World Kinect Corp (WKC) 2008 Q4 法說會逐字稿

Good afternoon. At this time, I would like to welcome everyone to the World Fuel Services fourth quarter and year end 2008 earnings call. (Operator Instructions). Thank you. I would now like to turn the call over to Mr. Frank Shea, Chief Risk and Administrative Officer. Mr. Shea, you may begin.

Good evening, everyone. And welcome to the World Fuel Services fourth quarter conference call. I'm Frank Shea, Executive Vice President and Chief Risk and Administrative Officer and 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. 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 Noble, Senior Vice President and Chief Accounting Officer. By now you should have all received a copy of our Earnings Release. If not, you access our release at 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 including, but not limited to, quarterly fluctuations in results, the credit worthiness of customers and counterparties and our ability to collect accounts receivable and settle derivatives contracts, fluctuations in world oil prices and foreign currency, changes in political, economic, regulatory conditions, our failure to effectively hedge certain financial risks associated with the use of derivatives, non performance by counterparties or customers on derivatives contracts, the integration of acquired businesses, uninsured losses, our ability to retain and attract senior management and other key employees, and other risks detailed from time to time in the Company's Securities and Exchange Commission filings. Actual results or facts could 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 and good afternoon and thank you for joining us today. Today we announced earnings of $29 million or $0.98 per diluted share for the fourth quarter of fiscal 2008. Our earnings for the year were $105 million, or $3.62 per diluted share, a 62% increase over fiscal 2007. In Q4, our return on working capital increased to 69%. Our return on equity was 19%. And our net trade cycle fell to six days. Our operating cash inflow in the quarter was $195 million. Our cash balance at the end of the quarter was $314 million. Shareholders' equity was $608 million. And we ended the year with over $900 million in liquidity.

Notwithstanding an extremely challenging operating environment, we were able to deliver record performance as a result of our continued focus on four key metrics. Credit and counterparty risk management, liquidity, margin, and return on working capital. By any measure, the Company had an exceptional year. But the financial metrics don't tell the full story. As you all well know, Q4 was a period of continued upheaval in the global financial markets. Credit and liquidity remained tight.

The global economy continued to deteriorate and the operating environment for our customers and suppliers remained challenging. In response to these market conditions we became more discerning in our customer base and conservative in our appetite for credit risk and because our unique position in the market gave us a competitive advantage in procurement, we were able to maintain margins, despite the drop in oil prices. The hard work we did in Q2 and Q3 to derisk our business resulted in a significant improvement in our receivables portfolio and no increase to our provision in the quarter. Given the difficult operating environment, our global team did a very good job in Q4 of fortifying the balance sheet, strengthening liquidity and reducing our risk while delivering great value and reliability to our customers, suppliers and shareholders.

Our marine segment delivered a strong finish to an exceptional year. Gross profit and operating income for the year were up 78% and 140% respectively. While freight rates deteriorated and overall trade slowed in the fourth quarter, our strategy of focusing on risk, return and value added services to our customers and suppliers paid off. While our volumes dropped in Q4 relative to Q3, our margins remained relatively steady. It is clear that the overall prognosis for shipping going forward is uncertain, given economic conditions. But sea borne trade will always be an essential part of global commerce and our competitive position in the market is more secure than ever. Moreover, we have traditionally excelled in difficult economic markets because our value proposition is more clearly differentiated and this has never been truer than it is today. Overall the team did an outstanding job in 2008 on every metric of success and we believe we are well positioned to respond to whatever the market may bring our way in 2009.

Our aviation segment also did a very good job in one of the most challenging environments in the industry's history. Gross profit and operating income were up 35% and 12% respectively on a year-over-year basis reflecting the resilience of our model in difficult conditions. Throughout the year we aggressively reduced risk and improved margins across all segments of the business and we entered 2009 in a very good position. AVCARD delivered good results and despite the difficult market for business aviation they continued to expand their charge card offering and secure more contract fuel. As with marine, we believe the steps we took in 2008 to reshape our aviation business leave us well positioned for 2009 and beyond.

In Q4, our land segment made a meaningful contribution to overall results and we were pleased with the directional trend. The Texor business acquisition has proven to be very successful and provides a platform for future expansion in the area of branded wholesale supply as we enter 2009. As announced today, we have signed a definitive agreement to acquire the wholesale motor fuel distribution business of TGS Petroleum in Chicago which represents approximately 100 million gallons of additional volume that will be integrated into the Texor business platform. This acquisition is exciting proof of concept for our land segment and we look forward to welcoming them to the World Fuel family.

All in all, World Fuel had an outstanding year in 2008. Of course, what is most pressing on everyone's mind is what the future might bring given the economic conditions we face throughout the world. Citibank's market cap has dropped from $256 billion in Q2 of '07 to $14 billion today. AIG continues to report enormous write-offs, triggering renewed concerns about their future prospects. The capital markets remained essentially closed. The stock market has recently dropped to levels not seen in over a decade and the daily media is filled with the relentless barrage of bad news about negative corporate earnings reports, growing unemployment and continued economic decline. No matter how you look at the facts, our country and the world at large face an economic crisis of truly unprecedented proportions with no easy solution in sight.

So what does all this mean to World Fuel as we look forward to 2009 and beyond? At a tactical level, we believe our aggressive efforts in 2008 to strengthen our balance sheet, reduce risk and leverage our business model has secured for us an enviable position in the global marketplace. Our financial strength, compelling value proposition and robust global service platform are significant competitive differentiators in a market in which many of our competitors have been adversely impacted by the deterioration of market conditions. Their weak liquidity and poor risk management have negatively impacted their results and impaired their capacity to compete aggressively in this market.

