World Kinect Corp (WKC) 2010 Q3 法說會逐字稿

At this time I'd like to welcome everyone to the World Fuel Services 2010 third quarter earnings call. My name is Russell, and I will be your event specialist for today. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). It is my pleasure to turn the webcast over to Mr. Frank Shea, Executive Vice President and Chief Risk and Administrative OfficerMr. Shea, you may begin your conference.

Good evening, everyone, andwelcome to the World Fuel Services third quarter 2010 conference call. I'm Frank Shea, EVP and Chief Risk and Administrative Officer, andI'm doing the introductions on this evening's call with, as we have been doing in recent quarters, a live slide presentation. The 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; Mike 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 receive a copy of our earnings release. If not, you can access the 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. A 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. Good afternoon, and thank you for joining us today.

Today we announced earnings of $36.8 million or $0.60 per diluted share for the third quarter of fiscal 2010. We are pleased with these strong results that reflect our ability to continue to execute well despite a persistently uncertain global economic environment.

In Q3, we achieved a number of key milestones. Number one, in July we completed the acquisition of Lakeside Oil based in Milwaukee, Wisconsin, adding 350 million gallons to our domestic wholesale land business.

Number two, in August we announced our agreement to purchase Western Petroleum in Eden Prairie, Minnesota. Western will add more than 500 million gallons of land-based fuel, growing our Land segment to a current annual run rate of 2 billion gallons. It will also add approximately 100 million gallons of jet fuel to our general aviation business and will diversify our business activity into propane, lubricants, ethanol and railcar logistics. We completed this acquisition in early October.

Number three, in September we expand the size of our revolving credit facility and successfully completed our secondary equity offering, which increased our total available liquidity to more than $1 billion. We continue to deliver strong performance in what remains a very choppy market and are better positioned than ever to take advantage of additional strategic opportunities.

In our Marine segment, the shipping industry was still in search of a more stabilized global trade environment, and this was reflected in lower results quarter-over-quarter. We attribute this to generally soft demand, as concerns about the current market direction persist across all segments in the shipping industry. In the near term, we will continue to focus on driving overall gross profit and good risk adjusted returns.

Looking forward, it is clear that despite the lagging economic recovery in the US and Europe, as well as fluctuation in rates and capacity, shipping remains an integral part of global trade, and the long-term outlook suggests continued robust growth in the emerging markets for years to come. We remain confident that our strategy of providing a high level of service to major global fleets with the staying power to weather the uncertain market conditions will continue to produce solid results for the Company.

Our Aviation segment delivered another record quarter in volume and gross profit. As we remain focused on risk management, we've continued to pursue lower risk, lower margin customer engagements, and this was a principal driver of our sequential growth in volume this quarter. We have been successful in opening up new markets and competing for market share with a broader spectrum of customer.

In addition to our continued growth in the commercial market, we have, by virtue of our acquisition of Western Petroleum, entered the branded fuel market in the business aviation sector. Western Petroleum is the exclusive US distributor of Exxon Mobile product in the branded fix-based operator market, as well as a distributor of ConocoPhillips product, serving a total of 100 FBOs -- 180 FBOs at general aviation locations around the country. This is a good complement to our existing unbranded sales in this space, and we see continued opportunities to grow our presence in both the brand and unbranded FBO markets.

Overall, [IATA] reports that industry conditions have significantly improved year-over-year in the aviation industry. Whether or not the recovery is sustainable will in part depend on the pace of economic recovery and capacity discipline in the industry. We remain focused on our core strategy of adding value by expanding supply at a growing number of domestic and international locations.

In our land fuel space we are very pleased with the additions of Lakeside Oil and Western Petroleum to our business. Lakeside is making a good contribution to our branded supply initiative, and Western has fortified our position in the unbranded space. Western is also active in propane, lubricants, ethanol and railcar logistics, all of which represent significant growth opportunities, and are businesses which benefit from our strong balance and liquidity position. We are also pleased that Western brings with it a talented team of dedicated professionals whose strong culture and passion for the business have already begun to have a meaningful impact on strategy and execution in our Land and Aviation segments.

Along with the many commercial initiatives which took place during the third quarter, we also focused our attention on fortifying the balance sheet and strengthening liquidity. We expanded our credit facility and completed a successful secondary equity offering, which increased our available liquidity to more than $1 billion. We are therefore well positioned to execute on our plans for continued organic growth and further strategic investment opportunities. Our strong balance sheet and liquidity position continue to be important differentiators in today's uncertain economic environment.

As we look forward, we see a market in which the major oil companies will continue to shed downstream assets and look to partner with well-financed supply chain partners to efficiently move their products to market, reduce their cost of processing, and mitigate credit risks. In Aviation, this will allow us to grow our commercial fueling presence at an increasing number of airport locations, expand our market in general aviation, and develop a more robust commercial flight services business. In our Land segment, it will allow us to continue to build out our domestic and international presence in the branded and unbranded supply of diesel and gasoline while diversifying into propane and renewables and developing deeper confidence in rail, pipeline and shipping logistics. In our Marine space, our continued focus on supply and the increasing use of technology to service large global customers will allow us to benefit when global waterborne trade more fully recovers.

