World Kinect Corp (WKC) 2007 Q2 法說會逐字稿

Good morning. At this time, I would like to welcome everyone to the World Fuel Services' second quarter 2007 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)

At this time I would like to turn the call over Frank Shea, Chief Risk and Administrative Officer. Thank you. You may begin your conference, sir.

Good morning, everyone, and welcome to the World Fuel Services' second-quarter conference call. I am Frank Shea, World Fuel's Chief Risk and Administrative Officer, and I will be serving as the moderator on this morning's call. Today's call is also available via webcast. To access this webcast or future webcasts, please visit our website and click on the webcast icon.

With us on the call today are Paul Stebbins, Chairman and Chief Executive Officer; Mike Kasbar, President and Chief Operating Officer; Ira Birns, Executive Vice President and Chief Financial Officer; Paul Nobel, Senior Vice President and Chief Accounting Officer; and Michael Clementi, President of World Fuel's Aviation segment.

By now you all should have received a copy of our earnings release. If not, you can access our release on our website. Before we get started, I would like to review World Fuel's Safe Harbor Statement. Some of the comments to be made on this morning's call may include forward-looking statements under the Private Securities Litigation Reform Act of 1995. These statements involve risk and uncertainties that could cause actual results or facts to differ materially from such statements. Detailed information on these risks is contained in the Company's SEC filings which are available on the Company's website or from the SEC. We will begin with several minutes of prepared remarks which will then be followed by a question-and-answer period.

At this time I would like to introduce our Chairman and CEO, Paul Stebbins.

Thank you, Frank. Yesterday afternoon we announced earnings of $17 million or $0.58 per diluted share for the second quarter of fiscal 2007. These results reflect solid year-over-year growth in volume and profitability in our marine, aviation and land segments as well as strong operating cash flow and return on equity for the quarter. Our balance sheet and liquidity position remain strong and we believe the current upheaval in the general market environment may favor us in terms of exploring strategic investment opportunities.

Our aviation segment generated gross profit of $30 million, an increase of 55% sequentially and 16% year-over-year. (technical difficulty) segment results rebounded strongly from the first quarter of 2007, which was adversely impacted by a rapid decline in jet fuel prices in the early part of that quarter. As expected, we benefited from the late first quarter rebound in jet fuel prices in the early part of the second quarter and our cost of inventory at the close of Q2 tracked closely with the spot market. Because of the business associated with inventory was booked in the United States, it drove our effective tax rate up to 27.5% which impacted the overall result. Ira will discuss this in more detail in a few moments.

As discussed on the Q1 conference call, we continued to review our self supply model to validate that the returns in the business justify the earnings volatility associated with average costing and basis risk which are an inherent part of our more sophisticated aviation supply model. We are satisfied that self supply is strategically important to the business and delivers a good return relative to these risks. However, given the high prices and general market volatility, we have looked carefully at the portfolio and have begun to shed any volume we believe provides only a marginal return.

Overall, the aviation industry continued to show strong results. IATA once again revised its 2007 estimate of industry profitability upwards and 3.8 million to 5 billion per annum. Passenger traffic in Asia and Europe was stronger than expected, offsetting some weakness in the cargo market. Load factors for airlines continued to improve, which offset some of the impact of rising fuel costs which represent 26% of operating costs. IATA's growth projections over the next few years remain strong, which bodes well for the overall health of the industry.

In our marine segment, we achieved gross profit of $25 million. While this represented a 15% decrease from the near-record results reported in Q1, we are very pleased with the growth in volume and solid year-over-year results. Offsetting the year-over-year (technical difficulty) growth in volume was a decline in absolute margin per unit sold, which we principally attribute to key factors. A, the sharp increase in prices and B, a change in the mix of business. Q2 saw a 15 to 30% jump in product prices in the period in major markets and this squeezed margins as the prices quickly moved up. And given the market conditions, we experienced a drop in derivative related activity. As we have discussed many times, marine is still primarily a spot business. And it is just the nature of the business to have changes in business mix quarter to quarter depending on the market and the intermarket arbitrage which drives lifting patterns. We are pleased with the continued growth in volume which validates the success of our global offering.

At a macro level, the shipping markets held their own in Q2 despite the drop in tanker rates and some softness in the bulk markets. The container markets remain relatively stable with only minor changes in supply and demand balance. In Q2, there was a continued sense of general health in the industry, offset by some concerns about the tight fuel oil market and the associated impact on bunker prices which increased sharply in the period.

In our land segment, our team continues to make steady progress and we are pleased with their results. In spite of carrying a full overhead allocation, the segment showed solid growth in volume and profitability. Our customer and supply base continued to expand and we made some key hires in the quarter which added depth and experience to our team. As we have said before, the diesel and gasoline markets are both large and global in scope, and we remain committed to further expansion of this business.

On the corporate front, we are pleased with the progress of our ERP initiative. In spite of the considerable cost in time, money, and management distractions, we remain excited about the power of technology and the role it will play in helping us scale our global business and creating competitive differentiation in the marketplace. Our Company continues to build its global capabilities, an investment which, unfortunately, is a cost of doing business in today's public market. It is the right thing to do for the business and we are pleased with the emerging organizational maturity of our worldwide network.

While our growth rate has tapered off from the explosive growth rates of several of our recent quarters, we are pleased with the overall results. We enjoy (technical difficulty) a unique position in the market and see opportunities for continued growth in each of our segments. We appreciate your continued support as shareholders.

I will now turn the call over to Ira Birns, our CFO, who will walk you through the second quarter financial highlights in greater detail. Ira?

Thanks, Paul, and good morning, everyone. Starting with revenue, revenue for the second quarter was $3.3 billion, up 21% sequentially and up 15% compared to the second quarter of last year. Our marine segment revenues were $1.8 billion, up 23% sequentially and 21% year-over-year. The aviation segment generated revenues of $1.3 billion, up 18% sequentially and 5% from last year's second quarter. The land segment grew to $154 million, which is up 34% sequentially and 32% year-over-year.

