World Kinect Corp (WKC) 2007 Q3 法說會逐字稿

Good afternoon. My name is Molly and I will be your conference operator today. At this time I would like to welcome everyone to the World Fuel Services Third Quarter 2007 Earnings Conference Call. (OPERATOR INSTRUCTIONS.) I would now like to introduce Frank Shea, Chief Risk and Administrative Officer. Mr. Shea, you may begin.

Good evening, everyone, and welcome to the World Fuel Services Third Quarter Conference Call. I am Frank Shea, World Fuel's EVP and Chief Risk and Administrative Officer. And I will be serving as the moderator on this evening's call. Today's call is also available via webcast. To access the 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, Michael Kasbar, President and Chief Operating Officer, Ira Birns, Executive Vice President and Chief Financial Officer, and Paul Novell, Senior Vice President and Chief Accounting Officer.

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 evening's call may include forward-looking statements under the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties that could cause actual results or facts to differ materially from such statements. Detailed information about 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. This afternoon we announced earnings of $14.8 million, or $0.51 per diluted share for the third quarter of fiscal 2007. These results were negatively affected by a special impairment charge of $1.9 million relating to a short-term commercial paper investment. The after-tax effect of this impairment charge was $1.3 million, or $0.05 per share. Ira will discuss this in more detail in his financial report. More importantly, these results reflect solid sequential and year-over-year growth in volume and gross profit across all three segments. And while our six-year run of upward earnings momentum has been pressured this year and in this quarter by an increase in costs associated with investment in technology, the hiring of new sales and management talent, and improvement of business process, we feel very good about this quarter's results and the underlying fundamentals of the business.

This is particularly true given the backdrop of a market shaken by core earnings in the downstream energy market, huge write-downs in the financial sector, and rocketing oil prices. We believe our asset light business model, strong focus on new customers acquisitions, and ability to perform in a high-priced market, have all contributed to the quality of our results this quarter.

While Ira will discuss the financials in more detail, I believe it is important to mention up front that we understand our shareholders want to know when our investment program in our business will stabilize, so that we can provide visibility on a ratable cost structure going forward. We believe by Q1 2008, we will have completed the implementation of our new system and the capitalized costs will begin to be depreciated and expensed. We expect the pace of these investments to slow and we have every confidence that they will pay dividends in 2008.

In our marine segment, we saw continued increases in volume and gross profit in the quarter, both sequentially and year-over-year. However, these gains were offset by some bad debt write-downs and an increase in expense. In Q3, we were pleased to see continued secular growth in spite of the sharp increase in prices and the corresponding pressure on margin and appetite for price risk management. That we saw growth in spite of these factors validated the durability of our offering in a variety of market conditions.

As an asset light company with a strong balance sheet and with no debt service related to owning equipment, we enjoy a special relationship with the global supply community in hundreds of markets worldwide. Unlike other more asset intensive companies who are looking for opportunities to develop an integrated supply offering, we are perceived by suppliers to be a neutral party and natural partner who adds value by rationalizing downstream distribution and scale, providing global marketing from 43 offices in 22 countries, extending credit, and offering operational and logistical support. We work with multiple physical delivery companies throughout the world and represent significant percentages of their throughput.

Furthermore, our customers value our neutral position in the market because we are agnostic about physical assets. We are asset optimizers with expertise in matching their discrete, operational, technical, and volumetric demands with the supply channel best suited to their particular needs. Our ability to offer competitive pricing, derivatives, technical expertise, and operational support is an important competitive differentiator and accounts for our success with some of the world's most sophisticated fleets.

And while we may change our view on owning physical assets if the right opportunity were to arise, we know that specializing in services, finance, and logistics has proven to be a successful business model, which can scale across multiple markets.

In our aviations segment, we saw a record gross profit in the quarter. As discussed in the last two conference calls, we have validated the importance of self supply to our business model, while acknowledging that it introduces a level of earnings volatility period to period that is more pronounced with higher oil prices and increased volume.

In Q3, we did benefit from increase in oil prices. In spite of best efforts to hedge our product in the natural pricing hedge created by back-to-back matched formulas with our customers, the reality is that hedging effectiveness and the impracticality of getting 100% matched volumes will open up some part of our inventory to market exposure. In this quarter, we experienced some benefit from that exposure, as well as the inventory average costing methodology discussed in previous quarters. Moreover, there will always be a lag between the end of quarter mark-to-market and business supplied in the first week or so of the subsequent quarter. While this reality introduces the prospect of volatility in earnings, it is important to point out that our overall blended margin has improved over Q2 and by and large, average costing not withstanding, will be captured over time.

On the previous call we stated our intention to shed some business we felt to be marginal, and we have done so. The good news is that we are replacing some of this business with higher quality volume at better returns. The aviation industry continues to be concerned about high prices, which have had a dramatic impact on operating costs of airlines. On June 29, 2007, the price of crude oil was $70.68 per barrel and jet fuel was $2.10 per gallon. On October 1, crude was $80.24 and jet fuel was $2.26 per gallon. And as of this week, we've seen $98 per barrel crude and jet fuel of $2.70 a gallon.

These are dramatic spikes in pricing and IATA has continued to reduce their profitability estimates for the aviation sector this year. However, the good news is that there has been continued strong traffic demand, both domestically and internationally, and as to the recession there are indications that the trend could continue through next year.

Our land segment did well this quarter on volume and gross profit. And while the net result was negatively impacted by a specific write-off, overall we could not be happier with the acceptance that our business model continued to receive in the market. Our team has done a great job growing the business and we see a number of opportunities to pursue in this rapidly changing space.

