World Kinect Corp (WKC) 2006 Q2 法說會逐字稿

Good morning. My name is Jody and I will be your conference operator today. At this time, I would like to welcome everyone to the World Fuel Services second-quarter 2006 earnings call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS).

I would now like to turn the conference over to Mr. Mike Mason of Allen & Caron Investor Relations. Please go ahead, sir.

Thanks, Jody. Good morning and welcome to World Fuel Services' conference call to discuss its financial results for its second quarter ended June 30, 2006. 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 of the press release announcing the Company's results for its second quarter 2006. It was released yesterday, on Wednesday, August 9, 2006 and 4:01 PM Eastern. If you did not receive a copy of the press release, it's posted in the client section of our Web site at www.AllenCaron.com or you may call our New York office at 212-691-8087. 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 August 17, 2006 and may be accessed from North America by calling 800-642-1687 and entering conference ID number 3680456. 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 Web site at www.WFSCorp.com. A replay of the webcast will be available through August 17, 2006.

Additionally, I've been asked to make the following statement. With the exception of statements of historical information made on this conference call, this call includes 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 or 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. Then the call will move into the Q&A. I would now like to turn the call over to Paul. Good morning, Paul.

Thanks, Michael. Good morning and thanks for joining us.

With me today are Michael Kasbar, President and Chief Operating Officer, Frank Shea, Interim Chief Financial Officer and Chief Risk Officer, Paul Nobel, Chief Accounting Officer.

Yesterday afternoon, we announced earnings of $14.5 million or $0.50 per diluted share, for second quarter of fiscal 2006. These results reflect significant year-over-year increases in revenue, gross profit and operating income. We're very pleased with the results, which represent continued strong performance for the Group.

In our Marine segment, we saw a strong year-over-year improvement in performance, reflecting the success of our business model, a compelling value proposition, and a focused commercial leadership team. However, you will note that there has been a sequential decline from the results reported in Q1, which was largely attributed a drop in volume and to a lesser extent margins.

There are several factors at play here. The first is the fact that record high prices prompted many buyers to minimize their lifting patterns. This heightened sensitivity to price was due, in part, to a slowdown in the overall shipping market, which of course had seen record returns over the last few years. Fuel prices featured more prominently in a rate-sensitive market. A general uncertainty about the durability of the freight markets, coupled with record high prices, made purchasers more reluctant to commit volume in the forward market, resulting in an increase in spot transactions. Our response to this was to focus our marketing efforts on the strongest international fleets and dial back on exposure to the second tier.

These macro issues notwithstanding, we have a robust service offering and opportunity for growth. We continue to invest in our global marketing initiatives and our public transparency and financial strength remain distinct competitive advantages in this market.

In our Aviation segment, we saw tremendous performance across the board with record volume, gross profit and income from operations as well as an increase in absolute margins. Our operating efficiency continued to improve and we had success in implementing a more process-driven sales and marketing initiative. The overall operating environment in the aviation industry was good, and we saw increased activity in the cargo and charter space. And of course, anyone who's traveled recently can attest to the fact that flights have been full. This is all good for our business.

Strategically, we will spend the balance of the year primarily focused on continued growth in our core reselling business and the expansion of our presence in the corporate aircraft space. A number of initiatives we're working on in the corporate space have been developing nicely, and we have been steadily hiring new salespeople to specifically target this market. We feel good about their success and our ability to continue to refine and improve our offering in this important and rapidly growing market.

In our Land segment, we continue to grow the business with deliberation. As we digest the impact of record high prices, we continue to calibrate the right mix of margin, return, and receivables risk. As we have discussed before, our strategy in this space is to take a highly disciplined approach to expansion. We are more concerned about refining our overall business process and achieving tight execution than we are in rushing to expand the business. We are very confident the growth will come in time. The market opportunity is sizable, and we believe our business model is sound.

Our strong performance in the second quarter is gratifying not only because it reflects continued success of our model, but because we have achieved it in a fast-changing market and at a time when we have continued to make important investments in the people, process and systems that are so critical to our future growth.

On a final note, it seems appropriate to comment on the possible impact of this morning's news about the foiled terrorist attack in London. While it is too early to tell what the longer-term ramifications might be on the overall aviation industry, we can state the targeted market -- three large U.S. carriers traveling trans-Atlantic -- is not a market we service, and we expect no direct impact on our portfolio.

We would like to thank you, our shareholders, for your continued tremendous support. I will now turn the call over to Frank Shea and Paul Nobel for a detailed review of the financials. Frank?

Thanks.

Let's start at the top of the P&L with quarterly revenue. Total revenue for the second quarter of 2006 was $2.9 billion, up $739 million, or 35%, compared to the same quarter a year ago. Marine segment revenues grew 33% to $1.5 billion. The Aviation segment grew 36% to $1.2 billion, and the Land segment grew 43% to $116 million, all compared to Q2, 2005.

World oil price increases versus a year ago across the three segments contributed $495 million of price-related increases, or two-thirds of the total increase in total revenues. The balance, $244 million, was primarily due to higher volume in our Marine and Aviation segments.

For the Marine segment, total business activity added up to 5.9 million metric tons, an increase of 445,000 metric tons or 8% compared to Q2 2005. Fuel reselling activities constituted 71% of total Marine business activity in the quarter. Our Aviation segment sold 551 million gallons of fuel, an increase of 46 million gallons or 9%, compared to Q2 2005. Our Land segment sold 51 million gallons, an increase of 2 million gallons or 5% compared to Q2 2005.

Regarding year-to-date revenue, total revenue for the first six months of 2006 was $5.4 billion, an increase of $1.5 billion or 39% compared to the corresponding period last year. Our Marine segment revenues grew 40% to $2.8 billion, and the Aviation segment grew 38% to $2.4 billion, and the Land segment grew 34% to $186 million compared to the first six months of 2005.

