World Kinect Corp (WKC) 2006 Q4 法說會逐字稿

Good afternoon, and welcome to the World Fuel Services fourth quarter 2006 earnings conference call. My name is Carol, and I will be facilitating the audio portion of today's interactive broadcast. All lines have been placed on mute to prevent any background noise.

(OPERATOR INSTRUCTIONS) And at this time, I would like to turn the show over to our host, Mr. Mike Mason. Mr. Mason, you may begin.

Good morning. Welcome to World Fuel Services' conference call to discuss its financial results for the fourth quarter and full year ended December 31, 2006. As mentioned by the operator, I'm Michael Mason of Allen & Caron Investor Relations.

Before we start this morning's call, there are a couple of items that I would like to cover. Many here received the copy of the press release announcing the Company's results for its fourth quarter and full year ended 2006. It was released on Thursday, March 1, 2007 after market. If you did not receive a copy of the press release, it is posted on 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 March 9, 2007, and may be accessed from North America by calling 800-642-1687 and entering conference ID number 892-2234. International callers should call 706-706-9291.

This call is also being broadcast live over the Internet, and may be accessed on the Company's website at www.WFSCorp.com. A replay of webcast will be available through April 1, 2007.

Additionally, I have 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 others 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 call will move into the Q&A. I would now like to turn the call over to Paul. Good morning, Paul.

Good morning, Michael, and thanks very much. Good morning, everyone, and thank you for joining us today. Here with me are Michael Kasbar, President and Chief Operating Officer; Michael Clementi, President of our Aviation segment; Frank Shea, Interim CFO and Chief Risk Administrative Officer; and Paul Nobel, our Chief Accounting Officer.

Last night, we announced earnings of $17.3 billion or $0.60 per diluted share for the fourth quarter of fiscal 2006. For the year, we produced earnings of $64 million or $2.21 per diluted share, which represents a 61% increase in net income and 41% increase in EPS for the year. The Company also achieved record levels of revenue, gross profit and operating income. The Company's cash position at quarter end remains strong at $176 million, and our return on equity was 17% for the quarter.

In delivering these results, our global team has demonstrated hard work, commitment and uncommon dedication to the business. We could not be more proud of what they have accomplished. By any measure, 2006 was a great year for World Fuel, and we're very pleased with the results.

In Q4, our Marine segment saw growth in volume over Q3, with further penetration in our current portfolio as well as the acquisition of new customers. When comparing Q4 '06 to Q4 '05, earnings results were lower due to higher-than-normal profits reported in Q4 of [2005] relating to derivatives.

In the quarter, we saw a number of initiatives bear fruit, reflecting strong execution on the part of our leadership team, (technical difficulty) [indicating] our disciplined approach to the market. For the year, the results in the Marine segment were strong, with a 12% and 25% increase in gross profit and operating income, as well as 10.6% increase in volume. We continued to demonstrate our ability to tightly managed receivables and protect our margins in the volatile market.

A strong supply position, deeper account penetration and a healthy operating environment in the shipping industry all contributed to the year's strong results. In 2007, our focus will be on continued expansion into new markets, our existing accounts, new account acquisition, and continued development of our derivative activity.

In Q4, our Aviation segment continued to deliver strong results. Volume was up over Q3 and up slightly for the year overall. It is of course important to note and remember that termination of the America West fuel management agreement resulted in the loss of some 225 million gallons in a year, and this volume was largely replaced by both replacement fuel management accounts and volume growth in our core reselling business at better margins. The result for the year was an increase of 28% and 42% respectively in gross profit and operating income.

The aviation industry itself saw a long-awaited return to profitability, with some of the strongest growth in Europe and Asia, both important areas for World Fuel. Modest capital expenditure levels allow many airlines to generate free cash flow for the first time in a while. Honeywell, a large manufacturer of avionics equipment, has predicted shipments of 12,000 new aircraft by 2016, and business jet manufacturers are expected to top 1,000 deliveries in 2007, up from 737 deliveries in 2005 and 850 deliveries in 2006.

Fuel, which represents approximately 25% of operating costs in the industry, still features prominently in the calculus of profitability. Every penny in the price per gallon of jet fuel is estimated to cost the industry some $200 million.

This heightened focus on fuel cost and the importance of strategic procurement is good for World Fuel. We continue to add value to our customers by creating a more proactive approach to managing exposure in the market, while we help our supply partners rationalize distribution risk in the downstream market.

As we look forward, we remain focused on increased activity in the corporate space, both in fuel and related services. Our strategic alliance with [Jefferson] continued to grow in 2006, and we hope to expand that partnership into some commercial areas.

We also have entered into an alliance with Honeywell to provide fuel to their avionics customers, which has generated a new flow of business activity in the business aviation market. We look forward to more developments in this space as we go forward.

In Q4, our land business saw reasonable expansion with gross profit increasing 8% from Q3 and 28% on a year-over-year basis. We're pleased with the progress of that our fledgling segment made in 2006.

Some of the challenges we endured due to the setbacks encountered (technical difficulty) the hurricanes of 2005 are behind us. And our team made up that ground and then some throughout the year. In Q4 we hired additional sales staff, expanded our supply base, and extended the number of active states in which we are doing business to 22. Overall, we're pleased with the progress in this small but growing part of our business, and we believe in the model, and see opportunities for continued growth.

