World Kinect Corp (WKC) 2006 Q1 法說會逐字稿

At this time, I would like to welcome everyone to the World Fuel Services first quarter 2006 earnings conference call. [OPERATOR INSTRUCTIONS] Thank you. Mr. Mason, you may begin the conference.

Thank you. Good morning and welcome to World Fuel Services conference call to discuss it's financial results for it's first quarter ended March 31, 2006. As mentioned by Lisa, I'm Michael Mason of Allen & Caron Investor Relations. Before we start this mornings 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 it's first quarter 2006. It was released on Wednesday, May 10, 2006 at 5:30 p.m. Eastern. If you did not receive a copy of the press release it is posted in the client section of our website at www.allencaron.com or you may call our office in New York at 212-691-8087 and we will e-mail it to you right away. It is also posted on Yahoo! finance.

In addition this call is being recorded. A replay of the call will be available through may 18, 2006 and may be accessed from North America by calling 800-642 -1687 and entering conference ID number 8323111. International callers should dial 706-645-9291. This call is also being broadcast live over the Internet and may be accessed on the Company's website at www.wfscorp.com. A replay of the webcast will be available through June 30, 2006.

Additionally I've been asked to make the following statement. With the exception of this--with the exception of statements of historical information made on this conference call, this call includes forward looking statements and involves risks and uncertainties including but not limited to the clearly 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 customer 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 Security and Exchange Commission filings. Actual results may differ materially for many forward looking statements set fourth 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 I would now like 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, Chief Financial Officer; and Frank Shea , Chief Risk and Administrative Officer.

This morning we announced record earnings of $15 million or $0.52 per diluted share for first quarter of fiscal 2006. We are very pleased with the results which represent a great start to the year. As you can see this is the first quarter in which we have broken out our Land Fuels businesses as a separate segment. We continue to add talent to improve our bandwidth in this business and recently hired a senior person with deep industry experience in supply and operations. And as we have said before, in previous discussions, we believe the last two years experience has given us proof of concept that the business opportunity is significant and it is now a matter of executing on our strategy.

When reviewing the results for Land compared to last year it is important to note that demand in the U.S. Gulf Coast, an important market for our business, is only now beginning to approach pre-hurricane levels. And unlike our Aviation and Marine segments, there is some seasonality in the demand pattern of our current Land customers, primarily agricultural and commercial consumers, and it is at this lowest level in Q1.

In the Aviation segment, our core reselling has continued to grow consistently while in our Fuel management offering we are diversifying our business model. We have accepted notice of termination of 450-- of our 450 million gallon Fuel Management contract with America West effective June 30th, 2006 and are currently in discussions with U.S. Airways to enter into a new services agreement. Under the existing agreement, World Fuel performs the full outsourced fuel management service which includes the procurement of fuel in the name of World Fuel on behalf of America West in exchange for a monthly service fee.

As--excuse me, Operator? Is the call still on? I'm hearing some beeping. Hello? Okay, we'll continue. They cannot--they're only dialing--they're only question, I'm not sure.

Yes, sir, the call is still going.

Okay sorry. There was beeping in Operator. I just wanted to clarify what was going on there.

Under the existing agreement World Fuel performs a full outsourced fuel management service which includes the procurement of fuel in the name of World Fuel on behalf of America West in exchange for a monthly service fee. As we have discussed in previous conference calls, volumes associated with these contracts run through our financial statements as gallons purchased and sold at no per unit markup. The service also includes the number of back office [inaudible]--agreement U.S. Airways would perform these functions in-house and World Fuel would perform a purely consultative service for a reduced fee. However and most importantly, World Fuel would have the opportunity to bid for U.S. Airways supply contracts as a reseller.

The primary impact of terminating this agreement will be the loss of revenue associated with contract volumes managed by World Fuel on behalf of America West. The impact on earnings per share is expected to be immaterial and the loss of volume is expected to have an insignificant impact on our ability to source fuel at competitive prices. In addition, we will no longer carry prepaid fuel balances maintained by America West which have averaged approximately $14 million. We are pleased with the direction our relationship with U.S. Airways is taking. While we have been very happy with the America West relationship it is not clear that the service offering we had been providing would generate an acceptable return if we were to take on U.S. Airways volume. The new arrangement being negotiated would better fit our business model and allow us to redeploy our internal resources to service growth in the core business.

On the business development front, we continue to make important strides in the advancement of our corporate fueling model. International trip planning and flight services are growing businesses for us and our fuel offering we believe gives us a distinct competitive advantage in the global market. Moreover, we continue to explore a number of alliances with other service companies to be the provider of contract fuel. We have just recently launched a pilot program with a large aviation services group to provide fuel as part of their total service offering to their customers. These initiatives continue to validate the quality of our offering and strength of our business model.

In our Marine segment, results remain strong in the first quarter. What is particularly gratifying is that our performance is a direct result of sound execution on our global strategy. Over recent years we have acquired a number of companies in order to aggregate volume and consolidate our global position. We have successfully integrated a highly talented group of skilled practitioners and markets around the world. Our supply segregation model and supply led marketing initiatives have proven highly successful. The oil companies continue to shed downstream assets and our customers are more focused than ever on the need for market visibility at scale.

Our efforts for the balance of this year will be focused on continued execution of our strategy and driving organic growth. We will also continue to monitor the health of the overall shipping markets to see how rates are impacted by some of the new buildings scheduled to enter the market late this year. We benefited from a good operating market in 2005 which carried over into the first quarter of 2006. High oil prices and geopolitical uncertainties are concerns we share with the rest of the world but continued strength in the global economy is positive. We continue to grow and see opportunity in our core space.