On the more strategic front, today we announced the signing of a definitive agreement to acquire AVCARD, a contract fuel and closed loop card processing company servicing 4,000 customers, representing 9,000 cardholders, at 7,600 locations in 190 countries. They are one of the most recognized and respected brands in the business aviation space. As we have discussed in previous calls, we are committed to expanding our presence in the business aviation market. And we have been keen to be able to offer our global customers and [FBO] partners a more robust card solution.

In addition, we are now able to market our flight support and third party services to all of AVCARD's customers, while at the same time providing AVCARD's robust data capture and reporting solution to our current customers, as well as those of our strategic partners. AVCARD has a first class reputation in the industry, a great management and technology team, and we could not be more pleased to have them join the World Fuel family. We will not only support their growth in their core space, but we'll look for ways to expand their offering into our land and marine businesses as well.

This is a time of broad-based market unease. The dollar is weak, the Dow dropped sharply yesterday and is off again today, prices are high, the world economy is stressed, and some of the subprime pain we have experienced in the U.S. could well spread beyond our borders. But in spite of all of this market backdrop, we feel good about Q3. We are pleased with the quality of our earnings and gratified by the strength we saw in our fundamental business.

We appreciate our shareholders would like to see us replicate the kind of earnings momentum we have grown--that they have grown accustomed to and avoid the kinds of earnings surprises they have experienced this year. We certainly share this sentiment. What we can tell you is that in 2007 we have hired some outstanding people. We have been relentless in our effort to build a technology platform that we expect will greatly improve our capabilities, and we have improved our overall business (inaudible). And while this may have impacted our earnings momentum in the near term, we have every confidence we have made the right decision and the company will benefit from this investment in the years to come.

Thank you for your patience and your support. And I'll now turn the call over to Ira. Ira?

Thank you, Paul. Revenue for the third quarter was $3.6 billion, up 10% sequentially and up 30% compared to the third quarter of last year. Our marine segment revenues were $2 billion, up 10% sequentially, and 34% year-over-year. The aviation segment generated revenues of $1.4 billion, up 12% sequentially and up 25% from last year's third quarter. And finally, the land segment grew to $153 million, up 26% year-over-year, but down 1% sequentially. The year-over-year increase in total revenue was primarily attributable to an aggregate $431 million of volume related increases from the marine, aviation, and land segments, and an aggregate $405 million price related increase from the marine and aviation segments. Partially offsetting these increases was a $3 million price related decrease in the land segment.

Our aviation segment sold 616 million gallons of fuel during the third quarter of 2007, an increase of 7% sequentially and 24% compared to the third quarter of last year. Our marine segment's total business activity was 6.9 million metric tons, up 2% sequentially, and up 6% compared to the third quarter of 2006. Fuel reselling activities constituted 75% of total marine business activity in the quarter, consistent with our previous quarter.

Our land segment continues to grow, selling 70 million gallons during the third quarter, up 5% sequentially, and up over 29% compared to the same quarter last year. The year-over-year increase reflects the steady progress we are making in growing the breadth of our customers in the land segment. Gross profit for the third quarter was $62.3 million, an increase of $4.3 million, or 7% sequentially, and $7.1 million, or 13%, compared to the same quarter a year ago.

Our aviation segment contributed a record $33.2 million in gross profit, an increase of $2.5 million, or 8% sequentially, and $5.6 million, or 20% over the third quarter of 2006. Gross profit in our aviation segment was positively impacted by sharp increases in jet fuel prices during the quarter. Our self supply model of jet fuel inventory position was approximately 40 million gallons, up 8 million gallons when compared to the second quarter. Due to higher jet fuel prices, the dollar value of our related jet fuel inventory increased to approximately $88 million, as compared to $65 million in the second quarter. Once again, this increase relates to both an increase in inventory to support profitable growth in the segment, as well as the impact of rising fuel prices.

Our marine segment generated gross profit of $26.9 million, an increase of $1.6 million, or 6% sequentially, and $1.1 million, or 4% year-over-year. Our land segment delivered gross profit of $2.1 million, an increase of $134,000, or 7% sequentially, and a $483,000, or a 29% increase, from the third quarter of last year. Concerning the $7.1 million increase in total gross profit versus the same quarter last year, an aggregate of $9.1 million was due to increased sales volume in all three of our business segments, partially offset by an aggregate of $2 million of lower gross profit per unit volume sold in both our aviation and marine segments.

Operating expenses for the third quarter were $40 million, an increase of $4 million, or 11% sequentially, and $5.6 million, or 16% year-over-year. Of the year-over-year increase, $1.8 million was related to compensation, $2.9 million was due to an increase in general and administrative expenses, and $.9 million related to an increase in our provision for bad debt.

As we have stated for the past several quarters, we have been consciously investing in our infrastructure by building our global team to support growth initiatives in our business throughout the world. The increase in general and administrative expenses was mainly due to increases in professional and consulting fees and our ongoing ERP project. Approximately half of the year-over-year increase in G&A relates to increased ERP expenses.

Therefore, it is important to note that approximately 75% of our total year-over-year increase in operating expense relates to our strategic investment in people and our ERP project, both very valuable investments in our future. The increase in bad debt expense, or our provision for bad debt, principally relates to somewhat higher write-offs experienced across all three business segments with no significant offsetting recoveries during the quarter.

Income from operations for the third quarter was $22.3 million, an increase of approximately $300,000, or 1% sequentially, and $1.5 million, or 7% from last year's third quarter. Income from operations for our aviation segment was $18.2 million, an increase of $1.5 million, or 9% sequentially, and $2.1 million, or 13%, when compared to last year's third quarter.

Our marine segment's income from operations was $10.2 million, a decrease of $1 million, or 9% sequentially, and $1.2 million, or 11% year-over-year. Our land segment's income from operations was $419,000, down from $782,000 generated in last year's third quarter, primarily due to higher compensation related to new hires to support global business growth plans in the land segment. When compared sequentially to the second quarter, our land segment's income from operations was relatively flat.