Turning to quarterly gross profit, our gross profit for the second quarter of 2006 was $51.4 million, an increase of $10.4 million or 25% compared to the same quarter a year ago. Our Marine segment's gross profit was $23.5 million, an increase of $2.3 million or 11% compared to Q2, 2005. Our Aviation segment contributed $26.5 million in gross profits, an increase of $7.7 million or 41% compared to Q2, '05. Our Land segment's gross profit was $1.5 million, an increase of $300,000 or 24% compared to Q2, 2005. Of the $10.4 million total increase in gross profit, $4.3 million was due to the increased volume of business in the three business segments. $4.7 million was due to margin improvement and a $1.4 million net positive impact related to derivatives activities. The margin improvement was mainly due to the Aviation segment, partially offset by the Marine segment.

Regarding year-to-date gross profit, our gross profit for the first six months of 2006 was $101.2 million, an increase of $24.6 million or 32% compared to the same period last year. The Marine segment's gross profit was $48.0 million, an increase of $9.4 million or 24% compared to the first six months of 2005. The Aviation segment contributed $50.6 million in gross profit, an increase of $14.7 million or 41% compared to this first half of last year. Finally, our Land segment's gross profit was $2.6 million, an increase of $500,000 or 25% compared to the first six months of 2005.

Now, let's move onto quarterly operating expenses. Operating expenses for the second quarter of 2006 were $34.4 million, an increase of $5.6 million or 19% compared to the same quarter a year ago. Of the total increase in operating expenses, $2.1 million was related to compensation and employee benefits, $2.9 million was related to general and administrative expenses, and $1.5 million was due to executive severance costs. These increases were partially offset by a decrease in the provision for bad debts of approximately $1.0 million compared to Q2 '05.

The increase in compensation and employee benefits was primarily due to higher performance-based incentive compensation and new hires to support our global business. The increase in general and administrative expenses was mainly due to infrastructure spending initiatives to support our global business, primarily relating to the following expenses -- professional and consulting fees and travel and related expenses. The decrease in provision for bad debts was mainly attributable to the improved quality of the Marine segment's receivables portfolio.

As for year-to-date operating expenses, our operating expenses for the first six months of 2006 were $64.2 million, an increase of $8.6 million or 15% compared to the first six months of 2005. Of the total increase in operating expenses, $4.1 million was related to compensation and employee benefits, $5.9 million was related to general and administrative expenses, and $1.5 million was due to executive severance costs. Partially offsetting these increases was a $2.9 million decrease to the provision for bad debts.

Moving onto quarterly income from operations, our income from operations for the second quarter of 2006 was $17.0 million, an increase of $4.8 million or 40% compared to the same quarter last year. Income from operations for our Marine segment was $10.0 million, an increase of $1.1 million or 12% compared to Q2 2005. Our Aviation segment income from operations was $13.4 million, an increase of $5.4 million or 67% compared to Q2 '05. The Land segment's income from operations was $300,000 as compared to $700,000 for Q2, 2005. Corporate overhead not allocated to our business segments was $6.7 million compared to $5.5 million for Q2, 2005.

Regarding year-to-date income from operations, our income from operations for the first six months of 2006 was $37.0 million, an increase of $16.1 million or 77% compared to the same period a year ago. Income from operations for our Marine segment was approximately $21.1 million, an increase of $7.1 million or 51% compared to the first six months of 2005. Our Aviation segment's income from operations was $25.9 million, an increase of $10.4 million or 67% compared to the first half of last year. Our Land segment's income from operations was $500,000 as compared to $1.1 million for the prior year. Corporate overhead not allocated to business segments was $10.4 million compared to $9.6 million for the first six months of 2005.

Next are taxes. Our effective income tax rate for the second quarter of 2006 was 18.4% as compared to 18.2% for the same quarter a year ago. For the first six months of 2006, our effective income tax rate was 22.2% compared to 15.3% for the corresponding period last year. The higher effective tax rate for the first six months of 2006 resulted primarily from profit fluctuations of our subsidiaries in tax jurisdictions with different tax rates.

Now, let me cover net income and diluted earnings per share. Net income for the second quarter of 2006 was $14.5 million, an increase of $4.9 million or 52% compared to the same quarter a year ago. Diluted earnings per share were $0.50 for the second quarter of 2006, an increase of $0.10 or 25% compared to the same quarter last year. For the first six months of 2006, net income was $29.5 million, an increase of $12.5 million or 74% compared to the corresponding period last year. Diluted earnings per share for the first six months of 2006 were $1.02, an increase of $0.31 or 44% compared to the prior year.

Regarding ratios and statistics, our return on equity -- that is our ROE -- was 15% for the second quarter of 2006 compared to 19% for the same quarter a year ago. Our ROE for the first six months of 2006 was 16% compared to 17% for the corresponding period last year. Our return on assets -- that is our ROA -- for the second quarter of 2006 was 5% for both the second quarters of 2006 and 2005. The ROA for the first six months of 2006 was also 5%, compared to 4% for the first six months of 2005.

Finally, let's turn to cash flow and balance sheet items. At quarter end, our cash and cash equivalents were $159 million, an increase of $26 million as compared to $133 million at December 31, 2005. Net cash provided by operating activities was $27.2 million and net cash provided by financing activities was $1.3 million during the first six months of 2006. Partially offsetting these inflows was net cash used in investing of approximately $2.7 million.

DSOs or Days Sales Outstanding, were 26 and our payable days outstanding were 23. On average, we also invested approximately 1.5 days of sales in inventory.

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

Thanks, Frank. Operator, we can open up for questions now, please.

Thank you. (OPERATOR INSTRUCTIONS). Alex Brand, Stephens.

Okay, Paul, so you had what looks like a good quarter. The market doesn't think so but it looks like you got good growth and you leveraged that on the operating expense side, but I would love to get some more color on what's going on in Marine and how you are thinking about sort of the growth of the business. By that I mean is marine pretty challenging right now and so the focus on aviation also implies that we should be thing about aviation as perhaps a bigger growth driver going forward?