The Land business is small but important initiative with promise and we look forward to steady growth this year. As we scale up the business and make investments in systems, people and business process, the ERP project led by Bob Tocci and his team continues to be one of the most important initiatives this year. It will provide a much needed platform to realize our growth potential and improve operating efficiency throughout the Company. We would like to thank you our shareholders for tremendous support and I will now turn the call over to Bob for detailed review of the financials. Bob?

Thanks a lot, Paul. As Paul mentioned, commencing with the financial results for the first quarter of 2006, our Land business is presented as a stand alone operating segment. In the past the Land Operations which started as a test pilot in 2003 was included as part of our Aviation segment. The historical Aviation segment information in the following discussion has been adjusted to exclude the Land business operations for comparability purposes.

Revenue for the first quarter was 2.5 billion up 759 million or 43% compared to the same quarter year ago. Our Marine segment revenues grew 48% to 1.3 billion. The Aviation segment grew 39% to 1.1 billion and the Land segment grew 20% to 70 million compared to the same quarter year prior. All three business segments contributed to a $705 million price increase related to total revenue. The balance of 54 million was due to higher Aviation volume. Through the Marine segment total business activity decreased to 6.1 million metric tons due to lower brokerage volumes. Partially offsetting was higher reselling volumes. Reselling activities new constitutes 69% of total business activity.

Our Aviation segment sold 557 million gallons during the first quarter of 2006 and an increase of 29 million gallons or 6% compared to the same quarter a year ago. Passenger, cargo, charter and corporate customers all contributed to this increase. Our Land segment sold 37 million gallons during the first quarter, a decrease of 2 million gallons compared to the same quarter year ago. This decline was due to reduce sales activity in the Gulf Coast following Hurricane Katrina.

Gross profit for the first quarter was 49.7 million, an increase of 14.2 million or 40% as compared to the same quarter year ago. Our Marine segments gross profit was 24.5 million, an increase of 7 million or 40%. Our Aviation segment contributed 24.2 million in gross profit, an increase of 7 million or 41% as compared to the same quarter year prior. Our Land segments gross profit was 1.1 million, an increase of 200,000 or 27%. The increase in gross profit was largely due to margin improvement in all three business segments as well as increased business activity in our Aviation segment. In general margins benefited from advantageous pricing, favorable market conditions, a change in business mix, and a net positive impact related to our inventory hedging and price risk management programs.

Operating expenses for the first quarter were 29.8 million, an increase of 3 million or 11% compared to the same quarter year ago. Of this increase, 2 million was due to compensation employee benefits and 3 million was due to an increase in general and administrative expenses. Partially offsetting was a 2 million reduction in the provision for bad debts. The increase in operating expenses was primarily due to higher performance based incentive compensation, new hires and infrastructural spending initiatives to support a global business. The decrease in the provision for bad debts was largely due to the provision that was recorded for two Marine customers during the first quarter of 2005. Despite higher world oil prices, we believe the overall quality of our accounts receivable portfolio has improved.

Income from operations for the first quarter of 2006 was 20 million. An increase of 11.2 million compared to the same quarter year ago. Income from operations for our Marine segment was 11 million for the first quarter of 2006, an increase of 6 million compared to the 5 million from the same quarter year prior. Our Aviation segments income from operations was 12.5 million for the first quarter, an increase of approximately 5.1 million or 68% compared to the corresponding quarter last year. Our Land segments income from operations was 200,000 compared to 400,000 for the same quarter year ago.

Corporate overhead not allocated to our business segments was 3.7 million compared to 4.1 million for the corresponding quarter a year prior. The Company's effective tax rate for the first quarter of 2006 was 25.7% as compared to 11.2% for the same quarter year prior. The higher effective tax rate resulted primarily from profit fluctuations of our subsidiaries in tax jurisdictions with different tax rates.

Net income for the first quarter of 2006 was 15 million, an increase of 7.6 million compared to the 7.4 million for the corresponding quarter last year. Diluted EPS was $0.52 for the first quarter an increase of $0.21 with 70% compared to the same quarter year ago. Our return on equity was 16.6% for the first quarter compared to 15.4% for the same quarter year prior, and our return on assets for the first quarter was 5.6% as compared to the 4% for the same period last year.

At quarter end our cash and cash equivalence was 150 million, as compared to the 133 million at December 31st, 2005. Additionally at both balance sheet dates of March 31st and December 31st, we had short term investments of 10 million with maturities within 30 days. Net cash provided by operating activities was 23 million during the first quarter. Partially offsetting were net cash used in investing and financing activities of 6.5 million in the aggregate primarily related to the acquisition of a minority interest of Tramp Oil Brazil, CapEx and dividends paid on common stock.

Our DSO or day sales outstanding was 27 days and our payable days outstanding was 23. On average we also invested 1.5 days of sales in inventory. Thank you for staying with me during this overall review of our financial results. Now, before we go back to the question and answer period, let me first turn the leadership of this call back to Paul.

Thanks, Bob. Operator we can go ahead and open it up for questions.

[OPERATOR INSTRUCTIONS] Your first question comes from Alex Brand with Stephens.

Thanks. I knew I had a question.

Good morning, Alex.

Good morning. Excellent quarter, guys, let me say congratulations on that.

Thank you.

I guess let me start with the America West.

