 13% versus 18% last year.

The next stop on our P&L review is non-operating activities, which for the third quarter of 2004 was a net expense of $88,000 as compared to a net income amount of $83,000 during the same quarter of 2003. This $171,000 negative change was primarily due to increased interest expense resulting from increased revolving credit facility borrowings for working capital requirements and the impact of the consolidation of our aviation joint venture PAFCO as previously discussed. Partially offset with an increased interest income and the recognition of foreign exchange gains in 2004 as opposed to foreign exchange losses in 2003.

For the first nine months of 200, we recorded a net non-operating expense of $1.5 million versus a net non-operating income amount of $312,000 during the same period a year ago. The cause for this year-to-year change is - are, the causes for this year-to-year change are consistent with the explanations provided earlier plus the recognition of a foreign exchange loss in the second quarter this year stemming from a not fully hedged conversion into US dollars of foreign currency acquired from Tramp Oil at the time of our acquisition.

Regarding income taxes, our consolidated effective tax rate was 18% for the third quarter of 2004 versus 24% for Q3 2003. We provided $1.5 million for income taxes for the quarter just ended as compared to $1.7 million for the corresponding quarter a year ago. The lower consolidated effective tax rate and the specific income tax provision for Q3 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 nine months of 2004, our effective tax rate was 20%. And that was unchanged from the comparable period last year. We provided $4.8 million for the income taxes during the first nine months of 2004 as compared to $3.9 million in the first nine months of 2003.

Our net income after taxes and our diluted earnings per share for the quarter just ended was $7.0 million and $0.59 per share respectively as compared to net income for the third quarter of 2003 of $5.5 million and diluted earnings per share of $0.49. For the first nine months of 2004, our net income after taxes and our diluted earnings per share were 19.8 million and $1.69 per share respectively as compared to $16.3 million and $1.46 per share for the comparable period in 2003.

Finally for the P&L, we have a few key ratios. Our return on equity or ROE of 16% for both, quarter three and first nine months of 2004 was unchanged from the comparable periods a year ago. Our return on assets or ROA was 5% for both Q3 2004 and the first nine months of 2004 versus 7% for the comparable periods of 2003.

Now let us move to the balance sheet, as of September 30, 2004. Again starting at the top, our quarter end cash position was $57.5 million, a decrease of $19 million from December 31, 2003. During the first nine months of 2004, in addition to cash used in operating activities of $31 million, we also acquired Tramp Oil for a net of cash received payment of $23 million, made $2.5 million in dividend payments, made $1.6 million in payments on the principal portion of prior year's acquisition notes and spent $2.1 million in capital expenditures.

Offsetting these significant usages of cash were $35 million in borrowings under our revolving credit facility and $6.3 million received from stock options exercises. As of September 30, 2004, working capital totaled $152 million and total assets were $657 million, whereas the December 31, 2003 working capital totaled $106 million and total assets were $358 million.

Moving on to our most important asset, gross receivables, they increased from $203 million at December 31, 2003 to $447 million at September 30, 2004. Our allowance for doubtful accounts increased by $1.1 million from our previous fiscal year-end to $11.7 million, as of September 30, 2004. During the first nine months of 2004, we provisioned $2.8 million and wrote-off receivables totaling $1.7 million.

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 22 days, which compares quite well with 24 days for the same quarter a year ago and 23 days for the second quarter of 2004.

As for the other side of the balance sheet, total liabilities of $479 million at September 30, 2004, represented an increase of approximately $269 million from our previous fiscal year-end. This increase primarily resulted from the liabilities assumed in the Tramp Oil acquisition as well as, from increases in accounts payable and accrued expenses of $138 million due to increased business activities and from borrowings under our revolving credit facility of $35 million.

Finally, at September 30, 2004 consolidated shareholders equity amounted to $178 million, an increase of $30 million or 20% over our previous fiscal year-end. Thank you for staying with me during this necessarily dry and detailed overview of our third quarter 2004 numbers. Now before we go on to the question-and-answer period, let me first turn the leadership of the teleconference back to our Chairman, Paul Stebbins.

Thank you, Frank. That's great. We'd like to open it up for questions. Myra?

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 withdraw your registration, please press the "one" followed by the "three." If you are using a speakerphone, please lift your handset before entering your request. Our first question comes from the line of Joe Chumbler from Stephens Incorporated. Please go ahead.

Good morning, everyone.

Good morning, Joe.