The year-over-year increase in total revenue was primarily attributable to an aggregate $446 million of volume related increases from the marine/aviation/land segments and a $3 million price related increase from the land segment. Partially offsetting these increases was an aggregate $32 million price related decrease from the marine and aviation segments. Our aviation segment sold 578 million gallons of fuel during the second quarter of 2007, an increase of 4% sequentially and 5% compared to the second quarter of last year. Despite the loss of approximately 100 million gallons of quarterly volume relating to the termination of the America West Fuel Management business at the end of the second quarter of 2006.

Our marine segment had a solid quarter, generating a year-over-year increase in gross profit and operating income of 8% and 11%, respectively. Total business activity was 6.8 million metric tons, a decrease of 1% sequentially but an increase of 15% compared to the second quarter of 2006. Fuel reselling activities constituted 76% of total marine business activity in the second quarter.

Our land segment continues to grow, selling 66 million gallons during the second quarter, up 13% sequentially and up 30% compared to the same quarter a year ago. The year-over-year increase was due to increased sales (technical difficulty) to existing customers as well as the continued expansion of our customer base. This was the fourth consecutive quarter of year-over-year increases in gross profit in operating income in our land segment. Gross profit on a consolidated basis for the second quarter was $58 million, an increase of $6.8 million or 13% sequentially, and $6.5 million or 13% when compared to the same quarter a year ago.

Our aviation segment contributed $30.7 million in gross profit, an increase of $10.9 million or 55% sequentially, and 16% over the second quarter of last year. As Paul discussed earlier, the aviation segment rebounded nicely from the first quarter which was significantly impacted by a rapid decline in jet fuel prices at the very beginning of the year. As expected, we benefited from the positive gap between our opening average inventory cost at the beginning of the second quarter and higher market prices for jet fuel.

Beyond this result, jet fuel prices remained relatively stable for the balance of the quarter and therefore, there was no other meaningful impact on our results relating to the average costing of our jet fuel inventory. Our quarter-end jet fuel inventory position supporting our self supply model was approximately 31.5 million gallons, up slightly when compared to the first quarter. Due to higher jet fuel prices, the dollar value of our related jet fuel inventory increased to $65 million as compared to $52 million in the first quarter.

Our marine segment generated gross profit of $25.3 million, a year-over-year increase of $1.8 million or 8%. Our land segment delivered gross profit of $2 million, an increase of $500,000 with 37% from the second quarter of 2006. Concerning the $6.5 million increase in total gross profit versus the same quarter last year, an aggregate of $6.7 million was due to increased sales volume in all three of our business segments. An aggregate of $3 million was due to higher gross profit per unit volume sold in both our aviation and land segments. Partially offsetting these increases was an aggregate of $3.2 million principally relating to a decrease in the gross profit per unit volume sold in our marine segment.

Operating expenses for the second quarter were $35.9 million, an increase of $1.5 million or 4% compared to the same quarter last year. Of this increase, $1.6 million was due to compensation and employee benefits and $2.4 million was due to an increase in general and administrative expenses. These increases were partially offset by $1.5 million in executive severance costs recorded in the second quarter of 2006 and a $1 million reduction in our provision for bad debt. The increase in compensation and employee benefits was primarily due to new hires to support our growing global business as well as an increase in stock based compensation. The increase in general and administrative expenses was mainly due to professional consulting fees, systems development and depreciation and amortization. The positive change in the provision for bad debt was principally related to an overall improvement in the quality of our receivables portfolio when compared to the second quarter of last year as well as specific recoveries during the second quarter.

Income from operations for the second quarter was $22.1 million, an increase of $5 million or 30% compared to the same quarter last year. Income from operations for our marine segment was $11.2 million for the second quarter, an increase of $1.1 million or 11% from the same quarter last year. Our aviation segment's income from operations increased $3.3 million or 25% to $16.7 million when compared to last year's second quarter. Our land segment's income from operations was $500,000, nearly twice the amount generated in the second quarter of 2006.

Unallocated corporate overhead was $6.3 million, a decrease of approximately $500,000 or 7% from the corresponding quarter a year ago. Excluding the impact of the $1.5 million executive severance payment in last year's second quarter, unallocated overhead increased by (technical difficulty) [$1 million], principally relating to the cost of newly hired employees including several key roles critical to our future success.

The Company's effective tax rate for the second quarter was 27.5% as compared to 16% in the first quarter and 18.4% for the second quarter of last year. The higher effective tax rate resulted primarily from a shift in the mix of the results of operations derived from our subsidiaries in tax jurisdictions with higher tax rates as well as an additional provision relating to FIN 48, which impacted our effective tax rates by approximately 3% in the second quarter; over and above the impact that we recognized in the first quarter. Remember, the rebound in the aviation segment, more specifically, the domestic segment which was negatively impacted by the sharp drop off in jet fuel prices early in the first quarter, shifted a greater portion of our income to a higher tax rate jurisdiction. Overall, on the year-to-date basis, our tax rate is 22.5%. Therefore, please note that our effective tax rate for the second quarter is not necessarily indicative of what our tax rate will be for the second half of 2007. For modeling purposes, you should assume our tax rate for the full year 2007 will be in the mid-20s.

Net income for the second quarter was $17 million, an increase of $2.5 million or 17% compared to the corresponding quarter last year. Diluted earnings per share was $0.58 in the quarter, an increase of 16% when compared to last year's second quarter. Our return on equity was 15% for the second quarter which was essentially flat with last year's second quarter, and our return on assets for the second quarter was 5%, also unchanged from the second quarter of last year.