Okay.

That sounds like that's potentially very good news for your company sort of internally. Does that free up resources internally that maybe you can reallocate to something that's more profitable I guess in the long run, and maybe just talk about is U.S. Air a bigger -- or forgetting the size of the opportunity with them, it's an opportunity to focus on what you really want which is just the more profitable reselling opportunity?

Right. I think you helped characterize it correctly, Alex. As you know, just as a bit of background, when the acquisition took place, we viewed it with a little bit of trepidation because we were obviously controlling the America West stuff and the U.S. Air volume was something that we really didn't feel so comfortable that we'd want to digest, so in fact you're right. The fact that they're taking that inhouse actually is beneficial to us in terms of deploying those resources to, if you will, higher yield opportunities. We're glad that we're going to pursue a relationship with U.S. Airways because I think there are things that we can genuinely help them with. I think that they were quite complimentary about the value that we had added to America West. They'd made kind of a strategic and political decision internally on the back of an integration to bring all of that functionality inhouse and that's fine. We have no issue with that.

If you go back a couple years ago you know that part of our strategy was to use the Fuel Management as kind of a volumetric stocking horse to build up some purchasing power. We've long since achieved that critical mass so from a return point of view, it'd be very difficult to justify having taken on the U.S. Air volume on the kind of basis that we first entered that deal with America West. So from that perspective, yes, we're very pleased and I think that you accurately characterized that our relationship with U.S. Airways is very good in that we believe that there will be opportunities to bid selectively for their various contracts and locations. So on all levels, I think it's a good direction. We have a good working relationship with the staff there. I think that the transition is going to be very smooth and we're going to help each other. It's a good relationship.

Now any change to your relationship with JetBlue at this point?

No. It's completely unrelated to any of the other relationships we have and I would say for the record that those are slightly different relationships anyway and we view them a little bit differently in terms of how we foresee overall sort of return for the relationships and stuff, so -- but they're incidental, they have nothing to do with each other. We continue to work the other things. In fact I'd say that from a more strategic view, given the volumetric footprint that we have now and the advancement of our model, we're looking in the Fuel Management model, we're looking at a different kind of sort of direction. It's more of a hybrid between management on an outsourced basis of certain select locations and then reselling to other locations as kind of a combined hybrid. This has been very successful with customers like Atlas Polar, so I think that that's the direction we're moving in and I hope to see U.S. Air go that way as well.

Okay. And now that we see what land looks like in terms of some numbers, what do you think is sort of the next step in that process? Is there an acceleration point there or is it just more about baby steps? I guess I'm trying to understand is it that you've learned that market and now you feel like you have a very clearly defined strategy of how to attack it or is it still something that we should expect to kind of move along fairly, slowly is not the right word but steady until you sort of get increased comfort?

Right. I would say that this is about an investment in people, process, and systems. And I think that ultimately it's going to be mostly about people that will drive kind of the change in the model. We spent a couple of years, we're a fairly cautious team? You know the Company well enough to know that we don't just -- we prefer not to be out over our skis so this was about doing a very thorough vetting of our market opportunity and understanding where our sweet spot might be. So there was a great deal of caution about wanting to break this out until we really felt good that we had all the makings of a good solid platform for growth, so it does take time. It's a matter of building the capability and we've learned from our other businesses that have grow pretty dramatically that the last thing you want to do is get out over your skis and overshoot the market when you can't really support it and sustain it from a systems and a process point of view. But what we are very gratified by is that we think the opportunity is real and it is substantive and it is significant.

This represents a very interesting complement to our core capabilities and our other businesses in the marine aviation space and it's an interesting complement to our existing relationships with the oil and supply community. So we are feeling very good about the fundamental reality of this market opportunity but I would be cautious about saying that this is going to be some wild, turbo shot, leap-frog type business. It is some seasonality. This is about steady steps. It's about building the infrastructure, it ties into the ERP project that Bob is building, it's about a committment to systems. It takes time. We're patient but we think the opportunity is very significant over time, but we're going to do it right.

Okay. And I guess sort of stepping back to how you you been driving your net revenue growth at this point, and I guess this quarter and I guess the last quarter too was more about driving your sort of profit per transaction and what's your sort of philosophy internally? Are you completely indifferent to profit per versus volume or at some point does the volume need to accelerate to keep that net revenue growth going?

Well, volume at a margin equals ultimate return so the way we look at it is that they are obviously kind of, they're deeply integrated, but let's talk a little bit about what's been happening in the business. If you step back at the 70,000 foot level for marine as we talked about even in my opening statement, the marine segment is representative of a culmination of a lot of strategy. This was about aggregating franchises to build a very strong platform of volume. It was about training those people that we integrated into the system and it was about making sure that they had the capabilities to execute our value proposition. It was about making sure that we had a successful segregation model between our supply and our sales execution. So part of our strategy over the last several years for people who have been with the Company for awhile was about the acquisition strategy that Bob and Mike Kasbar worked together on to roll up and give us a very secure global footprint.

I would say now it's all about more the advanced strategy and driving organic growth but there are absolute limits to margin. You're not going to make infinite dollars per unit so ultimately we are committed to volumetric growth so it's about understanding our percent penetration of volume of major global accounts and executing our strategy of using a highly trained group of practitioners around the world to drill more deeply into these relationships. As you know from sort of conventional sales in any business the most difficult challenge is building the relationship and establishing credibility with the customer. I think that we've done that very effectively and in today's market which is high priced, which is difficult, which is global in scale, we have actually built a very, very successful franchise that is viewed with a great deal of credibility by the world's largest fleet. So from our point of view this was just about discipline, execution, teamwork, and focus, and I think that our strategy for marine is organic growth.

