World Kinect Corp (WKC) 2006 Q3 法說會逐字稿

Good morning; my name is [Meredith] and I will be your conference operator. At this time, I would like to welcome everyone to the World Fuel Services Third Quarter 2006 Earnings Conference 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 will now turn the conference over to Mr. Michael Mason of Allen & Caron. Please go ahead, sir.

Thank you; good morning and welcome to World Fuel Services' conference call to discuss its financial results for the third quarter ended September 30, 2006. As mentioned by Meredith, 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 third quarter 2006. It was released on Wednesday, November 8, 2006 after market. 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 November 16, 2006 and may be accessed from North America by calling 800-642-1687 and entering conference ID number 9061926. 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 January 9, 2007.

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, regulatory or environmental conditions; the loss of key customers, suppliers, or key members of senior management; uninsured losses; competition; credit risks associated with accounts and notes receivable; and other risks detailed from time to time in the Company's Securities and Exchange Commission filings. Actual results may differ materially from any forward-looking statements set forth herein.

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

Good morning and thank you Michael. Thank you for joining us today. With me today are Michael Kasbar, President and Chief Operating Officer, Michael Clementi, President of our Aviation Division, Frank Shea, Chief Financial Officer, Paul Nobel, Chief Accounting Officer.

This morning, we announced record earnings of $17.2 million or $0.59 per diluted share, for the third quarter of fiscal 2006. We are very pleased with these results, which represent continued strong performance for the Group. Our cash position remains strong at $130 million and our return on equity is 17% for the third quarter of 2006.

In our Marine segment, we saw improvement year-over-year from Q3 2005, as well as sequentially over Q2 2006. Marine volume improved 20% over Q3 2005 and 11% over Q2 2006. This sequential quarter-over-quarter growth in volume reflects continued strong business activity in our core portfolio of top-tier customers.

The overall operating environment was good in Q3; low oil prices relieved pressure on working capital employed in the business while absolute margins remained constant. The overall shipping market remained healthy, with continued strength seen in both the tanker and [bulk] markets. New ship-building orders in the period reflected the financial health of the industry and confidence in the future market, although there is still some concern about the ultimate impact of overcapacity may have on the market next year. We will continue to focus on our core value proposition and deeper penetration of our target market.

Aviation had another strong quarter; volume dropped 8% compared to Q3 2005 and 10% sequentially from Q2 2006 reflecting the termination of our fuel management contract with America West. However, it is important to note that approximately half the volume associated with the termination of the America West contract was replaced by new volume in our core business. Overall profitability and absolute margins both improved in the quarter. These results continue to validate the success of our model, which has produced solid performance in every market segment.

The overall operating environment in the Aviation industry was good, with AIDA reporting that traffic for the first 7 months of the year grew by 6.4%, which outpaced the corresponding 4.7% increase in capacity. Load factors grew to 76% overall, with some markets as high as 80% to 85%. In June of 2006, AIDA was predicting industry losses in the range of $3 billion for the year, reflecting the sharp increases in fuel prices. However, that estimate has been cut significantly in recent months as fuel prices have declined. JP Morgan has estimated the reduction in fuel cost could save the industry some $10 billion.

We also saw continued strength in the cargo and charter space, while the business Aviation market continued to grow. We will spend the balance of the year focused on continued growth in our core reselling and fuel management business and further expansion of our fuel and flight services offering to the business Aviation space.

In our Land segment, volume was flat year-over-year, but up 5% over Q2 2006. The Land results reflected full corporate cost allocation, and we saw improvement in profitability. We've added sales people and we continue to grow the business in a deliberate way. We are gratified by our results this quarter and will continue our efforts to improve operating efficiency and make important investments in the people, process, and systems which are so critical to our future growth. We would like to thank you, our shareholders for your tremendous support.

And I will now turn the call over the Frank Shea for a detailed review of the financials; Frank?

Good morning; before we run through the financial results for our third quarter, let me take a few minutes to refresh everyone's understanding of some aspects of our accounting for derivatives. Last year effective July 1, 2005, we implemented changes in our financial treatment of inventory hedging and price risk management services in order to more effectively align the reporting of sales and the profits or losses on those sales. As noted at this time last year, prior to these derivatives accounting changes in our price risk management programs, we had entered into 6 physical purchase commitments, for which approximately $4.5 million of unrealized losses had been recognized in the statement of income for the 9 months ending September 30, 2005.

