World Kinect Corp (WKC) 2007 Q4 法說會逐字稿

Good afternoon. My name is Marcello, and I will be your conference operator today. At this time, I would like to welcome everyone to the World Fuel Services fourth quarter 2007 earnings call. All lines are placed on mute to prevent any background noise. After the speaker's remarks there will be a question and answer period. (OPERATOR INSTRUCTIONS). As a reminder, ladies and gentlemen, this conference is being recorded today, Thursday, February 28, 2008. Thank you. I would now like to introduce Mr. Frank Shea, Executive Vice-President and Chief Risk and Administrative Officer. Mr. Shea, you may begin your conference.

Good evening, everyone. And welcome to the World Fuel Services fourth quarter conference call. I am Frank Shea, EVP and Chief Risk and Administrator Officer and as is evident, I'm doing the introductions on this evening'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. Michael Kasbar, President and Chief Operating Officer, Ira Birns, Executive Vice President and Chief Financial Officer, Paul Nobel, Senior Vice President and Chief Accounting Officer. By now you should have all 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 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 Chief Executive Officer, Paul Stebbins.

Thank you, Frank.Good afternoon and thank you all for joining us. Today we announced earnings of $18.1 million, or $0.63 per diluted share for the fourth quarter of fiscal 2007. These numbers include a $1.7 million after tax impairment charge related to the write down of capitalized software costs from a business we acquired in 1998. Overall, we delivered solid earnings performance in Q4. And our return on equity, excluding the software write down was 16.8%. [technical issues]

Extremely volatile operating environment. We continued to deliver robust underlying growth across all segments. In our aviation segment, we were pleased to announce the acquisition of AVCARD, which offers a private label charge card and sells aviation fuel and related services to the general aviation industry. AVCARD's robust offering has been an excellent strategic complement to our core business. They came with great management depth and we have already begun to leverage their expertise within our existing organization. This acquisition has generated considerable interest in the aviation market and have embarked on a number of successful joint sales initiatives with the AVCARD team. We could not be happier with the AVCARD acquisition and its positive impact on our business.

We are also pleased to report that the overall aviation industry continues to prosper. Boeing set a record for plane orders in 2007, with over 1400 commercial jet orders and deliveries of over 440 aircraft. Airbus had over 1200 orders and delivered over 400 planes. Our own core aviation business remains strong in the quarter with gross profit up sharply on a sequential and year-over-year basis. Furthermore, our self-supply model continue to drive value as we benefited from increasing prices throughout Q4.

Looking forward, IATA expects airline industry profits in 2008 to be around $5 billion, down from their previous estimate of $7.8 billion. This decline is directly attributable to the rising costs of jet fuel, which increased 20% in the quarter, and is expected to increase some $150 billion in 2008 and represent 30% of airline operating costs. This market backdrop only serves to highlight the strategic importance of fuel and presents continued opportunity to expand our services across a broad spectrum of customer groups, including business aviation, cargo, passenger, charter and military service. Our marine segment delivered great results in Q4, posting an increase in volume at record gross profit. Volume and operating income were also up quarter to quarter and year-over-year. It is clear that our strategy of deeply analyzing supply markets and promoting intense customer focus had paid dividends. Our worldwide marine leadership team has done a great job and we are well positioned for 2008.

Recent industry trends favor our marine business model. During 2007, average bunker prices rose 20% and the customers of large container liners are beginning to accept the bunker charges need to be separated from freight rates. The idea of imposing a floating fuel surcharge as being adopted by some major players in the industry which is a significant departure from the traditional fixed term surcharge. One industry leader, Maersk Line, has announced that it will introduce a bunker adjustment factor for its fleet. The move to bifurcate fuel and freight charges is a development which highlights the importance of fuel cost to large fleets and bodes well for our services, particularly in the area of price risk management.

On a more macro level, the marine space has demonstrated resilience in the face of an uncertain economic outlook. Tanker rates rocketed in December with BLCC rates hitting levels not seen since November of 2004. The increased demand forecast for 2008 is up for tankers across the spectrum of BLCC's Suez Max and After Max class vessels. On the container side of the market, demand is forecast to remain relatively healthy, with projections of 9.7 % growth in 2008 and 9.8% growth in 2009.