Unallocated corporate overhead was $6.5 million, a decrease of approximately $1 million, or 13% from last year's third quarter, and up approximately $200,000, or 4% sequentially. The company had other expense net of $2.2 million for the third quarter, compared to other income net of $1.7 million for the same quarter last year. That's a $3.9 million change, which was primarily due to a $1.9 million investment impairment charge, foreign currency losses caused by the devaluation of the U.S. dollar compared to certain foreign currencies as compared to foreign currency income reported in last year's third quarter, and a decrease in interest income due to lower average cash balances when compared to last year's third quarter.

The $1.9 million investment impairment charge was related to a two-week commercial paper investment with a par value of $10 million, which was rated A1 plus P1 when purchased. Prior to the maturity date of the investment, the paper was downgraded to junk by both S&P and Moody's, and the issuer subsequently defaulted on its repayment obligation at the maturity date. The commercial paper is no longer highly liquid, and therefore, a readily determinable fair market value of the investment is not available at this time. Based on the most current information available to us, we have estimated the market value of this commercial paper investment to be $8.1 million as of September 30. This information is subject to change and additional impairment charges may be required in the future in connection with this investment.

The company's effective tax rate for the third quarter was 24.9%, as compared to 23.4% in last year's third quarter. Excluding the impact of the investment impairment charge, our tax rate for the third quarter was 25.4%. The higher effective tax rate resulted primarily from additional provisioning relating to FAS Interpretation Number 48, or FIN-48, partially offset by a shift in the mix of the results of operations derived from our subsidiaries in tax jurisdictions with lower tax rates. For modeling purposes, you can use an estimate--estimated effective tax rate for the fourth quarter of somewhere between 24 and 28%.

Net income for the third quarter was $14.8 million, compared to $17.2 million in the corresponding quarter last year. Diluted earnings per share was $0.51 for the third quarter, compared to $0.59 for the same quarter last year. Once again, this year-over-year comparison is impacted by the investment impairment charge discussed earlier, which was $1.3 million after tax, or $0.05 per diluted share. Excluding the impact of the investment impairment charge, our return on equity was 14% for the third quarter, compared to 17% in last year's third quarter, and our return on assets was 4.2%, compared to 5.9% for the corresponding quarter last year.

At September 30, our cash, cash equivalents, and short term investments were $143 million, compared to approximately $220 million at June 30 of this year. During the third quarter, net operating cash flow was a negative $68.1 million, which was clearly impacted by rising fuel prices throughout the quarter.

Regarding our ERP project, we incurred an aggregate cost of $4.8 million during the third quarter - 2.7 million was capitalized and the remaining $2.1 million was expensed. Although the ERP expenses during the third quarter were approximately $600,000 higher than the amount we estimated on last quarter's call, the aggregate expenditures incurred during the quarter were in line with the estimate which we shared with you back in August. We currently estimate capital expenditures of $2.5 million and related expense of $2.5 million will be incurred in the fourth quarter relating to the ERP project, which we expect to go live in early 2008.

Days sales outstanding in the third quarter was 27 days, unchanged from the second quarter, and our payable days were 24, up from 23 last quarter. Inventory was $114 million, up $29 million from the second quarter, principally due to price increases, representing 3.3 days of sales. Inventory days in our aviation self supply model were approximately seven days, up two days from the second quarter.

Finally, as Paul has mentioned, we also announced the signing of a definitive agreement to purchase AVCARD this afternoon. AVCARD is one of the two largest global providers of charge card services to the aviation industry. As we have discussed on recent calls, we have been exploring strategic investment opportunities for some time. AVCARD's strength in the transaction processing arena immediately enhances our value proposition to our business aviation customer base. With no significant customer overlap, we see this as an exciting opportunity to offer the AVCARD value proposition to our customer base and the World Fuel value-added services to the AVCARD customer base.

We will be financing the $55 million purchase price with cash on hand, and we estimate the transaction to be between $0.02 and $0.04 accretive in 2008. This estimate includes the impact of related intangible amortization representing approximately $0.03 per share. Therefore, cash accretion is estimated to be somewhere between $0.05 and $0.07 per share next year. The transaction is expected to close within the next 30 to 60 days.

I will now turn the call back over to Paul.

Thank you, Ira. Operator, we can open up the call for question and answer.

(OPERATOR INSTRUCTIONS.) Your first question comes from Jon Chappell with JP Morgan.

Thank you. Good afternoon, guys.

Hey, Jon.

Paul, first question regarding the margins and particularly on the marine side. The volumes have been pretty robust and continue to be that way in all the businesses. Is this just a function of bunker fuel prices have been straight through the roof and maybe people are a little bit hesitant to use some of your hedging or other derivative value-added strategies and that's what been putting pressure on margins? Or is there more of a secular shift in what you're seeing from your customers?

No, I think that it's--look, one of the downsides of this tough climate can be anybody who's (inaudible) oil prices. It's just unbelievable. So when you're chasing a market that's moving that quickly, and it's something that we talked about as a phenomena in Q2, it's just the reality is that you're chasing a market that is just moving so much everyday. You've got a purchasing community that, of course, is naturally resentful of this market that just seems to be moving on them every minute. It does make for some difficulty in expanding margin.

It also in this kind of a market, you're absolutely correct, for anybody to take a strong position in the forward market, given the uncertainty of the current near term, it's very difficult to persuade people to lock in forward cover. So from that point of view, we've seen a relatively anemic response to any risk management in this near term.

However, it's important to note that if you look forward, there is some backwardization in the market. We hope that eventually if there's a sense that things are stabilizing by year-end, that maybe people will begin to look at the forward curve and see some opportunities for calendar '08. But right now, it's--we feel actually that what's most gratifying for us is the underlying strength of the business and the volume and that we've been able to hold onto margin as well as we did in a fast rising market and still see secular growth in our volume. So we're very happy about that part.