These commitments were fulfilled through the sale of Marine fuel in the fourth quarter of 2005 where the profits on those transactions were fully realized in that quarter. As of September 30, 2006, we have had significantly improved success in our efforts to align the reporting of sales and the related profits, namely there was only a net $100,000 unrealized gain on the same type of transactions.

As it relates to our inventory derivatives hedging program, to the extent that the price of a hedged item, that is the portion of our inventories that are hedged, and the price of its hedge instrument are highly correlated, sales and the reporting of profit or loss on sales from inventory are matched. To the extent that there is not a hard correlation, the hedge is ineffective and any difference between the hedged item and the hedged instrument is recorded to the statement of income prior to the sale of the related inventory.

In both the third quarters of 2006 and 2005 our Aviation inventory hedges were largely ineffective due to shifts in those quarters from the historical correlation between heating oil futures and jet fuel prices. As a result, we had unrealized mark-to-market gains of $1.3 million as of September 30, 2006 as compared to $2.5 million in unrealized mark-to-market gains at the end of the third quarter of 2005. This high level of ineffectiveness is historically unusual.

And now a discussion of our third quarter results; let's get into that. And let's start at the top of the P&L with quarterly revenue. Total revenue for the third quarter of 2006 was $2.8 billion, up $468 million, or 20%, compared to the same quarter a year ago. Marine segment revenues grew 34% to $1.5 billion. The Aviation segment grew 8% to $1.2 billion, and the Land segment grew 10% to $121 million, all compared to Q3, 2005.

Of the $468 million increase in revenues versus a year ago, $415 million was due to increased sales volume in our Marine segment and $174 million was due to higher sales prices in our Aviation and Land segments. Partially offsetting these increases was a decline of $83 million due to decreased sales volume in the Aviation and Land segments and a decline of $38 million due to lower sales prices in the Marine segment.

For the Marine segment, total business activity added up to 6.5 million metric tons, an increase of 1.1 million metric tons or 20% compared to Q3 2005. Fuel reselling activities constituted 74% of total Marine business activity in the quarter. Our Aviation segment sold 497 million gallons of fuel, a decrease of 41 million gallons or 8%, compared to Q3 2005. This decrease reflects the reduction in fuel management business for the third quarter of 2006 partially offset by a volume increase in our commercial business. Our Land segment sold 54 million gallons, a decrease of 600,000 gallons or 1% compared to Q3 2005.

Regarding year-to-date revenue, total revenue for the first 9 months of 2006 was $8.2 billion, an increase of $2.0 billion or 32% compared to the corresponding period last year. Our Marine segment revenues grew 38% to $4.3 billion, the Aviation segment grew 26% to $3.5 billion, and the Land segment grew 23% to $308 million all compared to the first 9 months of 2005.

Turning to quarterly gross profit, our gross profit for the third quarter of 2006 was $55.2 million, an increase of $8.9 million or 19% compared to the same quarter a year ago. Our Marine segment's gross profit was $25.8 million, an increase of $5.7 million or 29% compared to Q3 2005. Our Aviation segment contributed $27.7 million in gross profit, an increase of $3.1 million or 13% compared to Q3 2005. Our Land segment's gross profit was $1.7 million, an increase of $100,000 or 7% compared to Q3 2005. Of the $8.9 million increase in gross profit versus a year ago, $6.4 million was due to increased sales volume in our Marine segment, and $5.0 million was due to margin improvements in our Aviation and Land segments. Partially offsetting these increases was a decline of $1.8 million due to decreased sales volume in the Aviation segment and a decline of $700,000 due to lower margins in the Marine segment.

Regarding year-to-date gross profit, our gross profit for the first 9 months of 2006 was $156.3 million, an increase of $33.5 million or 27% compared to the same period last year. The Marine segment's gross profit was $73.8 million, an increase of $15.1 million or 26% compared to the first 9 months of 2005. The Aviation segment contributed $78.3 million in gross profit, an increase of $17.8 million or 29% compared to the first half of last year. Finally, our Land segment's gross profit was $4.2 million, an increase of $600,000 or 18% compared to the first 9 months of 2005.