At June 30, our cash, cash equivalents and short-term investments were $221 million, an increase of $32 million from year-end (technical difficulty) 2006. Operating cash flow for the quarter was a strong $34.7 million in capital expenditures, principally related to costs associated with our ERP project were $4.5 million in the second quarter. Our ERP integration project is progressing as planned and we expect to go live with our new enterprise system on January 1, 2008. We currently estimate capital expenditures of approximately $3.5 million and a related expense of $1.5 million to be incurred in the third quarter relating to this project. And we remain on budget for the full project.

DSO was 27 days in the second quarter, down from 29 days in the first quarter. Our payable days outstanding were 23 days this quarter, down from 24 days last quarter. Inventory was $85.2 million, up $19.4 million from the first quarter principally due to higher prices, representing 2.4 days of sales, resulting in a net one day improvement in our cash conversion cycle for the quarter. Inventory days in our aviation self supply model were approximately 10 days, consistent with where we were in the first quarter.

In summary, we delivered solid year-over-year growth in all three of our business segments and generated strong cash flow and return on equity. The combination of our leading global position and expertise in the markets we serve together with our very strong balance sheet position us very well for the significant, organic and strategic growth opportunities that lie ahead.

I will now turn the call back over to Paul.

Thank you, Ira. Jessica, if we could open it up for Q&A, that would be great.

(OPERATOR INSTRUCTIONS) Jonathan Chappell.

Thank you, good morning, guys. (multiple speakers) Hey, Paul, in the marine business the average unit gross profit was (technical difficulty) the lowest it's been in a little while. You mentioned a mix shift. Can you go in a little bit more about the mix shift? And then also in the 10-Q it had mentioned some competitive pressures in that market. Can you speak a little bit about what you saw from a competitive landscape?

Sure, I'd be happy to. Just a couple of things. I think just by way of backdrop, as you know, the marine business -- and we've discussed this in previous quarters before and I think those who have known the Company a long time, they're familiar with it -- marine is primarily a spot business, which means there's a lot of variability period to period with how we lift the fuel, lifting patterns, from market to market and also the pricing arbitrage between ports. So, in its granular detail, shifting patterns can move between the Far East and the West Coast or the East Coast and Europe. When that happens, depending on where we happen to be managing the business for the particular customer, it can have an impact on not only our access to the volume but also our competitive opportunity on margin. So, it's a moving target. It's just the nature of the spot market. So that's one thing.

The second thing is that if you look at major markets in Q2, Jonathan, one of the things that we were struck by was there was a very sharp jump in pricing, anywhere from 15 to 30% in major markets. And what that does is when you are in a spot market and you're putting on margin and you're chasing a market up, it definitely puts pressure on the overall margin. So, that's something that's just a reality of that particular quarter and it's something that's going to be variable from period to period. But when you do get that sharper spike and it's just relentless and you're chasing it, that's where you get the pressure.

The third part of it, which is the mix that we talked about -- and a lot of it has to do with just how much of the market is conducive to derivative activity and our ability to use the price risk management instruments in the model. It's one of our most robust product offerings but it's very much a function of what's going on in market dynamics. And that is, as we saw on the first quarter, we did see considerable activity in the price risk side, but in Q2 we saw almost none because everybody was chasing the market up. And that's not the time that people want to lay on cover or dial in those instruments into the business. So, that ends up being extracted from the mix and that definitely has an impact on margin as well.

The last piece of it which is the competitive pressure is that I would say that look, we're in an ever-changing landscape. I think those of you who are in the public space, you've seen a few players come into the public domain. We watch that carefully. It's just a fact of the market that when you get as much volatility as we've seen there is going to be competition.

But I would say that from our perspective, we're not so concerned about that ultimately. The thing that we're focused on is that volume growth has been very good and this validates our offering. We talked a lot last year about how we were gearing up for a complete reshape of the leadership team in marine, how we were going to be reshaped; our global marketing efforts, how we were going to be looking at large account penetration and moving to quality in the space, that we were not going to be so focused on the middle tier but we were going to continue to stick to our best practices and go after the blue-chip space. We've executed that very well. We're very pleased with the volume that we've been able to garner and I think that that bodes well for the success of the model.

And Paul, another topic that we've been talking about for a couple quarters is the acquisition landscape. It sure sounds like there's more competitors that are out there now on the marine side that may provide some opportunities there. But I know that it seems in the past you maybe want to focus a bit more on aviation and land. Given your strong cash balance that continues to increase every quarter, are some opportunities becoming a little bit more attractive now?

Absolutely. No, in fact I would say that the landscape does favor us. I think that we've been quite selective in this market. We've been very disciplined about our approach and we've been very deliberate in terms of how we process these various opportunities. But Mike Kasbar has been very active in generating sort of pipeline of opportunities in all three of our segments and it's something that I think represents considerable opportunity. I think as a backdrop we've all known what's been going on in the markets in the last couple of years. It's been kind of crazy with some of the activity [went] out there. But I think some of those chickens are coming home to roost and we definitely see that the landscape in all three of our segments represents some strategic opportunities. Mike, you may want to add to that?

No, I mean we have interest in all three of our business segments -- marine, aviation and land, as well as a lot of (technical difficulty) senior talent that continues to want to be a part of our group. So, we've been deliberate in this market. We always have been and be selective. We want to have the right blend of this strategic next steps and economics and management fits. So, we've been close on some transactions but we've rejected them based on either terms or price. So, despite the markets being hot, we're patient and taking a long-term view and just refuse to get away with some of the current market euphoria. But we feel good about our capabilities. We've got, I think, a strong team in place and we feel very good about our organic position as well as our opportunities to expand externally.

As we said, Jonathan, just by final note, you're right. We're in a good position. We kept our powder dry and we've been very conservative. The balance sheet is strong. We've got good liquidity, a good cash position. And I think that, sure, in terms of access to capital we're like everybody else; the prices go up. But I think that our conservative disposition puts us in a very good position in terms of strategic exploration.

