World Kinect Corp (WKC) 2005 Q2 法說會逐字稿

Welcome to the World Fuel second-quarter 2005 financial results conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded Wednesday, August 10, 2005. I would now like to turn the conference over to Michael Mason, Account Manager. Please go ahead, sir.

Thank you. Good morning, and welcome to World Fuel Services' results conference call for its second quarter ended June 30, 2005. As mentioned by the operator, I am 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 the press release announcing the Company's results for its second quarter ended June 30, 2005. It was released yesterday, August 9, 2005 at 4:30 PM Eastern, and was also covered by Dow Jones at 4:30 PM. If you did not receive a copy the press release, it is posted in the Clients section of our Web site at www.AllenCaron.com, or you may 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.

This call is being broadcast live over the Internet on the Company's web site at www.WFSCorp.com. A replay of the call will be available through August 17, 2005, and may be accessed from Canada and the U.S. by dialing 800-633-8284 and entering conference ID number 2125-2897. International callers should dial 402-977-9140. A replay of the webcast will also be available through August 17, 2005.

Additionally, I've 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 Securities and Exchange Commission filings. Actual results may differ materially from any forward-looking statements set forth herein.

With us this morning is Paul Stebbins, Chairman and CEO. Paul will provide an opening statement addressing the Company's progress, and then the call will move into the Q&A. I would now like to turn the call over to Paul. Good morning, Paul.

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

Late yesterday afternoon, we announced earnings of $9.6 million, or $0.40 per diluted share for the second quarter of fiscal 2005. This represents a 3.2 million, or 50%, increase in net income over the comparable quarter a year prior. Gross profit increased 10.3 million, or 34%, over last year, while operating income was up $3 million, or 33%. Our cash position at the end of the quarter was 94 million, and operating activities provided net cash of $42 million.

Business momentum is strong. The operating environment remains favorable, and opportunities exist for growth organically and through acquisition. We're very pleased with our Q2 results, and believe we are well positioned for the balance of 2005.

In our Marine segment, margins improved and drove strong profitability, while volume dropped as we eliminated transactional business. The shipping market continues to post strong results in almost every sector. And while rates are off from the unprecedented levels of last year, the overall drivers for shipping remain strong in all of the major trades -- container, dry bulk and tanker.

The health of the global economy in general and the pace of international trade are the macro drivers of the shipping industry. But it is hard to overstate the fundamental impact China's growth has had and continues to have on shipping. China is experiencing a supercycle -- a prolonged period of industrialization and rise in commodity prices not unlike what Japan and the U.S. both experienced over the last century. The acceleration of this cycle is expected to continue as steel production drives the demand for coal and iron ore, and economic growth drives the demand for oil.

China is expected to import 6.9 billion barrels of crude oil per day in 2005, up from 4.7 million barrels per day in 2004. GDP growth in China was tracking at 9.5 percent in Q1, and is expected to track at 9% for the year. All evidence suggests that oil prices will remain high, as projected global demand may outstrip projected supply by Q4 and refineries continue to operate at capacity.

These market fundamentals, coupled with continued price volatility highlight the demand for our global service offerings in the Marine space. And we remain focused on service, product development, and tight execution.

In our Aviation segment, the results reflect continued strong performance across the spectrum. Margins improved, as we continued to successfully diversify our customer mix throughout the world. Overall, the aviation industry is showing better results worldwide. And passenger demand, while still below pre-9/11 levels, have seen a steady increase in load levels as growth in traffic has outpaced growth in capacity. Activity in the cargo, charter, military, and corporate markets has been brisk, and we are pleased with the level of activity we see.

Low-cost carriers continue to grow their market share. And even the legacy carriers, with a few notable exceptions, are showing some positive signs, as load factors and revenues improve. And while this positive news is somewhat offset by sustained high oil prices, it is clear that the need for our services has never been greater. Volatility and fast-changing supply markets only serve to emphasize the need for a proactive approach to managing supply, price, and delivery logistics.

Our Land business continued to grow this quarter, and shows every indication of developing over time into a major global market opportunity for World Fuel. The size of the worldwide diesel fuel market is estimated to be about 200 billion gallons, of which the U.S. market, our current focus, is estimated to be approximately 40 billion gallons. And while our volume is only annualizing at about 200 million gallons, indications suggest that there is an important role to be played by a well-financed intermediary with extensive expertise in supply, marketing, and logistics. We believe there are significant opportunities for organic growth as well as expansion through acquisition.

