World Kinect Corp (WKC) 2008 Q2 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 Second Quarter Earnings Call.

All lines have been placed on mute to prevent any background noise. After these speakers' remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS). Thank you.

I would now like to introduce Mr. Frank Shea, Chief Risk and Administrative Officer. Mr. Shea, you may begin your conference.

Good evening, everyone, and welcome to the World Fuel Services second quarter conference call.

I'm Frank Shea, Executive Vice President and Chief Risk and Administrative Officer and as is evident, I'm doing the introductions on this evening's call. This call is also available via webcast. To access this webcast or future webcasts, please visit our website and click on the website icon.

With us on the call today are Paul Stebbins, Chairman and Chief Executive Officer; Mike Kasbar, President and Chief Operating Officer; Ira Birns, Executive Vice President and Chief Financial Officer; and Paul Noble, 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 for joining us.

Today we announced record earnings of $20.5 million or $0.71 per diluted share for the second quarter of fiscal 2008. In the quarter, we improved our net trade cycle, liquidity remained strong, and our return on equity was 16%. In a quarter marked by sharply increasing oil prices and continuing turmoil in the global financial markets, we demonstrated our ability in a difficult operating environment to manage risks, grow margins, invest working capital wisely, and maintain a strong balance sheet.

We also successfully completed our Texor acquisition, a best-in-class business in the branded gasoline space, which diversified our land business model while expanding our strategic reach.

Given the extensive discussion in the press about the overall state of the aviation industry in Q2. our jet fuel business has, understandably, been the focus of considerable interest on the part of shareholders and suppliers. We are pleased to report that our aviation segment delivered a great result this quarter, in spite of, and to some extent because of, very difficult operating environment. Our commercial and business aviations divisions, as well as AVCARD, delivered strong performance across the board, while reducing our exposure to risk.

While this may seem surprising, or counter-intuitive to some considering the market conditions, we see it as further validation of our business model, which emphasizes aggressive risk management, a disciplined approach to optimizing margin, and a rigorous focus on a return to working capital.

To be clear, it is certainly true that the aviation industry as a whole is challenged by the relentless pressure of high oil prices and a weakening global economy. This created stress fractures in the business models of many airlines, and in some cases, led to defaults. While we were not, and are not, immune to the risks associated with these trends, it is important to note that managing credit risk has been at the core of our business model for many years.

Furthermore, we have always told our shareholders in extraordinary times, we would look to dial back exposure and shed business as required. In this quarter, we did just that. To achieve better returns on working capital, we reduced our self-supply volumes, and shed low-margin business.

In mitigated risk, we took a more conservative approach to risk rating, which is reflected in our increased provision. And in response to the high price market conditions, we adjusted margins. Our ability to respond quickly and decisively on all these fronts created a strong result and demonstrated once again to our supply partners why we represent a highly-reliable financial counter-party. As suppliers look to de-risk their portfolios and protect their position in the market, our ability to aggregate demand on a global scale is a significant value add. The strength of our performance in the current operating environment serves to highlight that value and the importance of our role in the supply chain.

In our marine segment, we had an all-time record quarter. Our global network, strong balance, and ability to aggregate demand continued to be important competitive differentiators for World Fuel in Q2. Our unique market position enabled us to continue to provide our customers a high-value offering, while many of our competitors found themselves challenged by restrictive credit lines and limited working capital in a fast-moving, high-priced market.

Continued strength in the shipping industry, driven by robust demand in the commodities market contributed to volume growth in the quarter. And the fact that the majority of our marine business is transacted in the spot market helped us identify market inefficiencies and improve margins while maintaining competitive pricing to our customers.

With the fast run-up in prices, our global sales and supply teams were focused on the importance of managing working capital, and their discipline in execution drive improved DSO and produced a very good overall return.

In our land segment, the rapid increases in price and deterioration of the economy had a negative impact on certain parts of our existing land business, particularly in the domestic US market. We responded by embarking on a wholesale effort to reshape the business. In the process, we aggressively rationalized our portfolio, we improve DSO by 9 days, and raised margins across the board.