Now, let's move onto quarterly operating expenses. Operating expenses for the third quarter of 2006 was $34.3 million, an increase of $4 million or 13% compared to the same quarter a year ago. Of the total increase in operating expenses, $3 million was related to compensation and employee benefits, and $3.1 million was related to general and administrative expenses. These increases were partially offset by a decrease in the provision for bad debts of $2.0 million compared to Q3 of 2005.

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 and systems development, primarily manifested in the following expense accounts; professional and consulting fees; travel and related expenses; depreciation and amortization; telecommunications expenses; and other general administrative expenses. The lower bad debt provision was primarily due to specific bad debt provisions recorded during the third quarter of 2005 for certain Land segment customers located in the areas affected by Hurricane Katrina, and the overall higher quality of our receivables portfolio during 2006.

As for year-to-date operating expenses, our operating expenses for the first 9 months of 2006 were $98.5 million, an increase of $12.6 million or 15% compared to the first 9 months of 2005. Of the total increase in operating expenses, $7.1 million was related to compensation and employee benefits, $9.0 million was related to general and administrative expenses, and $1.5 million was due to executive severance costs related to the departure of our former CFO. Partially offsetting these increases was a $5.0 million decrease in the provision for bad debts.

Moving onto quarterly income from operations, our income from operations for the third quarter of 2006 was $20.8 million, an increase of $4.9 million or 31% compared to the same quarter last year. Income from operations for our Marine segment was $11.4 million, an increase of $3.5 million or 45% compared to Q3 2005. Our Aviation segment's income from operations was $16.1 million, an increase of $2.7 million or 20% compared to Q3 2005. And the Land segment's income from operations was $800,000, an increase of $400,000 compared to Q3 2005.

Corporate overhead not allocated to our business segments was $7.5 million compared to $5.7 million for Q3 2005.

Our income from operations for the first 9 months of 2006 was $57.8 million, an increase of $20.9 million or 57% compared to the same period a year ago. Income from operations for our Marine segment was approximately $32.5 million, an increase of $10.6 million or 48% compared to the first 9 months of 2005. Our Aviation segment's income from operations was $42 million, an increase of $13.1 million or 46% compared to the first half of last year. Our Land segment's income from operations was $1.3 as compared to $1.4 million for the previous year. Corporate overhead not allocated to our business segments was $17.9 million compared to $15.3 million for the first 9 months of 2005.

Next are taxes; our effective income tax rate for the third quarter of 2006 was 23.4% as compared to 29.3% for the same quarter a year ago. For the first 9 months of 2006, our effective income tax rate was 22.7% compared to 21.3% for the corresponding period last year. The fluctuation in our effective tax rates for the quarterly and 9-month periods results 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 third quarter of 2006 was $17.2 million, an increase of $6.5 million or 61% compared to the same quarter a year ago. Diluted earnings per share were $0.59 for the third quarter of 2006, an increase of $0.15 or 34% compared to the same quarter last year. For the first 9 months of 2006, net income was $46.7 million, an increase of $19 million or 69% compared to the corresponding period last year. Diluted earnings per share for the first 9 months of 2006 was $1.62, an increase of $0.47 or 41% compared to the prior year.

Regarding ratios and statistics, our return on equity, ROE, was 17% for the third quarter of 2006 compared to 16% for the same quarter a year ago. Our ROE for the first 9 months of 2006 and 2005 was 16%. Our return on assets, or ROA, both for the third quarter and the first 9 months of 2006 was 6% compared to 4% for the corresponding periods of 2005.

Finally, let's turn to cash flow and balance sheet items. At quarter end, our cash and cash equivalents were $130 million, a decrease of $3 million as compared to $133 million at December 31, 2005. The usage in cash of $3 million was due to net cash used in investing activities of $18 million partially offset by net cash provided by operating activities of $15 million.

DSOs or Days of Sales Outstanding, was 28 days, and our payable days outstanding was 23 days. On average, we also invested approximately 2 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.

Thank you Frank, I appreciate that.

Operator Meredith, if you would be kind enough to open it up for questions.

[OPERATOR INSTRUCTIONS]. Alex Brand, Stephens, Inc.

Thanks good morning guys; nice quarter. Hey Frank can I just do a housekeeping thing first? You were talking about inventory-related hedge gains, you said $1.3 million versus $2.5 million last year; was that just for the quarter or was that for the 9 months?