Okay. One last one then I'll turn it over. Paul, you made mention in your opening remarks that you shed some of the inventory volumes that you thought maybe you had some more moderate returns in the self supply. I don't know if it's possible to even quantify this, but as you look at your position in August versus what it was in January and February where there was that exposure to a massive shift in prices, have you kind of taken that back a little bit, that exposure?

Yes. I'm reluctant to give any -- to put too much quantitative on it. But I would say look, one of the things we've talked about with Q1 is that one of the questions around the fact that we had sort of the surprise of this average costing impact and there was a lot of unhappiness and people were trying to get more visibility.

And one of the most enduring questions that came out on the conference call -- and I would say even with other conversations -- is are we confident as a management team that this strategic move into a more advanced strategy on supply and making that a more robust part of our volume, are we getting the returns that we would expect for taking a little bit more of that risk. And I think we're quite confident that we are. But as we do that very carefully -- what we also talked about on the call was that we were going to be very disciplined in our effort to go through and really scrub the entire model and make sure that we were getting (technical difficulty) the returns we want. I would just say that part of that discipline is we're going to shed some of the stuff that we just don't think merits the investment in it. So, that will shake out over the next couple of quarters, but I think it's just part of making sure that we're taking a disciplined approach. But we feel very good about the model and I think it's been proved out.

All right, great. Sounds good, Paul. Thanks, Paul.

Christine Min.

I just wanted to ask another question about the marine growth profit metric. Is that -- with the oil prices staying at pretty high levels, they've come off a little bit but continuing in this high-level range, can we expect to see the gross profit per metric ton kind of hovering around this level going forward? Or what are some of the dynamics do you think that can pick it up or affect it downwards or upwards?

Sure. I appreciate you asking the question, Christine. I think that again I'm a little reluctant -- you know I don't know that I can give you with any precision what it would look like on a specific basis going forward. But I would say it goes back to these fundamental aspects. It's something that's just been a part of being a spot business that the margin, if you will, variability is a function of what's going on in the market up and down. It's also a function of lifting patterns where our fleets are actually taking the fuel and margin opportunity varies from region to reach and customer to customer. And I don't mean that to sort of cloud the issue but it's just a basic reality of how the business works.

And I would say that it also has to do with the mix of our product because there are a lot of things going on. You've got the brokerage, you've got the reselling, you've got the price risk management activity. These are all different components of the business and the price risk comes and goes, depending on what's going on in the market.

So, I would say that the most important thing -- and history has proven this true -- we had variability in margin but typically when you to do get these swings and sort of market conditions, we tend to have downtimes like this one and we then tend to have up ones. It just comes and goes. And I know one thing for sure that we're very confident that we are very quick to move when the opportunities shift in our favor and we can increase the amount of price risk business that we do, we'll do that as well.

So the real key is making sure that you've got a foundation of base volume (technical difficulty), that we've got a good solid offering in the market and that we've got deep entanglement with that customer base and that we're basically hanging on to quality customers on a global basis. That's the part that's much more interesting to us and more important to us on a long-term basis. And we feel very good about that.

Great. And also the volume side was very impressive. Could you kind of give a color on the macroenvironment there with volumes in marine and aviation and where you see -- I mean, you guys are doing a great job of selling into new and existing customers. Can you give some color on where you see volumes trending as well in just the macroenvironment going forward?

Yes, I mean, I think that it's sort of -- one of the great advantages of having scale is it creates opportunity for more scale. And I would say that we've talked in the past about this, this is sort of building the Japanese sword. You know, there's a discipline to this. You've got to have a really focused value proposition. You've got to have a highly targeted initiative in terms of your offering. You've got to be very disciplined about your follow-up and your execution. Service is critical in today's market. It's about having a much more discreet understanding of what the demands are of these customers. It goes far beyond just price and credit. It gets into all sorts of operational issues and logistical concerns.

And as you know, we see ourself emerging more as a finance services and logistics company. It's not just about the oil and the credit and the pricing. There's lots of other value add going on that we're driving more deeply into. And we feel very good about the development of that offering and the refinement of that offering in all three of our segments. And I think it's probably one of the most gratifying things as the Company matures and as we add the people and as people grow up with the Company, it's fun to be in a position where we see a horizon of opportunity where that value proposition is difficult by others to replicate and we begin to execute on it very well.

So, I would say that yes, the aviation side has done a tremendous job. And the marine team has done an excellent job of securing that position. Even in a relatively mature market like marine, we've continued to make great strides in garnering market share and we feel that it's share that we can hold on to. So we feel good about that. So it's just discipline. It's blocking and tackling every day (technical difficulty) Hey, there's no magic to this. It's hard work. But it also is all of the other work we've done to build a mature organization with the systems support, the financial support, the sophistication of legal support and operational support around the world to help our commercial people out in the field execute at the highest level. It's been -- it's really coming together. And as you know, this is something that we've worked on for the last couple of years. Mike Kasbar has done a phenomenal job of just driving organizational transformation and taking this Company to a new level. And we're beginning to see the dividends. It's really very exciting.

Okay, thanks a lot.

Alex Brand.

Listen, I guess let me start with on the cost side of things, I thought great job there but I was a little surprised given sort of all the things you've got going on, and I'm wondering do you feel like you've got that kind of at a manageable level now? I know you won't get the major leverage until the systems are in place but is that run rate something that's reasonable to expect for at least the next few quarters?

Alex, this is Ira. I would say that if you look at the total operating expenses for the second quarter, that's a reasonable number. I would expect that you break it down into a couple pieces that comp probably still has a bit of a way to go up as we continue to invest in people around the world; to support growth, to support our new ERP initiative. Aside from that, we're probably pretty close to a reasonable run rate. It's tough to give you an exact number. So I would assume that the overall number may trail up a little bit next quarter because of the compensation piece specifically.