Just as we have seen in the Marine and Aviation markets, oil companies appear to be rationalizing their investment and exposure in the downstream retail market. Our strong balance sheet, extensive marketing network, and ability to process transactions we believe presents the supply community with an attractive platform for maintaining volume while reducing costs. Our ability to provide customers with financing and diverse sources of supply allows them to achieve not only competitive pricing, but also reduce costs and improve operating and logistical efficiency. We're very encouraged by the response from the industry, and we intend to continue developing this new and exciting market.

Finally, it is important to comment briefly on the Company's capital structure, which is key to future growth. Yesterday, we announced the closing on our expanded $220 million bank revolver, which has an according (ph) feature up to 250 million. Also, as you know,, we filed an S-3 in June with the intention of issuing additional equity. We expect to complete the share offering sometime between late September and mid-October.

We could not feel better about World Fuel and our current position in the market. Our global team is focused. The operating environment is favorable. And we continue to make investments in systems, people, and business process to further our growth and enhance our value. We appreciate your continued support.

And with that, I would like to turn it over to Bob Tocci, our CFO, for a more detailed review of the second-quarter results. Bob?

Thank you, Paul. Before we run through the financial results for the second quarter of 2005, I thought it would be beneficial to discuss the drivers of profitability of our business. From a purely financial perspective, profitability is mainly driven by volume, margin, performance-based employee compensation, bad debts, and income taxes. In Marine, we act as a principal and as a broker, and volume is measured in metric tons. In transactions where we act as a principal, margins are measured in dollars per metric ton. In brokerage transactions, we earn a commission for bringing together a buyer and seller, and margins are measured in cents per metric ton. In Aviation, we always act as a principal, and volume is measured in gallons, and margin in cents per gallon.

Inventories are held for competitive reasons and, despite turning over rapidly, are subject to market-price risk. Hence, we utilize fuel derivative to hedge market fluctuations in price. We also have fixed-price commitments to buy physical product in future periods. We use derivatives to float the price with market. Margins are largely influenced by customer mix, geographic location of sales, market volatility in oil prices, the economic health of the shipping and aviation industries, and more broadly, the world economy.

Our largest expense driver of our results related to employee compensation, which is largely performance-based. The other major expense driver relates to credit risk associated with selling fuel on an unsecured basis.

To the extent that we are required to provide for potential bad debts, our profitability will be affected. Recognizing that this is a significant risk to our business, we perform extensive credit analysis, and credit lines in pricing is customer specific. Lastly, income taxes are based on the operating income contributed by our various subsidiaries and the tax rates of the applicable tax jurisdictions.

Now, a discussion of the second-quarter financial results. Revenue for the second quarter of 2005 was 2.1 billion, up 738 million, or 54%, as compared to the same quarter a year ago. Marine segment revenues were 1.1 billion, an increase of 362 million as compared to the same quarter a year prior. Of this increase, 474 million was due to a 76% increase in the average price of fuel, primarily due to higher world oil prices. Partially offsetting was 112 million from a decrease in unit volume of fuels sold, primarily due to our efforts to reduce transactional business.

For the quarter, total Marine business activity, measured in metric tons, decreased to 5.4 million as compared to 6.2 million during the same quarter a year prior. Reselling constitutes 60% of total business activity as compared to 69% a year prior.

In our Aviation segment, revenues totaled 990 million for the second quarter of 2005, an increase of 376 million as compared to the same quarter a year ago. Of this increase, 320 million is due to a 48% increase in the average price of fuel, primarily due to higher world oil prices. And the balance of 56 million was due to a 9% increase in the number of gallons of aviation fuel sold. In fact, we sold 554 million gallons during the second quarter, an increase of 46 million gallons, and it is largely due to additional sales to new and existing customers in our commercial business and growth in fuel management.

For the first six months of 2005, revenue was 3.9 billion, an increase of 1.6 billion, or 70%, compared to the same period a year ago. The gross profit for the second quarter of 2005 was 41.1 million, an increase of 10.3 million, or 34%, as compared to the same quarter a year ago.