Just starting off with the marine segment, it looked like, you had a pretty nice sequential increase in volumes in both brokerage and resold, if my math is right. Can you just talk about, what's going on there?

Sure. Of course, we have -- we've been integrating the Tramp activity, which is primarily, in fact exclusively a resale model and so that added to our overall trend. We've also seen growth in the core, the sort of business that we had prior to the acquisition of Tramp has also grown. And I would say that this is just reflective of a bit of turnaround in the industry and we are quite pleased with that trend.

There has been an increase in volume and as mentioned in the script, we're also seeing a slight move up in the margin side. So, we think that's a good sign and the market conditions overall are generally favorable. With brokerage, the volume was off a little bit but this has been consistent with the trend. We still carry a base load of brokerage volume, which is significant, but I would say that it's flat to slightly down.

OK. And I guess on the margin side, have you seen any meaningful attrition in the marine space, say from some of your smaller competitors?

Well, certainly the high oil prices have put a tremendous squeeze on privately held undercapitalized companies, with these kinds of price levels, it is not so easy to play in the States. So there is no question the duration of these high price levels has put significant pressure on the smaller companies and we think that that gives us a distinct competitive advantage over the long haul.

So, a little bit of our strategy and we've talked about this in other conference calls is to keep our powder dry and sort of wait these markets out because when you do, you get a robust shipping market, you get people who decide to come in and out of the space. But our own view is you need to rely on your global footprints and your deep market penetration and your demand expertise and sort of ride out these areas. But certainly, the high prices have put clear competitive pressure on the smaller players in the space.

OK. And then sticking with marine, I'm just wondering, with the integration of Tramp, has your compensation structure changed for a -- for the long-term now that you've got integrated Tramp on the marine side?

Yes, I think the way, I would characterize that, Joe is that, the first couple of quarters with Tramp was just a whole lot of focus on integrating systems and reporting and back office and rationalizing all of the ways that we had to kind of get a grip on what was a privately held UK company and make it rational in the day of public companies US style. So that took a lot of effort and there was a tremendous amount of hands on deck.

So during Q3, we began the process of really turning the focus to the more commercial issues and turn, including the overall look at compensation long-term, what are we doing with our global deployment of all of the team and ES? So I think, we have a much better grip now on what ratable costs will be throughout the entire Tramp operations, as we go forward.

So I think, we're feeling good about that directionally and again as I mentioned in my notes, we couldn't be more pleased with both the management and the overall commercial team at Tramp. These are great people, I think it's a very complementary fit to the group and as one of these situations, where sometimes acquisitions can be difficult and highly distracting. But I would say the more we get into the Tramp thing, we couldn't be more pleased with just how complementary this is to our overall strategic footprint. And good people at all levels and I think that we're getting a lot better handle on what ratability means going forward.

OK. Just jumping to aviation, real quickly. Did you have any exposure to ATA; can you just talk about how you manage credit risk with your domestic fuel management contracts?

Sure. Absolutely. On ATA specifically our exposure was under about 200,000, maybe slightly under. This is small. They are on a prepay with us right now. We'd only had a small amount of credit with them in a couple of areas. And in fact, it's quite likely that we will qualify for essential vendor status, which means we will be covered for that as well. So the amounts are nominal.

I would say that as a general rule the name of the game in this kind of a market is just to be very, very tight on your vigilance. Now I would say that if there's one thing that we live and die by every single day is very, very close watch on all of these customers and the record speaks for itself. We've done a tremendous job of managing this risk in the difficult market.

As it speaks to the fuel management side, remember that a lot of that model is a prepay structure. So it's not quite the same kind of risk profile that we have in other parts of our portfolio. So we don't see that as much of an issue long-term but I would say, nothing has really changed. The day-to-day blocking and tackling of our business is to maintain a very close watch on all these customers and to make sure that we understand what we are all times and we've done a very, very good job of that.

All right. Thank you.

Thank you. Our next question comes from the line of Michael Whitney (ph) from Taylor Investments Association. Please go ahead.

Good morning, guys.

Hey, Michael. How are you?

I'm well. I've got a few questions for you. A couple of nit-- the first, can we talk about the inventory on the balance sheet. I'm not quite sure, why inventories are increasing so much given that, if you are -- have a majority of your customers are on a prepay model, the inventory shouldn't be on your books?

Let me answer that, the fact that we have customers, aviation customers on prepay really has nothing much to do with inventory. Basically, we buy for immediate resell for most of the business we do, as a company. By far most of the business we are doing, we buy and we take delivery at the same point as which we make delivery. So, it goes directly from a purchase order into a receivable and there really is never any inventory.