Are you becoming a little bit more concerned about the impact of oil prices not just directly on your business, but indirectly, in regards to how it's going to potentially impact your end customers, potential more risks or provisions for bad debts, or just slowing in volumes as maybe the airlines or the shipping companies come under a little bit more pressure?

It's a practical reality you have to deal with. And it's like Thomas Paine, eternal vigilance is the price of liberty. So we live and die by our vigilance on the global credit market, and we live and die by Frank and his team with extraordinarily care and due diligence on our customer base. There are always going to be write-offs in the business, but I would say that this is just a battle we fight and we're disciplined in every day. So there's no magic to this, it's just the hard work of discipline. Logic predicts that when you've got $70 oil back in June, and you've got $98 oil today, and people have had to live with the translation of that into the product stream at a time when there is some sense that the global economy is a little more skittish, needless to say, that could--if we went into any sort of prolonged recession--you could certainly see some negative reaction to the economy.

However, it's important to understand the backdrop. You've come off four or five years of just extraordinary returns in shipping. So I would say that never in the history of this industry in the shipping side have you seen such strong liquidity and sort of balance sheet and kind of a good piggybank relative to prior experience earlier in the last decade or so. So I would say that you're dealing with companies that are just better--they're just stronger than they have been in the past, so they're weathering it a little bit better.

But, of course, we do watch the rates, we do watch the cash flows, we do watch the debt structure, we do watch the new building program and who's buying ships. All of that goes into our valuation and, again, fortunately the great majority of our business is focused in the marine space on the large blue chips. In aviation, these are tighter trade cycles. And again, as you know, we've done a great job in the aviation space of migrating to a better class of customer and a far more diversified class of customer. You've seen us expand in business aviation. You've seen us expand into the blue chips.

So for all those reasons, we're not in any way casual, but it's just vigilance. It's just hard work and paying attention.

Right. Okay. One more on AVCARD, and then I'll turn it over.

Sure.

I just couldn't find any financials on their website. Are you guys giving any just big picture things, revenue, whatever, margin? And then, also, just from a qualitative less than a quantitative perspective, can you talk about the synergies that you potentially see here, any new geographies that they offered you, or just margin enhancing services that they provide?

Yes. We--I don't think we're in a position to give you all of the previous detail yet on the financials. But I can certainly say that strategically this opens up we think some very good opportunities. Look, we've talked about the business aviation space for several quarters now. It's an area that we're committed to. It's an area that we're bullish about. And it's an area that we think is a very important complement to our global fueling program.

One of the things that we have felt was missing in our offering was the ability to do sort of a total solution from a card processing point of view and to manage a certain level of information reporting to our customers, and a certain ability to marry our tremendously robust fuel offering with an electronic card procurement tool somewhere out there in the market, both domestically and internationally.

And AVCARD is a closed loop system and that's very exciting to us. They've got a tremendous brand. We think that complemented with our fuel, this represents a great strategic, if you will, fortification of our entire business offering in that space. And we couldn't be more excited. This is a property that we think has got great management, a tremendous team. They've done something very exciting. And I think they're very excited about this for their own business model, because the thing that was difficult for them to do at scale was what we've achieved on fuel. So it's a tremendously synergistic marriage between the two enterprises.

Okay. Sounds good. Thank you, Paul.

Thank you.

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

Good afternoon, early evening to you guys.

Good afternoon, Al.

Paul, I was wondering, if my math and I heard Ira right, I think there was 616 gallons on the aviation side in the quarter.

Yes, that's correct.

And does that translate into about $0.054 per--or gross profit per gallon?

Approximately. Yes, that's correct.

So then, if I look back to the prior year, it looks like it's down a little bit, but yet volumes are up substantially.

Right. And gross profit is up. Correct.

So rather than the "tough" cost environment or competitive environment, what's maybe driving that then, because I would have expected--?

--Well, remember, we've talked about this in prior calls. But there is a mix in business change. One of the things we've been doing is we've been trying to increase volume and our target has been to diversify the customer base to a better class of customer overall. And I think that we've been successful in doing that. And so, that did drive--mix of business has something to do with that overall margin. But I think that when we think about where--again, if you go back to some of the strategy of management, the idea to get the sort of volumetric flow through the business, so that we could achieve better economies of purchasing on [supply] and that drove our margins down close to below $0.03 almost a couple--sort of 1.5 to 2 years ago.

We've now moved that back up to this $0.054 range and we're doing that with a much more diversified base of customer and a higher quality customer. So we're actually very pleased with the overall look of what the aviation space is doing. It's definitely validated our ability to more deeply penetrate the market. We've certainly got global recognition and credibility at a level that we never enjoyed before. We think that's very positive. It's very promising. It's getting easier for us to market to the community. So, yes, there are stresses on the aviation sector just because of high prices. But the fact that we're holding onto that kind of margin and diversifying our base, we're very pleased with that. We think that's very, very good.

So should--I guess that margin profile with your expectations and the competitive environment is going to keep that same level going forward? Is that what your expectations are?

Well, as you know, we don't predict this with any precision going forward, but I can certainly say that we're comfortable with what's going on in margin right now. But I can't give you any specifics on whether that's going to track precisely into future periods.

Can you give us any granularity on the incremental volumes that will--and specific markets or class of markets within aviation that accounted for--?

--I would say it's pretty diversified. We've had success in the passenger space. We've picked up some very large contracts there. We've also had continued success in the cargo space. We've had some success in the military space. So I would say that it's across a fairly broad segment. It isn't just in one area. And I would say that probably while we have seen some growth certainly in Europe and Asia, we've seen pretty significant growth in the U.S. market as well. So what's comforting to us, what gives us comfort, Al, as to the model, is that we're seeing it across a geographic spectrum and we're seeing it across a class of customer sector. So that's good news from our point of view.