We continue to grow volume in the aviation space because it seems to me that we're kind of coming into our stride in terms of realizing a value proposition that is quite effective across our core commercial business which is the cargo, charter, and passenger. So that's just about systematic, continued efforts to market our product on a more globalized basis. We see more fragmentation in the aviation industry, that is good for us. We found that we have a niche to play with the blue chips and we're doing that. Our fuel management, as we discussed earlier is transforming to what we think is a better overall model for the Company. The corporate space is very exciting to us and we've had some real proof of concept in that space that we think is very gratifying in terms of our strategic vision of where we thought it would go, that seems to be taking place. So it's not as if we're going to just focus or margin or just focus on volume. We see them as integrated, we're committed to growing both, but there are certain realities about the limits to margin and that's just the nature of the business we're in. But we feel good about the opportunity suite which is the most important thing.

Okay. I think that helps me a lot. I mean I guess the model is to grow that net revenue and you get there one of two ways.

You got it.

Let me just ask one more question and then I'll turn it over to someone else, for Bob. Excellent cost controls in the quarter, particularly the lower bad debt provision. Can you just talk a little bit about sort of what you think is sustainable versus maybe just a one quarter positive?

In the area of the provision for bad debts?

Well, that specifically and then just sort of total overhead just overall.

I think -- well, the fact of the matter is as it relates to the overhead of the Company, much of our overall expenses is salaries and performance based bonuses so as the gross profit of the business grows, so will the overall level of expenses related to compensation; all right? In general, the Company has grown quite substantially. You can see that in the first quarter we had 2.5 billion in sales which puts us at a run rate to be somewhere around 9.2 billion for the year. So the Company is increasingly global and shall continue to make an investment in infrastructural spending to support a business that is global and needs to be compliant worldwide.

As it relates to the bad debt, I guess what I would tell you in that regard is that despite the fact that our overall gross receivables move from 700 million at year-end to 770 million at the end of the first quarter , because of the higher pricing of world oil, we feel very good about the receivables as of March 31. The overall quality had improved, Frank and his credit team have done a good job in that area of monitoring receivables and actually reshaping the portfolio to be what we believe to be at what we feel to be an all-time best and as a result of that, the actual charge-offs that we incurred in the quarter were down substantially from 1.9 million in the first quarter a year prior to just about about 670,000 in the first quarter this year. So the amount that we had to charge to the allowance through a P&L hit to the provision went down, and as a result of that, the year to year improvement was $2 million. But where that goes, only time can tell.

Okay, but it's fair to say that you've been conservative in your reserves in the past and as your credit portfolio quality improves so should that bad debt expense.

If that holds true the answer is yes.

Okay. Thanks a lot, guys.

Your next question comes from the line of Michael Novak with Frontier Capital.

I wanted to add my congrats to the good results. I appreciate it.

Hey, Mike, how are you doing?

Good, thanks. My first question was on the cash flow from operations. I got the 23 million versus consuming about 48 million in the last year and it looks like it was the accounts payable and customer deposits that overwhelmed the accounts receivable this year. Could you give some more color on that?

Well, I mean, that type of item in a growing business is not something that's easy to project. It was a matter of timing. We did have an improvement in our overall day sales outstanding which was helpful as also -- the timing of the receipt of customer deposits as well as the payments that we made to suppliers. So from quarter to quarter that will vary particularly in a company that is growing and utilizing cash.

But it's nothing different about how you're managing the payables or how you're managing the customer deposits because it was--?

Well, what I would tell you is that there is a concerted effort in our organization to focus on working capital. I mean earlier in the discussion Paul told you that we look to build volumes and improve margins. Well, the other part of that is the return side, and the quality of the return, and what we do there is we look to manage our day sales outstanding, our number of days that we invest in our inventories, and we like to optimize our free-trade credit with suppliers so there are efforts in programs in each of these areas given where world oil prices is today.

Okay. My next question was on the tax rate. Do you have any sense on where we should model it going forward or is it just dependent upon where the sales take place globally?

That really does jump around quite a bit. I know for the first quarter we are 25.7, substantially greater than the first quarter a year prior and lower than it was in the fourth quarter last year. It does move around. I mean for that reason what we do is we look at the income that is generated by each of our entities and we look at the statutory rate and our effective tax rate just falls out of that. So what I would tell you is as our mix of earnings moves around, so does the tax rate but if I had to take a guess at this point what our tax rate would be for the year, it should be in the 20 to 23% range.

Okay, great. And then just back on the cost side. You had said that as the bulk of your expenses are salaries and wages and performance bonuses, et cetera, those expenses would show up in the compensation and employee benefits line; correct?

Correct.

I mean that line item showed a fair amount of leverage with your gross profits or net revenue growing 40%. I was surprised, however, that the G&A grew 39%, almost in line with revenues and I'm wondering if that's investments in the land business or what's caused that?

I mean we've had a series of areas that -- and I mean that's basically our general and administrative costs and the areas where we saw that increase was roughly higher travel and entertainment, all right? Which is related to our marketing efforts. There were roughly -- which was 1.2 million higher, roughly an increase of 700,000 in professional fees and higher rents and telecommunications so those were the areas where the expenses were really rising.

Okay thank you very much and again, appreciate the strong results.