Right. Fair enough. And Paul, the aviation business, you know you guys said okay, you got a little benefit from the average inventory cost at the beginning of the quarter and obviously aviation had a great quarter. So what should we think about in terms of the aviation business (technical difficulty) strength? Is there some onetime benefit in the quarter or is it that aviation business is really sort of organically that strong?

Yes. No, I think you have to keep in perspective what happened between the Q1 and the Q2. Obviously, there were some offsetting penalties there. And I think that, as we've talked about sort of ad nauseum in Q1, is as that part of our model which represents sort of a drive to a more sophisticated supply model which creates competitive opportunity for us in the market, what we had not anticipated fully, as we talked about in Q1, was when it sort of ended up straddling the quarterly period, we got that disconnect in sort of a perfect storm of circumstances that sort of shifted some of the profitability into a different period.

So, yes, there was some correction that I would say is the onetime correction from the previous period. But do we feel good that there's an underlying ratable base of business that's solid? Absolutely. Do we feel that we've made very good strides in replacing the volume metric, the shedding of the America West volume? Very much so. Because it was all reconstructed and rebuilt in sort of core business. And again, as we talked about just a few minutes ago, bigger begets bigger. It does give you a more competitive footprint.

But yes, this quarter does reflect some of the correction from the previous. So I would be very reluctant to have you say that that was strictly ratable. It's not -- I don't think that would be fair. But we feel good that -- what is most important to us is that it's the proof of concept, the model did work. Exactly what we thought would happen did happen. It's just the nature of what's going on, average costing, and it's just become an integral part of our more sophisticated supply model. But that's also creating market opportunities. So we're committed to it and as long as the returns are there, we'll keep doing it.

Okay. And just one more question if I could. The balance sheet -- I don't think you guys have ever had more cash than you've got right now. It seems like even if you did an acquisition or two, you've got more than enough horsepower or powder here to do whatever you need to do. Is there a consideration that days like today where the market is reacting very negatively to your stock that having some sort of resting buyback plan in place to take advantage of select opportunities is something that you would seriously consider?

Yes, I think we would, we would have to seriously consider it, Alex. Because look, you guys, I feel -- my sympathies are to everybody on this call. I mean you guys live in a world that is just completely chaotic out there. As you say, you think about what's been going on in the global markets in the last couple of weeks. Certainly today, yesterday and whatever, it's just bloodshed and it creates a lot of craziness in values. And look, we understand the value of this enterprise and we understand that we might have to consider that. And we understand that we can get buffeted by the hurricane winds of a crazy market just like everybody else regardless of how strong our value proposition is. It's just a reality of being public.

But we've kept that war chest dry because we felt that there were opportunities. As we talked about a little while ago, the market has been a little nutty in the last couple of years and it made it difficult to go out. And as Mike said, we've looked at things and turned away because of either terms or price just because of some of the crazy numbers being done out there.

But I think that now that some of that's going to go away, I think that backdrop is favorable to us. And even though, as we said, the cost of money is going to no cheaper for us than anybody else. But I think that the fact we've been disciplined and kept our powder dry creates opportunity. However, if it turns out that we are not able to use that effectively, certainly we would look to consider things like buybacks. But that hasn't been our primary focus. Dividends and buybacks have not been the focus. But look, we're practical, we're realistic. We have to take these things under consideration. Ultimately we've got to do what's right for the franchise and for the shareholders.

Fair enough, guys. Good quarter. Thanks a lot.

Al Kaschalk.

Paul, I was hoping -- or Ira -- you could give us maybe -- since we're not going to get dollars or quantity -- maybe you could talk about rates of change, specifically on the lower derivative activity I think you said in the marine business. Does that mean 10%? Does it mean 50%? Could you just help maybe add a little bit to that (technical difficulty) comment?

Yes, I don't have that off the top of my head. The guys are looking to see if they can give you something. But we'll see if we can get you something like that. But I know that -- again, Al, let's go back to the backdrop. It's an ongoing business mix issue. And we know that we were quite active in the first quarter and it dropped off. So, I would say that maybe on a sequential basis, it's going to be, you know, could be sort of 15 to 20%. But the thing is it does have an impact. And it has to do with market circumstances.

People are not going to be dialing the derivative positions when they've got a rocketing market, which is exactly what happened. As we've talked about, you got 15 to 30% sharp jumps in major markets and people just basically waited out. That's not the good position to be buying into the forward curve. Whereas in Q1 you had a backwardized market, you had some opportunities to discount off the current spot. And people locked up some volume for the forward period and that was very positive.

So, these things come and go. It's just part of the mix. What's great from our point of view is that it doesn't do you any good to have the expertise on how to execute on these kinds of transactions if you don't have the underlying volume to do it for. So again, it's back to -- it's primarily a spot business. We're glad that we've got the volumetric footprint to be able to execute on. And when those market opportunities are there, we're going to pull the trigger and move.

But is it fair to say if you looked at sort of a $4 number last year on marine gross profit per ton for Q2 and now it's right around $3.45 this quarter that the majority of that would be due to maybe not so beneficial derivative activity? Or is it more the pricing game?

As I said, it's a whole combination of the above. We talked about it before. There's a combination of factors. You've got business mix. You've got the nature of the arbitrage between markets and lifting patterns. You've got a sharp moving price move-up that squeezes margin. You've got a little bit on a competitive landscape. And then you've got a mix of business in terms of product which includes derivative. All of that conspires to change market margin and make it variable from period to period.

So, we're trotting a little bit this quarter below historical lows. But again, this is -- from our point, the reason you hear us being so comfortable about it is that this is the history of the marine (technical difficulty) business. We grew up in this business. This is just the way it is. So it doesn't bother us one bit. The things that we're more focused on is what's your underlying foundation of business. So, you know.

