World Kinect Corp (WKC) 2010 Q2 法說會逐字稿

Hello and welcome to today's 2010 second quarter earnings call. I'll be your event specialist today. Questions will be taken by the phone at the end of today's Webcast. Instructions on how to ask a question by the phone will be given at the beginning of the Q & A session. If you are disconnected from the Webcast you can log on again using the login instructions provided to you. If you can not log back in with these instructions please call support at 1-866-271-7592. It is now my pleasure to turn the Webcast over to your speaker, Frank Shea, Executive Vice President and Chief Risk and Administrative officer. Mr. Shea, the floor is yours.

Good evening everyone. Welcome to the World Fuel Services second quarter 2010 conference call. I'm Frank Shea, Executive VP and Chief Risk and Administrative Officer and I'm doing the introductions on this evening's call, with as we have been doing in recent quarters, a live slide presentation. This call is also available via webcast. To access this webcast or future webcasts, please visit our website www.WFSCorp.com, and click on the website icon. With us on the call today are Paul Stebbins, Chairman and Chief Executive Officer, Michael Kasbar, President and Chief Operating Officer, Ira Birns, Executive Vice President and Chief Financial Officer, and Paul Nobel, Senior Vice President and Chief Accounting Officer. By now, you should have all received a copy of our earnings release. If not you can access our release on our website.

Before we get started, I would like to review World Fuel's Safe Harbor Statement. Any statements made or discussed today that do not constitute or are not historical facts, particularly comments regarding World Fuel's future plans and expected performance, are forward-looking statements that are based on assumptions that Management believes are reasonable, but are subject to a range of uncertainties and risks that could cause World Fuel's actual results to differ materially from the forward-looking information. The summary of some of the Risk Factors that could cause results to materially differ from our projections can be found in our Form 10-K for the year-ended December 31, 2009, and other reports filed with the Securities and Exchange Commission.

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 evening and thank you for joining us. Today, we announced earnings of $37 million or $0.61 per diluted share for the second quarter of fiscal 2010. With the exception of the extraordinary results we reported in the third quarter of 2008, these are the best quarterly results for gross profit, operating income, and net income in the history of the Company. And sequentially, we had quarter-over-quarter growth in volume and gross profit across all three segments. Our returns on equity, invested capital and working capital remain strong in the quarter, and our total shareholders equity exceeded $800 million.

While we are certainly pleased with the financial performance of the Company this quarter, we are most interested what the results reveal about the key drivers of our business model. We believe our results underscored three important factors which have contributed to our success over time. Number one, managing risk is a core competency of this Company. In a highly uncertain global market we continue to emphasize throughout the Company that our primary focus should be managing risk. By maintaining a disciplined approach to driving solid risk-adjusted returns, good results will follow. This approach has served us well in delivering consistent growth over time.

Number two. Excellence in execution and committment to Customer Service are not only competitive differentiators, they are essential components in achieving sustained growth over time. This is not just a matter of corporate culture. It is a matter of continuous investment in the people, process, and technology which make World Fuel easy to do business with. As was highlighted by our customers and suppliers at our analyst day in New York, we have demonstrated an ability to build long term relationships with customers and suppliers, which has allowed us to drive efficiency, scalability, and superior returns over time.

Number three. Strategy matters. By understanding and anticipating the long term structural changes taking place in the energy and transportation markets, we have firmly established ourselves as a value-add fixture in the global supply chain and we are well positioned to pursue strategic opportunities across a broad spectrum of activities related to fuel, services, technology, and logistics. By staying true to our core strategy of solving the challenges of procurement and supply in a highly fragmented global market and being highly responsive to fast changing market conditions, we have been able to deliver consistent growth throughout our volatile period, and while we are unable to predict with precision the future of interest rates, sovereign debt, GDP growth, or the balance of trade, or even the pace of economic recovery, we do know that maintaining a disciplined and focused approach to rich management, execution, customer service, and strategy will continue to serve us well through a wide range of market conditions.

This has been a hallmark of our success as we've tripled gross profit over the past five years. The details can be seen in each business In our Marine segment we posted significant sequential and year-over-year increases in volume, gross profit and operating income. In fact, our volume was up 12% sequentially and was the highest we have reported since the fourth quarter of 2008, while gross profit was up 10%, which is the highest we have reported since the first quarter of 2009.