Thanks, Mike.

Your next question comes from the line of Al Kaschalk with Wedbush Morgan.

Good morning, guys.

Hi, Al.

Good quarter, or should I say phenomenal quarter, but in any regards can we drill back down on the bad debts for a moment? I just want to, I realize you're not going to give us a number, but if you think about the reserve as a percentage of sales, I know that's a big number there, but 50 basis points is reasonable to think that the dollar level will stay in the reserve unless you have some type of specific issue. Is that fair to think about it that way?

Well, the provision for bad debt as a percentage of sales in the quarter was roughly 2 basis points, now, 0.2%, all right? And it's really hard to tell you where we're going to wind up, all right? But the fact of the matter is, is that the overall quality of the receivables was good and I think that is something that we feel certainly delighted about and whether or not that can continue only time can tell.

But what would it need to either go, maybe wrong is a bad word but Frank and his team were doing a phenomenal job of screening and getting the quality up. Would it be you getting more aggressive on business that would drive that the opposite way?

Yes, Al it's Paul. There are a couple ways to think about that beyond just the financial metrics.

Right.

It's not only the screening side but look, you've got economic circumstances, we've had consistent economic growth, we've been the beneficiary of a robust market certainly in the shipping side for some time and we still see signs that the rates are kind of holding there. We do watch that with some caution. If we saw significant deterioration in the economic climate or in the core industries that we're servicing we would perhaps be a little bit more stingy with the lines that we're giving so this is the ongoing care and custody that Frank and his team exercise every single day. So the -- it's the Thomas pain, vigilance is the price of liberty or however that quote goes, but so it's just basically being consistently vigilant to changes in conditions.

We've seen a fairly robust market for the airline side on the cargo and the charter side has been very active. Corporate of course is very active. The passenger, we haven't historically had exposure to the large legacy carriers that have gone through the upheaval of the big bankruptcies so that hasn't been really our core focus, but I think the business model that we're driving is less about the credit. It's more about the high value ad. So what could change it? Yes. Are we going to get hit? Are we going to have write-offs? That's just part of our business model. If we turned into an absolute zero risk model, I think that's kind of the old fashion major oil company approach which is just take no risk and don't do any business, but from our own perspective, it's a reality we live with. We are very, very diligent and careful. Things can happen. We are going to get hit from time to time . It's just a reality but I think from our point of view it's just the discipline, just continuing to be very disciplined in what we're doing.

That's helpful, thanks. On the acquisition of Tramp Oil, the remaining 33%, is there some strategic reason for that or how should we think about that announcement?

Well, I look at that as the completion of the acquisition of the Tramp group of companies which happened a few years earlier, and the fact of the matter is, is that we have a talented group of people in Brazil that will be supporting us in not only our purchasing of marine products from Petroglas, but also we're working together on a joint venture on the land side.

Okay. Paul, I know you touched on this a little bit but on the land side of the business I know you're not up to scale in any fashion yet, but revenues up 20, operating profits down I think 53%. Some of that is certainly growth in terms of people and resources on the expense side, but--.

Right.

Any -- and you talked about incremental steps here, but is that something that we would expect to trail the aviation side in terms of growth?

Well, it's hard to say because I'm not sure that I could link the two. Our aviation business model has advanced quite dramatically over the last five years and is at a very different state of maturity in terms of it's development and our proof of concept in a variety of different segments. So I would say that in many ways the land business is a far less mature operation and it was more about finding our way, finding a sweet spot, what we found in aviation is that we found an entryway into the business some years ago, but then began to diversify and very carefully peel off different silos of activity which now have culminated in a value proposition which crosses many many different segments and aspects of the aviation model. I think that from a strategic view management views land has a similar opportunity but that's over a long period of time. That's not something we're going to do in five minutes and I would say that look, we knew when we put these numbers out there's a little bit of noise. It's way too early to ascribe much to it. You had some noise from the hurricane, there's allocated costs the way we were treating profitability. It's all kind of new.

I think that as this thing takes a little bit of speed and you get a little bit more comfort with the seasonality flow which is a little bit different from aviation marine, because of our agricultural business and commercial nature, you're going to see a little more activity in the spring and summer. So I think what you'll find is after a few quarters you'll get a little bit more comfort with that and we'll have a little bit more clarity on the pacing and the speed with which we feel comfortable growing that.

But again, I'll go back. It's the management disposition is to be conservative about these things. Let's execute carefully, let's make sure that what we do we do well. Let's make sure that we don't blow our first shot at a first impression in the market. Let's make sure that we don't hurt relationships with oil companies where we've got strong relationships already in aviation marine. It's just about disciplined execution, getting the right people in place, it's been a working formula for us over the years and the other models so we have sort of a certain amount of management patience about it. We would rather get it right and grow it well than just jump all over the place and grow a bunch of volume and then find out that we were in the wrong part of the market.

Finally, on the land side, two forms of transactions, contract sales and RAC sales. Can you give us some indication on where the hedging or financial risk management comes into that market?

Yes. I mean okay. Bob and I both are going to -- but anyway I'll give you a shot. Bob may have something to add to it, but I think generally the way we view it, Al, is not unlike what we've done inside of our core space. Customers from time to time are looking to manage a forward curve, so they have exposure, they don't understand, they are trying to get a grip on their costs. So they are going to be -- time to time there are going to be opportunities perhaps to help them with that.