Those were for the quarter.

Okay.

The inventory, those were quarterly because the ineffectiveness and effectiveness is by quarter, so everything in that description related to the 2 quarters.

Okay great, thank you; Paul can you talk about last quarter, you had talked about reducing your credit risk profile and how that had impacted Marine, and your Marine volumes were obviously, grew quite strongly this quarter. Can you talk about how the environment changed and how you guys attacked the market in the third quarter that was maybe a little bit different?

Sure; I mean as we talked about in Q2 I think that you have to remember you have got timing lags here, and they have an old saying in shipping, that it's difficult to turn a very large crude carrier, because you turn the wheel but it takes about a mile-and-a-half to get the thing to actually turn. So these industry phases are not quick, sharp turns on a race track. These are sort of macro things. And what had happened going into Q2 was as we had talked about; we had watched Q1 during the Q1 period and into Q2, we had a little bit of anxiety about what the future freight rates would be. We just didn't know what the landscape was going to be. I think there was a lack of visibility about just what would happen in the whole capacity, supply and demand balance, so you had prices rocketing up very sharply. There was a sense of sort of pressure on a little bit of the working capital, some of the credit lines. We took a very cautious view as we talked about at the end of Q2.

In any event, what's happened in the meantime is that the industry has maintained some stability. We don't, there hasn't been any sharp deterioration that we've seen. There is some anxiety as I mentioned in my opening about the balance between capacity, overcapacity, and how that's going to affect 2007, but I would say by and large, we saw continued steady activity in the shipping markets throughout the Q3. You saw a drop in oil prices; you've seen sort of a generally stable and financially healthy market. So from that perspective I would say that we benefited from that.

Other than that, I think our disposition was just to continue to stay focused. As we talked about at the end of Q2, there was a lot of sort of questioning about what did this mean and you had the sequential drop in volume. From our perspective, this is just, this was sort of noise. The nature of the shipping market has always been a spot market. It's going to go up and down; it's the nature of how it works. So I think that from our point of view, we saw Q3 as just further validation of our model. Our marketing efforts are working. We remain focused on our core customers which are these large global fleets, and adding value to them and we just saw consistent success as a function of our very focused efforts of our global team.

So I would say that from our perspective, there's no great radical shift between what happened in these periods other than that we did have some dispositional shift. We did have some anxiety as we talked about in Q2 about, where the market was going. But the market seems to be okay right now.

Okay, and it sounds like this is kind of continuing; you said it was, it looks like it's steady now?

Well, it's hard to give any forward-looking guidance on what the overall shipping market will do, but I think the metrics that anybody who's tracking the shipping industry they look at is what's happening on the new building front; what's going on in capacities; will the supply/demand capacity issue get out of balance; will that cause deterioration in rates. There had been some anxiety about what the forward look would be on container shipping capacity, meaning there were a lot of new buildings coming out in '06; would they be absorbed by the market; would there be sort of overcapacity. There's certainly evidence to suggest that there is a spread, there is going to be sort of more capacity than there is demand going into '07 on the container side. But what was interesting is just because the economy has kind of continued to roll on and these companies have done well, some of that capacity has already been absorbed.

So there just hasn't been any radical shock one way or the other. So I think that steady as she goes, but I certainly can't tell you what it's all going to be in '07, but I would say right now it's kind of a relatively stable market.

All right, and just one more sort of piece of color if I could on Marine; it looks like you had -- it was volume-driven growth and you had some offset on the pricing dynamic. Is that just market fluctuation or does that sort of tell us you continue to attack some of the larger shipping companies out there as you --?

I'm not sure I can give you absolute precision because it just doesn't work that way. As you know, the Marine is a spot market; it sort of comes and goes with the way the market's flowing. We see that those changes in margins are sort of well within any tolerance of variability given period-to-period because there's so much going on at the granular level between port arbitrage and where the shift in pricing is from the Far East to the West Coast or from Northwest Europe into the BG. There's just a lot going on at a granular level that we would say that those shifts in margins are well within any sort of band of variability given quarter-to-quarter. So to attribute it to one specific thing, or to say that we can get it sliced so thin that we can give you that with precision, that's very difficult.