I would imagine the same comments may pertain a little bit more on the marine side as well, because that looks like a similar type of pressure on the GP line.

Yes. I mean, as you know, the marine space is a little bit different, because it's a spot market.

Right.

So there is always going to be an inherent variability on marine margin just because of the nature of port arbitrage. We've talked about this I think to some extent in the past where a little bit of--we're following our customer to various regions of the world. There's a lot more spot activity where they're evaluating the prices in one market versus another. And depending on how those markets shift back and forth, we may or may not get the business. So there is a little bit more variability in the marine margin historically, because of the spot. And we tend to round out that margin by price risk management as being a product offering. And when that's available, you have seen that we tend to do pretty well on overall volume and gross profit.

Right now, as we've talked about in Q2, in these kinds of markets that's not as attractive to the customer base. So that tends to fade from our business a bit. But it will be back. Edging is an integral part of strategic procurement and it isn't going away. It's simply market timing. But I would say it's a little bit different. Aviation's more of a contract structure for the most part, and marine is spot. But again, in terms of customer diversity, the marine space we have learned that our sweet spot is in the high blue chip companies. We believe in a high value-add relationship with these local fleets, and I think we've done well there.

Finally, I know this is probably not something (inaudible) necessarily talk or elaborate on. But could you take us back to the commercial paper transaction, and sort of what was the thought process of entering into that transaction?

Yes, I think if--Ira, you want to--?

--Sure. We had regularly purchased commercial paper for many years. We had a policy which we thought was prudent, clearly, only investing in highly rated paper. At the time we invested in this piece of paper, it was rated A1-plus by Standard and Poor's. And it was only a two-week investment, so from a risk standpoint we didn't feel that there was meaningful risk in that investment. And unfortunately, our timing could not have been any worse as that particular investment was downgraded within about 10 days of the day that we made the investment, just a couple days before we would have had our maturity and our money back in our bank account.

And I can tell you that was the only piece of commercial paper that we had outstanding. And we currently have no investments in commercial paper. Most of our investments are either in bank deposits or Treasury bill or note-related funds. So it was just an unfortunate circumstance in terms of timing. Once again, when you invest in an A1-plus rated piece of paper, historically, that's generally been a pretty safe investment, especially for only a 14-day period.

Right. And then, just to conclude on that. I assume you're just being conservative when you say there could be more charges forthcoming. Or what's required or what's the event that could trigger more? Or perhaps more positively spun, what would conclude this or get this sort of out of our minds to think about in terms of impact on the business?

Well, right now there's no real liquidity for this piece of paper. As things move along what will hopefully happen is the paper will start trading again. We did our best job to estimate where we think the paper would trade. But I can tell you that it's not a perfect science. We think we made a very reasonable judgment in terms of what we've reserved and we're watching it very closely on a day-to-day basis and we're hopeful that there aren't further impairments that we have to take. But we really have no way of knowing at this time where the ultimate conclusion will take us.

Okay. Thank you very much.

Thanks, Al.

Your next question comes from Christine Min from Calyon Securities.

Hi. Good evening.

Hey, good evening, Christine. How are you?

Good. With regards to the contracts on the aviation side, could you just remind us again the nature of the length of those contracts, and also, as the--as fuel prices fluctuate how easy it is to change pricing with regards to those contracts?

Remember, on the contract business aspect it's usually tied to a tender--a request for tender at a certain location, and you're negotiating a differential off an index. And once we've locked in that differential, that becomes the operative differential for the period of time. So from our point of view, the margin's very stable. That's why it doesn't have the kind of variability that you see in the stock market that we have in marine.

There's also other components of our business that we call ad hocs - we've talked about this before - where these are businesses that are not predictable, they're not on a scheduled route, it happens to be something that came up, it was some sort of a small series of flights into an area, or it was somebody who was diverted. Ad hoc is an ongoing and integral part of the business as well. That and we have more variability on pricing, and sort of more opportunistic to price it, if you will, a little bit like marine where it's kind of a spot ad hoc thing. And we just depend on the market and it depends on the visibility in that market and what's going on in the particular part of the world in which the ad hoc takes place.

So the reason that there's not as much variability is that when you do a contract you're locking in a differential and a fixed margin over the dedicated period of time. Those contracts can run from a couple of months to they could be a year. It could be a tender for a year's worth of listings off the differential at an airport, and it could also be a short term. It could be three months. So it just varies.

And you haven't seen any pushback in terms of the high volatility, the high increase in fuel prices from--for those contracts from the airlines?

No. I think the airlines pushback is more of a general one that's become very important. Look, look, I think I mentioned on the Q2 call that if you consider that a couple years ago the operating--the percent of operating cost attributed to fuel and aviation was about 18%, and by Q2 it had gone up to 26%. We're probably tracking close to 30%, if not greater, right now. So it's just the pushback has more to do with just the general resentment, if you will, of an entire industry that's got this huge operating cost that's highly variable.

It isn't so much a resentment about the specific contracts. I think that when they're evaluating the contracts, I think that the purchasing community understands that the market is the market is the market, and that they're going to negotiate the best thing they can in a given market. And some of their decision making is going to surround the quality of service and some of the operational support and all those other things that represent our value-add.

But at the end of the day, I don't think it's a resentment so much at us. I think they see us as solution providers. And to the extent that we're helping them construct hedging strategies, I think they see us as somebody who's helping, if you will, alleviate the burden they feel. But the general pushback is just to the fact that this was just a huge shock to the system. And it's something we experience as consumers ourselves driving our cars, and so does the aviation community and so does the shipping community.

And then, on the ERP side, you're expecting to go live in early '08. How much in terms of cost savings could you expect from that system going live and over what time period?