We also acquired the Texor business in the branded gasoline market. One month of Texor's numbers are included in this quarter, and the results demonstrate the ability of the Texor business to generate cash, achieve good margins, and manage risk. We believe the Texor acquisition will help fortify our position in the wholesale market, while opening up a number of opportunities to invest further in the branded gasoline market.

If there was ever a quarter in which our Company's business model, financial fortitude and management agility were tested, it was the second quarter of 2008. As crude oil rocketed to $147 per barrel and the financial markets imploded, we responded by shedding risks, tightening our cash management, and increasing margins. We delivered strong results in our core business, and expanded the franchise with another strategic acquisition.

As we look forward, we remain focused on risk, cash, and return. We will also continue to help our customer navigate a volatile market, while providing our supply partners a reliable counter-party an efficient platform for global distribution.

These extraordinary market conditions have proved challenging, but they have also helped to differentiate our offering, secure our strong position in the market, and open up a number of strategic opportunities going forward.

We commend our global team on their steadfast performance, and thank them for their determination, dedication, and passion. Thank you for your support, and I will now turn the call over to Ira for a detailed review of the financials.

Thank you, Paul, and good afternoon, everybody.

Revenue for the second quarter was $5.7 billion, up 26% sequentially, and up 73% compared to the second quarter of last year. Our marine segment revenues were $3 billion, up 25% sequentially and 66% year-over-year. The aviation segment generated revenues of $2.3 billion, up 20% sequentially and 74% from last year's second quarter. And finally, the land segment grew to $366 million, up 91% sequentially and 137% from last year's second quarter, including the impact of the Texor acquisition in June.

These increases in revenue were significantly impacted by the sharp increase in the fuel prices, which were the highest in the history, in the second quarter of 2008.

Before I review our results by segment, I would like to point out that our second quarter results also include Texor's results of operations for the month of June, and a full quarter of AVCARD, which also was not included in prior year's results.

Our aviation segment sold 593 million gallons of fuel during the second quarter, down 5% sequentially, but up 3% compared to the second quarter of last year. The sequential reduction in volume was principally due to our continuing efforts to reduce exposure to low-margin, higher-risk accounts. We expect volume to drop further in the third quarter as such efforts continue, which includes the termination of a single account relationship as of July 1, representing approximately 30 million gallons of quarterly volume.

Our marine segment's total business activity was 7.4 million metric tons, up 7% sequentially, and up 9% year-over-year. Fuel reselling activities constituted approximately 81% of total marine business activity in the quarter, 5% higher than the first quarter of 2008.

Our land segments sold 103million gallons during the second quarter, up 48% sequentially and up 55% compared to the same quarter a year ago. Once again, these amounts include Texor volumes for the month of June.

Gross profit for second quarter was $94.3 million, an increase of $20.5 million, or 28% sequentially, and up $36.3 million or 63% compared to the same quarter last year.

Our aviation segment contributed $45.2 million in gross profit, an increase of 29% sequentially, and 47% over the second quarter of 2007. Excluding the impact of AVCARD's results, year-over-year gross profit was still up over 33%.

Our self-supply model's jet fuel inventory position was approximately 28 million gallons at the end of the quarter, down 3 million gallons when compared to the first quarter. The dollar value of our related jet fuel inventory increased to approximately $102 million from $90 million in the prior quarter. While gallons of inventory dropped 10% sequentially, the dollar value of our jet fuel inventory increased 14%, due to the impact of rising fuel prices.

Jet fuel market prices climbed over 30% during the quarter from $3.06 to $3.80 per gallon. Therefore, the sequential increase in aviation gross profit includes a benefit related to inventory average costing, driven by the 30% increase in jet fuel prices during the quarter. Please keep in mind that this is a two-way street. As we have, and can experience, both positive and negative benefits to gross profit when prices move sharply in other direction during a given quarter.

While we do expect our aviation gross profit per gallon sold to rise, due to the continued rationalization of low-margin business, it will be difficult to match the result achieved this quarter.