Sure, let's talk about each piece. Then I would say that, in the marine side, you know, it's the old Thomas Paine. Vigilance is the price of Liberty. I would say that, in the second quarter, I think just disproportionately, we exercised a little bit of caution. As I alluded to in my notes, what we perceived in the market was you had a couple of things going on with the segment in general. Shipping has just come off two years of unbelievable rates. Any of you guys out there who own in the transportation space have seen it.

What we did see coming into the second quarter was a little bit of a slowdown in the rates. We saw a little bit of uncertainty in terms of what those rates were going to do for the balance of the year. It was hard to get absolute visibility on that. I think we also saw a dramatic, sharp shoot-up in the prices which was definitely pressuring the purchasing community and perhaps in a more heightened way than it had previously. By that, I simply mean that when everybody was making so much money in shipping, the bunker prices were up but people weren't as focused on it because you were making money. It just didn't matter.

Now, there's a little bit more scrutiny on it and the lack of visibility on the forward market has made people a little bit reluctant to put a lot of volume into fixed contract-type positions. They are basically minimizing lifting. We are seeing a lot more activity in the spot market. So our own strategy throughout this was to simply dial back a little bit, focus on the blue chips, look at the international fleets.

Now, obviously, when you go to the blue chips, that puts a little bit of pressure on margin, and we made a decision to walk away from a little bit of volume just until we get a better sense of how to calibrate what was going on with the rates going forward.

I would say, going into Q3, if I would make any comment so far in July, we've seen that rates are actually holding pretty well, so it's giving us a little more comfort in what we see for the balance of year. But I think we've always run that side of the business just being cautious. You know, it's high prices; it's optimization; it's just making sure you know your market and where you want to trade in it. So, it is; it's a spot business. This is the nature of shipping.

In terms of aviation, it's absolutely true that it's been just a tremendous run and we feel very good about what's going on fundamentally in that business. We are seeing a lot of robust activity in the core reselling space. Our strategy has been successful in terms of aggregation of volume to achieve economies of scale on the procurement side, which has begun to drive higher margins in the core space, so you've seen a significant increase in the absolute margins as well as the income side.

We feel very good about some of the emerging markets. You've heard us talk before about corporate. I alluded to it in my opening remarks. This is a very dynamic and exciting space and it's very well-primed for our particular offering, and we are investing a lot of resources in that. We've been hiring sales staff in that space. There's no question in our mind that we are confident that we feel very good about the underlying fundamental dynamics of what's happening in the aviation space and our particular role in it, and the success of our model.

So it just happens to be right now that, unlike other times in the market where the marine was rapidly outpacing the aviation as we saw sort of Q4 last year, right now, it just happens to be that the marine we were a little bit more circumspect and just kind of taking a conservative view, and the aviation has been going very strong. So, that's as good a summation as I can give you.

No, that's great color. Now, as you think about sort of growing the business as the Chairman, is it sort of the way you look at that one comes in, the other accelerates? I mean, you are managing this for total growth and so you are relatively indifferent to how you get to growth as long as you achieve your sort of internal growth targets.

Sure, I mean, at the end of the day, we are stewards of the shareholder value and investment in this company, and we're looking to total result and our business model has got application across all our segments. There's going to be variations in what goes on in these various segments, just depending on what's going on in kind of the world markets. So I think that we -- obviously we think that both those spaces are still very exciting and very robust opportunity slates. Simply because marine -- you know, we took a little bit of a cautious view in terms of our business model and our view of the space in this quarter, doesn't in any way change our fundamental view that this is an enormously interesting market that we are a prime mover in and we have an enormous competitive advantage in. So this is just the ebb and flow of the business and of course, as most of the people who have been shareholders in this company for awhile know, the marine has always historically been more a spot-oriented business. It has a little bit more cyclicality historically than aviation. Aviation tends to be a little bit more ratable, it's more contract-driven, and so it doesn't seem to be as subject to a little bit of these cycles as we see in shipping. That's just the nature of the beast. We've been doing it for 20 years and we continue to advance the model. We think we are very, very happy about the competitive position we've built in the market. And again, being a public company, being transparent, we've got a great value proposition, very deep domain expertise in the space. Shipping has its ups and downs but I think, fundamentally, we are very well positioned to take advantage of it, and it's not going anywhere. You know, international shipping is an industry that's here to say; it's just a matter of how we calibrate our own sort of cautions and how we decide to play in the space. We've got some choice in that and we have exercised it.

Okay, can you just update us on some of the systems work that you've been doing? I think you had your new systems come online in June. What's going on there and is there any sort of prospects for that sort of helping improve profitability in the future as well?

Well -- (technical difficulty) -- that project continues. We have a solid team on it, and it's proceeding as these projects do. You know, we feel good about where we are now. We've just finished conference room pilot two, we are gearing up for conference room pilot three, so the benefit of that is going to be significant certainly with the type of company that we are, the tremendous amount of demand for information processing, communication. So the organization has matured to a point where we really have the capability to extract the value out of it. You know, this first phase is really the foundation and we do have a two to three-year plan that we are developing to really exploit that investment. You know, our Allegro system that we put into deal with our derivatives activity went online in June, and that's producing a very sound result so we are very happy about that.

So our capabilities and our competencies are growing in that area, and it we feel very good about that. It's very important to our business.

I think, Alex, there's significant impact on the bottom line because you know this is a very robust upgrade. I think when we look at our overall processes and how we do them, how you streamline efficiency, one of the things that we did and because -- (technical difficulty) -- this is all about the discipline of getting all the mapping and the process right. As you well know, people spend a lot of time on systems and they are not easy to do. But we've really taken the time to kind of do this correctly but we think there definitely is going to be an impact on overall productivity going into '07.

Okay, I really appreciate it, guys. Great quarter.

Jon Chappell, JPMorgan.

Good morning, guys. Just one step further on the Marine side and then I will move off this topic and you've already been quite helpful with giving a little bit of forward-looking insight. But the tanker markets are unseasonably really strong in the third quarter. The futures market are flying. Dry bulk is taking off. You said you'd dial back a little bit as there was a little bit less certainty in the second quarter. When do you start loosening the strings a little bit and getting more aggressive on getting away from I guess the blue-chip customers and getting kind of the second and third-tier type customers in this type of unseasonably strong market?