During the second quarter, we saw increased activity in the shipping market. Container rates showed sharp increases from a year ago, reflecting high demand for space on ships as well as for actual containers. Rates in the dry bulk market were off sharply but this seemed to reflect the shift in capacity, not so much a sharp drop in the movement of goods. Having said that, China's demand slowed somewhat through the quarter, and they remained a key driver of bulk market activity going forward. The tanker market was off in the quarter, but projections about oil production levels would suggest an increase in tanker activity is expected in Q4 of this year and into next year.

The tanker market, as you know, is also sensitive to external events, so unrest in the Middle East, the drilling issues in the US Gulf and the recent explosions in China all have significant market sentiment impact. While these facts point to a somewhat more positive outlook for the overall shipping industry, we believe persistent concerns about the sustainability of an economic recovery are grounds for caution. Our strategy is to stay focused on servicing our global customers and providing an important distribution platform for our suppliers.

Our Aviation segment delivered record results with sequential and year-over-year increases in volume, gross profit, and operating income. We saw positive developments across the spectrum of passenger, cargo, government, and business aviation and continue to benefit from continuing changes in the supply market coupled with a generally positive operating environment for the overall aviation industry. Cargo trade in particular performed well in the quarter with overall activity according to IATA up 26.5% from June of 2009. Passenger activity has also improved by 11.9% year-over-year. Having said that, sustainable traffic is a function of business confidence, and there is still uncertainty about the durability of the economic recovery. On the supply side, we see a continued trend towards open markets and infrastructure investment which present new opportunities for us to participate in the bulk supply market. We also expect the integrated oil companies to continue to work with us to reduce their distribution costs and rationalize their go to market strategy.

In our Land business we saw sequential growth in volume and gross profit, but overall performance in the segment was negatively impacted by a reduction in margins associated with targeting a more blue chip class of customer in our domestic wholesale business and some investment in the development of our UK and Brazil based businesses which are beginning to scale. We expect to have a better sense of our success in these new markets towards the end of the year.

In the meantime, our branded wholesale business continues to develop in the US market and we were very pleased to announce the acquisition of Lakeside Oil Company in Milwaukee, Wisconsin. Lakeside supplies approximately 350 million-gallons of gasoline and diesel fuel under long term contracts to more than 250 retail Operators in Wisconsin and Minnesota. We are excited to have Lakeside as part of the World Fuel family.

The second quarter was a good one for World Fuel. We demonstrated as we have in the past that continuously changing markets can present opportunities to drive both organic and strategic growth. In previous calls, we have indicated that in the event the economy started to recover, we would be well positioned to benefit, and we did. Our global team was prepared and executed well. Looking forward, we are excited about our opportunity set, and will continue to exercise patience and financial discipline as we drive future growth. 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. Consolidated revenue for the second quarter was $4.4 billion up 12% sequentially and up 74% compared to the second quarter of last year. The year-over-year change in revenue is impacted by the increase in crude oil prices from an average of $60 per barrel in the second quarter of 2009 compared to an average of $78 per barrel in the second quarter of this year, as well as an increase in volume in all three of our business segments.

The aviation segment generated revenues of $1.7 billion, up $231 million, or 16% sequentially, and up $859 million or 103% year-over-year. Approximately 53% of the year-over-year increase was due to increased sales volume and approximately 47% was due to an increase in the average price per gallon sold as a result of higher world oil prices. Our Marine segment revenues were $2.3 billion, up $178 million, or 9% sequentially and up nearly $900 million, or 65% year-over-year. Approximately 71% of the year-over-year increase was due to an increase in the price per metric ton sold as a result of higher world oil prices and approximately 29% was due to increased volume, and finally our Land segment generated revenues of $430 million, up 19% compared to last quarter and up $110 million or 34% year-over-year. Approximately 65% of the year-over-year increase was a result of higher world oil prices with the remainder being the result of increased volume during the quarter.

Our Aviation segment sold 689 million gallons during the second quarter, up 11% sequentially and up 50% year-over-year representing record quarterly volume and the fifth consecutive quarter of growth in our aviation segment. Our aviation volume in the second quarter is actually 10% higher than the record level of quarterly volume reached in the first quarter of 2008 before the market began to decline. Recent volume increases have been driven by our continued focus on driving growth in our commercial passenger, cargo, and general aviation businesses, as well as further increases in government related business activity. The disruption caused by the volcanic eruption in Iceland in mid April did not have a meaningful impact on our second quarter results.