Great. And then secondly, if we could talk about a follow-up to an earlier question about shedding volume. It sounded like you have really through the balance of this year and that may be something that you continue to evaluate as you operate the business. But do you feel like there's a certain -- can you give us a sense of what percentage of your business maybe you're evaluating (multiple speakers) --?

No, let's go back to -- I think -- I would suggest that perhaps there's a different way to think about it, Al. But what generated this particular part of the conversation was that as we went through Q1, which of course as you know we've had a lot of discussion about, we were not happy about the fact that it created a lot of anxiety in the shareholder community. Because it was kind of a surprise, right? You had what was perceived to be sort of a change in your business model, the impact (technical difficulty) [it was] costing and it all circulated and some of the basis risk issues associated with self supply.

So the question is if you're going to be using self supply as a part of your strategic model, are you making sure that you're getting the returns? This is one of the questions that I think was a very good question. And we decided it did provide an opportunity to go back and revisit that and make sure in a very careful way that we'd analyzed that. And if there was any business that we were doing under the self supply model that we felt simply was marginal relative to the earnings volatility risk associated with some of these things in self supply, we should take a hard look at it and consider shedding it.

So, that's an ongoing process. However, I would also say that offsetting that is an ongoing effort to grow this. So there's new opportunity coming in. There's a constant re-evaluation of the portfolio going out. Because at the end of the day, why would we want to be doing business for certain marginal returns if it just doesn't pay. So, that's something that we have to take stock of and we evaluate it given market conditions -- whether prices are very high, whether they're low, whether they're volatile, what the risk profile is, what's going on in the industry. All of these are part of the discipline of just managing the portfolio.

Okay. And then one -- couple of housekeeping items and I'll hop back in queue. Ira, do you have the specific amount that was recovered in Q2 on the (technical difficulty) receivables?

On the receivables? The recoveries were somewhere around $350,000 in the quarter.

So that would mean that the provision was 0 on the P&L?

Right. The provision was basically flat and the P&L impact was somewhat conveniently equal to the amount of the recoveries.

Okay and then secondly, if I take your tax rate of mid -- suggestion of mid-20s remodeling, I think that implies that you're probably north of -- you're at or north of the rate you had in Q2. Is that fair?

Not necessarily. I mean, unfortunately it's not linear and the numbers move around quarter to quarter. We're at 22.5 for the first half of the year. So mid-20s would imply potentially a little bit above mid-20s in the second half of the year but not necessarily higher than the 27.5%.

Okay. And how about some color on the percentage of income in North America or non-North America?

Normally we don't -- unfortunately we don't break out the income geographically. We don't do that in the Q. We haven't done it historically, so. But obviously, (multiple speakers) was material from the first quarter to this quarter and that's the [drill] of a change.

[Sirang Ahusia].

Going back to the bad debt provision that Al just mentioned. With fuel prices going up, obviously receivables go up, that makes total sense with the $1 billion receivables at the end of the quarter. Have the receivables gotten that much better that you're not accounting for any more bad debt provision?

What we could tell you is that we have a consistent methodology that we use to analyze the quality of our receivables. And it is true that the balance has gone up year-over-year but quality has, based on upon the methodology that we use, the quality has improved a bit. And therefore an additional reserve was warranted. So, once again we try to apply a very consistent methodology. And there are some receivables in the portfolio that may have weakened a little bit and there are some that improved. But net-net the overall portfolio on a global basis is somewhat (technical difficulty) better than it was last year, which drove the result in the provision for this quarter.

And aside from the provision, what is currently in the bad debt account, I mean, in terms of what's sitting there? I didn't get a chance to describe that.

The overall reserves?

Exactly.

I think it's approximately $12 million. If we got (technical difficulty) correction, I'll let you know in a minute. Yes, it's $12 million -- [about] $12 million is the balance at the end of the second quarter.

With inventories going up I would hope that the receivables do stay better for you. Another question I have for you was on the compensation. Since a lot of your compensation is tied to performance, I would have expected compensation to go up in the quarter with a better performance. It really didn't. Were there some cuts that might have occurred that we could try to model for? Or was something else going on there?

No, there weren't any cuts in the quarter but obviously in the marine segment, for example, with performance off the first quarter, the incentive accruals would be lower in the second quarter. And you had -- that was offset a bit by new hires. So really there's ups and downs. But at the end of the day the number didn't change too much in the second quarter.

What was the net in the change in accrual for the performance on the marine side?

We normally don't get that granular on that piece. That's just one indicator of one of the items that may be moving around over the course of the quarter.

So that would [accrue] --

Those numbers will be up and down over the course of the year depending upon quarter over quarter performance.

And [I think that's all I have for you]. Thanks, guys.

Scott Blumenthal.

Al and company asked most of my questions. But just a couple. Paul, in your opening remarks you talked about chasing prices up during the quarter and just how the bunker market remains kind of tight. Am I correct in implying that prices after the run-up have kind of tapered off a bit and have stabilized?

Yes, there has been a little bit of stabilization. And again, ultimately it is going to trace through as a relationship off crude. But it also has to do with what's going on in terms of refining, conversions, residual fuel streams. And there's been I think some just changes in the fundamentals in the market that have driven the price of the resid stream up. But we don't -- it was very sharp within the quarter but it didn't continue to be as sharp thereafter. But it's just reflecting what's going on in the market and competition for the barrel out of a refinery. And the resid fundamentals were such that it got squeezed a bit and it moved up quickly.

Sure. So what we're kind of looking at -- and if you could help me think through this, are we looking at a situation where the bunker fuel prices were kind of similar, the dynamic, what was going on in Q2 was similar to what happened in Q1? And that might turn around for us here in Q3 and give us a little boost to our margin and profits?