On the corporate front, 2006 was a year of continued organizational transformation. Our success is built on people, profits and systems, and we continue to invest in all three areas. In 2006, we hired a number of people to deepen our bench strength in finance, the legal department, human resources, sales force management, and global training. These additions to the team reflect the continued maturation of the Company and commitment to providing best-in-class support to our commercial team around the world.

On the systems side, our ERP project continues in earnest. And while the past of the project is taking longer than we would like, puts us in good company with 90% of the companies who embark on ERP implementations, we recognize that it is simply a cost of doing business. And we believe the ultimate results will have a very positive impact on the Company and its ability to grow and scale.

2006 was another transformative year for World Fuel. We further secure the Company's strategic position in the market, delivered robust growth in earnings, while investing in infrastructure and organizational developments and reward our shareholders with significant appreciation in stock value. We are proud of what our team has achieved and look forward to 2007.

We would like to thank you, our shareholders, for your continued support. And we'll now turn the call over to Frank Shea for a detailed discussion of the numbers. Frank?

Thank you, Paul. Let's start at the top of the P&L with quarterly revenue. Total revenue for the fourth quarter of 2006 was $2.6 billion, up $84 million or 3% compared to the same quarter a year ago.

Marine segment revenues grew 10% to $1.4 billion. The Aviation segment decreased 7% to $1.1 billion. And the land segment grew 44% to $113 million, all compared to Q4 2005.

As for the $84 million of increase in revenue versus a year ago, $384 million was due to increased sales volume in our Marine segment and $35 million was due to an increase in the price and volume from our Land segment. These were offset by a decline of $253 million due to lower trading prices in the Marine segment and a decline of $27 million and $54 million due to reductions in volume and price respectively for the Aviation segment.

For the Marine segment, total business activity added up to 6.9 million metric tons, an increase of 1.1 million metric tons, or 19% compared to Q4 2005. Fuel reselling activities constituted 73% of total Marine business activity in the quarter.

Our Aviation segment sold 527 million gallons of fuel, a decrease of 13 million gallons or 2% compared to Q4 2005. This decrease reflects the reduction in fuel management business for the fourth quarter of 2006.

Our Land segment sold 60 million gallons, an increase of 18 million gallons or 49% compared to Q4 2005.

Regarding year-to-date revenues, total revenue for the fiscal year 2006 was $10.8 billion, an increase of $2.1 billion or 24% compared to the corresponding period last year. Our Marine segment revenues grew 30% to $5.8 billion; the Aviation segment grew 16% to $4.6 billion; and the Land segment grew 28% to $421 [million], all compared to (technical difficulty) 2005.

Turning now to quarterly gross profit, our gross profit for the fourth quarter of 2006 was $57.7 million, an increase of $1.9 million or 3% compared to the same quarter a year ago. Our Marine segment's gross profit was $27.4 million, a decrease of $4.0 million or 13% compared to Q4 2005. Our Aviation segment contributed $28.6 million in gross profit, an increase of $5.4 million or 24% compared to Q4 2005. Our Land segment's gross profit was $1.8 million, an increase of $399,000 or 28% compared to Q4 '05.

Concerning the $1.9 million increase in gross profit versus the same quarter last year, $9.2 million was due to increased sales volume in our Marine and Land segments and $6 million was attributed to higher gross profit per gallon sold in our Aviation segment. Partially offsetting these increases was a $12.8 million decrease in the gross profit per unit volume sold in our Marine and Land segment, and [fifty -- $550,000] was due to decreased aviation sales volume.

Contributing to the decrease in gross profit per unit sold was higher than normal profits recorded in Q4 2005 of $4.5 million relating to unrealized derivative losses recorded for the first three quarters of 2005, where profit on the physical sales was realized in Q4 2005.

Regarding year-to-date gross profit, our gross profit for fiscal year 2006 was $214.1 million, an increase of $35.4 million or 20% compared to the previous year. The Marine segment's gross profit was $101.2 million, an increase of $11.1 million or 12% compared to fiscal year 2005. The Aviation segment contributed $106.9 million in gross profit, an increase of $23.2 million or 28% compared to last year. Finally, our Land segment's gross profit was $6 million, an increase of $1 million or 21% compared to fiscal year 2005.

Now let's move on to quarterly operating expenses. Operating expenses for the fourth quarter of 2006 were $38.9 million, an increase of (technical difficulty) [point 8 million dollars] or 8% compared to the same quarter a year ago. Of the total increase in operating expenses, $1.8 million was related to compensation and employee benefits. $658,000 was related to general and administrative expenses. And $220,000 was attributed to an increase in the provision for bad debts.

The increase in compensation employee benefits was primarily due to higher performance-based incentive compensation, which includes non-cash payment awards, 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; telecommunication costs; and other general administrative expenses.

Regarding year-to-date operating expenses, our operating expenses for fiscal year 2006 $137.4 million, an increase of $15.4 million or 13% compared to fiscal year 2005. Of the total increase in operating expenses, $10.5 million was related to compensation and employee benefits. Included in this amount is $1.5 million of executive severance costs relating to the departure of our former Chief Financial Officer and $9.7 million related to general and administrative expense. Partially offsetting these increases was a $4.8 million decrease to the provision for bad debts.