Our Marine segment gross profit for the second quarter of 2005 was 21.2 million, an increase of 6.4 million, as compared to the second quarter a year prior. Of this increase, 10.7 million was due to a higher gross profit per metric ton sold, which reflects advantageous pricing. Partially offsetting was 2.1 million related to lower unit sales volume and 2.2 million in higher unrealized losses on derivatives associated with the hedging of fuel inventory and open fixed-price purchase commitments.

In our Aviation segment, the gross profit for the second quarter of 2005 was 19.9 million, an increase of 3.9 million as compared to the same quarter a year ago. Contributing to the total increase was 1.7 million in higher gross profit per gallon sold, 1.5 million in increased sales volume, and 0.7 million and unrealized gains on derivatives associated with the hedging of fuel inventories. The increase in gross profit per gallon sold reflects a change in our business mix.

For the first six months of 2005, our gross profit was 76.6 million and increase of 19.5 million, or 34%, as compared to the same period in the prior year.

Operating expenses for the second quarter of 2005 were 29.1 million, an increase of 7.4 million, or 34%, as compared to the same quarter a year ago. Of this increase, 4.3 million was related to salaries and wages, approximately 200,000 to the provision for bad debts, and 2.9 million to other operating expenses. The increase in salaries and wages was primarily due to higher performance-based incentive compensation and new hires to support business growth. The increase in other operating expenses relates to higher nonemployee director compensation, office rent, insurance, auditing, and consulting fees.

For the first six months of 2005, operating expenses were 56.2 million, an increase of 15.3 million, or 37%, as compared to the same period last year. Of this increase, 8.3 million related to salaries and wages, 1.9 million to an increase in the provision for bad debts, and 5.1 million to other operating expenses.

Other income from operations for second quarter 2005 was 12 million, an increase of 2.9 million, or 33%, as compared to the same quarter one year ago. In absolute terms, the marine segment contributed 51% of total operating income for the quarter. The balance of 49% was provided by the Aviation segment.

Income from operations for our Marine segment was 9 million for the second quarter 2005, an increase of 4.2 million, or 87%, versus the same quarter a year ago. The Aviation segment's income from operations of 8.7 million for the second quarter of 2005, an increase of 1.6 million, or 22%, as compared to the corresponding quarter in the prior year. The operating return on segment assets for the second quarter of 2005 was 7% for Marine and 12% for Aviation. For the first six months of 2005, income from operations was 20.4 million, an increase of 4.2 million, or 26%, as compared to the same period last year.

We reported approximately 200,000 in net other income for the second quarter of 2005 as compared to 1.4 million net other expenses for the corresponding quarter last year. The 1.6 million change was primarily related to the recognition of exchange losses in 2004. For the first six months of 2005, we reported approximately 200,000 in net other income as compared to 1.2 million for the corresponding period a year ago.

The Company's effective tax rate for the second quarter of 2005 was 18% versus 16% for the same quarter last year. We provided 2.2 million for income taxes during the second quarter of 2005 as compared to 1.2 million for the corresponding quarter a year prior. The increase in the effective tax rate for the quarter resulted primarily from profit fluctuations in tax jurisdictions with different tax rates. For the first six months of 2005, the Company's effective tax rate was 15%, and we provided 3.2 million for income taxes versus 19% and 2.9 million for the corresponding period a year ago.

Net income for the second quarter of 2005 was 9.6 million, an increase of 3.2 million, or 50%, as compared to the corresponding quarter last year. Diluted earnings per share were $0.40 per share, an increase of $0.13 per share, or 48%, as compared to the same quarter a year ago. For the first six months of 2005, net income was 16.9 million, up 5 million, or 42%, over the same period last year. Diluted earnings per share was $0.71 per share, an increase of $0.20, or 39% as compared to the corresponding period a year ago.

Our return on equity was 19% for the second quarter of 2005 as compared to 17% for the same quarter a year ago. Our return on assets was 5% for the second quarter of 2005, unchanged from the corresponding quarter last year.

At quarter end, our cash position was 94 million, an increase of 30 million as compared to 64 million at December 31, 2004. The increase in cash was primarily due to 42.2 million of cash provided by operating activities, partially offsetting the 1.7 million in dividend payment, 1.1 million in note repayments, and 8 million reduction in borrowings under our revolving credit facility, and 2.2 million of capital expenditures.

Our gross receivables Increased from 501 million at December 31, 2004 to 596 million at quarter end. Our allowance for doubtful accounts increased by 1 million to 12.3 million.