Our marine segment again delivered phenomenal results, generating record gross profit of $44.4 million, an increase of $7.5 million or 20% sequentially and $19.1 million or 76% year-over-year, benefiting from significant price volatility during the second quarter. As Paul has already mentioned, our strong global network and balance sheet and our continued ability to aggregate demand were all key contributors to our successes in the marine segment over the past two consecutive record quarters.

Our land segment delivered gross profit of $4.7 million, an increase of 162%, or $2.9 million sequentially and 132%, or $2.7 from the second quarter of 2007, principally driven by the impact of the Texor acquisition in June.

Operating expenses for the second quarter, excluding our provision for bad debt, were $56.4 million, an increase of $6.8 million sequentially and $20.1 million year-over-year. This amount exceeded the range which I provided on last quarter's call. The principal drivers of such increase related to increases in incentive compensation expense, due primarily to record quarterly results, as well as Texor operating expenses, which were not forecast in my prior quarter estimate. While total compensation increased, it actually decreased as a percentage of gross profit as compared to the first quarter.

Our bad debt expense was $8.1 million, up $6.2 million sequentially, and $8.5 million year-over-year. The sharp rise in fuel prices during the quarter resulted in a significant in the size of our receivables portfolio. At the same time, record fuel prices clearly placed a strain on certain segments of the markets we serve, causing us to reevaluate the internal risk ratings of certain customers, principally with our commercial and aviation segments. A combination of the adjustment of certain customer risk ratings, and the increase in the total dollar value of our receivables portfolio led to a significant increase in our bad debt reserve. Such increase consists of certain specifically reserved receivables, as well as an increase in our general reserve. Our total reserve as a percentage of total receivables was 1.2% at June 30, as compared to 0.9% at the end of the first quarter. We are comfortable that our current reserve is adequate.

While our reserve has increased, please be reminded that the overall quality of our $1.8 billion receivables portfolio remains strong. Furthermore, despite numerous well-publicized commercial airline bankruptcies this year, we had little or no exposure to most of these airlines, and where we have had exposure, we often find ourselves in a strong position to recoup all or most of such receivables through various forms of security and successes in the bankruptcy process.

As an example, we had a receivable over $1 million from a customer which filed for bankruptcy in the fall of 2007, which we have recently fully recovered through our bankruptcy claim.

It is also worthwhile to note that approximately 67% of our overall receivables portfolio relates to our marine segment, and only 27% of our overall portfolio relates to our aviation segment, which once again includes sales to business aviation, charter, cargo, and government customer, in addition to the commercial passenger space.

Regardless of past successes, we cannot and will not avoid every potential credit loss in a period during which we have witnessed record fuel prices and volatility. However, managing such risks remains our core competency, and based upon what we know today, we once again believe our current reserve is sufficient to cover any risks which may exist in our receivables portfolio.

Based upon what we know today, we are not expecting to have a need to record bad debt expense at anywhere near the level we did t his quarter over the next couple of quarters, assuming no further significant deterioration in the markets we serve.

Unallocated corporate overhead was $11 million, an increase of approximately $4 million sequentially. The principal driver of such increase relates to increased incentive accruals related to record quarterly results. Once again, I will try to help you model operating expenses as we've been doing for the past few quarters. I would assume overall operating expenses, excluding bad debt expense of approximately $54 million to $58 million in the third quarter. This estimate now includes Texor's operating expenses for a full quarter, which are running between $4 million and $5 million on a quarterly basis.

Please note that there is a certain level of variability in our cost structure, principally incentive compensation related, which is tied to the amount of gross profit we generated in a given quarter. Therefore, such estimate is clearly subject of such variability quarter-to-quarter, as you've seen in the second quarter.

Income from operations from the second quarter was $29.8 million, an increase of 34% sequentially, and 35% from the second quarter of last year. Income from operations for our aviation segment was $17.8 million, an increase of 44% sequentially, and an increase of 6% when compared last year's second quarter. Our marine segment's income from operations was $23.7 million for the second quarter, an increase of 34% sequentially and 112% year-over-year.

Our land segment had a loss from operations of $600,000, primarily due to an increase in their bad debt provision. The loss in our land segment was partially offset by income generated by Texor's profits for the month of June. Texor performed as expected in the month of June, and we are very happy to now have them as part of the World Fuel family.