Moving on to quarterly income from operations, our income from operations for the fourth quarter of 2006 was $18.8 million, a decrease of $902,000 or 5% compared to the same quarter last year.

Income from operations for our Marine segment was $11.8 million, a decrease of $1.7 million or 13% compared to Q4 2005. Our Aviation segment's income from operations was $14.6 million, an increase of $3.6 million or 33% compared to Q4 '05. Our Land segment's income from operations was a loss of $112,000 compared to a loss of $485,000 for Q4 2005. Corporate overhead not allocated to our business segments was $7.5 million compared to $4.3 million a year ago.

Regarding year-to-date income from operations, our income from operations for fiscal year 2006 was $76.6 million, an increase of $20.0 million or 35% compared to fiscal year 2005. Income from operations for our Marine segment was $44.2 million, an increase of $8.9 million or 25% compared to fiscal year 2005. Our Aviation segment's income from operations was $56.6 million, an increase of $16.8 million or 42% compared to last year. Our Land segment's income from operations was $1.1 million as compared to $942,000 for the prior year. Corporate overhead not allocated to our business segment was $25.4 million compared to $19.6 million for fiscal year 2005.

Next, our tax. Our effective income tax rate for the fourth quarter of 2006 was 17.5% as compared to 39.2% for the same quarter a year ago. For fiscal year 2006, our effective income tax rate was 21.3% compared to 27.7% for 2005.

Included in the calculation of the effective tax rate for 2005 was $2.8 million additional income tax from a provision associated with our decision to repatriate $40 million in foreign earnings pursuant to the special taxing provisions contained in the American Jobs Creation Act of 2004. This repatriation affected our quarterly effective tax rate for Q4 2005 of 39.2% and our yearly effective tax rate for 2005 of 27.7%. The remaining fluctuation in our effective tax rate for the quarterly and yearly periods 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 fourth quarter of 2006 was $17.3 million, an increase of $5.3 million or 44% compared to the same quarter a year ago. Diluted earnings per share was $0.60 for the fourth quarter of 2006, an increase of $0.18 or 43% compared to the same quarter last year.

For fiscal year 2006, net income was $63.9 million, an increase of $24.3 million or 61% compared to last year. Diluted earnings per share for fiscal year 2006 was $2.21 per share, an increase of $0.64 or 41% compared to the prior year.

Regarding ratios and statistics, our return on equity, ROE, was 17% for both the fourth quarter and fiscal year 2006 compared to 14% in Q4 2005 and 15% for fiscal year 2005. Our return on assets, ROA, for both the fourth quarter and fiscal year 2006 was 6% compared to 5% for Q4 2005 and 4% for fiscal year 2005.

Finally, let's turn to cash flow and balance sheet items. At quarter end, our cash and cash equivalents was $176.5 million, an increase of $43.2 million as compared to $133.3 million at December 31, 2005. The net increase in cash and cash equivalents was due to net cash provided by operating activities of $67.9 million and by financing activities of $504,000. Partially offsetting these net cash inflows was net cash used in investing activities of $25.2 million.

DSOs or day sales outstanding was 29 and our payables days outstanding was 25. On average, we also invested approximately three 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. Good job. Carol, if you would be kind enough to open it up for Q&A?

(OPERATOR INSTRUCTIONS) Christine Min.

On the Marine side, could you elaborate on how much of the decrease in the gross profit per metric ton you can characterize as a function of the decelerating or declining rate environment in Marine versus perhaps other factors that could be involved? And what are you seeing going into the first quarter of '07?

Sure. Thanks, Christine. If you look at the year over year, it's a bit skewed, because as you know, the gross profit margins were impacted, we think, a little bit artificially by the impact of the derivatives in Q4 '05. So when we -- if you talk about a rate drop in margin from year-over-year, it's a little bit skewed because of what was going on in the noise of Q4 last year.

So the way we would look at it is that if you look at sort of margins going on from Q3 to Q4, they're actually quite ratable. There isn't a huge difference and we see some sort of normalized ratability there.

The environment is changing a bit. Certainly in Q4, we saw little bit of pressure beginning to reveal itself on the shipping side in terms of rates. But as you know, we've just come off a couple of years of very strong shipping results. We have -- again, our view is that the underlying portfolio of customers is still stronger than they have ever been. They're in pretty good liquidity. I would say if there's any segment of the market that we would be a little bit wary of, it would be the operators -- the people who are chartering in ships and just making sure that their financial models are good.

But if you look at the underlying ownership, we feel very strong about our customer base, and that while there might be some weakness in the container trade, and maybe even a little bit of weakness in the bulk and tankers, these are not sharp, precipitous drops. And we still feel there's a durability underlying the entire structure.

Of course, I would say that we feel very good about our offering, because even when you go into these markets, there's nobody who's better positioned from our point of view to sort of help them think about what's going on in volatility.

One thing that I will say is -- and this is true across all our segments -- is that when you look at the drop in oil prices, this has certainly helped everybody across the board in terms of driving the cost structure down a little bit.

Great. And then alternately on the aviation side, you're still seeing pretty robust year-over-year growth in gross profit per gallon. So I was just wondering if you can sort of elaborate on what's contributing to that, and if you can foresee improvement going forward that can be made to the metric as well?