Yes, yes. That's logical and that is consistent with our view.

Okay, so you're doing it now?

Yes.

Okay, great. On the Aviation side, you mentioned no direct impact from what happened this morning but clearly aviation is under a lot of question marks right now. Is there any way you can give us a sense of commercial versus freight versus charter? You've said you are focusing on charter and cargo but have you taking huge leaps in making that a bigger percentage of your business?

Sure, I think -- well, there are two things. Let's talk about the event in London. I think we picked a hell of a morning to have an earnings release, I will tell you that! Anyway, and I think that we are philosophical about just, look, the market is going to react. These things are as much sentiment as emotion; there's a lot of uncertainty out there. When you combine the whole total picture of terrorist threat, how big could it be, where is it, what's the impact on oil, what's going on interest rates, etc., etc., I can certainly appreciate that people who live in the world that all of our shareholders live in -- it's not so easy to be tracking how all this impacts what's going on. So, we are sort of philosophical about it.

You know, our underlying business didn't change any between 8 o'clock this morning and 11 o'clock this morning; it's the same business. So it is what it is. We will just deal with that, and I think the people who understand what we're building are going to see that as an opportunity as opposed to risk.

But look, this impact on aviation -- it was highly targeted. I mean, the news we are hearing, which is to say that you're hearing, is that it was focused on three U.S. carriers. These are large, global, international passenger carriers and as people who know this company well know that it has never been our primary focus to deal in the space as a reseller to these large international fleets. These are highly sort of transparent and competitive markets. We are not helping American Airlines negotiate fuel at London Heathrow. It's just not part of our target pattern. But what I would say is that -- so (indiscernible) we don't see any impact on our portfolio and the way it works.

In terms of our mix in business, it's true that, historically, our roots have been not in the large volumetric international global passenger carriers. It's been in the charter; it's been in the cargo; it's been in the military; it's U.N. charters; it's relief efforts; it's cargo activity in various areas around the world. All of that business is very active, very energized, and we feel very good about our position in that space. We don't see that this recent event this morning is going to have any impact on that all.

So there is some emotion; there is some sentiment. I can certainly appreciate that none of us as citizens of this country can predict with any accuracy just what the true nature of the terrorist threat may be on a global basis or to this country or to these industries. So we are certainly sympathetic to people who are skittish and a little uncertain. But in the meantime, we are building our business and we feel very good about the fundamentals in our space and the areas in which we are active, which is that underlying reselling space that has been very robust and we feel very good about it. The corporate space, if anything, I will tell you what -- if people start feeling uncomfortable about flying on international passenger carriers, guess who's going to be really booming? It's the corporate space, and you'll be seeing a lot more G 550s flying around with people in them.

So, in any event, we are watching all of that the same way you're watching it but we don't anticipate any impact on what we are focused on. In fact, it may even, perversely enough, create some opportunities.

All right. Two quick numbers questions too -- the provision for bad debt, you'd you guys have done an excellent job bringing that down to less than 2% of overall sales. Are you happy with the customer base right now?

Yes. Frank will comment in a little more detail.

Yes, we are happy with the customer base right now. As Paul said, that doesn't mean we're not going to be growing our business in second and third-tier in marine, but the fact is that we've had a lot of growth in the first tier and that's been a substantial part of it. It's given us a very good, solid, high-quality portfolio on the Marine side.

Okay. The last one, Frank, just on the tax rate -- obviously it's lumpy. Anyone who has followed your company for more than a year knows that it's lumpy, but one of the concerns that we've heard this morning was that it was lower than expected and that made the number look better, which I don't necessarily agree with. But is there any way to give any type of guidance to the back half of the year on where the tax rate might fall out?

Well, this is Paul Nobel. To answer that, the reason it shifted down since the first quarter, as you know and as we've always said, is that, based on the profitability and in different taxing jurisdictions, it has a direct impact on our overall effective tax rate. In this particular quarter, we had some expenses, notwithstanding the severance, where it pushed the effective rate lower. So going forward, I mean, again, it's hard to predict exactly where the profitability will be, but we expect it to stay within the range of a 22 to 25% overall effective rate.

Okay, great. Thanks.

Scott [Blumenthal], Emerald Advisors.

Good morning, gentlemen. Just a couple of questions -- I spent a little bit of time with Frank recently. And Paul, I was wondering if you could perhaps give us an idea of some way that we might be able to gauge the volume, the transactions of the business throughout the quarter.

Help me out here. When you say "gauge the volume of transactions", I'm not --.

Well, you know, it seems like we certainly have access to management during the course of the quarter, and it would be really nice if there was some way that we could get a gauge on the business throughout the quarter. Certain companies, you know, they will post on their Web sites or some public forum order rates, backlogs, those types of things but it doesn't seem like we've got that same amount of information from you all. I was wondering if there was some way that you could up with -- for us to get a little more clarity as to how the business is progressing through the quarter.

Yes, I mean, again, we have not done that and I think it would be difficult for us to do that. As you know, unlike sort of a manufacturing business or other -- building computers or whatever, we don't get that kind of just-in-time access to what goes on. These transactions -- let's say in marine, I mean, you place an order for a ship that's going to lift in (indiscernible), China. well, okay, you put in the order; you're waiting; you don't know when it's going to exactly happen and when we get that information. It doesn't really lend itself to the kind of monitoring that you would suggest would be helpful to get that visibility. So I would say that the better visibility for watching this company is sort of what's going on in the macro space, what are some of the fundamentals going on in the industries themselves. What's happening in international trade and what's the overall state of the economy. It's very difficult to give that kind of visibility.