Yes, well, I can't give you that [folks], but it could if it turns. When you think about what happened in Q1 we definitely benefited from it. In Q2 we had that sharp increase, it put a little pressure on it. And you're right, if there's some correction that will definitely help us.

Okay, and can -- that sounds good -- can you tell us at least the direction of the volume of derivatives, if you've seen that activity pick up at all or --?

Sure. I would say as a general proposition, Scott, if you look at the global markets, the global derivative market is an enormous market in all sorts of things; whether it's currencies or crude or -- it's a huge market. And it's become sort of an integral part of strategic procurement around the world. So, it's just a fact of reality now. These are very active and dynamic markets. I don't think they're changing any time soon. It becomes a very important part of just the toolkit required to manage something as variable as a cost called fuel. And if you consider that as we talked about is 26% of operating cost in aviation and it can be as much as 35% of operating cost in marine, these are big numbers. And they're moving around a lot. And there's a lot of variability.

So any large procurement operation has got to think about the role of derivatives to help them manage cost variability into the future. And particularly as you get into the larger public enterprises, it's just the reality that you can't be talking to your shareholders about the movement across if you don't have an intelligent answer about how you're going to help manage cost and the use of derivatives. Because if you're buying 100% in the spot market and you have no idea what the price of oil is going to do, by definition you're essentially speculating. So, because your P&L is vulnerable to that variability.

So the programmatic and disciplined procurement specialist is going to be working in partnership with us to help think about how they can execute a derivative strategy in the market because it helps take some of the spiking out of that variability. It's just -- it's like doing push-ups and sit-ups. It's just part of your homework.

Any way, we think that it's an increasing market. We think that we have tremendous expertise in this market. We've been one of the pioneers in this market. And we've been one of the people who have really added the value add offering to a very high level and a very sophisticated level with these large global fleets. We think it's a core competence for this group. We think it's an area that we have expertise in. And we also by virtue of our balance sheet earned a position to be in that space in a way that small marginally capitalized companies just can't play. So we represent a very good counterparty to both the writers. We've got excellent credit. We've got access to those markets and we have very, very sophisticated understanding about how to use those to manage cost. So, it's a growing part of our business. We're excited about it and I think that you're going to see it featured more prominently in the years to come.

So you did mention that in a period of increasing bunker prices, do the customers -- your customers, derivative customers, tend to not chase prices up. And that puts pressures on margin. So can we then infer from that that in periods of declining prices, they tend to chase it down?

No, you're getting way too -- you're trying to build a very -- well, I won't say simplistic but it's sounds to me to simply hang a model off that kind of very binary type relationship negates a whole lot of other stuff going on in these markets. Because strategic use of derivatives and procurement is just that strategic. It isn't just ad hoc one minute at a time.

But what I would say is that it wasn't that the sharp rising market squeezed the margin on derivative. What it means is that when you're in a spot market and you're chasing a very fast jumping market, it puts pressure on margin because you're always trying to catch up with the price. So in a spot market, that's just a reality.

It also means that in a sharply rising market, nobody is going to go out there in a very sharp contango market and make a big bet on the forward curve until they sort of know where it's going to go. Right? So what it means is they dial back. Whereas we talked about earlier, Mike Kasbar mentioned it, in the first quarter when you add a little bit more of a backwardized market and you can discount off the spot -- off the current spot market by buying forward, that's a little bit more conducive to buying into the forward curve. So this comes and goes. Markets go up and down and it's the nature of the business. So I would just be reluctant if I were you to make it that binary. There's lots of other things going on in strategic procurement.

Yes, I didn't mean to imply that, you know, chasing the markets down put pressure just on derivative margins.

Yes, yes. Okay.

Sorry, I didn't make that clear. Can you talk about on the acquisition front what has been the largest acquisition that you've made for those of us who have only covered the Company for two, two and a half years? Can you give us (multiple speakers)

2004 we bought the Tramp Oil Group.

And --?

That was in our marine space. It was a marine acquisition. They were a privately held company based in the UK that was one of the most successful reselling franchises in this space. We've known (technical difficulty) them for many years and that's what we did. We bought them.

That's really helpful. And I guess my last question is Ira, did you give us -- or could you give us an idea of any benefit that you got from Forex during the quarter?

Nothing meaningful. We don't have a meaningful impact on foreign exchange on a quarterly basis. There was no meaningful impact on our numbers in Q2.

Mark Madsen.

This is actually Jim Larkins with Wasatch Advisors.

Hey, Jim, how are you?

I'm doing well, thanks. I wonder if you could give a little bit of color on the aviation side on your ancillary services that you're doing in addition to fuel. Are those driving significant bottom-line results or is that something that's more of the add-on service that drives the primary purchases of fuel?

I'm glad you asked the question, actually. As you know, we've talked about it in other calls and it wasn't so much the focus today but, look. The services business is very interesting to us because it's a very interesting complement to what goes on in the fuel beast. We have the Baseops operation which has continued to grow. We couldn't be more pleased. We brought in some additional talent and management depth in that space in response to what we think are very favorable market opportunities to grow that space. Services is very interesting because it creates kind of a hook and a link into the space. And from our point of view I think that that's an area that we'll continue to invest in. We think that the business aviation space is robust and it's an area that we like.

So I think that we're going to continue to focus on that. But absolutely. We like it. It's been good. And there are a couple of things going on in aviation that we're interested in. Number one is I would say that on the credit (technical difficulty) side if anything, in commercial side, we've been maybe a little bit too conservative. We've been very, very good. We've moved to quality. We've been very tight about what we've done in that space. But I think there's an opportunity overall generally in the commercial space to perhaps relax that a little bit and open up some of the market opportunity to a little bit down the chain.