I think it's difficult to give that with any precision right now, Christine. I mean, this is an enormous enterprise that we've undertaken. It's an important project. I think it would be premature to give you that visibility. As I said in my opening remarks, we are very sensitive to the fact that we've--we have, if you will, asked our shareholders to be patient while we made a substantial investment in a transformative event in technology in this company. And we understand that there's a certain amount of frustration at not being able to get some sort of nailed down visibility of where all of this settles out or some sort of ratability on cost.

But we're getting close to that. I think the end is near. We would like nothing more than to be able to give you that in some detail. And I look forward to the day that we can. And I guess I can just ask you only to be patient with us for another quarter as we get this thing going. And as we get into early '08, I think we're going to have a pretty good feel for that. But I can tell you with absolute confidence that we have never been more support--I mean, this is absolutely critical to the kind of business model we're building.

And technology is a robust part of any value proposition that we're delivering. We are committed to it. We're very excited about the promise of this exercise. We're certainly sick of it. It's been double-duty for a lot of people in our organization over hours and hours and hours and weeks and weeks and weeks and months and months and months where they've been working double-duty. But I think there's also a collective sense of excitement that this thing is good for us. So when we know what that is, we'll give it to you. But I don't have it with any precision right now.

Okay. I look forward to it. Thank you.

Thank you.

Your next question comes from Scott Blumenthal with Emerald Advisers.

Good evening, gentlemen.

Hi, Scott.

Hey, Scott.

Paul, you think you have trouble predicting margins?

I'm sure you guys are having that problem (inaudible).

Okay. Not to beat a dead horse, but to follow up on what Al was talking about. And I guess this one's direct to Ira. We're about halfway through the quarter, just about. With the commercial paper transaction, if you were to evaluate that right now, Ira, could you give us any idea as to what you would do for the--what's the general direction - up, down - or wouldn't you do anything at this point?

I think it's fair to say that based upon the information that we have today, our opinion and evaluation has not changed at all. So I think we'd really be at the exact same spot as where we were on September 30. There is no new information that's come to our attention that would make us feel any differently at this point in time.

Okay. Just wanted to get that out of the way. And Paul, you mentioned on a couple of occasions during your remarks that you're moving the company towards a higher quality customer, yet we saw a pretty significant increase in the write-downs for bad--for bad debt. Can you talk about what's kind of changed there? In the first couple of quarters we had a benefit from bad debt. And it's kind of turned around almost--well, a little bit more than 180 degrees.

Yes. I can talk about it in the business sense. We are in the business of extending credit and there will from time to time be write-offs. I mean, it's just a fact of the business. And I would say that to some extent, it's just timing. There are aberrations. In this case, I would say in marine, these are pieces of pieces of business that were out there that you fight--it's a fringe part of the segment. These are not to our core customers. These were things that we chased, we fought, we took our best shot, we collected as much as we could, and we wrote off the balance. It's as simple as that.

So I don't believe that there's any--I don't believe that this is indicative of any sort of more fundamental malaise within the portfolio. We have worked very vigilantly, and I commend Frank and his team and also the marketing group, to really make a decision, a conscious decision, that we wanted to be living with a level of ratability and predictability in our portfolio. So, again, I would say that we--while we did take some write-offs, that's just--it's going to happen from time to time, but I don't think it's indicative of any commentary about the general portfolio.

And Scott, keep in mind that in the first and second quarter we had some recoveries that had an impact--a clear impact on the result on the bad debt expense line, which we didn't have this quarter. This quarter we had generally a reasonable write-off experience, nothing out of the ordinary, but didn't have the offset that we happened to have in Q1 and Q2, which led to a number which is generally consistent with the long term average over the last couple of years for our quarterly bad debt expense. It's somewhere around $1 million.

Okay. So if we look at this quarter, it's pretty safe to say that this is part of the moving towards the higher quality customer and the non-core customers that Paul mentioned probably are not going to be customers that we're going to be dealing with going forward?

I would say that's certainly true in the marine space and in the aviation it's something similar as well. Again, look, I think that we feel pretty good about the overall portfolio and we feel really good about the discipline of our procedures and how we look at this. But it's just a reality. We do extend credit. You're going to have write-offs. It just is what it is. And as Ira said, we happened to be in a quarter where we didn't get any recoveries to offset it. So it is there, but I would say that it was more on the fringe and it's not at the core of our sweet spot in terms of customer base.

Well, that's why people use World Fuel, right, Paul?

That is absolutely correct. Thank you for making that sales pitch. I appreciate that. (Inaudible) we appreciate that, Scott.

Okay. Just a couple others. Do you have any idea--or I'm sure you do. Can you give us some clarity on what's going on in the current quarter since, like I said before, we're kind of halfway through it, thought we were chasing prices up in Q3. Q4 has been even a lot more drastic. Can you talk about your ability to kind of keep up with the price--.

--Sure--.

--The price changes and what you can do?

I'll do my best to comment on that. Again, we're very loathe to give any specific comment about the current period we're in. However, I would say that World Fuel enjoys an interesting competitive advantage in the market. We've got a very strong balance sheet, we've got tremendous liquidity, we've got an excellent name in the market, and we are a best in class partner to a global community of suppliers that are looking to continue to sell the product in a high price market. And I think that we've done very well at that. So I would say that in some ways, as the rubber meets the road in a very difficult market backdrop, we are very well positioned to succeed.

There are certainly smaller, less capitalized companies that are struggling under the stress of this. The working capital constraints are very severe. Cash flow becomes a problem for people. People who are dealing with the less creditworthy part of the market are going to be even more stressed than they ever were.

So again, let's go back to the foundation of what the World Fuel value proposition is all about. We represent a value-add partner to a global community of suppliers that are looking to rationalize their downstream, rationalize their credit exposure, and sell to our balance sheet and our reliability to continue to move product. We've become more important than ever to them.