If you look at the aviation transaction side, you know, these are like -- to use Frank's very famous analogy, many of you on this call will have heard him say it, but boats are like camels drinking water and airplanes are like hummingbirds. You know, there are zillions of transactions. Every time an aircraft lifts a few gallons at some airport, we are processing thousands and thousands and thousands of those transactions. So I'm not sure that that in and of itself would give you the visibility, because it's not the transaction flow; it's the mix of business. We are not disposed, for a number of reasons, including competitive ones, to break that out in any public format like on a Web site, even if we could do it. I think the system's burden would be significantly. So I would say that I not sure we're going to be able to help you, Scott, to give you whatever you've seen other examples of that (indiscernible) what you want. I'm not sure that we will the able to satisfy that. But as a management team, we are very available, and we're more than happy to have as many conversations as one feels they would like throughout the quarter. I mean, we are happy to do that. We obviously -- it's in our shareholders' interest to get as much visibility as they can.

Okay, good enough. Paul, also I was wondering if you could give us an idea of what you're going to do with all that cash.

Yes. Well, I think we were sort of patting ourselves on the back recently with our present decision to go raise equity, because the first thing that we did was put it right back into the business at a pretty good return. When you look at what happened with prices over the last eight months, nine months, I think that our decision to go out and raise equity was perfect timing; it fortified our balance sheet. You'll know, Scott, probably from your discussions with Frank, that one of the most interesting statistics that we were focused on was improving our shareholder equity to total assets, which as of June '06 was tracking at sort of 33%. You've also got 95% shareholder equity as a percent of invested capital.

These are very important statistics in what looks like a very conservative balance sheet. It's very important in terms of how we relate to our international supply community. As you might imagine, in the same way that you are shareholders are skittish about the global markets, so are our suppliers. You know, they are out there trying to navigate this market as well and that balance sheet becomes a very important comfort factor for them in terms of us as a counterparty. So, we've been investing the business -- the cash in the business.

I would also say that we continue to actively -- Mike Kasbar and his team has been actively screening acquisition candidates. We do look at that. You know, we continue to monitor possibilities in each other segments, and you know, it's not inconceivable at all that we would continue to grow that way as well. So I think the cash is being, first and foremost, deployed in the business, which we've seen some very good returns and we're happy about that, but I also think there will be opportunities to deploy some of that cash into the acquisition strategies as well.

Can you talk a little bit more about those acquisition strategies and if we're going to be seeing more on the services side or more in the core business? (multiple speakers)

I'm sorry, I cut you off. Go ahead.

And you know, what the pipeline looks like?

Well, I would say that the near-term primary focus is going to probably be aviation-related, and it is related to some of the things that we see developing on the corporate front. I think that represents perhaps the most interesting near-term window because it's consistent with the strategy we are developing. Whether that is specifically acquisitions or some interesting alliances, anyway there are a number of things going on in that space that it would be premature to talk about in detail, but we certainly feel very good that that's the most near-term specific focus.

We've also talked about, in the past, that land represents some opportunities, and I think that's still true, although I would just simply -- the caveat that I would add to that is that our reluctance to move aggressively on the land space in that sense has been very much to what I talked about in the opening notes, which is that we've made a decision which we think is the prudent one, and because we've grown Aviation and Marine over the years and we remember what it was like those were small businesses, you can make a lot of mistakes early on if you just don't calibrate your position in the market correctly. So a lot of our time right now has been focusing on just getting our sweet spot, maximizing margin, understanding return and understanding receivables. Once that sort of stabilizes and we have a sense of what we are really focused on, we then might look to, if you will, add an acquisition dimension to that, but that's not the immediate term. Did that help you, Scott?

Very good, very good. Thank you very much.

Al Kaschalk, Wedbush Morgan.

Good morning. Actually, this is Rich Keung sitting in for Al Kaschalk.

Rich, we will take you instead of Al.

Thanks, I appreciate it. A quick follow-up question about the marine business -- you had said that rates for Q3 seemed to be holding well. So are we to expect that volume will kind of stay at the same level as it did in Q2?

Well, I can't give you that prediction with any precision. It's very difficult. Again, as we've talked about, the very nature -- and this something that's been a challenge for anybody who has followed the Company for a long time and there are plenty of shareholders on this call who would agree -- but it is the nature of the marine business; it's very nature is primarily a spot business. The trade cycles move from region to region and you've got a lot of arbitrage between markets -- the West Coast, the far Eastern markets, what's going on in northwest Europe versus the Persian Gulf. These lifting patterns vary depending on what's going on in these various markets.

So it really is difficult for us, as much as we would love to give it to you -- I tell you, we'd do anything to be able to give it to you because it would solve a lot of headaches. But it's very difficult to give you that kind of visibility with any precision. So to tell you what it's going to be in Q3 -- A, we don't give those kinds of forecasts but even if I could, it's just not so easy to do. So all I would tell you is that we tend to look at it as portfolio management. We are looking at an overall receivables base of a very diverse customer mix, and we made a decision in Q2, based on our assessment of what was going on in the macro industry, to dial back a little bit and exercise some caution, take a conservative view on the receivables and just kind of see what the overall mix is going to be. As Jon Chappell had touched on earlier, yes, there's definitely some change in rates. We're watching that carefully and those present opportunities. But I cannot give you any precise visibility on what that's going to do to the volumes.

Understood, okay. Paul, I think it was during the Q1 conference call that you commented about a number of alliances that the Company was looking into. Also at that time, you indicated about a recent launch of a pilot program with a large aviation services group. I was wondering if you can please provide some details, an update about that and currently where you stand with these alliances.

Sure. As I mentioned just a few minutes ago, we are very excited about a couple of different things going on in that space, and again, it's premature to give any granular detail just because of the nature of what stages they're in, but we feel good about them. They certainly validate our model; they certainly give us a great deal of confidence that we are well positioned by giving this unique offering called fuel into this space.

I would just generally characterize -- I think the best way to approach this is to just characterize it that there are a number of service offerings in this space that are at various levels of relationship between customers and vendors. All of the strategies revolve around how many different things can I do to entangle my customer? This is not new to corporate aviation and it's not new to many industries. But it's something that many of you on the calls who have dealt in other industries -- you know, logic predicts the more things that you can offer a customer around your core offering that allow you to entangle and keep that customer and achieve some competitive advantage, or some sort differentiation, is a value-add.