On the supply side, the container fleet grew 11.6% in 2007. And growth is projected at 13.4% in 2008 and 12.7% in 2009. This will create some supply demand imbalance as capacity expansion is expected to outstrip demand growth by some 3.7% in 2008, and close to 3% in 2009. In the [drive bolt] market, the year ended on a soft note with rates off from record highs seen in November. In the mean time, total fleet capacity is projected to grow at just over 10% in 2008.

Overall we feel good about the shipping market. The industry has enjoyed several very strong years and is well positioned to weather potential downturn in the global economy. And it is it worth noting that historically, we have tended to benefit in down markets as oil companies grow more conservative on credit and customers are pressured to cut costs. In our land segment, we were pleased to see volume growth and expect profitability to improve as our investment in people to populate the organization begins to stabilize and then the new technology platform enables us to scale.

This call would not be complete without some mention of our much discussed systems implementation project. We were pleased to report that our ERP system went live early in the first quarter and it was a successful launch. The enormity of this undertaking can not be overstated, and our success in delivering this system is an important milestone for the company. We were grateful to our global team whose effort and commitment were truly extraordinary. They can share in the pride of delivering a robust platform for scaling our global business. With this major project behind us, we look forward to having these dedicated members of the World Fuel team return full time to their normal duties and focus on the many opportunities we see in the market.

2007 was a challenging but transformational year for World Fuel. We saw an unprecedented level of earnings volatility associated with our successful self-supply model, which was driven primarily by significant price volatility. We had a number of key people consumed with the challenge of putting in a global ERP platform which distracted them from the core business. The meltdown in the financial markets contributed to a difficult operating environment and a $1.9 million impairment charge against a routine two week investment of A-1 plus p1 commercial paper. Despite all this we have delivered robust fundamental growth in volume, gross profit and completed a significant strategic acquisition. Notwithstanding the challenges of 2007, we believe the company's fundamentals and global market position are stronger than ever and we look forward to 2008.

We would like to thank you, our shareholders, for your continued support and we will now turn the call over to Ira Birns for a discussion of the financials. Ira?

Thank you, Paul and evening, everyone. Revenue for the fourth quarter was $4.1 billion, up 15% sequentially and up 58% compared to the fourth quarter of last year. Our marine segment revenues were $2.3 billion, up 17% sequentially and 63% year-over-year. The aviation segment generated revenues of $1.6 billion, up 12% sequentially and up 52% from last year's fourth quarter, and finally our land segment grew to $181 million, up 18% sequentially and 60% from last year's fourth quarter. These increases in revenue were significantly impacted by the sharp increase in fuel prices over the course of 2007, with the most pronounced impact occurring during the fourth quarter. Before I review our results by segment, I would like to point out that our aviation results include AVCARD's result of operations from December 1 through year end.

Our aviation segment sold 601 million gallons of fuel during the fourth quarter of 2007, down 2% sequentially, but up 14% compared to the fourth quarter of last year. Our marine segment's total business activity was 7.1 million metric tons, up 3% sequentially and year-over-year. Fuel reselling activities constituted 75% of total marine business activity in the quarter, consistent with the third quarter. Our land segment continues to grow, selling 74 million gallons during the fourth quarter, up 6% sequentially and up over 24% compared to the fourth quarter of last year.

Gross profit for the fourth quarter was $73.8 million, an increase of $11.6 million or 19% sequentially and $16.1 million or 28% compared to the same quarter a year ago. Our aviation segment contributed a record $39.1 million in gross profit, an increase of $5.8 million or 18% sequentially, and $10.5 million or 37% over the fourth quarter of 2006. Similar to the second quarter of 2007, the sharp rise in jet fuel prices during the quarter resulted in an imbalance between the average cost of our jet fuel inventory and higher market prices. This imbalance was the principal driver of the sequential increase in gross profit from the third quarter. Our self-supply models jet fuel inventory position was approximately 33 million gallons at year end, down 7 million gallons when compared to the third quarter. The dollar value of our related jet fuel inventory decreased to approximately $86 million from $88 million in the prior quarter. While gallons of inventory dropped 17% sequentially, the dollar value of our jet fuel inventory only dropped 2% due to the impact of rising fuel prices. For the record, jet fuel market prices climbed nearly 20% during the quarter from approximately $2.28, to $2.67 per gallon.