Meanwhile our suppliers have made it clear to us that current and prospective market conditions have further suppressed their appetite for participation in the downstream market and they would like to direct more of their volume through our network as they seek to reduce the number of channels they rely on for distribution. Our customers who are under enormous pressure to manage costs value more than ever our ability to provide competitive pricing while managing quality control, and operational support in every market in the world. This comprehensive service offering continues to drive value for customers and suppliers alike. As we help them make sense of a very difficult marketplace.

Worthy of special note is the systemic concern about counterparty risk which has prompted our customers to scrutinize more carefully the financial viability, transparency and corporate governance of their vendors. This is a welcome trend for World Fuel. What we're strong competitive differentiators for us in a good market have become essential requirements for doing business in a difficult market. This new level of scrutiny has only served to highlight the strength of our business model and validate the value of our global offering. At a tactical level, we are better positioned than ever to continue to service our core business even in an uncertain market.

At a strategic level we believe the Company has secured a leadership position in a market rich with opportunity across all three of our business segments. The upheaval in the global economy has precipitated [tectonic] shifts in the energy, transportation and finance industries and. Enterprise valuations are at all time lows and good businesses are starved for capital in a climate of unrelenting scarcity of credit. Our strong position should allow us to take advantage of these positions, as we look to complement organic growth with strategic acquisitions. Throughout this year, we will be reviewing opportunities to make accretive acquisitions with a focus on our core space of fuel distribution, services and logistics.

2008 was a remarkable year for World Fuel. We successfully launched our new ERP system, achieved new milestones in organizational maturity, effectively managed risk in a wildly volatile market and delivered record financial performance. As we look forward we harbor the same concerns as you do about the tough economic landscape our country and the world face and we will continue to engage the marketplace with discipline and caution. But we take a great deal of comfort in the fact that we enter the new year with a very strong, sound financial foundation. While we remain cautious about overpromising on our ability to drive growth in this challenging operating environment, it is important to note that we believe the crisis has created significant strategic opportunity for World Fuel.

The position we have achieved in the marketplace represents the culmination of years of effort and investment and we feel very good about our ability to deliver significant value to all our stakeholders going forward. Thank you for your continued support. And I will now turn the call over to Ira for a detailed review of the financials. Ira?

Thank you, Paul and good afternoon everybody. I would like to thank our team for the tremendous efforts that were made during this past year. We experienced global market conditions unlike anything seen before and our performance is a testament to the hard work and dedication that was put forth by everyone at World Fuel Services. Before I review our results by segment, I would like to point out that the sequential and year-over-year decreases in quarterly revenue were significantly impacted by the sharp decrease in fuel prices, which continued through the fourth quarter. Also, it is worthwhile noting that our extraordinary results in the third quarter of 2008 significantly impact the sequential comparisons of gross profit and operating income, despite our very strong performance in the fourth quarter.

Revenue for the fourth quarter was $2.9 million, down 47% sequentially and 30% compared to the fourth quarter of last year. Our marine segment revenues were $1.5 billion, down 48% sequentially and 35% year-over-year. The aviation segment generated revenues of $1.1 billion, down 45% sequentially and 31% from last year's fourth quarter. And finally, our land segment generated revenues of $260 million, down 46% sequentially, but up 44% from last year's fourth quarter principally driven by the acquisition of Texor last June. Our aviation segment sold 453 million gallons of fuel during the fourth quarter, down 13% sequentially and 25% compared to the fourth quarter of last year. The sequential and year-over-year reduction in volume was principally due to our efforts to reduce exposure to low margin, higher risk accounts which continued through the fourth quarter. While volumes have declined sequentially over the past three quarters, we now expect volumes to stabilize during the first half of 2009.

Our marine segment's total business activity for the fourth quarter was 6.6 million metric tons, down 5% sequentially and 7% year-over-year. Similar to aviation, the sequential and year-over-year decrease in volumes principally relate to our efforts to reduce exposure to low margin, higher risk customers. Fuel reselling activities constituted approximately 79% of total marine business activity in the quarter, slightly above the average percentage of such activity over the past several quarters. Our land segment sold 139 million gallons during the fourth quarter, down 2% sequentially but up 88% compared to the fourth quarter of 2007. Once again, these amounts include volumes from our Texor business, which we acquired last June.

Revenue for the full year was $18.5 billion, up $4.8 billion or 35% compared to 2007. The year-over-year increase in revenue reflects the impact of the record high prices we saw during the first several months of 2008. In addition to record high oil prices, this increase also reflects the impact of a full year of AVCARD and seven months of Texor. Gross profit for the fourth quarter was $103 million, a decrease of $20 million from the third quarter, but up $30 million or 40% compared to the fourth quarter of last year. Our aviation segment contributed $35 million in gross profit, a decrease of 31% sequentially, and 10% compared to the fourth quarter of 2007. Our self supply model jet fuel inventory position was approximately 15 million gallons at the end of the year, down 1 million gallons when compared to the third quarter. This represents our lowest jet fuel inventory position since the first quarter of 2006. The dollar value of our related jet fuel inventory decreased to approximately $18 million, down 64% from $50 million in the prior quarter.

Our self supply inventory remains strategic, and we regularly evaluate our inventory driven opportunities which could result in increases or decreases to our self supply inventory position in the future. Jet fuel market prices fell approximately 50% during the quarter, from $2.98 at September 30th, to $1.47 per gallon at the end of the year. Despite our reduced level of inventory, significant price volatility during the quarter, resulted in a negative impact to gross profit related to inventory average costing. This is in contrast with the third quarter when we significantly benefited from price volatility. This is the principal driver of the $15 million sequential reduction in aviation gross profit.

Our marine segment again delivered very strong results, generating gross profit of $59 million, a decrease from last quarter's record of $5 million or 7% sequentially, but up $26 million or 79% year-over-year. Again, benefiting from continued market volatility during the fourth quarter. As Paul has already mentioned, our fourth quarter results reflect our ability to execute very well in what was clearly an extremely volatile spot environment. We continue to be the counterparty of choice as well as a clear leader in the marketplace during these turbulent economic times.