During the first six months of 2005, we provisioned 4.1 million and wrote off receivables totaling 3.1 million. Our consolidated DSO was 27 days at the quarter end, relatively consistent with prior periods.

At quarter end, working capital totaled 185 million, and total assets were 850 million, whereas at December 31, 2004, working capital totaled 181 million, and total assets were 712 million. Our total liability of 644 million at quarter end represents an increase of 120 million from December 31, 2004. The decrease was primarily due to increases in accounts payable and payables related to marking our derivatives contracts to market. Partially offsetting were decreases in accrued expenses and other current liabilities and debt. Also at quarter end, our consolidated stockholders' equity amounted to 206 million, an increase of 18 million (ph) from December 31.

Thank you for staying with me during this detailed overview of our second-quarter numbers. Now, before we go on to the question-and-answer period, let me first turn the leadership of this conference call back to our Chairman, Paul Stebbins.

Thanks, Bob. Pamela, if we could open up for questions?

(Operator Instructions) Joe Chumbler, Stephens, Inc.

Great quarter, guys. (multiple speakers) Hey, Bob, could you just run through the numbers again?

Sure. I'd love to go through everything.

(laughter) I wanted to start on the Marine side. It looked like a very pretty good pickup in gross profit per metric ton. Could you just talk about what you're doing to tweak that segment?

Well, first off, there has been a concentrated effort over the last 1.5 years to integrate Tramp into the fold. Another area that has been really important to us is the development of supply teams. And this is so important to us because through individuals concentrating on specific areas of supply, you have far greater knowledge and expertise that can be applied to a specific area, which improves margins overall.

And in addition to that, we also made a conscious effort in the quarter to reduce our low margin transactional activity. All of these things together have worked to increase our overall margins in that business.

And on a per-unit basis, is this a sustainable level, or was there some -- I think you mentioned advantageous purchasing dynamics?

You have been on this call for some time now, and you know that our margins in the Marine business really are influenced by the mix of customers that we do business with, the volatility of markets. And there are many things that come into play, including the locations in which we do the business at. So from quarter to quarter, it is difficult to really tell you whether our margins are going to increase or decline, or whether this is ratable over an extended period of time.

Okay, and then on the Marine side again, just credit quality -- can you talk about -- I think you said you provisioned 1.4 million, but you charged off 3.4. What is going on with the credit trends in Marine?

Looking specifically at Marine for the moment, in the six-month period, we provisioned roughly $2.4 million, and we wrote off 1.4 million. That is the change within the six-month period. Coming into the year, we had 5.7 million in the allowance. And it actually increased to 6.7 million as of quarter end. And really, the difference is the write-off of one specific account.

Joe, I would say more generally speaking that the operating environment still continues to be positive for shipping. And while we are not saying the incendiary rates of last year, which just were just unprecedented in shipping history, we have certainly seen continued strong markets in all of the major segments. We see good liquidity. We see good activity. We see good demand.

And I would say when we look at our overall mix of portfolio, of Bob mentioned earlier, we have done a concerted effort as a global team to reduce some of the more transactional low-end stuff and really migrate to the high-end, real high-value, deep entanglement relationships with the top-level customers. And that's where our focus is. And we think that is where our value proposition has the most yield. So overall, we feel very good about the portfolio. And it helps that the overall environment is good.

Okay, and then just finally on the land-based opportunity, you threw out some numbers at the beginning of the call. Does that equate to about 200 million in gross revenue on an annualized basis? And when do you expect to start breaking that out?

I think our sense has been that it has just been too small to really do that. But as it does grow, I think that we anticipate over the next several quarters, we are going to begin to think about trying to break that out. But again, it went from being a fledgling pilot program. It has now got broader acceptance. We're seeing more validation of the concept. We're seeing more activity generated. And we're seeing more interest. And I think we're beginning to feel more and more confident that this has got durability, and is something that we can grow over time.

But a think we are very excited about not only the fact that there has been such a positive response from the industry, but we're excited by the fact that the size and the scope of the market is substantial. On a global basis, it is an enormous market relative even to our core businesses in Marine and Aviation. And the U.S. market, where we see the biggest opportunity to drive our value proposition is a very large market in its own right.