Our marine segment also delivered solid results, generating record gross profit of $32.8 million. An increase of $5.9 million or 22% sequentially and $5.4 million or 20% year-over-year, benefiting from significant price volatility during the fourth quarter. Our land segment delivered gross profit of $2 million, a decrease of 8% sequentially, but an increase of 10% from the fourth quarter of 2006. Operating expenses for the fourth quarter were $49.3 million, an increase of $9.3 million or 23% sequentially and $10.4 million or 27% year-over-year. Of the sequential increase, $2.4 million was related to compensation and $7 million was due to an increase in general and administrative expenses.

With respect to compensation, the sequential increase included the impact of newly hired employees in the third and fourth quarters of 2007. As we stated over the course of 2007, we have been consciously investing in our infrastructure by building our global team to support growth initiatives in all three segments of our businesses throughout the world. We have added over 100 employees to our global team in 2007, excluding the impact of the recent AVCARD acquisition. And we believe that heavy lifting is now principally behind us. While we will always be seeking out talent to further strengthen the organization, we expect the pace of head count growth to slow over the course of 2008.

Our bad debt expense was $1.3 million, down $1 million from last year's fourth quarter but consistent with the third quarter. The sequential increase in general and administrative expenses includes the impact of the $2.4 million non-cash impairment charge relating to the write down of capitalized software development costs associated with an aviation flight planning company which we acquired in 1998. The increase also includes the impact of $1.1 million of depreciation related to software used in the data conversion process related to our ERP project which was all booked in the fourth quarter as well as one month of AVCARD operating expenses. Unallocated corporate overhead was $8.1 million, an increase of approximately $600,000 from the corresponding quarter a year ago, but up approximately $1.6 million sequentially. Regarding our ERP project, which Paul mentioned earlier, we incurred an aggregate cost of $5.7 million during the fourth quarter, of which $2.9 million was capitalized and $2.8 million was expensed. Both amounts are only slightly above the amounts estimated on our last earnings call.

For the full year 2007, we capitalized $10.5 million of project costs and expensed $7.7 million. As we will incur some stabilization-related expenses in the first and second quarters of 2008, in addition to beginning to depreciate the capitalized project costs, our IP-related costs will increase in the first and second quarters before decreasing in the second half of the year. Also, please note that costs related to employees who have been directly associated with the development of the project were capitalized in 2007. We will once again impact compensation expenses beginning in the first quarter. So I understand I just covered a lot of pluses and minuses.

So I will try to help you model our operating expenses going forward. I would assume overall operating expenses including AVCARD of approximately 46 to $50 million in the first quarter, and full year operating expenses of approximately 185 to $200 million for the full year 2008. Income from operations for the fourth quarter was $24.6 million, An increase of 21% sequentially and 43% from the fourth quarter of last year. Excluding the impact of the $2.4 million impairment charge recorded in the fourth quarter. Income from operations brought aviation segment was $18.1 million, an increase of 13% sequentially and an increase of 40% when compared to last year's fourth quarter. Once again after excluding the impact of the $2.4 million impairment charge.

Our marine segments income from operations was $14.6 million for the quarter, an increase of 44% sequentially and 24% year-over-year. Our land segment had a slight loss from operations of under $100,000, consistent with a loss in the fourth quarter of last year but down from a $400,000 profit in the third quarter due in part to higher compensation related to new key employees who are driving global business growth strategies. The company had other income net of $600,000 for the fourth quarter, compared to other income net of $2.3 million for the same quarter a year ago. This $1.7 million change was primarily due to a decrease in interest income due to lower average cash balances and lower interest rates on our investments when compared to the fourth quarter of last year.

Heading into 2008, we expect to incur net income expense principally related to capital employee to purchase AVCARD and support increase working capital requirements driven by higher fuel prices. For modeling purposes, I would assume interest expense of approximately $1.5 million for the first quarter. Sequentially, other income net increased by $2.8 million, primarily relating to the $1.9 million impairment charge recognized in the third quarter ,related to a commercial paper investment. Using methodology consistent with the third quarter, we estimated the market value of this investment at $8.1 million at the end of the fourth quarter, consistent with our valuation at the end of September. Therefore, no further write down was necessary in the fourth quarter. This information remains subject to change, and depending on the ultimate resolution of this matter, additional impairment charges may be required in the future in connection with this investment. As discussed last quarter, we have no other similar investments and is also worth noting that we also have no option rate security investments which are no longer permitted under our short term investment policy.