One of the most difficult things to achieve is a granular understanding of what's going on in fuel markets, because they are complex, they are difficult, they involve receivables at a very high level. There is just a whole different nature to fuel that makes it hard. So the fact that we've become identified as somebody who has a particularly robust offering in this most difficult part of the vendor space has made us attractive as an alliance partner for a number of service companies.

We are excited by what those alliances have begun to produce. We are excited about what it represents just directionally for us for a strategic point of view in terms of how we position. And again, it is premature to give you much more detail beyond that but I would say, structurally in the industry, we've got an offering that is very difficult for others to replicate because of the nature of its complexity in fuel.

So we feel good. We've got something to offer and it's becoming attractive to a number of players.

Okay, understood. Well, thank you very much.

[Philippe Gressemer], Belmont International.

Congratulations, gentlemen. (multiple speakers) -- which I didn't quite understand. You mentioned that your operating expenses were up but compensated by a reduction of bad debt provision. One is a cash item; the other is a book entry. [Am I wrong?]

Yes, yes you are. In terms of the provision itself, and ultimately if we were right, it ends up being cash depending on what happens with the provision. If we miss that, it would be a cash that would not becoming into the Company. In the quarter, though, you are right; the provision is down and the other compensation and G&A is up.

Yes, but it's not quite the same pocket, so to speak. Provisions are not a cash item. Expenses are. Correct?

That's right.

All right, thank you.

Adriano Almeida, DGHM.

The first thing I wanted to try to understand here from a bigger-picture perspective -- quarter after quarter, it seems pretty clear that aviation is growing much faster than everything else, and now it's a much bigger part of your operating income. Based on the data you give us in your quarterly filings, it's pretty obvious that the returns on invested capital on aviation are, like, much higher or like two or three times higher than what it is in Marine. Doesn't that mean that if you continue to improve this mix, doesn't the total return of the aggregate business go up over time?

That's a true statement. I mean, logic predicts if you do the overall blended result, you're going to have an improvement in overall return on invested capital. I would say a couple different things. If you look at those growth curves that you referred to, Adriano, remember where we came from. In the Marine space, it's a far more mature presence in that market. This is a substantial footprint that we have. We are a large player in the space and it has grown over 20 years, so it has been a little bit of slower quarter-to-quarter curve, although I would argue that we saw some awfully robust growth over -- in the last few years in that space, and it's really catapulted us into being a substantial, meaningful player on the global stage when it comes to the marine space. I don't see that going away. In fact, I think the more that we secure that competitive advantage, we're going to see more opportunities in that space.

So from our perspective, it may be (indiscernible) aviation you didn't see quite (indiscernible) but remember where we came from in aviation. Aviation, we were tiny percentage points of overall market share, and so we were starting from a very different platform in terms of what we could grow there. I'm sure that at some theoretical point in the future, that may also become a more mature position we don't feel that that's the case right now but conceptually, it could become a more mature position in the future. So yes, you've seen more rapid growth in the last couple of years on a quarter-to-quarter basis, relative to marine.

However, when we look at the overall complex, there's a lot of synergy between the two spaces, and again, as someone alluded to earlier in the call, we don't really think about it so much as just the one segment or the other. We do think about it as an overall return in this company because the value proposition has to do with an offering that is commonality across the whole spectrum. So we think about our position in the market in terms of the entire oil complex.

What are we doing to intermediate ourselves between highly fragmented procurement markets and highly fragmented supply markets? So the value proposition -- the deeper we can do into as many different things that we can provide that value to, the better off we will be. So there is a relationship between having been very strong in the marine space, very strong in aviation space. That's helping us with the land space. Many of these companies are seeing us as being a service provider across the entire spectrum of these segments. So, they are integrated. There is a synergy between them. We think of the Company as one company. Obviously, historically, there were segment, but we think about it as one overall return. So from our perspective, we see opportunities to continue to invest in all of them, and I think that the overall result will continue to grow.

Okay. Now, specific to aviation, I noticed, just sequentially, your receivables actually went down by about 8 million for that segment, and yet your volumes were up and your profits were up. I am wondering whatever it is within aviation, the mix shift here that resulted in you collecting faster -- is that something that fluctuates wildly from quarter-to-quarter, or is it something with more staying power going forward?

I wouldn't say that it fluctuates wildly from quarter to quarter. I would say that we have been very, very -- look, one of the things we are most out of in this company and I'll tell you, hats off to Frank Shea and his team. This has been a remarkable discipline and effort to make collections just part of that catechism of this company. I mean, I'll tell you what. People take this very seriously. It's very much about our sort of cultural disposition that the price of playing in our space and the price of being public and the price of being a public company and having the opportunities to grow that we have and access to capital is about the discipline of collection. It is absolutely core to our business. So there's nothing that we spend more time on, and I think one of the things that we are singularly most proud about has been the evolution and transformation of the overall aviation portfolio and its nature of risk over the last five years. It's been just a huge transformation.

So, I wouldn't say that you're going to see wild fluctuations. I would say that we are very pleased with the overall quality of these portfolios and the discipline and rigor with which we collect, our ability to manage very tight trade cycles on these customers. It's just been great and I think we've sort of gone from strength to strength.

So I can't tell you again, looking forward, that there's going to be wild variability. I would say that we're just very proud of what we've achieved and I think that's part of an overall corporate discipline that has done us well and will continue to serve us well.

Okay, thank you. Then back to the marine side, I just want to understand from -- if you were to look at, say, over the last few years, is there a trend in terms of are you doing fewer, larger transactions with fewer players? Or is it going the other way?

I'm sorry, in the marine space?

Yes.

Yes, that is a good characterization. It was a decision we made in terms of how you optimize -- well, how do you, A, think well about your value proposition? What is the part of the market that you're going to have most success and most sort of durable success over time? What is the most efficient part of the market, in terms of the return on our deployment of resources, people, training, investment, capital, etc.? As we have shaped all that, there has been very much a focus at the fewer, larger-type transactions as opposed to getting kind of lost in the mice -- the rats and mice of (indiscernible) small transactional, low return, low yield business or very expensive business to work. That was a conscious decision.