However, in the -- in two places we do maintain inventory. One is there is a small amount of inventory in Tramp, and I'll get back to that after I describe the aviation inventories because it's much the same kind of a situation. The largest amount of inventory is in the aviation business where we -- it's basically what we would call a self-supply model where instead of buying the fuel at the airport, we buy the fuel at -- from where it originates, bring it by pipeline to the airport, and if you compare the cost, the logistics cost of managing that movement, it is fully hedged during that time period so there is no price risk on the inventory, OK?

It's merely a tolling cost to the -- in the pipeline and a money cost while it is in movement, which could take a few weeks. Gets to the airport. It is still lower priced than had we just bought it at the airport. So, this is a good investment of working capital funds. That's what that inventory is. It is fully hedged, and it has been a good investment for us in terms of its effect on working capital and our ability to offer our customers the most efficient means of fuel management out there.

OK. That makes sense. Thank you. On the bad debt expense, obviously I don't know the airline industry the way you guys do but as a reader of the newspaper it seems to me that those customers are becoming less creditworthy, not more creditworthy yet your bad debt expense is down significantly from the prior quarter. Could you fill me in on what on -- what the thought process is there?

The thought process is that, well, let me start with a couple of things. Let me start up with one. If you look at our portfolio, of course, the credit losses, that is the write-offs cover both marine and aviation. The fact is that they are down in both. Our portfolio of aviation credit risks by and large covers airlines that are not the ones you read about in the newspapers. The ones you read about in the newspapers are actually a relatively small percentage of the names that make up our credit portfolio.

We have about -- 1,500 names that is airlines with which we do business or companies with commercial size jet planes that we do business with and which we make credit decisions. Many of these, for instance, the cargo segment, the charter segment, some of these segments of global aviation are doing reasonably well regardless of the state of being of the largest scheduled passenger airlines in the United States. In other parts of the world, Asia, for instance, there are quite successful large scheduled passenger airlines. So, even in that segment outside of the United States there is real health in some places. Take for instance Singapore Airlines.

So, the -- I guess the point is that that what we do is we measure our credit risk quite carefully, we are basically subjected to the same standards when we're audited for this as a bank would be subjected to. We go through a formal credit risk evaluation process. We in fact are checking our aviation credits; all of our major credits are checked every week. So, we are quite confident that we have correctly measured the risks and that in fact the risks in our portfolio are less regardless of what you are reading about with ATA and some of the other large carriers.

But isn't ATA a charter Airline, which speaks to what you said about charter airlines doing fairly well?

Actually, ATA is mostly a scheduled passenger airline. Virtually all of the passenger airlines also do a little bit of charter, do a little bit of cargo but they are largely a scheduled passenger airline.

Michael, this Paul. I would say that the way we think about this is diversification. Historically, this was a company that if you go back five or six years ago we are primarily, almost exclusively in sort of Latin American cargo activity. We have today a far more diverse portfolio and we also have a lot more, I would say that these are a larger number of smaller credit lines so it's any kind of classic portfolio management.

The real name of the game is just vigilance. And we spend a lot of time highly focused how we focus on this part of our business and we mark-to-market immediately anything that even looks mostly like it's trouble, we just take the hit and move on and we've done a very good job of managing it and you'll see that the track record over last couple of years will bear that out. There is no change in policy today and I would say that certainly we're in a climate where there's a lot of press but remember we are also the guys who are helping a lot of these airlines hedge their fuel and actually manage that risk a little bit more effectively.

So, I would say that it is not logical to connect the high profile, very financially challenged weak business models of some of the flag carriers is not necessarily reflective of what's going on across the entire portfolio when you consider government activity and corporate, think cargo and charter and passenger in various parts of the work. So, the name of the game is diversification and management.

OK. Along the lines of helping your customers, your receivables have grown faster than revenue, your interest expense is up and your payables are up as well. Payables are fairly significantly. Are you -- you know that helping your customers by extending credit terms longer? Is that what -- was causing the draw down on the line of credit, interest expense gaining up and receivables being up?

Well, yes, we do finance our customers. That is correct.

But if you mean are we giving more extended terms than we used to in the past, no that's -- I don't think that's the case.

No, that's absolutely true.

In fact if anything, I would say it has gone down.

Yes. I mean, the DSOs have gone down and the DSOs are the best measure of, you know, of that or certainly of collections.