And again, right out of the box, two years into the pilot program, we could not be more encouraged by the response from the industry, both on the supply side, which is looking again to sort of rationalize downstream operations and certainly rationalize our exposure. And from a customer point of view, we represent a tremendous value from the perspective of not just price competitiveness, but credit financing, logistical efficiency, wear and tear on equipment, driving patterns of trucks -- all sorts of dimensions to this that are very exciting. And I think a company of our size and scope with our footprint and our ability to use our balance sheet and our marketing network all plays very, very well.

So it is a nice complement to the other two businesses. And it further consolidates our position as an effective intermediary.

Great quarter.

(Operator Instructions). Jerry Heffernan, Lord Abbett.

Thank you very much for some nice results here. On a sidenote, do you guys try to hire only people who are very fast talkers, or do you actually practice that?

(laughter) I think we have a DNA problem, Jerry. I think that's our problem.

We all grew up on the trading desk, so --

One person's problem is another person's advantage, so that's all right. In regards to the Marine business, you have mentioned several times in both the preamble and answer to Mr. Chumbler's questions here about -- I will phrase it trying to high-grade (ph) the margin of business in the Marine segment. Could you help me understand on a more tangible level what is the higher-margin business and what is the lower-margin business? I'm not quite getting it.

Sure. As you know, our Marine business is segregated into two different categories. We've got the brokerage business which is a more traditional commission model, where we are acting as kind of an agent on behalf of the client to source pricing in the market. And we get paid a commission from the supplier for making that transaction effective.

On the principle side of the business, we're really acting as a supply management company, where we are creating opportunities in the market where we're able to generate a higher yield because of our ability to aggregate volume -- we're generating value, and we're taking value out of the market itself and allowing us to create opportunities for the customer from a competitive pricing point of view that they would not otherwise be able to get. And in those transactions, we're able to get a higher yield.

The other thing that I would add to that is in terms of complexion of customer, we referred to what we call transactional business. There is business in any industry that we would consider low grade from the perspective of that it is very time consuming. You spend a lot of running around. You have got a very low closure rate. It's basically -- dilutes the effectiveness of our enterprise from a day-to-day time efficiency point of view of the sales guys out there working the market.

What we're tried to focus on -- and you know just from being a participant in this company, our value proposition is about building long-term partnerships with much higher-end global blue-chip fleets who really appreciate the value that we're driving from the point of view of financing, from market access, from technical quality control, from oversight. And all of that entanglement means that you get a more closure rate, a lot less wasted time. And you generate an overall more reliable yield.

So that is our effort. We're trying to move business from a more traditional pure spot market to more entangled relationships on contract business. And I think that this is something that we see as being a promising direction for the Marine industry in general. And that is where the value is not only just for the customer, but it is also for the supplier, because from a supply perspective, Jerry, they are looking to rationalize all of this. They don't want to be managing multiple individual discrete transactions on a one-off basis for multiple buyers around the world. It is just too fragmented a population of buyers, and most of the oil community have moved to kind of a trading model.

So we're trying to play the match game. We've got suppliers that are looking to use us as kind of a virtual marketplace to consolidate all of this highly fragmented transaction, and effectively and efficiently match what the supplier's offtake stream looks like, and what the customer's looking to do to just drive this commodity they have to buy. As we talked about, fueling is not their core competence. It's the business of shipping. So this is something that takes up a lot of time.

So by virtue of bringing that efficiency, by managing the logistics, by moving from a pure transactional spot basis to a more entangled high-value relationship, we've been able to generate higher yield. And that is where we think is the long-term value of our company.

Okay, thank you for that. On the Air business, over the last two years, you had made some significant moves there. It was the UAL business that -- you took a piece of that business to bring in-house, and advantage of (ph) a situation there. You had won business with America West. Certainly, JetBlue was your poster customer for a while there.

Could you just on a real quick review say hey, look, we have done these things over the last 24 months, and bring them to where everything is today -- have they hit the optimal point that you had hoped that business would hit when you originally brought it in? And where do you take it from here?

Sure, I would be happy to talk about that. Let's go back to do a little bit of a survey on where we were a couple of years ago. As you remember, the history of our aviation model had been primarily focused on reselling model to sort of a middle-tier customer, and to some extent, even a lower-tier customer, primarily focused in the cargo and charter ends of the market. And if you go back a few years, it was Latin-centric (ph) in its focus, and it began to expand beyond that.