Now, as the market comes and goes, you have to always revisit that -- those assumptions; you have to revisit and test and validate that that's the correct place, because you may be losing opportunity. You may be giving up some opportunity in the second tier. So we constantly revisit that but ultimately, we feel that it's important to be prudent first, stick with something that's difficult to replicate and be best in that space. I think that was one strategy and I think we have been successful at that. But you know, we always continue to revisit, Adriano. It's not a fixed thing forever but what you said is an accurate characterization of what our strategy has been in the last couple of years, and we would argue that it has been enormously successful.

Okay. I guess my final one is on the land. So, right now, if you just look at the gross profit as a percent of the total revenues in land, it is like 1.3%. That's lower than marine. Is there any structural reason why that metric should be lower?

Not that I can tell you off the top of my head. I cannot give you a single rationale for that. Remember, when you come to land, it's important to get some perspective on this. You know, we are inventing this space. What we're doing in this space has not been done, so we are a little bit, as I said in the opening remarks, Adriano, a little bit of this is the discipline of calibrating the mix of return, margin, receivables risk. You'll notice that we increased a provision of debt, because we felt that was the prudent thing to do as we begin to get a sense of what we're doing in that space.

So I think it's premature and I think it's too early in our business model to tell you whether or not that percentage statistic that you cited is meaningful in terms of a benchmark and should I be looking to improve that to some level closer to marine or aviation or whatever. I think it's just a little early and I think that I would say, over the next several quarters, it's going to be a lot easier to begin to zero-in on these benchmark metrics that will give you more comfort from a modeling point of view, where you can kind of calibrate where we are off the mark or on the mark as the business develops. But I think it's just a little early in the game. A lot of it is just about establishing our position, making sure that we can understand margin.

Remember, you had very sharp run-up in prices over the last period, particularly in this quarter. That did have a big impact on how we were thinking about margin in that space and what we thought was an acceptable return, and how we thought about the net trade cycle between credit terms and all that.

So we are finding our way. I think that what we like about what we've achieved is that we've got some bedrock and it's got some real legs to it, and we think that there's some durability. But I just don't have -- I can't give you those benchmarks yet and tell you have to measure them yet. I will feel a lot more comfortable talking about those metrics in a couple of quarters.

Okay, but the (indiscernible) model that you have in these regions where you're building the land business more -- it's fully -- you can replicate that around the country, right?

Yes, yes. It's also -- there are different products within this space that we haven't fully explored yet either, but it's a little bit like okay, let's just do one thing at a time and make sure we got it right, but what happens is as you get in it, the supply community says, well, geez, while you're doing this one thing, maybe I should think about you on this other thing. So there's a little bit of a pump-priming thing here where they have to sort of, A, accept you; B, they've got to decide that you have some role to play in their supply chain that was not previously there. They have to get past sort of the initial knee-jerk resistance and then they begin to embrace it, then they begin to test it, then they begin to say, geez, now that I've got a real look at this, maybe I can do some other things with it. This is just part of the evolution of a business model that we've kind of created in this space.

What I would tell you is that we feel really good about the feedback that we're getting in this. I mean, as people have begun to know better what we're doing in it, it's just -- it feels very good. I think we're getting very good validation that we've got genuine value to add in this space, which is a sizable space, so there's considerable opportunity but we are very loath to get out on our pogo sticks and just blow this thing out at 100 miles an hour, because you can just make too many mistakes early in the business. We've just we just want to make sure we've got it right.

Okay. Well, at the risk of asking too many questions, this is my last one -- (multiple speakers). Relative to land alone, the bulk of what you're doing now, is it more spot-rack sales or do you have some contracts in there as well?

We do have some, but I would say it's primarily the former. That has been the focus of the business so far, but again, like we found in some of our other spaces -- marine, aviation -- as you kind of develop those markets, they lead you to more ratable contract relationships. Then of course when you dial in things like managing price volatility and some of the strategies that we've deployed in aviation and marine on hedging side, these are things that have application in this space that allow you to lock up more ratable volumes into the future -- these are things that we are exploring and testing, but again, we are expanding it with deliberation.

Okay, very good. Thank you very much and good job, guys.

(OPERATOR INSTRUCTIONS). [Jim Larkins], [Wasach].

Good morning. I wanted to make sure about the number right on the land. Was it 51 was the gallons?

Yes, correct.

Okay. Then on the aviation business, I want to make sure I understand kind of the moving pieces with your customer base there. What is happening with America West now? Are they out of the numbers or are they coming out? What kind of directionally is happening -- (multiple speakers)?

Good, I'm glad you brought it up, Jim. I probably should have had something in the intro just to calibrate back to that. As we talked about in Q1, we were going to change our relationship with America West and move away from the fuel management volume. We talked a lot about what that achieved strategically and why, in some ways, this was a little bit of relief for us in terms of our business model not having to manage all of that volume at kind of a low special deal. What's happened is as we predicted. Our objective was to move out of that contract. You'll see that a lot more evidenced, Jim, in Q3 than you did in Q2. There's a little bit in Q2 but you'll see more of it in Q3.

But what is interesting and what we had anticipated and what we had hoped for was that, on the back of that migration of the fuel management volume out of our -- out from underneath our management or administration has been a number of supply contracts that have come our way. So we've been awarded a number of locations as a supplier, so we're now acting to them as a reseller as we do with other customers. I would argue that the most significant thing is that it puts us in a position now where we are making -- it's going to generate income that we were not able to generate when we were their sort of management administrator. So, it's turning into what we had hoped happen.

So what's going to happen in Q3 is, while you will see some of the volumetric disappearance in terms of sales, there will be income contribution that we didn't have prior. How ironic! So it's a little bit of a strange picture but this is what we were hoping to achieve is that we could move it to a different relationship.

Again, we're still working with them on the consulting side. They are very happy about that. We've added, I think, some significant value to them in terms of how they think about hedging strategies and stuff. That has also had some follow-on impact on other relationships with other airlines. But you know, it's working out the way that we had hoped.