It isn't the primary focus of the model at this point in time, and I think that there are certain limits to our ability to scale it and it is a different customer base than for example an AP [Moller]or an NYK and the marine space or some airline in the aviation space. These tend to be smaller franchises. They tend to be family run. There's -- they are private concerns so we just don't see it as being the same kind of thing at least initially. That's not to say that there isn't an opportunity but it isn't the primary focus at this time. I think there are going to be occasions where it is appropriate for some of the larger entities to help them manage their forward curve by dialing the derivative activity to help them stabilize costs, but it's something that is probably going to be for a select sweet spot of the customer base, not a broad wholesale program.

Okay.

Bob has nothing to add he says.

Thank you for taking my questions.

Thanks, Al, appreciate it.

Your next question comes from Jim Larkins with Wasatch.

Good morning. I've got a couple details that I wanted to follow-up on that I missed. Could you repeat the gross profit in aviation and land? I'm not sure I saw that.

All right the gross profit numbers?

Yes.

For the first quarter?

Yes.

Were 1.3 billion of course, in marine; 1.1 billion in aviation--.

And I'm sorry.

Wait, I'm very sorry.

We wish.

Yes. Again, let's try that again. All right. 24.5 million in marine, besides I was giving you cost of goods sold. I need better glasses. Aviation was 24.2 million, and land was 1.1 million.

Okay, great. And then what was the volume in the business?

All right. I have that as well. On the marine side, we had total business activity of 6.1 million metric tons. In aviation, we sold 557 million gallons. And in land we sold 37 million gallons.

Okay, great. And if I look at what you've been talking about, can you hear me?

Jim, I lost you there for a minute. Could you repeat it?

Sure. If I should -- I'm thinking about near term opportunities for the Company, land it sounds like you're going to go at a measured pace and obviously breaking it out with the discussion we've had it's definitely a go, but it sounds like maybe we should look at kind of corporate aviation and even maybe commercial aviation as being more in the kind of inflection point of the sweet spot of the power curve as far as where growth is currently at your Company. Could you maybe--?

Yes, absolutely and in fact you're dead on, Jim. I would say we would characterize it precisely the same way. I think until we've got some more flavor, it's our natural management sort of temperament and disposition to be cautious about land until we see it take some shape. We think it's a great opportunity, but we're going to be disciplined in the approach. In marine it's the culmination and the maturation of a whole lot of strategic initiatives that have combined to put us in a very good position to drive organic growth this year. That will be our primary focus. We feel very good about that but you're right.

In terms of the near term areas that we're concentrating a lot of our collective corporate management energy and the team between finance and all of the functional support and the marketing teams is on this corporate space. We think it's very exciting. We think that the whole trip planning and international trip planning and flight services business is growing. We have been identified by that community as being the generic source for quality fuel distribution around the world. That's are very interesting position to be in. We think it's achieved a distinct competitive differentiator for us and we will continue to be pursuing a series of alliances in that space so I would say that yes, near term that is the primary immediate commercial development focus of the Company.

So when you talk about trip planning, does that involve services above and beyond fueling?

Correct, it does. You get into some of the things that our Houston operation does which is flight planning in the sense of over flight permits. You're actually have to file flight plans, you've got weather reporting, you've got the follow-up on catering services, limousines all that kind of stuff. There's kind of a whole suite of things that go around the care and custody and coddling of that customer. And as you think about entangled services fuel becomes an interesting core component of that service offering and we've been able to kind of dial that into the mix and we think that that's a good place for us to be in the space.

And so you mentioned that you've initiated some relationships I assume, I mean would these be people like a Flight Options type service providers or is it more like an FBO basis?

Yes. I would say it's not so much as the FBO basis. There are companies who have sort of a dedicated business model of providing services and one of -- as people think about trying to expand their suite of services because they like to better entangle their customer by saying I've got a deeper laundry list of things that go into my service offering, one of the more difficult things to achieve is fuel because it's complex, it's difficult, it's expensive, and it's all over the world, and it's not so easy. So we're kind of the guys in that space and it makes us a logical place to look for support in that area. So that's why it works for us and we'll be interested to see how it develops.

Okay, great. And then can you talk about I guess it would be particularly with the marine business but just how is the business developing in terms of contractual buying and the use of derivatives and hedging, maybe just how does that piece of the business going there?

Again, it is a little bit opportunistic in terms of what is going on in the market at any one given time and what a particular individual ship owners disposition is about a forward curve or what their own particular risk is or their ability to pass on costs so there is some granularity in terms of each individual customer is a little bit different. So the nature of our offering in that sense has been in addition to all of the things that we do to help them manage their exposure in the market one of the things we help them think about is whether or not they should be actually using derivatives to manage their forward curve. Sometimes it's appropriate, sometimes it's not so it just kind of depends on the customer. Certainly from a directional point of view, a lot of what we have been trying to achieve in the business over the last couple of years is to get some of the spot market business, get away from some of the spot market and move towards more of a contract relationship or managing volumes or services of ships.

So we would prefer to move to a world where we didn't have to sort of fight it out every day over every slot ship and I think that we've been somewhat successful in achieving that. I don't think we'll ever make a full move to that. I think the market at it's very nature is always going to be somewhat spot, but certainly we've made some moves in that direction, I think our united marketing effort has been to make a global sell to these large global fleets and the fact that we've got the scale, the 43 offices, the 24 countries what have you to support these, large global fleets, we're in a much better position to do that than some smaller regional franchise that is privately held and not well financed. So I think that we'll continue to focus on that. It is part of our strategy to want to move it away from the spot market. I can't give you sort of absolute percentages of overall volume and where we'll move to, but that's certainly the direction of where we would like to be.