On the customer side, they're reeling from the market dynamics. So again, our demand expertise, our ability to give them visibility, to help give them guidance, to help them optimize as best they can under difficult circumstances, is a value-add. So I think that--but the rising prices did benefit us in Q3. If, for example, prices were sharp--to sharply drop, that could negatively impact us as well. So we might pick up some margin, but you also might have some of the ineffectiveness in the hedging and we might get hurt there, too. But by and large right now, as you say, we've been in a rising market and I think that we're adding good value. And it's a competitive differentiator for us to be who we are.

Okay. And just one kind of housekeeping. Ira, can you quantify or give us a general idea as to what the inventory benefit was this quarter?

It's really tough to break that out separately. In the first couple of quarters, we walked through this and didn't provide a number then. So unfortunately, I think the answer is we--I don't think we're going to change that pattern. Clearly, we did have a benefit, but difficult to quantify for you with a finite number for Q3.

Okay. I'll try again when I get you live.

And one of the things we--one of the things we try to do, Scott, is share some more information with you in terms of our inventory levels and the cost of our inventory, which you--on which you could derive a cost per gallon. And we've let people make their own conclusions based upon that information. But it's tough otherwise to share anymore detail than that.

Okay, fair enough. Thanks.

Your next question comes from Alex Brand with Stephens.

Hi. This is actually George Pickle for Alex Brand.

Hey, George. How are you?

Doing well.

(Inaudible) use Alex today?

Let's see here. Just to clarify, Paul. Did you say at the beginning of the call that if--because of your aviation inventory, if you see a spike in the price at the beginning of the quarter, you'd benefit from that?

Yes, I didn't phrase it that way. No.

Okay. Fair enough. Briefly touching on the AVCARD acquisition, without getting into any details, is this the type of business and does it have the capabilities, both with the sales and with the IT, to transform to the marine or land business?

It's an interesting question and I appreciate you asking it. We certainly--the primary deployment of this card has been in the business aviation space. It's a robust offering. It's got a great sort of technology base to it. It's got a great processing capability to it. It's got a great reporting component to it. So we're very excited about its capabilities. It's certainly not a stretch for us to want to entertain the possibility that we could begin to use that same technology with possible application in other parts of our business. I would say it's a little premature to do that, but certainly we believe that this an excellent piece of technology. It's a very, very good team. We like very much what they've built.

But I think our first and foremost objective is to allow them to grow what they're already good at into a space where I think that they've got opportunity absolutely to grow in business aviation, which is growing around the world. I think that our first objective will be to allow them to grow their core competence, and then also to begin to dial in more of our synergy from a fuel supply point of view.

Now, having achieved that and as we get working down the road, I think then we'll begin to sort of branch out and look a little bit more deeply into how it might have application in other segments. But certainly, that was one of the attractions to it. We just can't give you any specifics on what form that might take at this immediate juncture.

That was great. Thank you so much. And lastly, this might be a question for Frank, actually. We've seen bunker fuel spike from around 400 to over 500 in the past few weeks. Does that change your approach to credit terms? Are you having to cut out people that may not be able to meet certain limits because of volume constraints? Or has the customer mix shifted enough to the blue chips that credit issue basically isn't an issue--I mean, so the credit limits basically aren't an issue?

George, the answer is that in a rapid change in pricing, particularly when the prices are going up as they have most recently, we will be--we have been reviewing literally all of our major credit lines right down the list in both marine and aviation. We simply go down every one, we look at how this is impacting them, whether we--if prices go up by 20% and their listings remain as usual on schedule, then their receivables are going to go up by 20%. That's an easy one. So you either increase the line or you shorten the days or you work something else out. But we do that right down the line in marine and aviation. We've been doing it very actively over the last few weeks.

It ends up being a combination of both, George. In some instances, you're going to just shorten the term because you don't want to extend the actual exposure. In some cases, you have enough faith in the underlying financial strength of the company that you're going to kind of flow with them and let them go ahead and over lift, if you will, or we reevaluate the line. So it's a combination.

Great. Thank you for your time then.

Thanks.

Your next question comes from the line of Jim Larkins with Wasatch.

Hello. Just on AVCARD, where are they from an IT perspective and how did this--does that business change or take advantage of what you're doing on your own internal initiatives?

From an IT perspective, what they've done is been able to give very high levels of reporting and allow the ability for their customer base, in this case business aviation aircraft, to transact all over the world, not only fuel, but also on related aviation services, and then be able to capture that information and deliver it back in a very, very good format to their customer base.

So we think that this is a complement to our sort of back office, commercial supply of lots of [tickets], and that's what we came from. We came from a commercial background. So certainly, it's very interesting to us, because some of these very customer-friendly interfacing capabilities, some of this reporting is very good. But initially, it's completely separate from our ERP initiative. This is completely different from the enterprise that we're putting together now. So fortunately, we don't have any integration issues. It's a standalone thing. It's been very successful in its own rite. And our CIO is very happy with the fact that it's on its own. It's not something that presents a challenge near term. So I think that over time, it's a question of what we can do to scale it even further and do other things with it, because it's a pretty robust system.

Okay, great. And then, on the marine business, is it fair to say that competition is a little bit more intense right now, just given that your customers are, like you said, generally pretty healthy, have nice balance sheets, and therefore it's a little bit more competitive for you to maybe capture that customer that others in the past maybe haven't offered credit to and you've been willing to? Or just describe a little bit more the competitive environment.