Our land segment delivered gross profit of $9.6 million in the fourth quarter, a decrease of 5% but nearly four times the gross profit generated in the fourth quarter of 2007. Principally driven by the impact of the Texor acquisition, which delivered solid results for their second straight quarter. Gross profit for the full year was $395 million, up $150 million, or 61% compared to 2007. The increase in gross profit reflects our ability to navigate through a difficult global marketplace and utilize our global experience within the local markets that we serve. We also benefited by having a strong balance sheet and being a very reliable counterparty to both our customers and suppliers. Again, 2008 gross profit was also impacted by the acquisitions of AVCARD and Texor.

Operating expenses for the fourth quarter excluding our provision for bad debt were $63 million. This is above the $56 million to $60 million range provided on last quarter's call, due entirely to an increase in compensation expense related to special executive bonus awards of approximately $5 million which were granted as a result of our record year in 2008. Excluding the impact of such awards, operating expenses were up $1 million sequentially, and $10 million year-over-year. If you also exclude the impact of AVCARD, Texor and the increase in marine incentives related to their record performance, operating expenses were actually down approximately $2 million year-over-year. In order to help you model operating expenses as we've been doing for the past several quarters, I would again assume overall operating expenses excluding bad debt expense of approximately $56 million to $60 million in the first quarter of 2009.

We recorded a benefit to our provision for bad debt of $800,000 this quarter, compared to a $6.9 million expense recorded in the third quarter. For those that may question an actual reduction in our accounts receivable reserve in the fourth quarter, one needs to focus on the significant reduction in the size of our receivables portfolio, over the past two quarters. Our receivables balance was $676 million at year end, down over $600 million from the third quarter, and down over $1 billion from the second quarter of 2008. Therefore, despite the $800,000 benefit to our provision this quarter, our reserve as a percentage of total receivables actually increased to 3.3% from 1.9% and 1.2% in last year's third and second quarters respectively. Our year-end reserve is now at its highest proportionate level since the fourth quarter of 2003. Based upon what we know today, we are comfortable that our provision for bad debt is adequate.

Excluding the provision for bad debt, operating expenses for the full year were $226 million, up 43% compared to 2007. This increase primarily relates to the acquisitions of AVCARD and Texor, as well as increased corporate and marine incentives related to our record results in 2008. Our bad debt provision was $16 million for the full year, up $14 million compared to 2007. This increase was principally a result of the impact of record oil prices and related industry conditions on our aviation receivables portfolio during 2008.

Income from operations for the fourth quarter was $41 million, a decrease from our record third quarter results but up 68% from the fourth quarter of 2007. Income from operations for our aviation segment was $14 million, a decrease of 41% sequentially, and 22% when compared to last year's fourth quarter. Once again, the sequential reduction in aviation operating income principally related to the impact of fuel price volatility on our jet fuel inventory. Our marine segment's income from operations was $38.1 million for the fourth quarter, a decrease from the third quarter's record of 10%, but an increase of $23.5 million or over 160% compared to last year's fourth quarter. Our land segment generated income from operations of $2.4 million, flat with the third quarter, and up $2.5 million from the fourth quarter of 2007, once again driven primarily by the impact of Texor results in the fourth quarter of 2008.

Full year income from operations was $154 million, up $68 million or nearly 80% compared to 2007. These record results reflect our continued commitment to both organic and strategic growth, and our ability to tightly manage expenses during a year of unprecedented volatility. The Company had other expense net of $5.8 million for the fourth quarter, compared to other income net of $600,000 in the fourth quarter of 2007. Other expense net for the fourth quarter includes approximately $4 million in foreign currency losses, which relate to prior quarterly periods in 2008. The remaining variance relates principally to increased interest expense in the fourth quarter of 2008 when compared to the fourth quarter of 2007. I would assume interest expense of approximately $1 million to $1.5 million for the first quarter of 2009.

The Company's effective tax rate for the fourth quarter was 19.2%, compared to 27% for the third quarter. The fourth quarter tax rate came in well below the guidance provided on last quarter's call, principally due to the reduced level of aviation US based income in the fourth quarter combined with the significant increase in marine income in low tax rate jurisdictions. The effective tax rate for the full year was 23.5%, down from 24.5% in 2007. We estimate that our effective tax rate for the first quarter of 2009 should be between 20% and 24%. Once again, our quarterly tax rates are always dependent on our mix of earnings by region in any given quarter.

Net income for the fourth quarter was $28.7 million, a decrease of 29% from the third quarter, and an increase of 58% year-over-year. Diluted earnings per share of $0.98 decreased 29% sequentially but increased 56% over last year's fourth quarter. Full year net income was a record $105 million, up $40 million or 62% compared to 2007. Full year earnings per share were also a record, at $3.62, up $1.39 per share or 62% compared to 2007. Return on equity was 19% for the fourth quarter and full year, compared to 28% in the third quarter and 14% for the full year 2007. Return on assets for the fourth quarter was 10% compared to 11% achieved during this year's third quarter and full year return on assets increased to 6% from 4% in 2007.

As I mentioned in the past, we have been very focused on reducing our net trade cycle and increasing our return on working capital. As a result, we have decreased our net trade cycle to the lowest level in Company history at six days, down 7/10 of a day from the third quarter and 2.1 days from last years fourth quarter. This has been a great accomplishment for us. Should fuel prices rise, our incremental working capital needs would be significantly lower due to the material improvement in our net trade cycle. Our heightened focus on managing working capital and related returns combined with the positive impact of the declining fuel prices during the fourth quarter enabled us to again deliver solid operating cash flow of $195 million in the fourth quarter and return on working capital of 69%, up from 53% in the third quarter and 30% in the fourth quarter of last year. Full year operating cash flow was $394 million, another record result. This was due to our focus on managing working capital and related returns throughout 2008.