But right now, I mean I know you kind of break out what the broker versus resale is, but if I look at the resale business, how much of that resale is still a spot business?

Oh, a considerable portion of it.

Almost all of it. The fact of the matter is, the usage derivative is less than 5% of our overall buying.

And would you include kind of contractual buy in?

I'm sorry, yes we would because what happens is, Jim, that whereas a customer may say look, go ahead and please manage this service. We're still out there doing spot yields for those ships. So again, it isn't like you try up a contract. It is a small percentage of the business where we just have absolute tied up volume in specific ports where we just control the whole volume and it's on contract.. That's not really where it's at. The contractual relationship as we perceive it is building relationships of these customers where they take pieces of their business and let us manage it in various markets around the world. That's what we're trying to move toward so we aren't kind of fighting it out on a dog fight basis on a ship by ship basis in the competitive spot market. That's what we're moving to do.

Okay. And then on your -- you broke out the corporate overhead on the segment information. Does that include the bad debt reserves? I mean on the operating segment break out, does the bad debt reserves hit that corporate line or is it spread throughout the individual segments?

It's spread throughout the segments.

Okay. Great. And I think that's it. Thank you, guys.

Thanks, Jim.

Your next question comes from Jon Chappell JP Morgan.

Bob broke out the margins pretty nicely, the reasons why the margins have been improving. Favorable pricing and mix are obviously something you guys have been focusing on. I'm just trying to get a sense of the price risk management and the inventory hedging. Is that lumpy in nature or is that something that you can also put a lot of focus on and see the ramp up as you improve your offerings?

What I would tell you is that we do hedge inventory purchases in aviation and marine. We don't see the amount of inventories that we'll be purchasing increasing, so you really are looking at the level in units of activity that we expect to have into the foreseeable future. The real variable is price and as price moves up, you protect yourself through the sale of a slot and that works against you in terms of incurring hedging losses; however, all right, effective last July, we made a change in the way we account for inventory hedging. It's now treated as a fair value hedge and as a result of treating it as a fair value hedge you're able to write up that inventory, that asset, at the same time that you're incurring a loss on the derivative hedge itself. Such that the real or true gain on sale is recognized when you sell the product.

So effective July of last year when we did that as well as we de-designated a number of our other derivatives, you would see on a go forward basis prospective deals that we did are a far better match between when we recognized gain and loss with when we actually sell the physical product. But because we were unwinding positions taken prior to that, you had lumpiness in unrealized gains and losses throughout the year as well as the fact that in our third quarter of last year on our aviation side, we had the in effectiveness of our inventory hedge that produced a gain in the third quarter and then reversed itself in the fourth quarter. So, to make something difficult sounds simpler for you. I think what I would say is that on a prospective basis to the extent that we do, you know, much of the generic things that we've done in the past, you will eliminate the volatility in our earnings associated with derivatives.

Sounds good. And Paul, one follow-up for you.

Sure.

On the acquisition front, I mean clearly I'm not going to ask for a timing or I know you're looking at several things, but if you just kind of give your background, your sense on what's going on out there. Have you found that you're disappointed with the potential acquisition candidates? Or is it just a pricing issue that's kind of maybe kept you on the sidelines up to this point?

I would say that there are a couple of things going on. One, we've had a lot going on just with the business itself. We've been a pretty busy team and there's been a lot of activity just in what the [Expletive] we're doing. So on the one end it's a little bit of well, you got plenty going on so let's not complicate that; however we do have an active screening review. Mike Kasbar has driven for some time that look it's just the good discipline of the Company he and Bob have worked very well on acquisitions in the past. We actually take a great deal of pride in our ability to effectively integrate. We think it's actually become something of a core competence. We have a lot of confidence in our ability to integrate cultures into this one.

So it's not for lack of feeling that we've got the capabilities or the skill, but I think there's sort of a discipline to it in making sure it's the right fit. We don't feel like we have to do an acquisition just to do it. So I think it's going to be about finding the right management teams, the right kinds of people. I would say that we still believe that there are going to be opportunities in the land space to identify acquisition candidates that we might fit in, but again, the way we think about it is we're not just rushing around trying to do it. They've got to be the right fit, it's got to be the right complement, but we feel pretty good about what's going on with our organic growth and I say that that's probably the primary focus. There's just a lot going on here at home.

Thanks, guys.

[OPERATOR INSTRUCTIONS] Your next question comes from Adriano Almeida with DGHM.

Hi, guys.

Adriano, how are you?

Pretty good. So I think most of the questions have been asked. I have just one simple one. How relevant has the military business been for you guys?

It's been a pretty good part of our business. We decided some time ago in the marine space that it was a core focal point and we've had some expertise in managing the very complex and somewhat bureaucratic process that is the U.S. Government's nature of tendering and that did lead us to some opportunities in other areas. I would say that the quality of activity on the marine side led to more focus on the aviation and there was a little bit of a concerted effort to build a marketing campaign to go after select Air Forces or NATO flights so we've been successful with the Dutch and the German and the Italians and we've done stuff in Chile and Brazil. So yes, I would say that it isn't a huge part of the volume, but it's a good niche business, it is an area that we focused on. We have dedicated some people to it and we're turning more into kind of a programmatic offering where this is what we do for governments whose primary driver of necessity is sort of readiness and immediacy of service and the convenience of a card and what have you. I think that we feel pretty good about what we've been able to provide these customers. So it's a focus of marketing. It hasn't been huge relative to the volumes we see in commercial and some of the other space, but yeah, I would say it's a part of the program and we'll continue to develop that.