The company effective tax rate for the fourth quarter was 27.4% as compared to 17.5% for the fourth quarter of 2006. The higher affective tax rate resulted from additional provision related to FIN 48 as well as a shift in the mix of the result of operations derived from our subsidiaries in tax jurisdictions with higher tax rates, principally the United States. For modeling purposes, you use an estimated effective tax rate for the first quarter and the full year of 2008 of 23% to 27%. While we were on the topic of accounting pronouncements, as you may know, in September 2007, the Financial Accounting Standards Boards issued FAS 157, which focuses on the fair value measurement of assets and liabilities. We adopted FAS 157 in January and as a result, recorded a cumulative adjustment to retained earnings of $2.8 million pre-tax related to the deferred gains of derivative transactions. These transactions were entered into in 2007 but do not settle until 2008. Accordingly, the related revenue in gross profit related to these transactions will not be recognized as income in 2008.

Please be aware of the accounting change can create lumpiness and earnings going forward as revenue and gross profit related to certain of our derivative transactions must now be recognized up front rather than over the life of a transaction. The following statistics exclude the impact of the impairment charges booked in the third and fourth quarters. Net income for the fourth quarter increased 22% sequentially, and 15% year-over-year and diluted earnings per share increased 22% sequentially, and 15% over last year's fourth quarter as well. Return on equity was 16.8% for the fourth quarter, compared to 16.6% for the same quarter a year ago, and our return on assets for the fourth quarter was 4.8%, compared to 5.6% for the corresponding quarter last year.

At December 31, our cash, cash equivalents and short-term investments were $44 million compared to approximately $143 million in September 30. Please be reminded that our quarter end cash position was impacted by the December acquisition of AVCARD or approximately $55 million. Despite the unusually sharp spike in oil prices in the fourth quarter, which really is from $81 at the end of the third quarter to $96 at year end, our net operating cash flow was only negative $51 million and our liquidity position remains strong. A testament to the strength of our balance sheet, which remains a competitive advantage for us during this period of volatility and rising prices.

To further enhance our liquidity position, in December, we amended our existing credit agreement. More than doubling the size of the facility from $220 million to $475 million, and extending the maturity date of this unsecured facility through December 2012. This provides us with a significant liquidity to support both organic growth initiatives and strategic investment opportunities. For the complete details regarding our amended and restated credit agreement, please refer to the Form 8-K that we filed on December 26, 2007.

DSO in the fourth quarter was 28 days, up one day from the third quarter and our payable days outstanding were unchanged at 23 days. Inventory was $103 million, down $11 million from the third quarter, representing two days of sale -- two days of sales, down one day from the third quarter. Therefore, our overall cash conversion cycle remain unchanged quarter over quarter. Inventory days in our aviation self-supply model were five days, down two days from the third quarter. In closing, well, Paul cited several of the challenges we faced in 2007, we are proud of several key accomplishments achieved during the year, which will pay dividends for years to come. We have significantly strengthened our team by filling several key positions within the company. We upgraded our systems capabilities, working very hard all year to prepare for the successful rollout of our new ERP platform at the start of 2008. We acquired AVCARD, and adding to our suite of capabilities, our aviation segment and finished the year with strong results in the fourth quarter. I would like to thank and congratulate my fellow employee for their contributions toward these accomplishments over the past year. On that note, I will turn the call back over to Paul Stebbins.

Thank you, Ira. Marcello, if you'd be kind enough, I will like to open it up for Q&A. Thanks.

Yes, sir. (OPERATOR INSTRUCTIONS). And our first question is from the line of Alex Brand with Stephens. Please go ahead.

Thanks. Good evening, guys. Congratulations on a nice quarter.

Thanks, Alex.

I guess, Paul I'd first like to just sort of get your comments on the environment. It sounds like you guys had some working capital that was drained, but I assume that's just rising fuel. It looks like your terms were stable. What do you seeing -- or are you getting any kind of push to pay sooner? Is it affecting credit terms? If not for you, what do you see with other suppliers in the market?

Sure. Certainly a good question. Thank you. I would say that, no, we haven't seen so much of that on our front. Again, we have -- we enjoy the benefit of a huge competitive differentiator which is our balance sheet and our liquidity. I think if anything I would say that from a supply perspective, we represent sort of safe haven and Safe Harbor. That balance sheet is very important to our suppliers. They look at it and it becomes the competitive differentiator for us and gives us some significant competitive advantage. Certainly for smaller privately held companies that are less well capitalized, this is not an easy market to be doing business in. There's a lot of volatility, prices have been high. We seen some evidence that it's certainly put pressure on some of the competitive landscape.