What we decided to do was we got proof of concept. And some other things that we'd experimented with from a high-value end service offering in the Marine space had application in Aviation, as well. And we began to diversify and kind of build proof of concept of service in a whole number of segments, and on a much more geographically diverse basis. So we drilled more deeply into the cargo market, the charter market, the military market, the corporate space market as well as the passenger market, and also even into blue chips.

And what we found is that we were not only able to grow volume, but we were able to diversify the mix of business and generate a very good return, and also reduce our credit exposure and not have as much concentration on what would have historically have been a higher risk business. So we went to a little bit lower margin business, but a much better risk overall.

Now what we wanted to do with the fuel management was we had had a lot of success with our high-end outsource model on the Marine side. And it seemed to us that the next logical transformation of the business model was to try to go to customers whose, again, core competence was not fuel, and see whether or not we could provide a fully integrated, complete outsourced service to those companies.

JetBlue, as you correctly identified, was kind of our poster child. This was a startup airline that had a lot of attention in the market. Dave Neeleman was a very creative guy. They were doing some innovative things. And in fact, they understood that the value of working with a specialist was to get much more visibility on their overall supply chain, which was something that they had the perception of control over, but did not really understand in as much detail as we were able to provide them. So inventory management, price efficiency, generating competitive tendering for their business, etc. -- these were all things that generated value.

Our goal by virtue of getting into that kind of an account -- and then America West and Midwest Express and a number of other smaller ones that are perhaps not as well known in the public domain -- was by consolidating that volume. It made us a much more effective buyer in the market. And instead of being dependent upon supply relationships at individual airports where we controlled very small percentages, these large volumes allowed us to become a much more significant buyer and drive efficiencies in the market, not only for those individual buyers, but also allow us to get economies of scale across our entire portfolio.

So if you fast forward to today, the JetBlue, America West -- these are companies that continue to grow and be solid customers from our perspective. I think that those companies would certainly make the case that what we have done for them is added tremendous amounts of value in terms of them being able to build much more efficient supply chains in their fuel procurement. It has allowed them to rationalize cost. It has allowed them to think about fuel procurement from a more strategic point of view instead of just a reactive transactional point of view. Instead of just doing it as a cost center, it's actually something that they can proactively manage with control and actually drive results to their bottom line.

So I think that where I would bring it today, Jerry, is that we could not be more pleased with what we proved by going into that model. And it achieved all of our objectives. One, it gave us a much more diversified customer base. Two, it allowed us to change our entire relationship with the supply community and generate economies of scale. Three, it allowed us to move to a more diverse and more creditworthy customer base. And from all of those points of view, we've been successful.

Where do we go from here? I think that we feel that we had built a model that is unique. There is nobody in the world market that has got the footprint that we have, that has the scale that we have, that has the domain expertise that we have on multiple markets throughout the world. And what we are finding is that by having that bedrock, that baseload of volume has allowed us to generate sort of strength to strength. We have a lot more attention in the international community. We've been rated very highly by some very prestigious industry trade organizations that track service offerings and support structure. We have won a number of awards in terms of being identified as both a global and a regional player in the States. This has fed on itself in generated even more attention.

We found that on the back of the United deal that you mentioned, where we were helping them maintain some of the contracts for the third party customers that they were not able to service when they went into bankruptcy -- by virtue of being able to maintain those relationships, we built relationships with global customers that historically had not been -- it was not intuitively obvious that we would have been able to get to those customers or that they would have logically called us up to help them. But by virtue of that United relationship, it got us deep into some customers that began to realize that we had value not only in the areas that United had introduced them to, but also other markets of the world.

So it kind of went from strength to strength. It allowed us deeper penetration into larger accounts. It allowed us to drive -- perfect our value proposition, and have that transfer across our entire service offering. And it was a much more important strategic move in terms of what we did as a management team to execute at a very high level of service. And that is something that's perfected and it's driven efficiencies throughout the organization. And from our perspective, each iteration of the platform transformation is giving us a much better opportunity from a global perspective to continue to drive the model.

So where do we go from here? We see increased volumes in every major category of our space. We see tremendous changes in the corporate space. It is a very exciting part of the market that we're deep into, not only just from a fuel point of view, but also services. We've been very successful in terms of being kind of the go-to guys for things like U.N. contracts, emergency aid relief, difficult hotspots of the world that need emergency relief in the cargo market and the charter market are there. Again, we've become identified as the guys who have really cracked the code on delivering that value. And so the word is out. It's not something we have to hunt as much as it is coming to us.