But certainly I would say that we are continuing to focus; we've had a lot of success with just being very focused on a top-tier, core customer that requires, that respects the high level of value-add service on a global basis. We continue to be very focused on that market.

I appreciate that color; I'll just save my other questions and let somebody else have it and get back in queue. Thanks a lot.

Jon Chappell, JP Morgan.

Good morning; Paul, Frank said in his comments part of the comp on benefit increase had to do with new employees. I assume you've just been bringing them on throughout the course of the year. Just wondering, is there any particular business segments or any regions particularly you're focusing on? Are you adding these people to try to gain market share in new areas? Or are you building on your core competencies in already established areas?

Sure, good question Jon; thank you very much. I think that where we're at is I think that we see it as across the board. As you know, the mission of the Company has been to both mature as an organization and we've also been looking to more deeply penetrate these markets in which we feel we've got proofs of concept and sort of validation of business model. So it's a combination of kind of adding people that are allowing us to scale because that's one of the most important things that we want to be able to do with the model is to make sure that we've got the mature infrastructure and that we can actually make sure that we are sufficiently equipped at all levels of the Company, whether it's finance, or whether it's administration, or whether it's supply, or whether it's HR, all the different functions that go into building this global offering. We're making sure that we're populating with sort of best in class and continue to top-grade the organization.

On the sales front, we certainly invested in increased numbers of talent in the various markets. To say that it's any one specific market I don't think we could tell you that. I think we see that there's opportunity across our entire spectrum, so we continue to invest in talent and the development of talent, not only in the Marines base globally but also in Aviation, in commercial, and in the Charter and the Cargo and the Government Sales, as well as the Corporate space. These are all areas in which we are investing.

Okay. And along the same lines, investing in talent; can you help explain to someone who's not familiar with the asset light model how acquisitions could be beneficial to you both financially and operationally? What you get from those?

Sure, absolutely good question; historically as you know, we've done a series of acquisitions both in Aviation and Marine, and in each instance we felt that there was either a business line complement that was important to the model, in the case of let's say Base Ops and we bought that in the Flight Services, it was a complement to our ongoing fuel, and it seemed like a logical sort of if you will, outlier to what our core business was. And that turned out to be an accurate strategy; it was a good way to build that part of the business.

If you look at the Marine space, or if you look at the Pasco acquisition which we did from Signature Flights again, it was a strategic move into a certain segment of the market which we felt was successful.

On the Marine side, you see a series of rollup of franchises that either had some geographic expertise or they had a particular base of business that was important to what we felt, in terms of rounding out our overall position in the market.

So between 1998 up until 2004, 2005 we were acquiring a series of franchises that were typically privately held that they had some regional expertise or they had a book of business. So Norse Bunkers of Norway had a very good relationship with the Scandinavian market. You had Marine energy; you had a very good concentration in the Persian Gulf.

In any event, as we rolled up these, we felt that they were complementary. So in each one of these cases it was about building management depth, it was about building domain expertise, it was about getting qualified practitioners of our craft to come into our what we felt was a superior business model, so it's sort of like getting better drivers for the Ferrari team. You've got a great race car, you've got a great pit crew, you've got all sorts of good support; you want to make sure you've got good drivers as well. So it was about just building people in. We didn't feel the need to go out and buy refineries or pipelines or trucks to make that work. We felt that it was important to just simply get the talent in and use our business model -- use that talent to expand our business model.

Integration we believe is a core competence. It's something that we've done very well. This is not easy to do; you've got the cultural challenge, these are people that came in from some small private thinking-type companies. We've been very successful because we all grew up in that context; we've been very sensitive to how these people perceive being acquired. We're very good at giving them the space to breathe; we're very good at giving them the training they need; we're very good at trying to let them come in and sort of adopt our best practices over time. And I think that the history would reflect that every one of those acquisitions has been enormously successful and we've not only gained market share and competitive position, but we've brought in really good talent that has become an integral part of our overall corporate culture.

So we're proud of that and I think that to the extent that we view asset-light acquisition in the future, it's the same thing. I think that we believe that there's talent out there that would fit well in our model and we'll continue to look at opportunities in every one of our spaces.

Very good; and then one last one, on the lost America West volume, you said you've replaced almost half of them already; are those -- I'm assuming you're earning better margins on that I guess it's difficult to not earn higher margin than zero, but is that basically commercial? Have you kind of expanded a little bit more rapidly growing your corporate with some of those volumes that you've regained?