And then on the business side, which of course is by its very nature a pretty good class of customer. We see a lot of opportunity to grow there both not only in terms of our own operation at Baseops but also with some of our alliances. So, we're excited about that. And you're right, Jim. It's a good space and we're excited about it.

But part of the question is, is that a significant profit driver for that business? Or is it really just a way to differentiate yourself to sell (multiple speakers)

I would say historically it hasn't been. It's been a relatively small part of profitability but it is a competitive differentiator. It is important to have that offering and to be able to wrap that around our core competence in fuel. Absolutely. It's very good thing.

But I would say it's a growing business. I would say that it's definitely a part of our business that will grow. Services, just to say it's small now relative to our fuel base, that's true, but I would say there are definitely opportunities to grow and we are focused on that as well. So it's both competitive differentiator wrapped around our fuel offering, which we can do again.

There are service providers out there who do not have the capability and the strength that we have in fuel. That's for sure. So we've got something that we bring to the party that's pretty important. And we've got the balance sheet and the muscle to grow it. And so I think that on the back of our core competence in the fuel, the services side is starting to become a meaningful part of the overall profitability stream and the overall offer. So, yes. That's -- we're investing in it and we're committed to it and we're going to grow it one way or the other.

Okay, that's helpful. And then on the marine side, could you just kind of update us on your position with the large shipping companies? And I'm not quite sure historically if that -- if I understand it correctly, that business with the larger companies was largely kind of more of a brokerage business and that maybe it's taking some effort to get some of them on board to your resell business. Could you just kind of tell us how that mix has changed over the past couple of years? Are you doing more with the larger shipping companies or do you primarily play with kind of the smaller fleets?

It's a very good question. I'm glad you asked that, Jim, because (technical difficulty) you do. As the previous caller said, there's some people that are newer to the story and we kind of forget what we already know in some of the history. But I would say that one of the things that have made us a very important counterparty to these large global fleets is our balance sheet, our domain expertise, our global reach and our highly discrete understanding of markets around the world.

This is something that historically you may remember us talking about that as these shipping companies began to think about procurement, it wasn't just a matter of being able to sort of call up a bunch of suppliers in different market and get a price. It was really understanding and managing more like an asset management, managing their exposure and their position in these various markets around the world. That requires market visibility. It requires an understanding of what's driving those markets. And it required specialists to help them do that and canvas the market and give them the color and the depth of understanding they need to manage the variability.

So I would say that absolutely, we made a very strong focus on global fleets that were in need of financing third party logistics, technical expertise, robust understanding of derivative markets in the forward curve, and how to integrate all that into a holistic package that gave them a sense of security, a sense of care and custody and comfort, and a sense of being able to give them a highly robust total offering that made them feel secure about their exposure.

Now, these large fleets are being asked to do more with less. They've all been through very busy growth transitions. They have a lot of difficulty in managing these highly variable, highly fragmented markets. And remember, as the oil community has sort of made a push for return on equity and moved to sort of the upstream side of the barrel, it's changed and made very, very fragmented the downstream market. So as a procurement person at a large fleet, if you're operating 200 or 300 ships from a single location in the world and you've got demand all over the world and your core competence is the movement of goods.

And that's the most important thing you're doing, is making sure that that cargo gets from A to B, but you've got this thing called fuel that's highly variable, operationally intensive. It's got a lot of exposure attached to it, is squarely in the radar of your (technical difficulty) Board of Directors and your senior management, and you're the procurement person, you've got a lot of your desk.

So, to be able to reach out to World Fuel that's public, transparent, robust balance sheet, very, very [deep demand] expertise, global footprint, sophisticated understanding of these instruments, this ends up being a real care and comfort to these procurement departments. So we've become an important part of their offering. And I would say that we'll continue to penetrate more deeply. I would say the volumetric growth you've seen has been primarily in the blue-chip space. And I would say it's tremendous validation of our offering is that these guys are saying this works for us. It definitely works for us.

Would you typify that as saying that you're still kind of in the early innings of being able to address that customer base? Or would you say they're pretty much onboard and understand your services and now it's just a matter of growing with them?

No, it's a moving target. Look, there are new customers all the time and they are changing. And you get new buyers and you get companies that are changing. And I would say that it runs the gamut in terms of where on the development scale is the maturity of our offering? So, in some cases you're starting out early in the game and you're convincing and you're making them understand it. And you're guiding them to other examples of where we've been successful and you're hoping that they'll test you out and they'll try you and they'll give you more latitude over time.

You've got others where we're deeply in the Company and you're doing a lot for them and there may be less specific growth. But remember, these large successful companies are always expanding as well. They've got changed management going on. And they're opening up new services and they're opening up new parts of the world where they're competing. And so there's always kind of a moving target of opportunity for us to add the offering.

And then you also have within those customers varying degrees of appetite. Some are more price focused in a spot market. Some are looking to put more of the volume on contract and they need help understanding how to structure that. Others are more logistically and operationally concerned and they're really looking to make sure that they've got a robust operational support structure as opposed to just price. And others are looking for us to manage their forward curve. So, it kind of depends on the customer but we certainly see there's a horizon of opportunity that's rich out there.

Great. Thanks, guys.

I would now like to turn the call over Mr. Paul Stebbins for (technical difficulty) closing remarks.

Thank you very much, Jessica. We appreciate the continued support of our shareholders. We know that we've got a wild and crazy public market out there with lots of chaos and it's not difficult -- it's difficult to sort of navigate. But we couldn't be more pleased with sort of the foundation work we've done in this company. As the Company matures, as the organization gets a more robust offering around the world, as we've been good about keeping our balance sheet strong and our liquidity. We feel well positioned to take advantage of the future opportunities. And we appreciate your continued support despite all the market chaos. And we'll look forward to talking to you after Q3. Thank you.

Thank you. This concludes today's World Fuel Services' second-quarter 2007 earnings conference call. You may now disconnect.