The Company had other expense net of $2.7 million for the second quarter compared to other expense net of $2.2 million in the first quarter. This $500,000 increase primarily relates to the cost of the funding of the Texor acquisition, and an increase in interest expense as a result of increased borrowings related to rising fuel prices.

For modeling purposes, I would assume interest of approximately $3.3 million for the third quarter. This amount excludes any impact of foreign exchange currency movement, which also are reported on this line.

The Company's effective tax rate for the second quarter was 24% as compared to 21% for the first quarter. The higher effected tax rate resulted from a shift in the mix of the results of operations to tax jurisdictions with higher tax rates. This includes the impact of Texor, which is taxed at US rates. Our estimated effective tax rate for the third and fourth quarters should be between 24% and 28%.

Net income and diluted earnings per share were also records for us. Net income for the second quarter was $20.5 million, an increase of 30% sequentially and 21% year-over-year. Diluted earnings per share of $0.71 increased 29% sequentially, and 22% over last year's second quarter. Return on equity was 15.9% for the second quarter, compared to 12.8% in the first quarter of this year, and our return on assets for the second quarter was 5.1% compared to 4.7% during this year's first quarter.

At the end of the second quarter, our cash, cash equivalents, and short-term investments were approximately $63 million compared to approximately $84 million on March 31. The record spike in crude oil prices in the second quarter, which rose from $102 at the end of Q1 to $140 at the end of the second quarter, was the principal driver of our negative operating cash flow of $85 million. Despite such use of cash, our liquidity position remains strong, a testament to our overall strength of our balance sheet, which remains a competitive advantage for us during this period of unprecedented price volatility.

We have also been very focused on reducing our net trade cycle and increasing our return on working capital. As a result, days' sales outstanding in the second quarter declined 1.5 days to 28.4 days. As a matter of fact, our DSO dropped in all three of our segments.

Our payable days outstanding were 22.5 days, down slightly from last quarter, and inventory days were 2.3 days, effectively flat quarter-over-quarter. Therefore, our overall cash conversion cycle decreased by a full day from the first quarter. Our return on working capital was 23.4% for the second quarter, up from 19.6% in the first quarter. As a result of our focused efforts to further reduce our trade cycle, and our related working capital investment, as well as the recent drop in oil prices, we have already generated positive cash flow during the first month of the third quarter.

In closing, despite volatile market conditions, our marine and aviation segments delivered record operating results, and the recent acquisition of Texor will significantly enhance the financial profile of our land segment going forward.

Unlike m any others, our balance sheet remains strong and liquid, despite the impact of unprecedented price volatility in the fuel markets. We remain poised to continue capitalizing on our relative size and strength in the markets we serve.

Thank you.

We'd now like to open up the call for questions and answers.

(OPERATOR INSTRUCTIONS).

Jon Chappell, JP Morgan.

Good afternoon guys. Paul, the marine business, you finally broke through a pretty good threshold the reselling business as a total percent of volumes. Was that a function of less broker business more reselling, and I guess more importantly, is this 80%-plus figure a good run rate to use going forward, or could it get back to the mid-70s?

Yes, I mean it accurately reflects the fact that we made a concerted shift further into the trade, and the brokers was reduced. It's tough to give you with any precision, Jon whether that's going to stay ratable in the future. Sometimes it is a caution of the market conditions, but I would say that we're pleased with an overall increase in volume in this period, most of which is reflected in the traded volume. So brokerage was off slightly, but we really had the concerted pickup in the trade side.

So I mean I'd like to tell you that it would be ratable, but we just don't have that, in a spot market, it's tough to predict with any precision.

Okay, that's fair. Another question, I don't know if you have this number either. Is there any way to quantify the self-supply inventory impact on the second quarter aviation results?

I would say Jon, the best number I could give you is approximately half of the sequential increase in gross profit in aviation could be attributed to that.

Okay, that's very helpful. And then finally, the current credit conditions out there, from a competitive standpoint and then from an opportunity standpoint, are you seeing any competitors who aren't able to really compete with someone with your balance sheet in this type of market, and does that give you opportunities both in just winning business overall, and then potentially from an acquisition standpoint, anybody who's looking at lot more vulnerable?