So from our point of view, I think that we have said all along we knew that prices could remain high and if nothing else they would be certainly up and down. And we wanted to keep our powder dry and be able to play in the space and we have done that very well. As Ira said, the uses of cash sequentially, where the acquisition of AVCARD so it's nice to be able to pony up the cash and buy the acquisition and not have to worry about our balance sheet or ability to protect our core and we also put $51 million into the business and that was over 20% jump in prices. From that perspective, prices could jump again and we would be in a position to play. That's not something that everybody else in the market can say. I think we are in a good position and, you know, we will stay focused on that mission.

Now you mentioned how it might be affecting the smaller players. Are you seeing any bankruptcies yet?

No. I don't think that's typically what would happen first out of the box, Alex. What you will see with some of the smaller resellers and stuff in this space, it means their credit lines get squeezed. The oil companies are more sensitive to this. We had conversation with large global oil companies whose financial departments are concerned more than they have been in the past about some of the more fragmented smaller intermediaries that they historically had relationships with. And they are looking to rationalize their relationships and consolidate them with larger players. Certainly we feature very prominently in their calculus as it relates to what kind of counter-parties they want to do business with. Again, we enjoy very good dialogue with these people at the top of their financial organizations. It hasn't manifested itself so much in bankruptcies as it is that we know some of these smaller players are being squeezed. It's difficult for them to do the volumes. We think it benefits us.

Does it manifest itself in smaller players being more willing to sell at reasonable prices? Is it good for your acquisition opportunities?

There is no question that when you look at what's happened in this last year, the complete sort of disappearance of the private equity machine and a lot more sensitivity on the availability of credit, as Ira said, a lot of our planning ahead and kudos to Ira who understood that by changing that bank facility it opened up a world of opportunities for us, in terms of being able to view the landscape in way others don't have access to the resources to do. Yes, we think it presents opportunities. Again, we kept our powder dry. We think it's a competitive differentiator. As Ira points to the 8-K, we have a lot of flexibility in our bank covenants and we've got a very supportive group of banks. So we have a lot of latitude in terms what we can do in this market.

And I will list housekeeping and then let someone else have it. The software writeoff in the quarter, you confirm what that was? Is that all that needs to be written off?

That's the end of it. Has to do with an acquisition that goes back to 1998 when we did the aviation acquisition of BaseOps which is a service group. Along with that came some flight planning software and every year as you know, we spend a lot of energy going through a major systems review this year, and at the end of the year it's a routine review of impairment charges. We don't have anything else like this in the system. This is unique and has a specialized application and we continue to use it. It was the right thing to do relative to the overview.

Okay. Great. Good color. Thanks a lot.

Thanks.

Our next question is from the line of Jonathan Chappell with JPMorgan. Please go ahead.

Paul, I found your comments about Maersk and some of the container lines using these floating fuel surcharges, pretty interesting. I guess it's because I'm a shipping guy. You mentioned it would help your price risk management business. Could you give more detail as to how this may benefit World Fuel from first of all your core fuel basis but other value added products that you offer to your customers.

Sure. I think these large global fleets realize they are under enormous pressure because what the customers -- the shipping companies themselves have had a very hard time managing this volatility. This is become a really big nut and represents a huge part of the operating costs. And it's moving all over the place. So it's hard to sort of quote these freight rates with any reliability. There is a move to say, look, this is getting big that we have to break it out. Unless the big guys are willing to begin to do this, it becomes difficult for everybody. No one will follow suit. It has become too important an item.

I would say a couple things that interest us. It highlights the fact that this is a basically garnered attention at the highest levels of these companies that I would say is unprecedented. They realize how important fuel is. There is a sense of, we have got to pay attention to this. And the not invented here resistance to getting outside help has certainly changed and it opens up opportunities given our large global platform, our very diversified base. Our large ability to aggregate volume and our expertise in using derivative instruments to manage the forward curve. All of this becomes again a place for these companies to turn as they look to manage these things.