Our Marine segment's total business activity for the second quarter was 6.17 million metric tons, up 12% from last quarter and up 19% year-over-year. While volumes in our marine segment remained stable over the course of 2009, after a modest increase in the first quarter, we experienced double digit growth this past quarter. Although our approach remains conservative in these fragile and still somewhat volatile core Marine markets, we have begun to see improvements within many market segments. Our focus on risk management and return on investment will continue to drive our decision-making processes regarding the amount of business we do in certain markets and with certain customers. Fuel reselling activities constituted approximately 80% of total marine business activity in the quarter, up slightly over the past two quarters.

Our Land segment sold a record 190 million-gallons during the second quarter up 16% sequentially and up 12% from last year's second quarter. As we announced a few weeks ago, we had closed on our acquisition of Lakeside Oil Company and look forward to the many additional growth opportunities that lie ahead. Our Land business has now nearly quadrupled its annual run rate from 269 million-gallons in 2007 to approximately 1 billion-gallons, and should continue to become a more meaningful portion of our overall business. Consolidated gross profit for the second quarter was $108 million, the second highest level in Company history, an increase of $9 million or 9% sequentially and an increase of $16 million, or 18% compared to the second quarter of last year.

Our aviation segment contributed a record $53 million in gross profit, an increase of $5 million or 9% sequentially, and up $13 million or 33% compared to the second quarter of 2009. While activity levels may vary from quarter to quarter, we continue to benefit from an increased level of government business as well as overall capacity and demand increases in the commercial passenger cargo and general aviation businesses. Our jet fuel inventory position was approximately 43 million-gallons or $87 million at the end of the second quarter, an increase of 3 million-gallons from the first quarter and an increase of $7 million principally due to the increased volume during the quarter. As we have for the past several quarters, we did realize the benefit from inventory average costing again this quarter. The amount of such benefit was approximately $3 million in the second quarter.

The Marine segment generated gross profit of $43 million, an increase of $4 million or 10% from last quarter, and an increase of $3 million or 7% compared to last year's second quarter results. We remain focused on driving profitable growth in our marine segment as we do across all of our businesses. Our Land segment delivered gross profit of $11.5 million in the second quarter, up $400,000 sequentially and flat with last year's second quarter. The Lakeside acquisition will contribute to gross profit in the third quarter, which will further increase our land segment's contribution to the overall profitability of our business. Operating expenses in the second quarter excluding our provision for bad debt were $60.8 million, up $4.5 million sequentially, and up $5.8 million compared to the second quarter of 2009. The increase in operating expenses were primarily driven by higher compensation expenses, driven in part by annual merit increases in April as well as acquisition related expenses incurred during the quarter. The level of operating expenses, excluding bad debt expense, as a percentage of gross profit remain generally consistent with last quarter. For modeling purposes, I would assume overall operating expenses, excluding bad debt expense ,of approximately $62 million to $65 million in the third quarter of 2010, including the addition of a full quarter of expenses related to the Lakeside acquisition.

Our total accounts receivable balance was approximately $1.1 billion at the end of the second quarter, up roughly $80 million from the first quarter, principally due to volume growth in all three segments during the quarter. Our accounts receivable reserve remained at approximately 2% of our total portfolio at the end of the second quarter which is generally consistent with the past several quarters. Our bad debt provision in the second quarter was approximately $1.7 million, up $1.3 million compared to last quarter and up approximately $1.2 million compared to the second quarter of 2009. The increase in our bad debt provision were primarily driven by the sequential and year-over-year increases in accounts receivable.

Consolidated income from operations for the second quarter was $45 million, an increase of $3 million or 7% sequentially and up $9 million or 25% year-over-year. Income from operations for our Aviation segment reached $28.7 million, a record level for the third consecutive quarter. This represents an increase of $2 million or 8% sequentially and $11 million or 62% compared to the second quarter of last year. Our Marine segment income from operations was $24 million for the second quarter, a sequential increase of $4 million or 20% and an increase of $1 million or 6% from last year's second quarter. Our Land segment had income from operations of $1.8 million, down $570,000 sequentially and approximately $2 million year-over-year.

The sequential and year-over-year declines were impacted in part by recent investments in our UK and Brazil wholesale land businesses as well as an improvement in mix of the credit quality of our domestic wholesale rack customer base which has had an impact on average margins. The Company had non-operating expenses of $200,000 during the second quarter. This number was comprised of net interest expense and other financing costs as well as foreign currency losses. Also included in this number was a $1.9 million gain from the collection of a short-term investment.