Sure, I'd be happy to talk about that. No, we were very excited about the dynamics of this year in the aviation model. As you know, there was a lot of anticipation that we would be negatively impacted by the drop in volumes associated with withdrawing from the fuel management contract for America West, when in fact, what was actually happening underneath was that we were seeing very robust growth in our core reselling business across a broad spectrum of customer. And they're not only here domestically in the United States but also around the world. And we take that to be just tremendous validation of the team's effort and the marketing approach and a much more disciplined segmented approach -- modeling approach to market segmentation.

I would say that the value proposition has just become increasingly robust, not only in terms of our ability to supply the physical barrel, but to dial in the derivative models and help them manage the forward curve.

So on many levels, we're feeling very good about that offering, not only in the commercial space, the military space, cargo space, but also in the business aviation space, which is I think what many of you on this call would know is a fast-growing part of the market. And we have seen robust growth in that area as well.

So I would say that just in general, it's a good market to be in. It helps that the aviation community is doing little bit better. The receivables portfolio has never been better in aviation in the history of the Company. And I think that's a tribute to the hard work of our team and Frank's team and [credit] analysts. I mean, it's been very good.

So I would say overall, we are feeling very strong about the entire foundation (technical difficulty) and this process.

Al Kaschalk.

Could you clarify in Q4 -- the bad debt provisions seemed to be way above where I think the Street had modeled -- in particular, where we had model. Or said differently, if you look at the last couple of quarters, the credit profiles seemed to improve. And then in Q4, it seemed to be a hurt a little bit.

Frank, do you want to --

Yes, the fact is that it is hard to separate the signal from the noise as you look at the quarter-to-quarter variations in the actual provision for bad debts, because remember, the way that we decide on the provision is by looking at a couple of thousand of individual customers deciding on the degree of risk, deciding on what's being done with one by one in terms of what is the degree of risk; what, if anything, is going to be written off and so on and so forth.

You add it all up, and basically feed it into a formula to determine what the provision -- what the reserve needs to be, and therefore what the provision will be, and that's where you get your number.

Now the fact of the matter is if you take the trendline -- and I often would say look at it on a two-, three-, four-quarter moving average, you would see that the quality of our portfolio has been consistently improving, even though in the fourth quarter, as you say, the amount was somewhat larger than the third quarter. But the amount overall -- for instance, in '04, in the four quarters of '04 -- I mean, in the four quarters of '06, we're clearly lower on total than the four quarters of '05. And in fact, the quality of the portfolio from '05 to '06 really did improve. And it continues to be, as Paul just said, quite excellent. So that's really the only way I can answer the question specifically. There was nothing driving what you're talking about.

I don't understand that, because in '05, each of the quarters saw 8.6 million for the full year. And the first three quarters of this year did not exceed 1.4 million. And then we basically got a 2.3 million charge in Q4. And I understand the accounting now -- you have to book these when they come up. But --

That's right.

But there has to be -- looking at the numbers, there seems to be customer or two in the segment that did not seem to pan out based on where you're at. And I'm just trying to get beneath that.

The fact of the matter is in -- okay, Q3 the number was not only low. It was actually a net recovery. And so, you have got a big swing from three to four because it happened [that] three was unusually low, and four was slightly higher than the average. And the difference therefore was what you got.

But there's no large write-offs that occurred in the fourth quarter. I think that's what you're asking -- is there any singular items that I should address? And there are none.

Okay. I have asked before, and I think we will probably get to the same answer, but let me ask anyway or give it a shot. Tax rate -- you're doing a tremendous job in the Singapore markets. And I presume that's an indication of why the tax rate is at the lower end of your range. Is that how we should think about going forward -- that we should be closer to the low end of what you have guided -- or traditionally have guided?

This Paul Nobel. That's the way this is shaking out as of late. We're quite fortunate with that. And you're right -- we are expanding quite quickly in the Singapore and other foreign markets that have the lower tax rate. So that is the answer to the tax rate that you're seeing.

In terms of guidance going forward, we really cannot predict that it's going to be that low. Again, we will be in this range. And as the amounts come through and as the operations grow in the various industries, we just have to see where it comes out.

Remember, underlying this is you have got an entire segment, the Marine segment, a segment which is a primarily a [spot] business, and that does move a little bit with just what's going on in the market arbitrage. So as you've got a lifting patterns that shifts from the Far East into the West Coast, that's going to change where you actually pick up that tax rate.

So it's always been a moving target. We think we've done a very good job. But it sort of is what it is.

Okay, maybe just a general question on the derivatives. Was there anything in the quarter -- last year, you had the negative impact related to a couple, I think, on the Marine side. But was there anything in this quarter that was overly positive or where you benefited from particular transaction that was favorable?

This is Paul again. What I would tell you is actually in the fourth quarter of last year, we actually had pick up on the Marine side because we had a change in how we designated derivatives, because some of the accelerated expenses related to those derivatives in the first three quarters of last year. And when those contacts actually were fulfilled in the fourth quarter we picked up all of the gross profit.

So, actually, it was a benefit last year. And through our way of designating our derivatives, we were able to keep the maturity of that variability out of the P&L this year.

So just to clarify the quarter over quarter, in terms of the second part of your question, there's nothing I would say in terms of this particular quarter that is an outlier. It's similar to what we had last year. We do have are marked to markets -- that's not the end of the quarter, we feel, a very significant impact to the quarter. And we are pleased that in general, our derivative strategy is working out the way we want it to.