Remember, fuel historically is not the core competence. The focus is on the movement of goods. So to the extent this represents a considerable challenge for them to manage internally, we have got the expertise and we represent a clean one stop shop for them to achieve some visibility on a very difficult part of their costing. We are watching the trends with interest. We are seeing that our access to very high levels in these companies continues to expand. I think we are viewed with considerable differentiation by the large global fleets as being able to add value and scale. Not only on the financial side but it's also, I'm able to manage visibility in these complex markets but it's also the value add of being able to add very sophisticated and very acute solutions on the operation side. These high rates, time is money. So these ships are very exposed to not only just the price of the fuel but all the operational support. Again, on all of these fronts we think these changes are good for us.

It sounds like a lot of people are starting to look at the Middle East and the Far East from a supply basis because a lot of new refineries are pegged to be ramping up in those areas in the next couple years. We saw the V-toll earning that market and chem oil plants and expansion there. How does this impact you from a competitive standpoint. Is it more competition as others take more product in that area? Or more opportunity for you as you partner with these companies to help take the supply and actually get it to the right people.

I would say it's the latter, Jonathan. We represent a very important platform for these companies. If you look at a company like V-toll historically that's operated in the trading market, the retail distribution and managing retail credit and being able to manage retail relationships and the complexity of fuel quality control follow-up operations, this is not their core competence. I think they view us as very important parts of the supply chain because they can rationalize huge amounts of off take in a very very clean way through us. I think these kinds of trading groups have made it clear that their core competencies are moving on the bulk side. Difficult for them to retail the scale. So again with our balance sheet and global platform and distribution network and our multiple offices and our deep customer domain expertise, this represents a very natural complement to them.

Again, these guys are primarily cargo traders but it allows them to distribute opportunistically into the retail side in a very very easy way. All this change is good for us as we talked at a macro level. There has been the migration, or as the major international companies have moved upstream and focused on return on capital it's opened up all sorts of creative opportunities further down in the supply chain. This is good for us. All this change validates our model and continues to create opportunities for us to expand our value proposition.

Good. One last one for you on the acquisition front. Obviously AVCARD seems to be pretty successful and also if I could just ask Ira briefly before I get to the main part of the question if there is anyway to quantify the impact of AVCARD on the aviation gross profit in 4Q?

It had a minor impact because it was -- we only had one month of activity in the quarter. So it didn't have material impact on the overall results. I could try to give you that number after the call.

Okay, great. And then the main point of the question is, as you look at other acquisition opportunities, do you see more kind of kind of core business whether it's people, whether it's new regions, geographies, whatever. Or are you also looking at maybe secondary or tertiary parts of the business that may be value add that may provide maybe a not so apparent complementary part to your core business?

I think, Jonathan, this is Michael Kasbar. In terms of the acquisition opportunities, there is certainly a broad range of opportunities to us. And we evaluate these more broadly every day. Adjacencies and extensions as long as they are a good solid strategic fit we would certainly consider. Obviously our core acquisition similar to the AVCARD acquisition we did recently are certainly our sweet spots and they're are a no-brainer as long as it's the right people and the right price.

Okay.

Jonathan, it's Ira. A quick follow-up. The AVCARD impact on GP in the fourth quarter was about a $1 million.

Thanks.

No problems.

Our next question is from the line of Al Kaschalk with Wedbush Morgan.

Hey, Al.

Just a follow-up a little bit on the marine and -- pardon if this is an elementary question, the revenues were up substantially. So we view that more just on the pricing aspect? Or were there new customer wins in the quarter, because it certainly performed better in the top line relative to where I was expecting.

You had some volume growth which we were happy about. Quarter over quarter we were up about 2.5% both sequentially and year-over-year. On a quarterly basis. On a year-over-year basis we were almost 9% increase in volume. Certainly prices increased significantly so a big chunk of that is coming from price. But I think the more important thing that we are pretty happy about is that we managed to gain market share.

Is the share down tier one? Or up in tier one level --

Yes. No, it's tier one. We didn't go bottom fishing.

Okay. Most of my other questions have been answered. I want to focus on the balance sheet in particular. The inventory level caught from Ira as it relates to aviation, looks like inventories are up a little bit. I know they are down sequentially but higher than I had thought we would be at. Could you comment on what comprises the balance of the inventory other than the aviation self-supply?

There is some largest chunk is there is some inventory on the marine side. That would be aside from that the rest of the numbers would be relatively small. Most of the change is related to the change in aviation. You thought the number would come down more. As I mentioned as an example in self-supply, even though we were down from 40 million gallons to 33 million gallons, because of price, the dollar value of that inventory was basically the same.