As many of you may remember in September of 2007, we took an investment impairment charge of $1.9 million related to an A1 P1 rated commercial paper investment with a par value of $10 million after the issuer defaulted on its payment obligations at the maturity date. Until recently, we had estimated the market value of this commercial paper investment to be $8.1 million. But after a nearly three year litigation process, we have collected the entire $10 million and took back $1.9 million into income less modest litigation fees. Net of taxes, this gain equates to approximately $0.02 per share for the second quarter. Excluding any foreign exchange impact I would assume non-operating expenses to be approximately $1 million to $1.5 million for the third quarter of this year.

The Company's effective tax rate for the second quarter was 17.3%, lower than the 18.5% rate for the first quarter and 21.4% rate in the second quarter of last year, below the low end of my range as well which I provided on last quarter's call. We estimated that our effective tax rate for the third and fourth quarters of 2010 should be between 16% and 20%, remaining at the lower end of its historical range based upon our current mix of business.

Our net income for the second quarter was $37 million, an increase of approximately $3.3 million or 10% compared to the first quarter and an increase of approximately $9.2 million or 33% year-over-year. Diluted earnings per share for the second quarter was $0.61, an increase of $0.05 or 9% sequentially and an increase of $0.15 or 33% year-over-year. Non-GAAP earnings per share, which excludes amortization of acquisition related identified intangible assets and stock based compensation was $0.66 in the second quarter.

Our return on invested capital was 19% this past quarter compared to 18% in the first quarter and 17% for the second quarter of last year, all consistently well above our cost of capital. Our overall net trade cycle increased from 6.5 to 7.5 days during the quarter driven in part by an increased level of government business. Return on working capital remained above 50% for the second quarter at 51% compared to 57% in the first quarter. Despite the increase in volumes and slightly higher fuel prices during the quarter, we generated approximately $7 million of operating cash flow during the quarter. This resulted in an ending cash position of $307 million. Combined with our generally undrawn credit facilities, our balance sheet remains strong and liquid.

So in closing, we saw volume improvements in all three business segments as a result of increased organic growth. We capitalized on our solid market position as global economic conditions began to improve. We continue to evaluate and execute our growth opportunities, both organically and through strategic investment, including the acquisition of Lakeside Oil, which we closed and integrated last month, and finally, our strong and liquid balance sheet and global presence and expertise provide us with the tools to continue to return value to our customers, suppliers, and shareholders.

I would now like to turn the call over to Russell to open up the call to questions and answers.

(Operator Instructions).

Operator, do we have any questions?

Our first question comes from the line of Jon Chappell.

Thanks. Good afternoon guys.

Hi, Jon.

Hi, Jon.

Paul, so I wanted to ask you a little bit on the Aviation side, the volumes continued to impress and I know you guys had spoken about doing some of this prepay business where you get a lot of volumes at a little bit lower margin, distributing pays in advance but the volumes like I said up very significantly, so I want to know, is this prepaid business exceeding your expectations or are you maybe going up for a little bit more of the core kind of normal margin business as you get a little bit more comfort with the broader macro back drop?

I would say it represents a pretty diversified mix, Jonathan. I think we're feeling pretty good about the current climate in Aviation. If you look at the underlying balance sheet and some of the earnings results of the airlines, if you look at the pick up in traffic year-over-year, I think we've got a pretty good feeling for the companies that did the hard work to restructure themselves during the worst of the economic climate have come out a lot stronger. These are sort of leaner and meaner and more efficient operations. I would say that as they also pared back but created new opportunities to develop relationships with some of those airlines, that was at a time when the oil companies were all considered their own cost structures and rationalizing some of their go to market strategies so when you put all of that together its provided us an opportunity to grow the commercial volumes significantly. We're very pleased about that, and I would say that this is a very diversified portfolio that runs the whole gamut, and I think that's the most exciting part to us is this represents a pretty good cross section of the entire spectrum of aviation activity.

And has this prepaid idea been catching on? Are you getting customers--

It really depends on the specific location. There's some of that but I think we would be wrong to characterize that that's the great majority of it. What's happened in our trade cycles, Jon, is we've narrowed our terms a lot so the whole way that we manage that portfolio is a lot tighter but it isn't all prepaid by any means. There's certainly a credit component in there but even to the extent we do, use credit, it's on much tighter term cycles to allow for larger credit lines.

Okay, and then if I can ask another one on the Marine side.

Sure.

And then one on Land last to make sure I don't leave anyone out. The Marine side has list or recently been more of a spot business but as you said the activity is starting to get a little bit better. Is there any way to lessen the volatility in that business or your business set up that it needs to be kind of spot exposed to Marine?