And then finally, and I will hop back in queue -- Paul, I was wondering if you could -- the Street has been looking for the land and aviation to be a little bit more -- maybe aggressive may be the wrong word, but a little bit better growth drivers. Can you update us on that strategy, in particular as we head into '07?

I would say that aviation is giving you a pretty good growth strategy. I think we've got nothing to be ashamed of there. So I don't know which Street we're talking about. But I would say that for a Company that delivered 61% -- I think we have delivered some growth.

Land is a little bit different issue. It's the nature of the world of public accounting today that we have to break that out as a segment. It would not be normally our disposition to do that. You have heard us say it before. It's what we have got to do, because I think that it puts a little bit of artificial pressure on what essentially is de novo business that we're building from scratch. And it's getting its legs, and it's moving from sort of infancy into childhood. And it's kind of like trying to perform at a concert in front of a whole lot of grownups.

I mean, the business is just getting a lot of scrutiny at a time when it's growing and it's formative. We're finding our market, we're identifying our sweet spot in the customer base. We've been building supply relationships. We've been sort of developing a model that didn't exist before. We've got proof of concept in that. We're very pleased with the feedback that we're getting from both the supply and customer community. It's beginning to gain some currency, and we're beginning to load it up with all of the full costing that it needs to be get from being the public company that we are. So it's getting it's fair share of corporate overhead now. And that makes it tough on a fledgling business.

But overall, you have heard us say before the reason we entered that space is that we have a lot of confidence that this is an enormous market, that the diesel and gasoline markets in the domestic United States and other parts the world is significant, and we think that our value proposition has been successful in Marine and Aviation. It's got application in the Land space as well.

In terms of what the Street wants, again, we have been very clear about trying to downplay that, because we just don't think it's the right way to think about it. It's going to grow at its own pace. And long term, this is about building durable value and not trying to get out over our skis and sort of get into trouble with receivables, because we go too quickly, whatever. This is about discipline. And I think that this is a conservative management team. We take a disciplined approach. It's about building durable value. We did it in the other two businesses. And I think that we are committed to doing it with this one as well.

Okay, let me ask it a little differently. I was not trying to take away with what you've done in Aviation. You've done a great job in particular on the profitability. But are we at a place where margins -- where you're comfortable with them, at the current level or (multiple speakers).

Yes, good point, I'm sorry -- because you're right. During the year, there was a bit of discussion about the impact that fuel management had on overall blended margin, what have you.

And you're right. We've seen a recovery -- we'll, what's essentially an increase as the core [reselling] businesses benefited from our advanced strategies on supply. And we've become a better buyer, and therefore, a better seller. And we have had a broader class of customer and a more diversified class of customer that led to some improvement in the overall blended margin. And that was further impacted when you back out the America West volume, which again, was basically just fee-driven. So for all those reasons, margins have moved up.

And yes, I think it's accurate to say, Al, that we're feeling good about the kind of margin levels we're seeing now. I think there is some stability in that. It certainly was the strategy all along was to move back to these kinds of levels at a much more improved portfolio.

So you're right -- I misunderstood your question. But from that point of view, yes, we feel pretty good about that ratability. And the only thing that might dramatically skew that was if for some reason, we were to introduce another large fuel management account on a fee basis. But that's not really the business model we're pushing at this time, as you know. And I think you can count on a little bit of ratability there.

Jonathan Chappell.

Paul, you talked a little bit about adding people, whether it's in the sales staff in the Land side or some back-office people, administrative functions, whatnot. How scalable is the employee count right now -- meaning if you continue to grow your volumes at a pretty decent rate, what kind of hiring do we need to look at from the cost side for '07? Or do you feel you're at a pretty good level right now, where most added business, at least from what you see on the horizon, can be added without significant new hires?

Good question. I think [there] probably is going on in the hiring. One, yes, it has certainly been salespeople in the field. It's been not only just in land but in the other parts of our business. And yes, there's been some back office additions. But we also have a view that as we migrate into a new systems environment, that will help some of that there.

I would say that the area that we have made the most important contributions have been in maturing the functional corporate structure, because as we prepare for broader scalability, we have wanted to add real depth and [bench stake] across all the spectrum of some core internal corporate functions, whether that be marketing, HR, performance, training, sales, supply, as well as legal and finance. And I think that that's what we have been doing. So these are key hires around which we do expect to be able to scale.

So where the action equilibrium finally settles out, I can't tell you exactly. We are a growth Company. And I would say that, look, you know this management team well enough to know this is all about building foundational value. It's about building the right kind of infrastructure and making the investments to allow us to scale this thing for the long term. We see enormous opportunity in the business environment. And to be able to realize the promise of that business environment, we have got to have the right kinds of investment in people, in systems and process.

So I wish I could give you with some precision what that would be. Do I expect the kinds of continuous ratable growth that you have seen this year? Probably not. I think you're probably going to see a little bit of stabilization in that, because we made a lot of very key hires this year at the corporate level. But, you know, we're [going up]. And we're going to respond to the needs. But we see them as critical investments to realizing that promise.