As a result of our strong cash flow performance, we have further strengthened our balance sheet which remains extremely liquid with our cash, cash equivalents and short-term investments increasing from $167 million in the third quarter, to $322 million at year-end. While our total outstanding debt declined from $60 million at September 30th, to $33 million at year end, leaving us at a net cash position of $289 million at December 31st. When you combine our cash position with our two liquidity facilities, our aggregate available liquidity exceeded $900 million at year end.

That being said, I am very pleased to reiterate that our Board of Directors has approved an increase in our regular quarterly dividend from 3 and 3/4-cents to 7 and 1/2-cents per share representing 100% increase over the quarterly dividend paid in 2008. The Board also declared that the dividend for the first quarter of 2009 will be payable on April 8th to shareholders of record at the close of business on March 20th. Consistent with our recently announced share repurchase program, the decision to increase our dividend supports our long-term strategy to enhance shareholder value. In addition to our increased dividend, we remain confident that our future cash flow generation, current liquidity profile and continued focus on managing working capital provide significant liquidity which will enable us to continue to pursue both organic and strategic growth opportunities going forward.

As evidence of our strategic opportunities we today announce that we will be acquiring the assets of TGS Petroleum, a independent branded distributor of gasoline and diesel fuel in the Chicago area with 2008 volume of over 100 million gallons. This business will be combined with Texor, continuing our expansion into the branded wholesale distribution business. This transaction is expected to be between $0.03 and $0.05 accretive in the first 12 months and we expect to complete the acquisition within the next 60 days. In closing, despite unprecedented market conditions, we delivered strong operating results across the business and we are extremely proud of our team for such accomplishments. Unlike many others today, our balance sheet remains strong and liquid and we remain the counterparty of choice in this fragile economic environment. We remain poised to continue capitalizing on our relative size and strength in the markets we serve, maintaining strong relationships with our suppliers while supporting our customers with value-added solutions and enhancing value for all of our shareholders. Marcelo, we are now ready to open up the call to questions and answers.

Thank you, sir. (Operator Instructions). Our first question is from the line of Alex Brand with Stephens. Please go ahead with your question.

Thanks. Hey, guys. So decent quarter. Kidding, good quarter.

(LAUGHTER). Easy Alex.

I want to make sure that I understand Ira, your commentary about the inventory, I think you said a $15 million hit which is kind of enormous. But the inventory level's very low now, so should we expect little to -- well, maybe not no, but much less volatility quarter-to-quarter going forward on that inventory?

Yes, so let me cover both of your points. First off, the $15 million number is a combination of two things. Last quarter we reported that we had about a $10 million positive impact. This quarter we had a few million dollar negative impact so on an aggregate basis it gets close to that $15 million. Now that we're down to about 15 million gallons, it really depends on volatility.

If you focus on the fourth quarter of 2008, the level of volatility was enormous. We saw 50% reduction in price from the end of September to the end of December. So despite the fact that our position was much lower than where it had been over the last several quarters, we still had a few million dollar impact, arguably that number would have been a lot larger had we been sitting on 30 million gallons of fuel. The opportunity for volatility is still there but it's certainly muted by the fact that we're sitting on lower level of inventory. I don't know what your assumptions are for prices going forward but with the price for a barrel of fuel at about 40 bucks, the level of volatility we saw is kind of difficult to repeat but you just don't know in this world, which directions prices will go down the road.

Let me use the volatility as a segue. Volatility is helping marine gross margins which were sounds like, again, pretty good. I don't know if they were around $9 again or what, but as I think about that going forward, how are you guys thinking about the fact that you're now more focused on return than ever so you're trying to do everything you can to keep that margin high, versus if the volatility comes down and the bunker market stabilizes, how much margin do you think is at risk?

This is Paul. As you know, margin historically is a composite of a lot of different factors. You've got a market environment which is ever-changing. You've got credit issues and a sense of what the risk profile is. You've got a mixture of what's going on in the actual portfolio itself and a broad spectrum of different accounts throughout the segment. All of these things are impacting margin in addition to the economic backdrop and just other issues like counterparty risk and what have you. There's also another key factor in there which is the maturity of our model, is such that we enjoy some competitive advantage in terms of just our procurement skills. So the fact that we can achieve pretty good results just by being very, very good, efficient buyers in the market allows us some competitive advantage that our other competitors just cannot achieve because of our scale and our aggregated position in the market. Which means that we cannot only achieve margin but we can deliver very competitive pricing to our customers and of course being the kind of counter party we are, that's a very, very valuable asset in today's world.

There's more scrutiny on that issue than there ever has been in the past. This is a welcome trend for World Fuel because it allows us to completely stand alone from the pack. So in terms of a go forward, I can't predict with any precision what will happen to margins and as you know we don't discuss that net level of granularity but I would say it's not just as simple as prices went down and therefore margin might be reduced. It's not -- that isn't necessarily a conclusion that we would reach. We are certainly focused on return as any good business should be but I would say that the market has changed enormously in the last 12 months and I think that our ability to use our mature system to buy effectively is a very key component of it as well.

That was a very thoughtful answer, Paul and I appreciate it but I want to attack it a little bit more simply if I could. I think last quarter you guys were very explicit that $9 was unusually high, that that wouldn't be reasonable to extrapolate that going forward. I also think there's a lot of concern out there about when you look back at the history of World Fuel, it's been three and four and $5 a ton. And could you comment sort of in that context, $9, what you said before, probably wasn't sustainable. Do we have a risk that we go back to three or four?