Well, this has been sort of the Holy Grail of the World Fuel story for years. I wish I could give a level of precision and accuracy with forecasting what that market will do because it is primarily a spot business and we are very close to our customer base. Our fortunes in this activity tend to rise and fall a little bit just with the activity of our customers and just from your own deep expertise in the transportation space what's going on over let's say the last five or six years in shipping. You had a huge boom, tremendous amounts of activity, a huge global expansion, you saw a radical contraction into 2009 as the shipping rates fell off a cliff and a lot of shipping companies were losing money.

I think the thing we're most proud of is that we've been able to maintain very deep relationships with a diversified sort of class of blue chip customers throughout all of that and been there to help them supply, but at the end of the day, the overall consumption patterns are what sort of drive our pattern. It can be [Wyfoal] or [AP Moller] or [K-Line] or APL in Singapore or whomever it maybe, the tanker operators, if their overall volumes are down regardless of how good our relationship may be with those customers, our volumes tend to be impacted as well. I would say the thing we noted with some interest is that throughout prices we're pretty confident even though it's hard to get very precise statistics, we had a pretty good indication we were not losing as much volume as the overall market was losing, so as the demand the structure was taking place, we were sort of at a slower pace of decline and in fact, the upheaval in the market gave us an opportunity to forge I would say more durable relationships with some of these customers that were stressed as they made sense of the crisis.

So I think it's just the nature of that business that it's not going to be easy to give you clarity with precision on what those look like. We do a little bit of trade with the economy and our customers but I do know that our value proposition is more deeply entangled. We're providing broad prospects of services on operations, logistics, quality control and support and derivative, balance sheet management, all that stuff is going on so I would say the relationships are deeper and more sophisticated than they've ever been so as the economy turns and shipping turns we will do well for sure.

Got it, and lastly on Land. Both of you mentioned in your comments the impact of the ramp up in the UK and Brazil on the Land margins. I recall not too long ago where you were ramping up infrastructure and systems in the other businesses and once that was done and the business came back the margins started to explode. Do you think that this ramp up is six more months left? Does it have 12 more months left, does it completely depend on any acquisitions you make? When do you expect all else equal on the volume side to start to see the benefits of that infrastructure ramp up and the margin expansion on the Land side?

Jonathan, it's Michael Kasbar. I think that we're starting to see the beginnings of the land business reaching some critical mass, and then it's still really been sub scale for a while by virtue of Lakeside, we'll have some improved purchasing economics helping support the investment in the platform and basically get us to a level where we'll be able to see it impact in the space, but it's maturing. We're starting to leverage our growing branded business into our unbranded activity and vice versa, so involved in more products that are driving some improved profitability like propane and lubricants so the market wants to see us in this space and the buyers and sellers, they like our balance sheet and they like our value proposition.

They see that we're committed to growth, so we're starting to get some efficiencies and it takes a while to build this global platform but we're starting to see the beginnings of duplicating in the land space what we did in the aviation and marine markets, so I think that we're not too far. I think we're around the corner from starting to see this break into a pace and its certainly taken a hell of a long time and we're not really satisfied with what we've been producing so far but we're confident that we're going to start to see a more significant contribution to the bottom line.

All right, got it. Thanks, Mike, thanks, Paul.

Thanks, Jon.

Our next question comes from the line of George Pickral.

Good evening, guys.

George.

Paul? Can you give us an update on the self-supply model? I think last quarter you talked about expanding into Europe and maybe Asia.

Sure.

Has that started first of all?

Yes, it has, and we're seeing opportunities as these markets open up. Depending on where you are in the world, airport infrastructure has list or recently been closed, so its been kind of controlled either by a local airport authority or a consortium of oil companies that might have had concessions at those airports but in a world that's sort of general deregulatory movement and sort of the changes in the EU and also these economies which are opening up like the former Soviet union, most specifically Russia, it has opened up opportunities for us to actually get into these markets and begin to bring our own barrels in.

Now, there's an economy of scale with that, that drives some efficiency on to the cost side which means we're more competitive to a broader class of customer in these opening airports, but these airports are now becoming more agnostic in terms of who comes in with supplies, so right now, we don't have any inventory investments so that doesn't show up in our inventory numbers but I would say over the next six months you are going to see a movement in that direction. We're pretty excited about some of the changes we're seeing. This is great news. These are changes I can tell you that we were sort of dreaming about, hoping, predicting a couple years back and they are all sort of coming to fruition. This is very positive news for us, so I think that as we look forward, this is a part of our growth strategy on the Aviation side that we think is very promising.