OK. Shifting to the income statement. I was confused about the comments that you made on gross profit. If my notes are correct both your gross profit on marine and aviation are both up year-over-year yet the aggregate gross profit is down and the trend is rapidly heading to zero. Every quarter the aggregate gross profit on the company has been negative. And as much as I like what you guys are doing, that is a troubling sign. Could you comment on that and what you expect to happen going-forward?

Actually, aggregate is important I think...

The gross profit margin was down, but the gross profit in absolute amounts, dollar amounts ...

I'm talking about profit margins, 2% this quarter, 2.3 before that, 3 before that, 3.3 before that and it's up and up. It is a trend.

OK. There's two answers for the two businesses. In the case of aviation, the concentration is on high volume, high quality, efficient you know, major airlines business in recent, you know, in recent quarters. Same for both, really. I mean, actually that's exactly what we are doing in the large shipping companies as well. The other thing of course is that the price of fuel has gone up quite materially. The margins are quoted in dollars per metric ton, cents per gallon irrespective of the price. So, as the price goes up, OK, the margin in percentage terms will go down. It's just the way the markets work and the way we work within those markets.

Michael, I would say more to the point with if you look at when Frank, talked about the - I would say the trend is quite favorable in absolute dollars -- in margin sense because when you talked about the 3 cents in Q2 sequentially into Q3 this is a consistent actual margin that we've held despite the fact that we've increased fuel management volumes which of course drag down the overall blended average but that reflects the increase in margin across the broader portfolio commercial customers. So, we are actually quite happy with the absolute trend.

OK. That makes sense. But given that dynamic, does that mean if oil was to return to, say, go from where it is to the mid 30's jet fuel would obviously fall in roughly the same proportion, there is going to be some delta there?

That means our gross margin as expressed in percent would go up and our ROAs would improve.

But what about your gross margin in dollars?

We might get some but that not necessarily.

OK.

Remember, the absolute margin is the more constant. When expressed as a percentage relative to price of oil that's what is moving up and down that has your attention. And what I would say is that I would focus more -- we tend to focus more on our ability to maintain and preserve durable absolute margin and over time it is about a more diverse portfolio of lower risk customers at a more consistent margin.

And we -- this has been our strategy if you go back a couple of years ago, people who have been in this company a long time and remember when the focus of the company have been higher manager but more erratic and less durable account base. We've in fact gone to the other end of the spectrum where it's about a much more diversified and broader portfolio of much more creditworthy customers and an overall lower blended absolutele margin. Part of that margin is being skewed by the fuel management impact.

OK. And last question, and I'll let somebody else have a turn. Are there any more fuel management contracts coming? Can you -- could you comment on America West, is that fully up and running? And also, could you comment on how the United deal is going for you guys?

Sure. I can't comment on your first question because I would be reluctant to do that in anticipation of any achievement of a new account. But, certainly, it's an ongoing part of our business model to be looking at new opportunities.

The America West thing has gone great, and I would say that part of the reason we haven't been rushing to line up 10 more right in a row is we really want to make sure that we had fully executed on all of the value proposition that we had worked with America West to develop. And in fact, we couldn't be happier. I think they are extremely happy with what it has delivered to them in terms of value and service and visibility on their overall business, both tactically in the market and strategically, overall, for fuel management. So their sense of having a grip and a sense of control, for active control on their overall fuel spend has been a very, very successful relationship.

Now, that was a huge amount of scale, and we did it across a vast number of airports, and we couldn't be more pleased with how well that has gone. It has taught us a lot about how to execute in the back office, and the best practices that we're developing out of that and some other fuel management customers are driving change throughout the whole company, which is very, very positive.

So, we are getting a lot of yield out of America West, not only in terms of its -- how it has changed our relationship with some of the supply community but our back office processing capabilities as well as, being able to map to all of the new world with Sarbanes-Oxley, and give a very good service offering to companies that are looking to outsource this very important part of their spend. So I would say, yes, very positive.

OK. Great. Thank you.

As a reminder ladies and gentlemen, to register a question please press the "one" followed by the "four". Mr. Stebbins, I'm showing no further questions at this time. And I will turn the call back to you. Please continue with your presentation or closing remarks.

Perfect. We appreciate all of your continued support. We are very pleased with the company's results during this challenging environment, and we feel very good about the quarter to come, and next year. So, thanks for joining us. And we will look forward to talking to you at the end of the fiscal.

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