I mean, I think I wouldn't view it as being quite that extreme a shift. I would say that when we did talk about this in Q3, we did talk about the extraordinary nature of what was going on and that it might be difficult to do that going forward and I think that that's still an accurate statement. So our focus is on a market that is fundamentally a spot market. We believe that the margin is a function of many, many different factors. I would say that we're going to obviously work to try to preserve margin but we can't give you any visibility with precision on what that will be but I would simply bring to your attention that again it's important to understand that there are many different components going into margin and while we might have articulated some concern about the sustainability of those margins in Q3, I think that was correct.

But I would also say we're going to a market where the factors are far -- it's a very different economic scenario today so we're going to do our best to continue to protect margin and buy better and continue to look at our mix of business. All of that's going to play into what happens with margin going forward.

Thank you for that color. If I could just ask one more question. With respect to the commentary that aviation volume took a big hit, which you guys felt was the right tradeoff for better margins and lower risk, but you now think aviation stabilizes, I know marine is a spot oriented business and harder to call, but is there a same thought process there that you've sort of called out most of what you think you need to and so something more like stable is the right way to think about it?

I would say there are different things going on in the two segments. As you know, given the extraordinary market conditions of 2008, our hat goes off to the aviation segment and the risk management team that worked very aggressively to under very extraordinary circumstances to sort of rationalize that portfolio, reduce low margin business, extract ourselves from volumes that were not generating returns relative to the risk and I think they did a very good job of getting us to some bed rock there and really building some foundation that we felt we'd really hit some hard ground there. I think that that puts us in a good position to rebuild those volumes as we look forward into 2009 so it's a little bit different dynamic.

With marine as we talked about many times, you've got a couple things going on. First and foremost, it is a spot business. So there is always going to be just an inherent variability on volume relative to what's going on in the trade. I would also say that as a secular backdrop we all know that there's been some changes in the whole dynamic in the shipping industry and I would say that as a secular trend, trade is down in the shipping industry has backed off some of its highs that we experienced over the past five years. That's going to have some impact. However having said that, I would say our business model has certainly been validated and as you know strategically we made a decision to focus the higher end of the market. So the customers that we have historically targeted in the last several years have been the more well-capitalized groups, the ones who we expect have sustainable positions in the market and while some of their volumes may retreat we think we going to do better than others in terms of being able to protect some of our market share. But certainly when you look at the backdrop and you look at what's going on in trade, it would be unrealistic to think there might be some threat to volumes going forward but we don't have the crystal ball better than anybody does. All I know is that we're better positioned than anybody in terms of our strategic position relative to that overall volume market.

Okay. Thank you for that. I appreciate the time, guys.

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

Thank you. Good afternoon, guys.

Hey, Jon.

Paul, despite all the good things you guys have been doing I have to imagine that some of the margin improvement is just a function of your competitive advantage given the transparency of your balance sheet and liquidity of your balance sheet and there's probably a lot of wounded animals out there I think in some of your core markets. Outside of what you've been doing in land, been a little quiet it on the acquisition front. Do you see potential opportunities in either the marine or the aviation side to pick up some good people, potentially on the cheap because of the problems with your competitors?

Yes to all of the above and I'm glad you asked that question. Certainly, I would characterize the 2008 was largely -- it was a world in which we were defending the franchise. The whole world had gone crazy. You had extraordinary volatility in prices. You have an economic meltdown of ex extraordinary proportions. The whole world was facing a very difficult time. And I think our team did a phenomenal job of defending the franchise, building the thick walls for the fortress, building a moat around our franchise, fortifying the balance sheet making sure liquidity was there. Because we like everybody else had no absolute clarity as to where all this was going to go. All that hard work paid off. We enter 2009 with a very, very strong foundation.

So our focus is now shifting towards not -- certainly we have to continue to execute very well on our core competence but I would absolutely tell you that we are focused strategically on a horizon where we believe the crisis has created an enormous amount of opportunity. There is huge upheaval in these major industry segments, energy, transportation, logistics, finance, these are all things that have been sort of stunned and shocked by what is gone on in the economy and I think that we could not be more excited about the strategic landscape and the opportunity to explore things in all three of our segments. So we are not in a position to give you specific color on any of those things now but I would certainly hold out to you that the acquisition that we signed, our intent to acquire TGS Petroleum is certainly evidence of our intent to move very quickly and take advantage of the opportunity. So I think I would just ask you to stay tuned. We've got a war chest. We're in a good position. We're executing well and we're disciplined in this whole process, so you won't see anything rash. But I think it's definitely a good climate for us.

Okay. And organically, if I remember correctly, you've done a lot of growth of your own sales force, and I think now you're probably getting to the point where the scale is building up and we're seeing the revenue kind of drop to the bottom line a lot quicker. Are you out there hiring organically as well or do you feel you have the right people system in place right now to take advantage of opportunities that may present themselves?

We certainly believe that we could achieve a lot with the team that we have and I think that a lot of work as you know for the last two years Mike Kasbar has been driving, he's just relentlessly the transformation of this company to a more a mature organization. And driving efficiency and teamwork and a level of collaboration and robust systems that have been unprecedented in this Company's history and he has dragged this company from being sort of the entrepreneurial energy ball that we were into a far more mature, disciplined, rigorous Company, focused on execution. I think that that allows us a platform to execute in a way that we couldn't before and while we are always opportunistically looking for talent, look, this company historically has been a magnet for talent.

We are first, last and always about people. We will continue. We would like to pride ourselves on being a Company that can attract innovation and entrepreneurism and talent. We will continue to do that. But it isn't the first priority. We think we've got a good team and a pretty good platform and there's a lot we can do and I think a lot of that robust growth that Mike was driving over the last two years have really put us in a great position as we enter '09 to execute on that.

Are you disclosing the price of the TGS acquisition?

No, due to the size, the relatively small size of the particular acquisition we decided not to disclose the price.

All right. Understood. Thanks a lot.