Okay so would it be a fair characterization to say that the oil majors are continuing to move upstream, this is kind of the next step up for you all and not to get too far ahead of ourselves but could this kind of take your Aviation spreads to the next level and I guess take your volume growth to the next level too?

It would be premature to comment on that, George. I appreciate your enthusiasm and from your mouth to the Almighty's ears we would welcome that, but it would be premature to talk about how that's going to drive margins specifically. Certainly, to the extent that ourself that this play model has allowed us to build it and you know the success of it domestically and the ability to build inventory positions and if you will trade around that barrel position has allowed us to optimize margin and still deliver very competitive value to our customers and also given us a renewed kind of relationship with the oil community because we represent a short position that's very important to that, that we represent a product and ratable demand that becomes important for them in terms of managing their overall balance system so from that perspective, we see similarities as the markets open up around the world, so it's promising but it would be premature to give you any commentary as to what that's precisely going to do to margin looking forward.

No problem. Shifting over to your military business, actually one of your customers this morning seemed pretty bearish about Military flying in the back half of the year. They may be in a different place in terms of kind of market share and percentage of their business as it relates to military but can you maybe talk about your expectations for your military business? Is it something that's reached an economy of scale and could decline if we saw a true pull out from Afghanistan or Iraq or are we still kind of in the beginning stages of you all figuring out your military business and how to supply more to the military?

George, hi, it's Michael Kasbar. We've been in the Military segment since 1986. We've consistently grown our expertise over that 25 years. The discipline required to service that segment has strengthened a lot of parts of our business, our quality control and market management, supply logistics, contract administration, what's difficult to predict where military or relief demand may go, we're pretty experienced in this space. We're very responsive, we've grown our capabilities and it's difficult to predict what's going to happen in this world.

Unfortunately, we don't think world peace is going to break out any time soon, so we sort of look at it and complicated logistics and being able to supply and deal with contracts we really specialize for many years in the US, but we've expanded that, our group and our team is quite a bit larger than it has been before and our risk team has grown as we've seen it be a place that we can provide a solution, so it's impossible to figure out where it's going but certainly improved part of our capabilities and very much Incorporated into our business.

And I would say George, it's Paul. Let me just add to that. You alluded to some customer who thought their flight traffic went up. That's highly granular size of what's going on in that business. When you look at the diversity of our activity in space it isn't just in theory. You've got multiple military all over the world running maneuvers, we're sponsoring support foreman for maneuvers and logistics for training exercises all over the world, troop movements as Michael referred to, these are relief efforts, all sorts of NGOs involved as institutional sales that fall under that category. It's a pretty diversified complex of stuff but our expertise is pretty well recognized. I think we're perceived as being a counterparty for these various militaries who are very fast, very responsive, give a very good service and have that sort of 24/7 non-stop so it wouldn't be as granular as just some particular airline that may have some committment to military that's going to cut back. That would be something I don't think that's how we think about.

Okay, that's good color, Paul, Mike, thank you. Last question and I'll turn it over. When you look at your competition and the acquisition environment a year ago versus today, can you maybe talk about what's changed I guess for the better or for worse?

I would say that the Company is in a position to evaluate a broader suite of opportunities than probably ever in the history of the Company, and that is probably one of the perverse benefits of having a real tectonic upheaval in the global economy, that has ruptured all sorts of traditional business peri- types and caused a lot of change in what's going on in the supply chain. All of that disruption quite frankly isn't good for us and it's obviated and made more clear how critical our role is in that supply chain so whereas the crisis is certainly something that's been challenging for the global economy it's still challenging for our country and citizens and for the banks in Europe and all over the stuff, I would say that the underlying opportunity it's generated at a crisis is this kind of opportunity.

So for companies with our kind of a business model who are well financed and have a global platform and have established a pretty critical part of the value chain, I would say that community of opportunity has expanded, not contracted. I would say that on the competitive landscape, I'm always a little reluctant to comment on that, but I would say our perception is that this crisis has created some considerable challenges for them. Anybody whose gone out to get financed knows the cost has changed and they know the availability is tight and the credit insurance market has changed so all those things made the cost of capital rise and but I would say given our scale and the quality of our discipline financially it gives us a distinct competitive advantage in that landscape so as we look forward I would say overall the opportunity slate is expanded.