Yes, it's a combination across the board. When we actually look at the offset, you've got offsetting penalties, remember we didn't lose all the America West, we're still supplying America West; it was just more, in fact we've got I think a far more productive relationship with them now that we're actually a supplier to them than we did when we were being their fuel management company and they had the integration of US Air. I think the relationship is very good and we're actually supplying them in locations and I think helping them on derivative strategy. So that relationship remains strong, but we got rid of the bulk of what we called the fuel management stuff that was basically the fee-based business that was running through our system.

What's happened though is that we were very successful in replacing like I said almost -- over half of that, and that has been across the spectrum. We've seen growth in corporate, we've seen it in commercial, we've seen it in cargo, we saw it in charter, we saw it in fuel management accounts with a little bit of a different hybrid model. Where in some of those accounts where we're actually doing a full outsource on some of it, but we're also supplier in other markets. So the thing that I feel is gratifying is that the make-up in that volume was across a fairly broad spectrum.

Okay, thanks Paul.

[OPERATOR INSTRUCTIONS]. Al Kasalek, Wedbush Morgan Securities.

Good morning Al; Operator I think we lost Al.

Hello good morning, this is [inaudible] for Al. I'm a new associate for Al. Can you please share your strategy on replacing the leftover of the volumes lost from the America West business?

Just continued growth in our business model.

Okay and second, would be, what is your view on average price per gallon going forward?

I have no way of predicting that.

Okay thanks.

Adriano Almeida, DGHM.

Hey guys; so I got a couple of them here; how much this hedge gain that you talked about that existed last year that is no longer a big factor this year; how much of it was in the fourth quarter of last year?

Oh gosh, you've got some offsetting stuff here; there's a bit of complexity to it; I don't know whether you want to walk through that Paul or Frank?

Roughly on the Marine side, which is the biggest amount, it roughly was $4.5 million that we had recognized losses for. With respect to the financial derivatives earlier in the periods and those transactions settled in the fourth quarter for which we took the full amount of profits for. Basically, on one side of the transaction, we recognized $4.5 million in the 9 months and we took all the profits in Q4.

On the Aviation side, it's really just about the inventory hedges that were mentioned at the end of the quarter for the open inventory positions, we roughly had a write up last year of $2.5 million which effectively takes some of the gains out of Q4 and moves them into Q3 for last year, and this year was roughly about $1.3 million.

That should give you some sense of the displacement between Q3 into Q4.

Okay very good; and these hedge gains, do they run through the gross profit line?

They do; what happens is at the end of each quarter, the mark-to-market runs through gross profit lines and through cost of sales. The hedge, relationships that actually settled during the quarter just obviously settled out as part of the transactions. Also through cost of sales.

Okay so the timing actually produced kind of a seasonality; last year it actually drew a lot of profits into the fourth quarter. So what I'm wondering is there any natural seasonality in the business given that we're kind of in peak shipping season in the fourth quarter? Does it tend to be stronger?

No, there's no, there is no seasonality that we've identified Adriano. I think it's just sort of the business model is sufficiently diverse globally that there is no seasonality that we've identified.

Okay very good; my next question is how is the CFO search going?

We are busy doing it; we're working on it.

But I assume it's within schedule; is that --?

Yes, I mean look the granularity is very simple; you start the process, you've got to meet people, those people have got schedules, they're all over the place, we're all over the place. So I would just say that yes, we're on schedule because it's just a process that takes time. But yes, we're meeting people but I would say the biggest challenge is just scheduling.

Okay and then how is the IT upgrade going?

Good, we'll probably complete that -- this is Mike Kasbar -- in the first quarter; if not, we'll slip into the first month or 2 into the second quarter. But we feel okay about it. I think was are not in the small minority of companies that do this on time and on budget but we feel okay about where we are and the fact that we'll have a pretty darn good system that will help us run our business significantly better than what we're working on today.

Okay and next question on just shipping to land; there wasn't much volume growth at all, and it was actually down a little bit, 1% year-over-year. Is there any other metric that us on the outside here can look at or that you can share with us that would like validate this model is evolving, that say the capacity to put more revenues on there is growing?