There's no question that the current environment has clearly differentiated our strength in the market. When you've had the kind of rapid increase in prices and the tremendous volatility, this has certainly stressed a lot of the less well capitalized small privately held companies out there who are really struggling with kind of the tsunami shock, and that caused restriction on credit lines, it caused tightening pressure on working capital, and we were able to take advantage of that and kind of be the strong guy standing in the market.

So there's on question that from a competitive perspective, this market was favorable in terms of differentiating us.

In terms of -- consider if you will a wounded antelope out there, there's not a question there are some people who are being stressed by this, and we clearly believe there are opportunities form the strategic side.

Is there one market in particular whether it's marine, aviation, or land where you're seeing more potential vulnerabilities?

I would say there are opportunities in all three.

Okay great, thanks a lot.

Alex Brand, Stephens, Inc.

Hey guys, this is actually George Pickle for Alex. I've got a few land questions for you actually. Could you, do you know what the land profitability would have been excluding the provision for bad debts? In other words, I guess I'm asking what Texor would have added to that.

On a consolidated basis, excluding these provisions for bad debts, the number would have been about $1 million on the plus side, with a big chunk of that coming from Texor.

Okay great, and also within Texor, I guess, in call it the Greater Chicago Area market, in the two months that you've had them, have you seen any slowdown in gasoline sales at any of the outlets?

No I mean if we focused on the month of June in particular, the results of operations from Texor were right in line with what we expected, so we did not see any meaningful impact in that regard.

That's great. Let's see, switching over to marine, I know it's a minute part of your business, but have you thought about, or have you expanded any asset-based supplies anywhere, or have you thought about doing that?

Hi George, it's Mike Kasbar. No we haven't expanded that, and certainly we're open to those opportunities as they present themselves, and as Paul just said, with the amount of capital required, a lot of these small independent companies don't necessarily have the appetite to play the game so much, so it's an opportune time for them to exit, and we're certainly looking at that.

Okay great, and lastly, kind of a big picture question, how much is the ERP system contributing to kind of this being able to call the low-margin business and I guess I don't if you'd kind of call it a timely fashion, but being able to quickly identify the low-margin business and get rid of it and be able to shift pricing and whatnot around to improve margins.

Well, we've always -- George hi, it's Mike Kasbar -- we've always had visibility on that. That's not that difficult to do. We're fortunate in having pretty good marketing and research team that works pretty hard to give us visibility on that. The ERP is an interesting sort of scenario because this is really not a whole lot of fun, the global initiative, and this was really a very interesting quarter for us in this kind of perfect storm in terms of credit crunch, rising oil prices, and then going live February 6 with our ERP, which is something that takes a good six months to digest and stabilize.

And so while we're happy that we did it, went through the pain, we're not really seeing the full impact of those initiatives just yet. But we're on our way, and our ambitions for that are quite significant, visibility in any number of different areas is certainly one the things we're looking for, as well as a number of other products that we hope to be able to produce. And certainly with the acquisition of AVCARD, that gives us greater technological reach. The beauty of acquiring these small companies is their people are very close to the business, so they're functional people pretty much stewed in the business activity, and we're pretty happy with what we picked up with AVCARD on the technology side.

Okay, and I guess just a quick follow-up; do you still have all the outside consultants down there helping you, and do you still all of your in-house employees focused on the ERP system and kind of not on their main jobs still?

I'm happy to report that we zero outside consultants that we employ -- okay, maybe two or three I guess -- but we're pretty much down from the 50 or 70 that we had at our peak. Now, I think we have what, about a handful Paul? Is it less than --?

Yes, five.

Okay fine, and our group is really focused on the business side, so ERP is done and it's really now, it's huge amount of work, and one of the benefits by going through this is you can't do it unless you have a superior IT organization. So we've really upgraded that. I'd say we're probably at a level three organization on IT, and we're on our way up.

So we're very optimistic on what technology can do for us, it's very important to our Company.

All right, thanks for your time guys, good quarter.

Steve Farzani, Sidoti & Company.