I'd just like to add one thing, George just following on your previous question on Europe and Asia in terms of the shedding of assets. We're certainly participating as we've demonstrated and we intend to continue that and for those opportunities that we don't participate in or choose not to, that's creating new players, so we're seeing more fragmentation in the marketplace and that certainly feeds our business model, so we benefit from the change as Paul commented in more than one way.

Sounds great and thanks for the time guys.

Thanks.

Thanks.

Our next question comes from the line of Steve Ferazani.

Good evening, everyone. Paul? Obviously a very strong volume quarter on the Marine side, yet you still seem to express some caution. What signs do you need to see that say that you're going back into a growth phase in that segment, and I know quarter to quarter, with the spot market can be some volatility but what do you need to say okay we can really start growing volumes consistently again?

Yes, Steve, I think as I tried to indicate in the previous comments, it's the nature of this business. I've been in the Marine business since I was 28 years old and Michael Kasbar and I started a little business in New York and I think we've survived every little shipping cycle there is. It's cyclical, it goes up, it goes down, it's a function of the global market so again I would say one of the challenges of our particular business model is that people would love to give us some precision around and clarity around what would constitute ratable consistent growth in that space. The nature of the trade, the nature of the arbitrage, if I could get sort of the divine clarity on what global trade would be, if I could get absolute insight into what China's consumption patterns would be and what they do with their economy and their currency and what they're going to do with their steel and their infrastructure spend and I could get insight into what relief aid efforts were going to be and what was going to happen in the grain trade, it would be easier to give you that ratability. Unfortunately it's kind of not.

So on a more general statement I would say that shipping which carries 80% of the world's goods is pretty fundamental to the global economy. It's not going away. It's core and I would say one of the things that we're quite proud of is we've built a model over the last 15 to 20 years is unique. There's nobody in the space that does what we can do and have the value we do at scale so in that sense I think what we've tried to represent to the investment community is as the economy turns and as trade grows, we are sort of uniquely positioned to benefit from that positive change and I think this last quarter is prime example. We indicated over the last couple quarters that we were taking a cautious view, shipping was struggling, as you know and if you call up all of the transfer space you saw the losses that were being recorded last year in 2009.

They were dramatic so we figured the better part of value, the prudent thing we could do would be cautious was to service our core client on the blue chip on a global basis that we take a cautious step back and wait to see how things turn. We did tell people if the economy began to recover, we would benefit and I would say that's exactly what happened in this quarter. As rates began to improve, as the trade patterns began to improve we benefited. We saw a 12% increase in volumes and 10% increase in gross profit. If the economy continues to recover we continue to stand the benefit so again, beyond that, it's very difficult to give you any precision about how to predict that ratability.

Five quarters now with Henty. Can you give a sense of the trends of the contributions from that acquisition?

I don't know if we can get that granular, Steve. I can tell you we've been very pleased with the Henty acquisition, that's complimented our Marine segment quite well. We continue to see opportunities for growth there and generally, it's been a solid investment for us and we think we did to well to go there.

It's a good Company. They're strategic and it allowed us to integrate our activity throughout the Baltic and UK area so again it was about a strategic move to build a platform in the region and as you know from our previous conversation, we're beginning to develop infrastructure on our land side there, so we think [INAUDIBLE] is achieving all of the things we hope for in terms of returns and also strategy.

On the Land side, you mentioned you were trying to pursue blue chip customers. Can you talk a little bit about what the sort of turnover that customer base is given the sort of sense I have for those kind of long term contracts with your customer base?

Yes, we don't have a lot of granularity on that and we don't discuss that kind of level but I would say that the general disposition as we discussed before that as we developed this market and as we began to carve out that part of the space that we thought was our space, we had to do an evaluation as to what our counterparties would be and where we thought our sweet spot would be in terms of servicing customers and I think that we've begun to sort that out in a way that we feel is pretty positive and as we go forward I think as Mike said now that we're beginning to get the scale we wanted and we've got a platform, it allows us just as we did in aviation. Michael alluded to this. We're beginning to see some of the repeat of what we saw in our aviation market. When you go back sort of 10 years ago as we began to scale aviation, we moved away from a higher risk class of customer, we began to get scale on supply, that allowed us to buy more competitively. That allowed us to sell to a better class of customer and over time we've built a considerable change in that model and it's been very successful, and ultimately we see some parallels a Michael alluded to earlier in that self-supply model has parallels in the Land space as well so in some ways we're just a little bit further back on the curb than we have been in Aviation but we're excited about where that can go looking forward.