Okay. I imagine they pay quicker or is there any difference?

No. They actually tend to pay slower. They are kind of a pain in the neck. They tend to be bureaucratic and slow and it's difficult and this is why a lot of people don't do so well with it because they can be awfully difficult with that stuff. It isn't ultimately so much a question about whether they can pay. It's whether how well has our system and our processing going to match up with their sort of crazy bureaucratic rules and regulations. Each one is different and has it's own kind of peculiar idiosyncratic nature but that's kind of a specialty skill in itself so we've spent some time dedicated to understanding that, we've got a great back office team to focus on it so I think it just becomes -- each one becomes a customer. They have their own peculiar eccentricities, but no, typically they pay slower.

Okay. Then on the land side, I just want to get a better feel here for what's important to track in terms of -- given that the profitability is something that's really going to change more with scale. What else is really driving the growth of the opportunity? Can we talk about the number of RACs that you have out in the system or the number of suppliers that you're representing? Is there some metric like that that you can identify that we can monitor?

I would say that volume will be the key indicator. Certainly this stage of the business volume is going to be the key indicator. I think that it's way premature in our model to be saying, X number of RACs equals X amount of return for World Fuel. I just wouldn't talk about it that way. It's really volume at this point.

Okay. And then my last one is back to the acquisition thing. I imagine there are still probably hundreds of small regional brokers out there who lack the balance sheet, but would just love to do more reselling. So to the extent that you can just bolt-on one of these guys all of a sudden you've created tremendous value by attaching them to your balance sheet. Is that a false statement?

I think you have mischaracterized it. A, the population is not that large in our view. I think that again just to go back, these only exist really in the marine space. From our perspective we spent a lot of time over the last five years. Mike and Bob had a very successful strategy of rolling out best in class franchises in certain critical markets and that was designed to achieve a certain critical mass in our volumetric throughput and access to what we felt was a pretty diversified relationship base out there. I think that that strategy worked. That combined with then training those integrated people has been part of our more mature strategy of now working on the organic growth. So I would say that our primary focus is not right now about bolting on these companies.

They tend to be smaller lifestyle companies, and in this kind of a market I think that we're feeling as we talked about earlier the primary thing that we can be doing now is after having the culmination of all of this strategic initiative come together which is to say aggregating franchises to get volumetric footprint, to retrain and integrate those people so that they become very good practitioners of our business model, to segregate our sales and supply, to make sure that we've got a discreet understanding of these major markets, and a much more highly focused marketing campaign on these large global fleets, that's where the initiative right now. It isn't about tacking on more people that are small lifestyle companies that we then have to train and integrate and whatever. We've kind of done that. Now, that doesn't mean that there won't be opportunities that may come up from time to time. We wouldn't just ignore them but that's not our focus right now. It's a more selective thing. We went out and identified, Mike and Bob had targeted what we thought were the best in class franchises and we bought them all. And that doesn't mean to say there aren't others but that's not our focus at this time.

Okay. Well, very good. Thank you very much, guys.

Thanks a lot. We appreciate it.

Your next question comes from Jim Larkins.

Follow-up. You touched on the land a little bit more, but I wondered how much of the business revolves around kind of getting in bed with the right refiners versus customers and I mean did the business grow that way by getting connected to the sources of supply or not?

No. It's actually a very good question, Jim. In fact, yes, I mean not unlike our aviation and marine models, very strong relationships with supply community has been part of our success, and again, our original opportunity in the land space was driven by, again this fundamental shift of interest of the oil companies away from kind of the downstream. They would rather be aggregating some of these volumes and getting rid of some of the fragmentation at the retail end and they would like to kind of consolidate that through us who have got the balance sheet and the distribution network and the marketing effort so from that perspective I think that it is true. We will be focusing very much on managing our relationship with these suppliers.

We've become sort of the neutral Switzerland. We're the guy that they all like to work with. We've got balance sheet. We've got, a tremendous distribution network. We've got highly skilled practitioners out there in terms of marketers. They've got very good relationships with us and there's a great deal of trust. So I think that that's become an important part of why we've been successful. If the oil companies thought we were somehow working at cross purposes with them then they wouldn't work with you and I think that we've been very successful in engendering that very good partnership and it's allowed them to continue to secure volume but allowed them to reduce their cost of processing and kind of rationalizing their exposure to downstream credit exposure. That is good. I think that's a good relationship. So I would say yes. It is in part our quality of relationship with supply, customers it's just one by one as we meet them and develop a relationship.

Okay, thank you.

[OPERATOR INSTRUCTIONS] Your next question comes from Ben Segal with Winchester Capital.

Good morning, guys.

Hi, Ben.

Most of the questions have been answered. With regard to the hiring of employees, has that been difficult here?

I'm not sure I follow what you mean, Ben.

Has it been difficult to get the quality employees?

No.

In order to keep growing the way you've been growing?

No.

Okay. Thank you.

At this time there are no further questions. [OPERATOR INSTRUCTIONS] There are no further questions. Mr. Stebbins, are there any closing remarks?

Sure. Thank you very much for joining us today. We're very pleased with the quarter. We very much appreciate your continued support and we'll look forward talking to you in Q2. Thanks.

This concludes today's conference. You may now disconnect.