Good afternoon, question on, we're seeing at least a slowdown in growth in aviation traffic. Certainly we've seen a bit of a turnaround in terms of Asia Pacific freight traffic. Given the slowdown growth, what do you think that does to transaction volumes in that segment going into the second half of the year?

I think we're going to have to watch it just like everybody else is watching it. Certainly, it's going to have an impact from our perspective as Ira already mentioned, we already anticipate, and in fact, with full deliberation are reducing some of our volume. Bu I would say that we feel pretty good about being able to -- we've got a fairly diverse portfolio -- so we're active in cargo and charter and military and a lot of different components of the business where interestingly enough, we haven't really seen the slowdown yet, and in fact, I would say if you look in this quarter, we actually saw a pickup in some of our cargo, charter, and government activity.

So I think from our point of view, I don't think we view that the overall economic conditions are going to be the driver there. It's going to be more our decision about what business we are able to take, and how we manage it.

Okay, you touched a little bit on the bunker fuel. Obviously, there's the consolidation with the physical suppliers. Does that sort of affect sort of the price shopping idea, given that there will be fewer suppliers, physical suppliers out there? What's the impact short term versus long term?

When you say consolidation of physical suppliers, what are you referring to?

To bigger bunker fuel physical suppliers, without naming, buying up some of the smaller guys and being fewer the bunker fuel, the barge operators out there.

I would say that I hear you, I think that's more anomalous. I would say if we were to characterize the bunker supply market, it's still extremely fragmented. And I don't see that changing any time soon. While there's been some examples of what you characterized in terms of consolidation, I would say generally speaking that is not the trend. It's still very fragmented.

Fair enough, and then on Texor, two months under your belt now, given some of the difficulties with the land-based markets, the $0.08 to $0.10 accretive in the first full year, is that still fair?

Yes, that number is still an accurate number, somewhere between $ 0.08 and $0.10.

Great, thanks a lot.

Jim Larkins, Wasatch.

Good afternoon, just a couple of balance sheet questions. I wanted to make sure I got the details. It might have been on the press release. But goodwill and intangibles, what were those at the end of the quarter?

Just a second Jim; goodwill was $119 million, and intangibles were $63 million.

Great, and then on the debt I saw the short-term debt broken out and the long-term debt, did you give that as well?

The long-term debt was $246 million, principally banked and there's a note in there related to the Texor acquisition.

Okay, but should we think of that as being unresolved, or it's going to ebb and flow with commodity prices and what's going on in your working capital?

Yes, I mean that number will move around during the quarter. As we said, we're making significant progress. We brought the trade cycle down the second quarter. We're very focused on return on working capital, and as I also mentioned, we generated cash in the first month of this quarter, which should start moving that number further in the nice direction, or the right direction.

So I think that answers the question you had.

Right, and on the derivatives, just in terms of the size, it seems that the activity has picked up. How much of that is simply driven by the commodity versus did you get involved in doing more derivatives for some of your customers?

We did see a little bit of increase in activity in the derivative going into Q2, and there's also been an impact on the price as well, so it's both.

Was that material in terms of the gross profit improvement we saw in marine especially?

No, not on an overall basis, it was not.

Okay, very good, thank you.

(OPERATOR INSTRUCTIONS).

Calvin Wilder, Minutemen Capital.

Thanks, congratulations on a good quarter. I have three questions; one can you qualify the earnings per share benefit of the appreciation and the value of inventory in the second quarter?

Yes, I think I mentioned previously that approximately half of the sequential increase in gross profit could be attributed to the inventory valuation.

Okay.

And I'm sorry, that's half of the sequential increase in our aviation gross profit, which is where we had that impact, which is where most of the inventory is.

Okay, following up on the question about the ERP system, nice to see that's moving on. Looking at the guidance for third quarter operating expense of $54 million to $58 million, of course, there's the second quarter actuals and that's $56.3. It looks like you're projecting flat operating expense in the third quarter where you'll have Texor on the books for three months rather than one. So we assume that there's a big drop in ERP spending, or what's getting that, what's dropping in expense in the third quarter?