Last one for me and I know this came up and was discussed in the last quarter but now you're guiding potentially on the low end even lower for the effective tax rate. Can you say, is that purely the markets you're now serving and strengthen certain markets, is that purely the issue?

Yes, we look at our forecasting internally and where the revenue streams and profit streams are coming from and they're expected to be generally consistent with where we came out in the second quarter and there for we don't expect significant movement in tax rate but considering that Marine is a spot business and things are always changing that could always wind up being a bit different but based upon what we know today, we feel comfortable with that 16 to 20 range for the second half of the year.

That's it for me. Thanks, everyone.

Thanks, Steve.

Our next question comes from the line of Mickey Schleien.

Yes, good afternoon. The airlines have generally reported very strong profits in the second quarter and I was curious what the trajectory was like in the second quarter in terms of demand from the airlines and how it's affecting more specifically your outlook for that segment for demand and profitability in the second half of the year.

Sure, thanks, Mickey. Thanks for calling in. If you look at some of what's going on in the market, you seen some of the aircraft that have been in storage and have been essentially laid up. That would be the shipping term, laid up, but as the economy had gone into its difficulties, a lot of the airlines were trying to cut back capacity and rationalize cost. They are basically trying to get aircraft out of the air and park them so they didn't have the operating cost. Now what's happening is that as the demand has picked up you're seeing those aircraft reactivated and the numbers are pretty significant so of course that logically increases consumption.

Now, that doesn't necessarily translate into specific volume for us. As you know, the way our aviation business works is it's a series of tenders and the tender cycles are on an ongoing rotating basis month in and month out depending on what cycle the particular trade happens to be on but what we like about the business is I would say that the tender process reveals that our customers are buying at more locations which means their service offering is expanding and they are buying larger volumes at existing locations, which means their capacity at those locations is expanding so to the extent that we win on the tender, we are looking at a larger overall aggregated volume at certain locations than we did, let's say, a year ago, so we think that's positive. We think it's partly what's contributing to the trend as well as some of the other issues that we discussed earlier so we think it's a positive development.

And on the land side, I appreciate your remarks regarding your investments, I think you said in Brazil and I forget the other country, but they affected your unit gross profit or gross profit per gallon. As those investments mature in those countries, do you expect the profitability of that business to sort of return to historical levels, or are we in a new level going forward?

Well, I think the thing you have to realize is that this is a business that is evolving and this is Michael Kasbar. You've got to appreciate the fact that there is investment in scale and it's sort of moving up and a little bit around the food chain. There's a certain contraction of margin as you're going after a better class of customer and then the expansion of that margin as there's value creation and we provide an important ingredient in the marketplace as I said earlier to the supply community in terms of a viable financial counterparty and service counterparty and to our demand clientele in terms of logistics, diversity of supply, risk management, any number of different components that we can bring to the equation, but getting to that size requires a certain amount of investment and we're still working our way through that and we are evolving into a fairly sophisticated offering into the marketplace, so and that's all I could say at this stage of the game but I'm confident that more or less around the corner from having a much more robust sort of result.

And again, Mickey, this is Paul. What Michael is saying is important, because if you think about the history of this Company, there's an overarching and overriding thematic investment theme here which is that we're benefiting from the structural sort of changes that are going up and down the entire supply chain, we're being invited into this space as much as we're sort of pushing ourself into the space and I think what we've proven in our aviation and marine models is we've become a very significant player in that area and what we found is that land is just the next sort of generation of this and it could go ultimately even beyond land, could go beyond gasoline and diesel. It could go to other commodities as well but right knew I think we're excited because again of you look at the macro picture and look at what's happened in the supply chain all the macro factors are encouraging us to expand and invest in this space which is ripe for opportunity so we'll get there. We're pretty confident. We've done it before. We know what these milestones are. Unfortunately, the nature of these developments just don't happen in the 90 day cycles that we all live with here, but we know from experience as entrepreneurs and as business builders this has got legs and we're pretty excited about the opportunity we're building.

Okay, thanks for your comments. Appreciate it.

Sure, Mickey.

Thanks, Mickey.

Our final question today from the line of Edward Hemmelgarn.

Actually, thanks. My questions have all been answered but great job and look forward to more results.

Thanks, Edward. Have a good evening.

And we have no additional questions at this time.

Thank you very much for everyone joining us tonight and we're excited about the quarter and the opportunities for World Fuel and we look forward to talking to you at the end of Q3.

Thank you very much for your participation. We hope you found this webcast presentation informative. Have a great day, everyone.