Our next question is from the line of Steve Ferazani with Sidoti & Company. Please go ahead with your question.

Good evening. Just want to touch on the TGS again. Seems like the Midwest has been getting the best retail, rack to retail spreads. I mean, is that part of the strategy, you look at the stronger markets or is it you look at the best acquisitions in terms of expanding geographically? Can you sort of explain out the strategy a bit there.

Hi, Steve. This is Mike Kasbar. It's a combination. Certainly that -- you have to look at markets. They do tend to be local. Not every market is a good market, despite the fact that we think we selected a pretty good space within the diesel and gasoline distribution. The whole game plan there was to leverage the Texor platform. We've got a great team there. So this is just a plug and play tuck-in, really nice acquisition. We're very happy about it. So it's a combination of staying true to the strategy and looking to get an acquisition that brings a lot of juice to the bottom line.

How much can you benefit from scale there as you expand, if you go into markets that maybe aren't quite as strong, it's offset by the benefits of scale?

Well clearly the beauty of this acquisition is it's -- doesn't come with a lot of assets or people, so we're looking to leverage what we think is a superior platform there. We've got the opportunity to take that same business model to other geographies and we'll just see how it all plays out. But for the time being, I think we're delighted that in less than nine months we've bagged a pretty nice acquisition in Chicago and we're going to get some economies of scale.

Going to have to circle back again on the gross spread issue a little bit. Now that we're three months, four months out from the initial credit crisis shock and you're seeing fuel prices come down substantially, so I'm assuming working capital constraints on both competitors, customers weakening a bit. Are you starting to see any pushback?

Steve, I think as Paul has said both in his initial remarks and then with Alex just a few moments ago the world is still a pretty rocky place. There's still a lot of risk out there. So I think a combination of our procurement skill, the scale of business that we have in the marketplace, combination of just the value add on looking at price risk management, it's a good opportunity to be looking at pricing. I think most everybody thinks that the price is more likely to go up than go down. That factors into our skill at dealing with price risk management. There's a lot of business development opportunities in the marketplace today. Everyone's interested in conserving cash and eliminating risk.

We've got a lot of skill at being able to bring solutions to both customers and suppliers. This market is ideal for our skill set. We've been focusing on these solutions, essentially our entire lives, so whether there's going to be pushback or not I think we feel pretty confidently positioned to be able to deliver a reasonable result. Certainly, 2008 is completely different than 2009. Planning, you know man plans, God laughs. So the whole name of the game today is to be extremely flexible and responsive and that's really what we're focused on.

Last question, just on risk assessments, certainly the big risk, commercial aviation customers, three, six months ago was the high jet fuel prices and how they'd cope with that. Now I guess it's declining volumes. Is that never changing risk assessment. Does your customer base, who you would accept as customers change?

Yes. I mean, look, as you know, there's no more discipline within this Company that we take more seriously than risk assessment and it is a moving target. One of the things we learned last year out of aviation, when you consider what happened in the high prices, there were many companies that moved very aggressively to rationalize their entire structures in the face of very high oil prices. Those same companies benefited tremendously when the oil prices came down because they had done a lot of the very hard work on slashing capacity and dialing back their asset position. So in some ways, there were companies that did the hard work in June and July that actually benefited later on in the year.

We certainly understand that the economic backdrop is challenging but all air travel and all air cargo has not stopped. It will not stop completely and I think that again, as we talked about earlier, Steve, we did a pretty good job of getting ourselves to some bed rock and we see opportunities to grow the volume going forward, without in any way impairing our risk. So I think it's about just making sure that you're fast and as Mike just said, we've always been very good at being responsive. It's all about being able to look at what's happening and the changing dynamics and respond accordingly. It's something we're very proud in terms of Frank and his team. And the leadership in the aviation segment, Michael Clemente and his group and what they did to rationalize that portfolio. They're all the same people who see the opportunities to grow that volume now going forward. It's just about being good at what we do.

Great. Appreciate it, guys.

Thanks, Steve.

And our next question is from the line of Michael Novak with Frontier Capital.

Despite your multiple, I think you've proven that your business model is better than anyone including me ever thought it would be. So going back to the gross spreads, if they really were to contract meaningfully, wouldn't it take a material improvement in the overall environment and wouldn't that lead to probably substantially stronger volumes, so to some degree the business model's offsetting so yield spreads, yields expand when things are very difficult, very -- the credit crisis is out there and then when -- if they were to come down materially, it would be because the general environment is much better.

Yes, Michael, this is Mike Kasbar. Our business model is perfectly suited for this marketplace. We've got the ability to pivot and respond. We're not welded to any particular position and just reflecting back on the previous comment in terms of the business development, the need for cash, the need for cost cutting as revenue is challenged for all these companies, they're looking for solutions.

They're opening their eyes to different ways of doing business and that's certainly good for us. We've got the ability to modulate. We take a progressive revenue management disposition. So if we've got to dial one lever, we can move the other the other way. So I think we feel like we're in a good position. We're not exactly sure exactly what's going to transpire. But we're pretty much prepared for anything.

I think historically, Mike, we've been able to demonstrate over and over again thatwe've been able to execute in a whole variety of different market conditions. One of the things that is significant to note too is that the competitive landscape has changed. This last year was a very powerful stress lever on a lot of the privately held, less well capitalized groups out there in the competitive landscape. The supply community had to completely re-evaluate its commitment to the downstream and do a lot of hard thinking about who they were going to be rationalizing their channel distribution through. I think that all of those trends favor us.

So there's a lot of things going on in this as we look forward and I think it's back to this is where all the years of the hard work and the investment in this platform have given us a really unique position in the market and I think that you're right, some of these metrics are going to change but I think it would be much too simplistic to say that just simply because prices have come down and maybe the economy comes back a little bit that it's going to stress all the margins and it's going to hurt your ability to succeed. I would say on the contrary. I think we're better positioned than anybody to take advantage of this market.