Sure let me comment about that; again you've heard us talk about before that it's a little bit of a frustration game because of living in the good old world of the public fishbowl; but as you know we would not normally have broken out the land business unless it was required by GAAP because it causes a lot of what we feel is sort of artificial focus. This is a de novo business that was a startup, and as we've talked about in previous conference calls, there's a certain deliberation that goes into building startups; these are not just appendages that add on and instantly scale dramatically. And so we always are living in this sort of strange world of trying to manage and if you will mute this sort of natural tendency to want to put expectations on what is a de novo business.

When you're building a de novo business, and all of us in this room on this side know this because that's how Marine started and that's how Aviation started; back when they were de novo businesses, they didn't look a lot different from what Land's going through right now, which is that you've got to make sure you've got your target market right; you've got to make sure that you've got your relationships with the [inaudible] committee right; you've got to get customer right; you've got to get your sales staff right; you've got to get your leadership right; you've got to get your systems right. These things represent all the challenges of any startup business. The only difference in this case is that we have to sort of live it out loud in the public arena, which makes it a little bit more difficult and we try to insulate that team from the stresses of the public expectation.

Having said that, the reality is that last year is skewed because we're dong all these comparisons year-over-year. We didn't even report Land last year, so you have to do, the way the accounting works is you have got to go back and you have to sort of extract it and it's a bit weird in the way you do that. So the reality is this is really the first year that you've got any kind of benchmark; that's a changing benchmark because it had to go in terms of how do we get the full allocation on costs; what market are we going after. You also had the hurricane last year, and some of our initial target markets were in Texas and Louisiana which meant that we lost a lot of volume right out of the box in some of those core customers. So it's skewing the overall look at what we consider to be the population of activity and opportunity that we see in the market in multiple states.

So the long answer on this Adriano is I think it's just going to take time; I wish I could give you some magic metric that would give you that visibility and clarity that you want, but it's like any other business; it's ultimately going to be the drivers of the business, it's going to be volume, it's going to be margin, it's going to be market opportunities, it's going to be number of customers, it's going to be bad debt, its' going to be tax rates.

So we're continuing to grow the business with deliberation; we feel good about the people that we have; we feel good about the upgrades in our systems, we'll be able to add some functionality in the Land space which we think will be good. But we're trying to do it with patience. And so I'd love to be able to tell you all sorts of great things about how big it could be and all that, but that's just not the right thing to do. So it's there, we're growing it deliberately, and we think it's a good business and a good market and we've got good people so we'll just stay focused on it.

Very good, okay thank you. My last one is on this lower tax rate; I'm just wondering if perhaps some of it has to do with less business in the U.S. versus let's say related to US Air as you wind that out and replace the business in other regions with other lower tax rate, if that has anything to do with it.

Well when you think about the US Air remember, that was the fee-based business anyway so that wasn't really, I don't think that is as relevant. And I think Adriano that when you look at it, I think we said earlier in the year that our tax rate was going to always be running somewhere between 21% and 26% just depending on where the business lands. I think we still feel good about that. We're right in the sweet spot this quarter on it, and I think we're on track for the year.

So Paul you may have some granularity on that you want to add?

No just to reiterate what you said; it is going to fall between that range and if you're comparing to last year, last year's third quarter had an increase and it was also related to some of the derivative activity which we also have been able to smooth out as we changed our approach to that treatment.

So we should, we fully expect it to stay within the range Paul had indicated and again it is primarily due to the fluctuations in those jurisdictions but no sort of negative impact as compared to last year.

It's just one of these things that's the nature of the business. We've got business all over the world and every one of those jurisdictions is different and it shifts because of market opportunity and where we're going and this is probably a little bit more pronounced on the Marine side because you'll get activity that'll shift between jurisdictions simply because that's where the market shifted. It's very hard to predict that; is Singapore going to be the market where they lift or is it going to be the West Coast? It's very difficult to say that. So I hope that helps you but I think we're sort of riding the sweet spot of what we thought the range was going to be.

Okay, yes that's helpful. Thank you for the outstanding job and congratulations.

Thanks a lot; take care.

[OPERATOR INSTRUCTIONS].

At this time, there are no further questions. Are there any closing remarks?

Yes, we'd like to thank everybody for your continued support. We appreciate you being here today and we'll look forward to talking to you at the end of the fourth quarter.

Thanks very much.

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