Now you mentioned systems a couple of times there. Maybe for Michael, I have noticed the ERP expected cost has continued to move up by about $5 million increments last couple of quarters. Where do we stand on the ERP integration? Do you think this latest $25 million cost benchmark is where it's going to end up, or is there potentially more escalation in the cost of that integration?

Well, Jonathan, it's been an interesting road. I think everyone understands that there is no more challenging sort of endeavor than a wholesale implementation of an ERP system. So for us, and like a lot of companies, it's like moving out of a house after living there for 25 years. So we have been rationalizing years of ad hoc custom development and numerous systems, moving towards best practices throughout the entire organization at the same time that we're driving rapid growth.

So it's just difficult. It puts an enormous burden on the team. They've got to deal with the detailed development and review, while continuing to do their regular jobs. And there's no quick fixes. So it's about our specialists and the people who are in the business that understand our business, taking the time, partnering closely without outside specialists and some of our inside specialists to make sure that everything is built completely and works precisely.

So it's difficult because you have got a compliance environment where you have got to deal with all sorts of regulations. It's time-intensive. It's resource-consuming. And it's around the Company.

So it's kind of like rebuilding I-95 during rush hour. And there's no shortcuts. You've got to do it right, and it takes more time and money than we would like.

But we finished a major development in the data conversion pieces of the project. We're now entering all of the testing. And we're determined to make sure that that is absolutely painstakingly done. And it takes a lot of time and money. And then we have got to sync up -- we've got to do a logical cutover, deal again with 404.

So it's disappointing that it takes more time and money. But we feel good about what we're doing, what we have built, and what the ultimate long-term value is for the business.

So we have got a number of global initiatives. Paul talked about them in terms of the buildout of the organization. We're gearing up for efficiency. And all of it is basically focused to take advantage of what we think is just significant market opportunities for us. So in order to realize that, we need robust systems and organization of scale.

And it's the ultimate team sport. The challenge is really sort of created, I think, a tighter discipline for us in project management and planning, driving process, solid decision-making. And all of those are keys to our cultural [maturization] and the future success. And it really kind of dovetails into everything we're doing.

So while it really hasn't been everyone's favorite thing to do, everyone is putting their heads down. And it's creating a challenge that the entire organization is responding to. So I think we feel good about where we are. And we feel like we are on the right course. And we have got a higher level of certainty and confidence in what we're doing.

One last quick one for Frank, just to tie everybody in here. The G&A in the fourth quarter up sequentially pretty big. But actually as a percentage of revenue, about the same place where Q4 '05 was.

Is there a ramp up in Q4 G&A that's tied to executive bonuses? Is that something that could be accrued throughout the quarters going forward? I'm just trying to get a sense of why this kind of seasonal pickup, and if that's something we should forecast going forward?

The big things in the fourth quarter or in G&A really have to do with FIN48 and with business continuity planning. Although more than anything, you have about 700 million [doll -- 700 -- yeah, thousand dollars] right there. So, that's compliance related in both cases. First -- yes, you also had professional fees as part of -- is where that showed up, as I mentioned earlier going through the numbers.

(OPERATOR INSTRUCTIONS) Alex Brand.

Paul, I guess I'm wondering -- I had kind of a different take on the bad debts. And tell me if I'm misunderstanding this, because I guess I see good volume growth in your Marine business. And based on your comments earlier in the year that you had been tighter credit, is this is not telling us that you guys felt better about the business and you were able to sort of loosen up on credit a little bit. And so that is a good indication coupled with the good volume growth that you had in the quarter that really -- you are on a nice sort of past year, a sustainable growth path in the Marine business?

I would say that that is a good characterization, because if you look at the [positioning] in Marine, it's actually flat. So you're absolutely right -- earlier in the year, we did talk. When you saw prices spiking to $77 a barrel, there was a lot of kind of caution here just about trying to understand what the impact was going to be on the overall climate in the industry.

And we did. We acted what we thought was prudently to just be cautious. And now that we have seen the shipping market sort of hang tough, we saw prices come off. It did free up a little bit of our appetite. We're seeing an increase in volume. It's also partly just better marketing efforts and leadership in our Marine side.

So yes, I would say that that is a pretty good characterization. Again, we're feeling pretty comfortable about the climate out there and the underlying portfolio.

And of course, we always wrestle with the issue of -- are we being too conservative? Look, at the end of the day, we do sell fuel. And we've been very (technical difficulty). And this is tighter than it's ever been.

And the provisioning that you saw in the quarter actually was more a little bit (technical difficulty) side. But again, these are specific things, and it's just the nature that comes forward in the quarter, as Frank said.

And I think it's also important to remind everybody that there are some differences in just -- the new accounting protocol is (technical difficulty) -- it's going to be variable quarter to quarter. That's just the way they do it. They want -- it's just the way it's done. It's going to be variable.

But I think overall, you're right, Alex -- the real point is what's our view on the business. Our business -- we feel pretty good about what's going on in the market.

Okay. And just to take that a step further, because what I'm trying to get at here is it seems like maybe the underlying Marine business is better than it looks on the face of this report. And the next part of my question is -- and it may have missed what Frank said. Can you go over the specific derivatives gain or loss this year for the lines of business versus last year so we can understand how much of a swing impact that had?

Yes, I think if you go back to the notes, you're going to see that in last year, in Q4 of '05, there was a $4.5 million profitability associated with the unwinding or the closure of derivative contracts for which the physical had been booked in the prior three quarters and then closed out in the fourth. So that added some noise to Q4.