Yes. We always have--we're always going to have a competitive landscape out there. We have to be realistic. It's disingenuous to think that we're going to live a life without competition. But I think the reality is it's a matter of staying very focused. We've got a strong balance sheet. We've got great liquidity. This is a distinct competitive differentiator from a lot of the players out there. And we also have the flexibility and the agility of being an asset light model. We have achieved volume growth, which means we're getting market share. I think that is validation of the success of the model, Jim. But, look, we're never casual about competition. You always have to be vigilant. You can't--the day that you think you've got it made, you don't. So there will always be competitors. The market will invite them in.

But I think we've done a very good job of staying very focused on what we are good at. And I would say that one of the things that we've been very good about not doing is getting distracted or sucked into parts of the market where it's a more competitive landscape that we're just not really ready to fight in. We've been very good at kind of carving out our zone and drilling away at it and executing at a very high level that's hard to replicate. So I think that's going to be our continued focus.

Okay, great. And then, can you give us any update on stock buyback? I don't think you mentioned it anywhere in your comments, and I haven't gone through the Q to see if any activity happened there yet.

Sure. No, we have not, Jim, and I think it's because we anticipated--as you see, we just used a bunch of--we'll be using some cash to do this acquisition. I think there are certainly other opportunities to evaluate things in the market ahead of us. As you know, we've always been reluctant to buy back stock or increase dividends or do any of those things when we've still felt that there was a better opportunity to either deploy that cash in the business, which, of course, in a high rising market we've been able to do.

Part of the reason that we can fight off that competitive landscape that you refer to is that we've got the liquidity to be able to keep up with the market regardless of what the prices have done. So that's a very distinct competitive advantage. Not everybody can do that. And the fact that we've also now, with all the private equity insanity having taken a little bit of a cool off period, I think we talked about in Q2 one of the frustrations for us over the last couple of years is that we just saw lots of crazy numbers being thrown around because everybody could lever everything up. Well, that game seems to be a little bit over. It's backed off a bit. We believe that there are going to be opportunities to use our cash and one of them was AVCARD, which we think was a great acquisition.

So I would say that stock buy back is not in the cards right now, but that's not to say that, again, as I think I mentioned in Q2, we have to take it under consideration. It's certainly part of the toolbox. It's one of the things that we can avail ourselves of, but it's not the focus at this moment in time.

Okay, fair enough. The last question, just on land. Can you just maybe talk about your growth stance on land right now? It seems like it's not growing maybe as rapidly as I had thought it would. It seems like you are focused a little more intense on aviation right now. Is it fair to say that you're still kind of incubating that business and not really focusing on rapid growth there right now?

Well, I would say that incubating is I guess still a good word. Thank you for that. I will quickly appropriate that and use it in my comments about that. But I would say that more deeply, we--part of that incubation is you're filling out an organization. We've been hiring talent. We have identified a good position in the market. We're getting I think what is a very, very positive response. We've now become part of what's sort of transforming the business model. And I think that volume was up 29% year-over-year, so we're getting the real results.

Now, I understand it is a relatively immature part of our business. We're still playing sort of the growth and expense game as we size the thing properly. But I would say that, yes, relative to some of the stuff that's been going on in aviation, it's relatively smaller in scale. But again, I think as you've heard Mike Kasbar talk about in the past, what's exciting about this business is that the market is bigger than the other two industries combined.

So we still think there is enormous opportunity in this space. We are growing it in the most prudent way we think we can. And I think that there are number of opportunities. As I mentioned in my opening comments, we see a number of opportunities in that space and we will be pursuing them. And I tell you, if anything, our feeling is we are more excited about that space than we ever were. So it's just growing it.

Very good. Best of luck. Thank you.

Thank you very much, Jim.

Your next question comes from the line of Greg Eisen with ICM Asset Management.

Thanks. Good afternoon. I guess from the way you answered that last question--I was going to ask does the AVCARD acquisition eliminate the need for a land segment acquisition to really jumpstart the business, seeing as it gives you that card capacity. Would you still be in the market for an acquisition in the land business that kind of really gets that business going and gives it breadth?

Yes, they're different things. The AVCARD we would have done regardless of what we were doing in the land space. And whether at some point in the future it might complement what we're doing in land, it's premature to tell you. But in no way, shape, or form does it preclude our strategy in the land space and the opportunity to acquire in that space completely independent of AVCARD.

Okay, I see. Turning to the (inaudible) of the land business, really the different products - jet fuel, call it naphtha, versus land business gasoline or diesel. They're different products, yet the margin on the air business seems to be consistently in the $0.05-plus range per gallon. In the land business it runs around $0.03 per gallon. Is that just the structural nature of those businesses that it will always be a lower margin business in the land-based business?

Well, "always" is a big word. But I would certainly say there are definitely some structural differentiations there, and it has to do with, again, not just the structural, but also mix of business, type of customer, the terms involved. There's a bunch of factors that play in with margin optimization, if you will. But I would say that--remember, land at this time is relatively modest in size, relative to the scale and scope of our 2 point-something billion gallons in aviation on a global basis dealing in all sorts of international markets.

So remember, when you look at the aviation space, it represents a blended overall margin of everything going on from Peru to Argentina to China to Frankfort to Heathrow to JFK to Miami. So there's a lot going on and it involves a customer base that varies from cargo carriers to big passenger, blue chips to whatever. The land space has been--at least primarily--initially, has been domestically focused in the United States. And as Mike has talked about in the past, we do have some operations developing in the U.K. and Brazil that are smaller in scope at this time. But it's been primarily focused in the U.K., so therefore, it's a more generic class of customer. So to that extent it's more structurally predictable at these levels.

But always is a long time. And it is a market that's international. It's global in scope. And I think we've only just begun to penetrate it. So we'll just have to kind of look and see what the margin does over time.

Okay. That's it for my questions. Thanks.

There are no further questions at this time.

We thank you all for joining us. We appreciate your continued support and we look forward to talking to you for the Q4 call later in the spring. Thank you very much.

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