Sure.

So clearly the price impact had a material impact on the changes you are looking at in inventory dollars.

Sales were up 15% sequentially, if I did my math right but AR was up 26%. Is that more a timing issue in the quarter or what's going on there? It seems relative to the number that you calculate it out on a quick math it seems higher than percentage-wise. I know the DSO details you gave us.

At the end of the day impact of rising prices and DSO was up one day and that translated to the AR position that we went at the end of the period. That's really the explanation.

I will follow up after. Finally on the receivables, derivatives were up about 50%. Is that a little bit more aggressive bad timing, what's happening there?

Al, you have to -- can you clarify that. I don't know what you mean with derivatives were up 50%.

If you look at the balance sheet according to what was released, the receivables are related to derivative contracts were $86 million. 86.5 at the end of December. They were $37 million last year and they were 47 and change or so at the end of Q3. As we were trying to get down to a little more analytics on the numbers, I'm wondering how much of that translates into operating profit. I thought I would start there as an initial question.

As you see, we have on both sides of the balance sheet the receivables and liabilities side. The increase is principally related to volume and price. Once again, price is up significantly in the quarter. On a mark to market basis it impacts both the asset side and liability side of that equation.

Very good. Thank you.

(OPERATOR INSTRUCTIONS). Our next question is from the line of Jim Larkins with Wasatch. Please go ahead.

Good afternoon. A couple of detailed questions. I missed a few of the segment numbers. I was wondering if you could repeat those for me. Did you give the operating income for the three segments? Or did I miss that on the press release? I didn't catch that.

Give us a second here.

Aviation was $18.1 million. Our marine was $14.6 million. And land had an operating loss of just under $100,000.

Great. And could you give the gallons on aviation again?

33 million gallons in jet fuel at the end of the period.

The gallons sold.

I'm sorry. Total volume? It was 601 million gallons.

As I look at the gross profit numbers, this quarter on marine, can you give some little bit of color on what drove those margins up? Was there more contractual versus spot business this quarter? Just talk about that a little.

Yes. On the marine side a good amount of reselling activity, inventory we had some robust opportunities there and good amount of volatility in the beginning of the quarter.

I know you talked a little bit about customers being hesitant with bunkers kind at record prices of engaging in forward transactions. Did that change during the quarter?

In fact, one of the things that we were pleased about is in spite of the fact that the derivative activity did not go up significantly for exactly the same reason. If you look at what was going on with Q4 we saw the same reluctance and a fast spiking market. I would say that the underlying ability to just garner margin out of a highly volatile market paid dividends in the quarter. Again, we saw the same reluctance.

And this is the funny thing when we were out there talking to customers. We were always arguing that managing the forward curve is like a discipline. It's like getting in shape. You don't just do it once and forget it. There is always still reluctance that people feel like they are chasing the market up and it goes again and there they are trying to figure out when is a good time. We're making better inroads. We are beginning to get people to realize that it is part of good procurement strategy to have dialing in derivative coverage as part of your program. It doesn't matter so much whether it's high or low. Just be doing it as a matter of discipline. It's getting better. There wasn't -- we saw fairly dormant activity on the front because of the fast rising prices. But we did very well on the underlying absolute margin on the barrels.

When you talk about inventory opportunities, there should -- these are still kind of covered transactions. You saw a certain supply opportunity, you matched it up with the demand opportunity and that's not a speculative-type position, is that correct?

That is correct.

One of the detailed question I missed was the unallocated corporate overhead for the quarter.

It was $8.1 million in the quarter.

And then on the systems side, you mentioned there is still first quarter may be a little bit of implementation costs or setup -- I don't know how you described that. Still a little bit more cost this quarter. Can you talk about aside from freeing up your people from having to work on the implementation. What are the benefits that we might see going forward from those systems?

I think one of the main things that, Jim, that work that would take us weeks and months to produce in terms of enhancements and changes, those changes are now taking us hours. So we have one global system around the world. One software, one source of data coming out of our systems. A lot of our financial guys or analysts who have been working very hard over the years to just extract information and be able to interpret it and we will have it at our fingertips. It will be tremendous power. We have a significant volume of activity in our two main business segments. So our ability to on our sales guys and our customer facing guys to be able to get to the answer quicker is going to be a huge pickup.