In this year, as you heard, Paul, we have done -- the way the accounting works is that it's much more matched. You don't have this disconnect between the unrealized and the realized losses and gains. It's been minimized, and it happens to be -- we've done a very good job of that. So I would say that we're in a more normalized accounting protocol now, and that once you get past this quarter, this apples-to-oranges issue that you saw Q4 last year versus this year goes away.

Okay, so the $4.5 million is the swing? There wasn't a loss on the derivatives this year, or --

No, no, no. It has nothing to do with that.

Let me just -- in the fourth quarter, you had $4.5 million realized gain. You had unrealized losses in the previous three quarters in last year.

So what ended up happening is the gross profit per metric ton in the fourth quarter of '05 looks a bit higher than it would normally be because of that $4.5 million of extra gross profit that had to do with the derivatives. And it's really just because it was the final thing for that year.

This year, everything is balanced. We don't have any derivatives gains or losses, per se. So there's nothing there in it, in the gross profit [from extra and] therefore, it's a straightforward figure.

Paul, do you have anything you want to add on that?

I guess just make my point on it is last year, as Paul said and as Frank also stated that the application of the derivative accounting -- the designation of the derivatives was different. It changed in the beginning of the third quarter of 2005. So that's why you had some of this movement in the fourth quarter, primarily because of how these derivatives were treated previously. And the important thing I think to takeaway is in 2006, the derivative application has been consistent throughout the year.

Okay, because I thought -- the note that I had from the last quarter was that there was some gain in both the Aviation and Marine business. And so I thought that was sort of a quarterly event. But you guys are saying it's basically a wash now.

You mean for last quarter, last year, or --?

No (multiple speakers) [Q3].

I think what you may have been referring to -- you may have been matching up against the Q3 '05. Because in Q3 '05, again, there's an unusual event whereby there was a hurricane that created a disconnect between the correlation of jet fuel and the futures -- (multiple speakers) [heating oil] futures. And this is going in Q3 '05.

So what happened is Aviation in the third quarter was matching off against a spike gain in derivatives in Q3 of '05 because that, because the correlation went out of whack. So the derivatives ended up with a large gain in Q3 of '05. So I think what we were trying to say is that the Q3 '06 Aviation was trying to match off against that anomaly. Again, it goes back to 2005, being that these are where these sort of unusual events with our derivatives occurred in '05.

It's kind of frustrating, Alex, because you're getting to levels of accounting analysis that are difficult. But really, what it comes down to is timing. You've either got sort of matched timing or you don't. And the lack of matched was effective last year in '05 (technical difficulty) because of the way that the protocol had this realized and unrealized losses and gains that were in disconnected areas.

The other thing was -- the other mismatch was when you get an ineffective [match], it separates it. And also, there's the timing disconnect between the two quarters. That's the frustration. If that had actually been effective as normal and you didn't have the hurricane causing that spike which caused the [effectiveness], you would not have seen that. So you just account for it again.

There was no problem, other than that it separates the timing. That's what makes it difficult to do the year-over-year matchups. But as Paul said, going into '07, you don't have that issue.

Well, the point being that if you didn't have that $4.5 million swing year-over-year, then what you showed at the gross revenue lines would have flowed through more to the net revenue line or the gross profit line, and we would have seen the growth. And that's really -- that's the thing I wanted to (multiple speakers)

That's 100% correct.

Last question for me then -- very nice cash flow in the quarter; I'm guessing one of your best, if not your best ever quarter. If this just because the commodity price dropped, and so that's really where we see that benefit in the working capital?

No. The reason is -- as I have said before, the cash flow is affected strongly by the balance sheet, by accounts receivable and accounts payable. Accounts receivable and accounts payable, as you can tell, are several times larger than our net profit. So if there's a small change in receivables and payables at that one day in the quarter when you measure them, that can have a pretty big impact on cash flow.

It just happened that this time, we got them right. They were favorable for us. And the real cash flow in the business came out. But I have got to tell you -- we managed the receivables, we managed the payables very carefully and very well. But there is still just a random variation out there in terms of what that value is on any particular day. And on these quarterly statement dates, every single customer and every single supplier is pushing on their number too.

So receivables, if you just let it go, will tend to be bigger. And payables will tend to be smaller, because those people are managing their balance sheet. We are managing ours. We're managing our portfolios as carefully as we can. And at this time, I think our performance ended up yielding a good number.

I guess the genesis of my question, Frank, is it looks like you guys were generally cash users until '06. And you have really nice cash flow in '06. So if that's -- did we hit an inflection point now in your scale that you can be a (multiple speakers) [consistent] free cash flow generator?

I think, Alex, it simply had to do with the year ends in the two previous years compared to this current year that just ended. And we had better success in managing the year-end balance sheets and the receivables and the payables in particular just in terms of our work with our suppliers and with our customers in getting -- in making payments and getting payments in.

You know, the basic cash flow of the business that comes out of our operating profits has been highly consistent over the last three or four years. That is right there and solid. If you look at our DSOs and our DPOs, they have tracked very steadily. But you get stuck with just the variation from day to day. You're only looking at it 1% of the time, one day of 90. I'm looking at it, basically --

And remember -- just maybe to close it, Alex, you get into [use] -- we look at trade cycle. We focus a lot on our DSO, DPO. That trade cycle as well as inventory days. And we've done a very good job of managing that. And obviously, when prices go up, as they did in the middle of the year, you get a lot of cash flowing out of the business. It's just the nature of it.