So I would just tell you that all of those strategic moves that were critical to building our footprint, establishing a global base of operations, perfecting our internal service model -- we could not be more pleased with how far we have developed that. And we see nothing but opportunity ahead of us in terms of growing that model.

Okay, I appreciate all that, Paul. Thank you. The last question I had involves the equity offering. You've expanded your credit facility here. I think it may elude some of us. Exactly what is the item on the balance sheet that requires the equity base to leverage off? You look at your balance sheet. You see 92 million in cash, 45 million debt. What do they need more equity for? What do they need more cash for? Let's just take the topic of any acquisitions off the table, because everything you had said so far is to support the growth you see. So again, refresh us as to the capital base that you require is in order to leverage what?

I think when you talk about cash flows, what you should understand is that the things that most significantly impact it is the volume of business we do, prices in the marketplace, and the changes in our trade cycle -- how efficient we are on collecting our receivables, and just how willing our suppliers are to give us free trade credit. So we as an organization are making strides at becoming more efficient at what we do. But we are a growth business. And the capital that we're raising is to support the growth of our business. That will be both through organic means and through acquisitions.

And new businesses -- and diversified businesses, as well, because what we arrived at, Jerry, is that we have got a business model that really validate that we've done something very interesting as a global intermediary. Now, we've done it in the Marine fuel. We've done in Aviation fuel. We're beginning to do it in Land. But there are other industries that might lend themselves to this kind of a business model. And we feel that it is only appropriate to be taking the steps now. It is the prudent thing to do to make sure that we have got the capital structure put into place to be able to take advantage of these opportunities.

So we just think that as good stewards of the shareholder value, that this is the responsible thing to do. We want to make sure that balance sheet is absolutely solid as we go forward, not only in the businesses that we're currently doing, which are enormous in their potential scope, but also other possible areas of activity.

Daniel Morris (ph), RS Securities (ph).

Great quarter. Just one question that wasn't answered -- just so I can get it through my head. The hedging that you do on a -- I guess it's on a quarter-to-quarter basis -- could you just go through that with me, so that I can understand it better? Because you take a charge, and then you pick it up again in the next quarter -- so could you just run through that for me quick, please?

Yes, sure. There are really two things that we're doing on the hedging for our own needs. And it's inventories, principally. And with inventories, you want to protect yourself against changes in market. So the worst thing that can happen to when you hold inventory is if the market were to fall.

So what you are basically doing is you're using derivatives to float your inventory value with market. Currently, what that says is that when market prices move up, we have a loss on the paper. And you are not going to recognize the benefit, which is the offsetting profit, until at which point in time we actually make the sale of the product on the physical side. That is the largest activity -- that is the only activity that we have in aviation, which is the hedging of inventories. We have some inventories in Marine, but to a far lesser degree.

The other piece on the Marine side happens to be virtual inventory. And what we're doing there is we have commitments to purchase product at specific locations, who are (ph) set quantities at a set price. And again, what we do there is in order to be floating with market, we sell swaps which float the price. And what happens then is, until which point in time that you actually sell the product, you are not going to recognize the gain associated with selling the physical position. Is that clear for you?

Yes, well, it's really a riskless situation, though, correct?

Absolutely.

Danny, welcome to the new world of FAS 133. Come on over and spend some time with us. (laughter)

I'm sure your accountants and attorneys do plenty of that.

(multiple speakers) is something everybody is going through. Even GE went through it. So it is the new accounting rules. And it's fine. We're doing our thing. But if you're not close to the business side, it is not clear what we're (multiple speakers)

But it's sort of muddies the number, because without that having to take it and then gain it back in, those numbers would be -- even as great as they were, would be even greater, so --

Well, as the saying goes, the number is what it is. It's GAAP. We're going to do it. It's just what it is.

Once again, congratulations. And it was really a tremendous quarter.

(Operator Instructions). There are no further questions at this time. I will turn the call back to you.

Thank you. We appreciate all of you us joining us today. We're very excited about the quarter and the current situation of the Company. And we appreciate your continued support. And we look forward to talking to you later on in the fall. All the best. Thanks.

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.