My second question goes more to the balance sheet with 37% of the market value of the Company in net cash and the share repurchase out there and I think you said your priority was acquisitions. How robust is your pipeline today? What's the priority for acquisitions? How material can you see it being over the 12 -- next 12 months and can you talk about acquisition multiples to where they've been historically?

Is there anything else you would like to know, Mike? Let's put it this way. We've been I think careful and prudent. We've had the ability over a period of time to do a number of different things and we haven't gone hog wild. If anything, perhaps we can be accused of being too conservative. But the reason we've done that is because we're keeping our eye on the ball and sticking to or admitting we've-- I think stuck to strategic selective acquisitions. There's certainly a lot available on the marketplace.

We're a little bit picky in terms of the type of people that we want to spend our time with. And it's been a Heck of a year. We went live with our ERP. 2008 was a challenge. So we've arrived through that and Ira has acquired, oh, I don't know about 70 or 80 companies in his spare time over the years. So we -- we're geared up and we're ready to roll and we think that it's certainly a good time to buy.

How much cash do you want to leave on the balance sheet to maintain that sense of comfort with suppliers, that competitive advantage and also hedge against the risk that fuel prices go up materially?

It's hard to give you that with any precision, Mike, but I would say that we certainly believe that we are in a -- we're in a very strong position and I think that we've got plenty of room to execute what we think are some of the opportunities out there. But I would be loathe to put a precise number on that. We can all do the math on various oil prices.

As you can imagine, we pay a lot of attention to all of our liquidity modeling. We spent a lot of time last June focusing on $200 barrel oil and we've run every scenario in between. Our first and foremost our responsibility is to protect the franchise and defend it and be able to execute our business model at scale in a whole variety of scenarios. Even having said that, despite our most sort of conservative assessments of that, we believe we've got ample room to execute quite a bit on the strategic side.

I'm sorry. Just to add, Mike, I think we really look at the overall liquidity as opposed to cash specifically and we're, as Mike mentioned, for other reasons on the M&A front, we are somewhat conservative bunch and always want to make sure we have adequate liquidity on hand to weather whatever storm may be thrown in front of us. 2008 was a great example of that and that will be a combination of some cash and a certain level of committed capital, such as our over $600 million of committed capital is completely unutilized today.

One last quick question. I know the Texor acquisition was more of a platform acquisition. Does it have the platform to manage the land business in multiple geographies, so outside of the Midwest, or will you have to -- is it more of a regional business and you'll need to buy more companies like that in other geographies?

Well, you know, today we're supplying unbranded product in 28 states throughout the United States. So --

Not through Texor, is it?

No, not through Texor. But I mentioned that as what we started in World Fuel a number of years ago, so we've got a good amount of talent within World Fuel already and by virtue of our ERP our systems are getting smarter and sharper every day. A big part of that business is very systems dependent. So by virtue of the competency that we pick up with Texor, some very smart people and a great business model combined with our unbranded wholesale rack business, I think that we're building a very interesting platform. And certainly with some additional acquisitions in that space I think you're starting to see something emerge that could be very exciting. Additionally, we have, although albeit it's quite small say fledgling operations in Brazil and the United Kingdom. What we call the land space it's pretty exciting. It's significantly bigger that our marine and aviation space combined in terms of volume.

Thank you.

Thanks, Mike.

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

Yes, thanks, congratulations on a good quarter. Couple of questions here. One, just thinking of the new acquisitions, basically you're buying the assets and it's just going to be rolled, pretty much there's no additional expenses associated with operating it.

Absolutely.

That's correct there's very limited incremental expenses related to the acquisition once we put it together with Texor.

I thought you said 100 million gallons per year, per year or per quarter.

Per year.

Per year. Okay. Next question. Ira, could you talk a little bit about this--the foreign currency loss that you recognized this quarter relating to prior translation? How did that arise and I guess how did you -- how was it not identified earlier?

Well, at the end of the day, we had some losses related to significant volatility in the second half of the year that weren't deemed to be overly material, some of which related to prior quarters in the year. Arguably, we could have identified them a little bit earlier, but we identified the issue in the fourth quarter and we recorded the $4 million adjustment at that point in time. But once again, if you look at the full year, there's no real material impact on the results for the year.

I understand. I was just -- I guess I was just kind of wondering how -- I mean, it just -- how it would arise or something. It's that you would recognize it in the fourth quarter but not in prior quarters or something. I mean, just how it would emerge or identify itself.

It was a result of our year-end review and preparing for our full year results, when we did a complete review of all of our foreign exchange activity, the impact on previous quarters were immaterial, so that's really the best way I could describe it for you.

Okay. You've got a -- when you -- you said to figure on about $1 million in interest expenses for the first quarter. That's not what your net number is, is it, but rather --

It's really a combination of two things. Good question, Ed. Obviously we don't have a lot of debt on the balance sheet and we have a significant amount of cash. We are pretty conservative today in terms of where we're investing our cash in this fragile economic environment. So I would ordinarily be embarrassed to say this but I'm actually not in saying that our yield is about as close to zero as you could get because we're focused more on the preservation of capital than on taking chances in an environment where many banks are on the edge at the moment. What also goes into that line are the amortization of fees related to both of our bank facility and our accounts receivable securitization facility which are reported as interest and that's principally the number that -- that's a big part of the number that I estimated for the first quarter.

Okay. The last question, then. Could you, just getting back to the gross margin issue, I think everyone has fears of trying to get an idea of where this number goes, but to what extent would you say that the improvement in operations or in your ability to -- whether it's your information systems now or your just general knowledge has driven an ability to drive gross profit versus -- if you could quantify it from a percentage standpoint, as opposed to the gross profit improvement that you saw from market volatility or liquidity issue volatility.