Okay, and so should I think about that -- year-over-year then, will your overall gallons in aviation be going down as they exit, or not necessarily?

Correct. Well, I mean -- I guess the question would be this. If I was able to continue to grow my increases in underlying reselling volume at the same pace that I was getting rid of America West, then know, there would be no change in volumes. What I can't predict for you Jim, at this stage, is whether that underlying business is going to fully offset the disappearance of America West. I would say it's unlikely. America West was somewhere in the 400 million gallons, whatever. We're definitely growing the underlying reselling volume, and the reason you can tell that is that when you look at our overall blended margin in Q2, again, we've continued to move up our absolute margin. despite the fact that we've still got a higher volume than we did a year ago, which means that the mix underneath is about the reselling growth, not about the (indiscernible) management growth. So from our perspective, as you see the America West volume go away, we're still adding and growing our core volumes, which of course was the original strategy in the first place and we're very pleased about that.

That's very helpful. Thank you and good luck.

[John Christiansen], Kane Anderson Rudnick Investments.

The airline -- the gross margin, the numbers were up nicely. I believe you said roughly half was due to volume, half was due to margin percent. I'm trying to get -- I'm trying to understand what drives that margin percent. I think I've heard two things today. One is the ability to get bulk purchases; another might the change from fuel management to resale.

Can you tell us what drives that margin percent and how sustainable the improvement is?

Right, let me -- and if I'm saying here, stating the obvious then I apologize. But just to be clear, it's a little misleading when you think about gross margin expressed as a percent. The reason is when you've got the price of oil moving all over the place. So that gallon of fuel is, on an absolute price basis, is moving up and down and so when you look at that absolute margin as expressed as a percent, it gets some real noise thrown into the gross margin expressed as a percent.

What we focus on in the business model is our absolute cent-per-gallon realization. That's what we're focused on. We look at the overall blended rate. We do not break out the various segments but we look at the overall blended rate. As we talked about, from a strategic point of view, what we had tried to -- what we had done is we were using the fuel management, which again was not really a reselling markup volume; it was just and agency fee, basically like the management fee. That skewed margins. Well, what it was doing was it was the (indiscernible) horse to get volume, to get better on our supply purchasing, which allowed us to do more of reselling volume for a better class of customer. That strategy has been successful, which is why you saw margins over the last couple of years. They went from sort 7 to 5 to $0.035, back up to $0.039 to $0.042 to $0.046 and now in this quarter back up at about $0.048, which was exactly the strategy we were hoping to achieve. So you've grown your volume, but your absolute margin has sort of come back the other direction and is growing.

So, I'm not sure if that 100% answer question but it is about mix of business; that is a key driver. And it was about volumetric power that gave us economies of scale to be a good procurement -- to be good at our procurement, which allowed us to be a reseller to a broader class of customer. That strategy has worked and continues to work.

I understand you separated that from the price of the fuel, but does the price of the fuel move your cent per gallon?

Not per say, no, it's just sort of independent. You can be locked into a contract in which your $0.03 per gallon margin at Tampa Airport for a series of flights, whatever, for a contract for a lifting pattern into that airport is going to stay at $0.03 regardless of whether jet fuel is $1.80 a gallon, $2 a gallon or $2.25 a gallon. That's why your gross margin expressed as a percent gets very difficult to track, because it's the $0.03 regardless.

Now, obviously, as these contracts get reviewed and as we look at total return, we are always calibrating our return expectations based on the overall price of fuel and what we think we can get in the market and what have you. But that price can move around regardless of the margin we happen to have it when we did the contract, because oftentimes these are index-related contracts. So you're saying, look, I am buying off the (indiscernible) midpoint, U.S. Gulf Coast plus whatever, and I've got a margin in there of let's $0.03. Well, that index is moving all over, reflecting the stock prices in the market. You follow?

I do, but if gas prices double and you've still got $0.03, then you've got a bigger receivable to fund and that can hurt return on capital. Is that correct?

That is correct. It does change your absolute return, which is why we are very -- that's why we spend a lot of time studying that very issue. So it's all about where do we get the best returns. That's (indiscernible) even about in land, in terms of how we drive that margin up, because whereas there was a time when the prices were lower that we were happy with sort of the $0.02 per gallon, well, I'm not happy with that now. So we're driving it up to $0.03, and we're trying to find out -- we're testing those tolerances.

Again, what I would say -- the way to think about aviation in terms of getting that granular visibility is it's very much account-by-account and location-by-location. So you can have an account that is going to have one kind of margin at Miami International, another kind of margin in Bogota, Colombia and another kind of margin at JFK and another kind of margin in the Caribbean. It all depends on what those visabilities are, what those markets are, what the volumes are. So these things are being calibrated -- when we think about it from a sales management point of view, we are thinking about it as what is my total return -- back to your point on return on invested capital. What you're total return on that account as an overall blended return? What's my average return? So, when we look at that cents per gallon in our portfolio, we're looking at that total volumetric position in aviation, which is tracking at the numbers you've just seen in the quarter, and what is the overall blended margin, and are we happy with that return? That's what we are always calibrating for. Because there's always going to be instances where there's going to be the account where you take the volume at one location because it happens to be some bedrock that you want, and it might be a little bit thinner margin than you wanted but you are making better margin in other locations. So you're overall blended return is acceptable.

Thanks for the help.

I hope that helped you and didn't confuse you, but that's how we think about it from a strategy point of view.

Thanks again.

At this time, there are no further questions. I would now like to turn the call back over to Mr. Paul Stebbins for closing remarks.

Great. We would like to thank all of you for being here today. I'm sorry that we had to announce our earnings in the midst of a terrible sort of event in the UK. It makes it a little difficult for I'm sure all of you; you're probably busy watching your screens. But we appreciate you being here, we appreciate your continued support and we will look forward to talking to you at the end of Q3. Thanks.

Thank you. This includes today's up World Fuel Services second-quarter 2006 earnings call. You may now disconnect.