There's nothing significant in its own right. One of the biggest drivers would be, there was a bit of a catch-up in incentive compensation in the second quarter because of the record results, and that number would come down a little bit naturally in the third quarter. And aside from that, there's a couple of smaller items that bounce around.

But on the ERP side, there probably was some consulting expense that was still hanging on in the beginning of the second quarter that's now out completely in the third quarter, so that would be another item as well.

Okay, and then the final question relates to increase in employee compensation expense. Yes, there was some leverage you mentioned that looks like in the neighborhood of 20 basis points. Should we be expecting to see operating leverage on the employee compensation line when it's growing slower than gross profit? Was there, you mentioned the fuel debt provision and normally minimized leverage in the second quarter. So what should we really expect to see in terms of leverage on your employees related to gross profit?

Well, I think you have a core base of compensation expense that's there. I think the only reason we highlighted the incentive comp piece this quarter is because of the extraordinary increase in profitability in Q2. So it's not simple to direct a, to come up with a tight correlation between gross profit accomplishments, for example, but there is some leverage on that line, but you've got to be careful in terms of how you model that.

Okay, and that's it. Congrats again on a good quarter.

Edward Hemmelgarn, Shaker Investments.

Sure thanks, I just had one question regarding the aviation segment. You indicated I think that you had gotten rid of a customer that was a 30-some million gallons or something --

Correct, quarterly volume.

Quarterly volume, okay. Typically you get a, there's an increase in terms of volumes in the September quarter, so should we still assume some I guess some tick-up in volumes in the September quarter absent the 30, if we ignore the 30 million, we can back it out later, but historically you've had anywhere from almost a 5% to 10% pickup I mean and just flights tend to be greater in the third quarter.

Sure, and I would say the answer is it's not just the 30 million, remember and these are also not normal times. So I would say that you can't really model this in sort of a conventional picture about what's going on in the business, as you can imagine, there's been a pretty dramatic shock to that industry, and we watch that very carefully. So what we've made an effort to do with the prices rising so quickly is that we've walked away from business that we just thought that, it might have even been good returns when it was put together some period ago, but given the high prices just doesn't give us the kind of return we think merits the investment on the capital side. So we're just walking away from it.

So I think our objective right now is to sort of rationalize risk, which we talked about, and I think we've been pretty focused on that. We're looking to reduce some of the higher volume, but thin margin business, which I think that we're also actively doing. That 30 million that Ira mentioned that expired on June 30, that was a fuel management contract. We think that that's consistent with it, but there's other business as well.

And then our real focus is to sort of tighten it all up and focus on smaller level volume but a better return. So it's difficult to give you a statement that says that in the September period, we're going to see an increase. I just can't tell you that's going to be the case overall, depending on where the mix shakes out.

Okay.

To be fair, we're gaining volume in some segments, but we are also shedding volume, so there's some offsetting penalties, that's certainly true.

Would you expect to see a, given that you're shedding the low-margin business, is it safe to say that your trend is up in the margin area absent any inventory pickup?

Yes.

Okay thanks, good quarter.

Llewelyn Banks [Hugh], Petrospot.

Hi guys, it's Llewelyn here. I have a question for you; it's regarding credit terms. You've got a (inaudible) fuel debt provision, bad debt provision. Just wondering if you, like quite a few other people around the world, are considering [cutting] new credit terms? Maybe 30 days is normally bunkering down to 21 days, 14 days, or less, or whether you've just stuck with it and carried on with 30 days.

No I think we've pretty much stuck to our policy historically, which is we're dealing in a fairly substantial Blue Chip portfolio around the world. I don't think we've made any changes materially in that area. Maybe a couple of exceptions to that depending on special locations, but I think in general, we've stayed with our policy, and again, we're servicing a fairly strong class of customer and that seems to be the right thing to do in this market.

Okay thank you very much.

And we have no further questions at this time. Mr. Shea, do you have any closing comments you'd like to make?

No, I think, we appreciate everybody joining us this afternoon, and we'll look forward to speaking with you at the end of Q3. Thanks again.

And ladies and gentlemen, this concludes the World Fuel Services second quarter earnings call. We thank you for your participation, and you may now disconnect.