Do you have enough cash now, Paul, that you would consider a stock buyback program?

I don't think that's what we have in mind. I think our view is that there are sufficient opportunities not only in our organic growth, but also in terms of the market and possible acquisitions, and we would much rather (technical difficulty) cash deployed in the business. We see far better return for it in that than to buy back shares.

Adriano Almeida.

I know -- I think Alex tried to ask this, but I just -- I'm going to try to -- I want to know if there is a theme here in terms of scale and your [qual] -- and I understand your suppliers are a lot bigger and stronger than you, but as you get bigger and more relevant in the business, don't you have the ability to extend those payables a little bit?

It's not the way it works in this business, Alex. This isn't about what's the (indiscernible) -- I'm sorry, Adriano, excuse me. It's not about flexing our muscle and pounding on suppliers. That's not the way this thing works. They have [net] terms. We pay our bills.

As you know, one of the reasons we enjoy the good pricing and the good competitive position we do in the market is that we are a very meaningful buyer from a lot of these suppliers. And a lot of the reason that they treat us so well is because we are very good citizens about payments. And we've got a great balance sheet, and we pay our bills, and they give us lots of secure credit. We're good citizens. It's not about stretching out the payables. That's not where we are at.

Okay. And how about to the extent that there is a greater mix or lesser mix of those types of government-controlled entities, state-owned oil companies that require letters of credit -- perhaps over time, will there be less of a need for that?

Sure. And what happens is that in many instances -- we saw this in Korea -- it starts out with a conservative relationship. They don't know you that well. You post [an LC]. And then after a while they give you a multiple of that in unsecured. And after a while -- whatever; it's a moving target.

But no, it's not like you are going to push back on a state oil company and change your whole model.

Okay. My next question is -- and in the 10-K you filed last night -- this is really granular stuff. But there's this SFAS 157 that you will adopt in '08 and you make the statement in there that this will -- actually, you think it will accelerate your recognition of these derivatives. Is that material at all?

This is Paul Nobel again. We're still assessing how we're going to react to the adoption of 157. In certain cases, it could accelerate the profitability of certain deals that we generally use derivatives with. In other cases, we're looking into ways that we can again better utilize our derivatives and our effectiveness -- hedging of those derivatives, and try to not accelerate the income related to those deals. That's what we would like to do. But certainly, it's a very complicated standard that's coming out. So at this point, we don't have the range of the impact.

Certainly, [that] goes along with 157 is not just a statement of income impact. But it also will show a lot more visibility in the footnotes. You should be able to track what's happening within our derivatives (technical difficulty) and the impact it's having on our income statement as compared to previous standards.

Well, I personally don't think I'll ever understand it. (laughter)

I guess the bottom-line answer is we don't know -- we're not able to quantify the impact right now. We're continuing to look. We'll spend a lot of effort this year on how we can try to be as consistent as possible in our current accounting -- (indiscernible) standard.

The main objective, Adriano, is to make sure that we just have consistency so can understand from a modeling point of view, because they keep changing it. And as they change it, we have to respond. The issues that we had last year as we already talked about, is a change along the way. And that's difficult -- it makes it hard to handle it.

But we have got a lot of forewarning on this. There's a lot of discussion going on in the accounting world. And as they get the guidance more clear, and we get a better sense of how it overlays ours, we'll be able to communicate that thoroughly to the (technical difficulty) investment community.

The other question is on your CapEx, and I understand it's really small relative to a lot of the other things that have gone on. Is there a normalization back to a lower level here? Or is the runrate we saw in 2006 something you grow on top of?

Well, I guess I would tell you that the large increase in 2006 obviously is related to the enterprise integration project that we have. And as we noted in the 10-K, we expect that we will have additional expenditures during 2007 related to that project.

So I would say that from a significant standpoint, that's the main significant increase. From then on, I mean, I think we consider ourselves still a relatively asset-light model. And if anything changes going forward, we'll certainly be noting that in our filings. But we don't expect there to be a continued long-term jump.

Just an opinion question here. Do you think we're going to be talking about IT integration in 2008?

Only to the extent that we'll be rolling out the beautiful future that we expect to (multiple speakers) (laughter) You know, when you look at this, you realize that it's not a snap of the finger. We fully expect and we feel pretty confident with the road that we're on, as I said earlier.

But we are committed to continuing to invest in technology beyond. You have to understand that this is a platform. We're going to be getting a lot of bells of whistles. But we will continue to invest. We're not expecting or planning to be talking about this ERP implementation beyond that.

And I guess my final one is just an update -- no one else asked about it -- on the CFO search.

Yes. We have interviewed a number of very good candidates and we expect to be able to communicate something pretty soon.

Guys, thank you very much. Great job.

Ladies and gentlemen, we have reached the allotted time for questions. And at this time, I would like to pass the call back over to Mr. Paul Stebbins for closing remarks.

Thanks. We appreciate all of you joining us today for this review. And we'll look forward to talking to you at the first quarter.

That concludes today's teleconference. You may now disconnect.