And our land business, that business relies very much on automation. We haven't had the systems to be able to execute that business activity. So there is going to be big front office pickups and big back office pickups. So we are very excited. You can't be successful on these types of projects unless you have a first class team. We were very happy with the group that we brought in, not so long ago, and that is certainly going to help us. For the type of business we are, that is a significant asset for us.

Okay. Great. I have one other question. I will get back in line. Go ahead.

Thanks, Jim. Appreciate it.

Our next question is from the line of Edward Hemmelgarn with Shaker Investment. Please go ahead.

It's regarding your outlook and how you have increased your operating expenses quite a bit. The low end would be about the same as you increased it it last year but the high end it would be about 26%. Can you talk about how we would expect to see the improvements in gross profit? Should we see it in terms of you guys just doing a lot more volume? Or should we see it in terms of margin expansion?

Thanks, Edward. I appreciate the call. I think it merits a little bit of background. As you know and I'm not sure how long you followed us, but '07 was a important transitional year for us. We were open with the investing community about the fact that we felt that to really transition to the next level of business expansion, we needed to make significant investments in people processing systems that we had grown like a weed. We were a classic entrepreneurial company that accelerated very rapidly but we were always commercially sort of out over our skis in terms of being able to support the whole structure and maintain our efficiency scale. We were investing as a maturing organization both the need to put in a global platform on systems. We had to invest in people and we also had to invest in sort of better business process. So I think all of those things were going on and that's why you saw the increase in expenses.

We feel confident that investment is going to give us a good return. How it actually directly translates into specific gross profits. I would say that you saw robust gross profit growth throughout this year. Granted it was a bit -- it was eaten up quite a bit by the investment and we aren't happy about that. We knew the investment had to be made. But we certainly have confidence that platform will add efficiency and increase volume and will be able to improve margin through that efficiency. We were confident that the investments will pay off and, , that's part of being good stewards of the franchise for the long term. You to make those investments or you can't expect to scale the platform.

Okay.

Thanks. And we have a follow-up question from the line of Jim Larkins with Wasatch.

I wonder if you can talk about AVCARD and what they will bring to your customers? Should we view this as a credit product? Should we view it as a consolidated billing service or a platform for additional services. Can you go into more detail as to what it's going to offer that you did not previously have on the aviation side?

AVCARD is a number of different things. First of all we get a great organization that has been run by a superb management team. By and large, that's our major consideration when we look at a company. But you have in addition to the basic business activity of selling fuel in a very similar manner to the way we sell fuel to the business aviation and corporate aviation market, you have three value adds. One is to the FBO in terms of processing the transaction to business aviation right there on the fueling side of that FBO. Second is convenience to that pilot to be able to swipe that card and present that card at any of a thousand locations around the United States and internationally.

And then third, management reports in control for those corporations that are running a fleet of aircraft. So that convenience of having that web interface. Those are the three pickups in terms of a convenience and the value add. And it was a lot more intelligent for us to go ahead and invite them to be part of our organization as opposed to spending the time and money to specialize in that particular area. Now by virtue of our ERP, we have greater capability. So we are happy about the union. And in addition, we get some operations in the U.K. that are showing is that they have management depth.

So with this acquisition can we think of it in terms of you picked up additional FBOs that are now willing to pick up World Fuel as a fuel provider? How --

Yes, well, certainly they have broad relationships. They are in different areas. They are doing government business. You have a company that the unique thing that they are bringing that is unique is their processing and their card -- their charge card processing system, they have different relationships and certainly we picked that up both on suppliers, vendors and customers. And now we jointly as I think Paul commented in his introductory remarks, have got joint initiatives to go after some of those larger business aviation clients and put that baggage together to -- packing together to be a more robust offering.

We were delighted to have their processing capability and they're delighted to have our very strong access to fuel.

If I'm going -- can I pretty much go to any FBO with this card as a pilot or will there be select FBOs that will accept this card?

In the United States it's pretty broadly accepted. I think I may not want to say any FBO. Thousands of FBOs in the U.S. That's right. There you go.

Thanks for the color, guys.

Thanks, Jim.

(OPERATOR INSTRUCTIONS).

Okay, sounds like we have no other questions.

No further questions. Do you have closing comments?

Thank you all for joining us today and we will look forward to talking to you at the end of Q1. Take care.

This does conclude today's conference call. You may now disconnect.