Well I think we're on our way. We spent a lot of money putting our global ERP system in. Ira's initiatives, cost management, have kicked in. You're getting visibility on OpEx. Our group is certainly maturing. So that's certainly the name of the game. Both on being able to take all of our capability, our procurement as Paul commented on and certainly squeeze more out of that in a net margin. So that's clearly where we want to go, to be the low cost provider. And that's basically the objective. So it's been a long time coming, in terms of building up the organization. Certainly last year, a lot of investment went into that. So it's up to us as a management team to start squeezing that out.

Okay. All right. Thanks.

Thank you.

Our next question is from the line of Brian Delaney with EnTrust. Please go ahead with your question.

Consistent with the prior question, can you just help us understand we're thinking about the gross spreads and the improvements in gross spreads, trying to just say 80% of it came from your better procurement versus filling the credit hole versus calling some of the lower -- the lower margin, higher risk business, I mean, how would you break it down in terms of the improvement?

Brian, again this is now I think one of several questions on this call, all trying to get visibility on how we would predict this margin going forward which we're not in a position to do with any precision and to ascribe these various percentages to it in a way that you would like also is not easy to do. We came through what was an extraordinary market, confluence of events in 2008 and we achieved -- we drove much better returns on the high price market. We held onto those returns as the prices came down because counterparty risk is more important than ever. We're looking forward at an overall economic backdrop which is uncertain and I don't think there's anybody on this call, either on this side of the call or on your side of the call that can give us visibility with certainty about what the future may hold in this economy so for us to give you any predictive or any precise indication of where that's going to shake out I think would be difficult, particularly in breaking it down in percentages.

What I would tell you is that his Company has done a lot of work to become Best-in-Class at executing on many different levels. It's systems driven. It's team driven. It's procurements expertise, it's counterparties, it's balance sheets, liquidity, it's market platform, it's 44 offices in 23 countries, it's the ability to understand customer at a very granular level, all of these things go into what ultimately drives as margin. I wish I could given you with precision what that would be going forward but it just eludes easy capture. We do have a lot of confidence in our ability to execute. I would say that a lost hard work was done to get those margins up to where we had seen them in '08. Whether we can hold on to them in a market that has a tough economic backdrop and perhaps some drop in price. You've got the offsetting dynamic of perhaps improved volumes. There's just a lot of dynamics going on.

As Mike said, in a low price market you're now looking forward into managing the forward curve. So there's a lot of issues around being able to structure forward pricing. I just wish it was as simple as being able to tell you that it's 20% this, 20% that, 20% another thing. It just unfortunately does not work that way. But I have a lot of confidence that we execute well. So we'll do our best.

I'm sorry. I wasn't asking for forward-looking guidance. Is was just saying from a historical perspective, when you analyze the business and you analyze kind of the improvements, is there -- is it evenly spread, just to give us a little bit more granularity around it, not whether or not it's sustainable or not but just helping us understand the major component, whether it was all just better buying around volatility and oil prices. Can you explain a little bit further in terms of just the concept of culling, having margin improvement because we're culling the higher risk, lower margin customers, I would have thought it would have been the higher the risk, the higher margin, as opposed to the opposite. Am I thinking about that incorrectly? If we're getting rid of higher risk customers, I would think that would be an adverse margin scenario because historically you would want to be charging more the higher the risk.

Again, you're reducing this to a set of I would say very primary components and there's a lot more going on in the margin equation. In terms of what is the long-term contract margin that might have been high risk that we shed because we didn't want the volume or it was not or we weren't getting the return at one price level. Or it started out as a contract at a good price level but then when the prices changed on us it was no longer getting the returns so we made a decision. We've also done very well by using forward curve and price management and procurement expertise to make good margins across a broad spectrum. It is not necessarily intuitively that the only way we get margin is because they're high risk. That hasn't been our model. Anybody's who followed this company for a long time knows we made a very strategic decision to move upstream in terms of customer quality and portfolio management and that's been our strategy for the last several years and I would say it's part of the reason we feel comfortable with our fundamental risk management expertise. Because we really deliberately did that.

So when we look at '08 there's a whole lot of stuff going on. You had some volatility. You had prices that were very much up and you had them going down. You had a very robust shipping market at one end of the spectrum and then it also became more stressed as the economy changed. You had aviation that was under radical risk earlier in the year that actually did better towards the end of the year. So again, you throw all this in the mix. You get a lot of offsetting components. The real issue is back to what Mike Kasbar said earlier is how fast can we pivot. How fast can we respond. How well does our risk management team work in concert with our commercial execution in the market and I would say nobody does it better. So unfortunately, I can't give you that clear, crisp model that you would like but I would tell you we've got a long track record of executing pretty well and we're now several quarters into executing pretty well in one of the most bizarre environments in history. So I think that's as much as we can give you.

Last question. When I look back, Q3 to Q4 historically on a sequential basis there is improvement and you started the call by saying Q3 was just a very good call, so when you think about the sequential trends and the gross profit going down, just because we had a very good Q3. When we think about Q4 going forward, now Q4 looks like the second best from an absolute dollar perspective quarter the Company's had. Will Q4 also then end up being somewhat of a high water mark on a sequential basis or how should I think about it leaving the experience we had in the fourth quarter.

That's forward-looking guidance which we don't provide so we really can't help you in comparing Q4 to what Q1 or Q2 of '09 will look like.

Thank you.

Thanks.

There are no further questions at this time. Mr. Stebbins, do you have any closing comments you would like to make?

We would just like to say thank you to all of our shareholders and all the people making time to join us on this call. It's been an extraordinary market. We're proud of the results and we appreciate your support. We look forward to talking with you at the end of Q1.

Ladies and gentlemen, this does conclude today's conference call. We would like to thank you for your participation. You may now disconnect.