One last note in the area of corporate governance. They were very pleased to announce the recent appointment of John Manley to our Board of Directors. After more than 27 years as a partner, John retired in 2009 from Deloitte and Touche, where he founded and was the National Director of Diloitte's regulatory consulting practice. Before joining Deloitte, John had seven years of regulatory experience with the Securities and Exchange Commission and Commodity Futures Trading Commission. John, who will serve on our Audit and Governance Committees, brings a wealth of expertise in the areas of commodities and derivatives accounting, and a deep knowledge of the ever-changing regulatory environment. We're proud to have John as part of our team as we continue to grow and expand our global business offering.

We're excited about the opportunities ahead and appreciate your continued support. I will now turn the call over to Ira Birns for a detailed review of the financials. Ira?

Thanks, Paul.

Consolidated revenue for the third quarter was $5 billion, up 13% sequentially and up 56% compared to the third quarter of last year. The year-over-year change in revenue was impacted by the increase in crude oil prices from an average of $69 per barrel in the third quarter of 2009 compared to an average of $76 per barrel in the third quarter of this year, as well as the increase in volume in all three of our business segments.

The Aviation segment generated revenues of $1.9 billion, up $166 million or 10% sequentially, and up $703 million or 61% year-over-year. Approximately 64% of the year-over-year increase was due to increased sales volume, and approximately 36% 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 $2.4 billion, up $79 million or 4% sequentially, and up $650 million or 38% year-over-year. Approximately 55% of the year-over-year increase was due to increased sales volume and approximately 45% was due to an increase in the price per metric ton sold as a result of higher oil prices.

And finally, the Land segment generated revenues of $774 million, up $344 million or 80% compared to last quarter, and up $432 million or 126% year-over-year. Approximately 92% of the year-over-year increase was a result of higher sales volume, which included a full quarter of our recently-acquired Lakeside business, with the remainder being the result of higher oil prices.

Our Aviation segment sold $781 million gallons of fuel during the third quarter, up 13% sequentially and up 41% year-over-year, representing record quarterly volume. Volume increases this quarter were again drive by growth in our commercial passenger, cargo, and general aviation businesses. We have now experienced six consecutive quarters of sequential volume growth, increasing quarterly volume 70% from the 459 million gallon level in the second quarter of 2009. But driven in part by seasonality, we expect volumes to flatten out a bit in the upcoming fourth quarter.

Our Marine segment's total business activity for the third quarter was 6.12 million metric tons, down less than 1% from last quarter, but up 17% year-over-year. Although Marine volumes remained relatively flat sequentially, we continue our conservative approach to doing business, as we continue to experience demand weakness and overall industry softness. Latest industry reports project that this weakness will continue at least through the first half of next year. Fuel reselling activities constituted approximately 82% of total Marine business activity in the quarter, which is slightly higher than our historical average.

Our Land segment sold a record 359 million gallons during the third quarter, up 89% sequentially and up 118% from last year's third quarter. All of the results presented for our Land segment now include our recently acquired Lakeside business, which is performing to our expectations. Excluding Lakeside, volumes were up 40% sequentially and 62% year-over-year.

As we announced a few weeks ago, we have also completed the acquisition of Western Petroleum. Western is based in Eden Prairie, Minnesota, with annual volumes of more than 500 million gallons of land-based fuel and approximately 100 million gallons of aviation fuel. Including Western, our current run rate of volume in our land business has reached 2 billion gallons. We look forward to the many growth opportunities that Western brings to our business, and again welcome the entire team to World Fuel. Since we closed the Western acquisition on October 1, we will realize a full quarter of their results in the fourth quarter.

Consolidated gross profit for the third quarter was $112.1 million, an increase of $4.5 million or 4% sequentially, and an increase of $17.4 million or 18% compared to the third quarter of last year.

Our Aviation segment contributed a record $55.8 million in gross profit, an increase of $2.9 million or 6% sequentially, and up $12.9 millionor 30% compared to the third quarter of 2009. Our jet fuel inventory position was approximately 68 million gallons, or $155 million at the end of the third quarter, anincrease of 24 million gallons from the end of the second quarter, supporting the significant increase in self-supply activity during the quarter. We also increased the level of shorter-term, low-margin business during the quarter, and expect this trend to continue through the end of the year. We did realize a benefit from inventory average costing again this quarter, but the amount of benefit was less than $1 million, which was lower than the benefit achieved during the past few quarters.

The Marine segment generated profit of $41.2 million, a decrease of $2 million or 5% from last quarter, but an increase of $1 million or 3% compared to last year's third quarter results. While business conditions improved somewhat in the second quarter, this quarter's results provide further evidence that the marine market continues to bounce along the bottom of what is still a generally weak environment.

Our Land segment delivered record gross profit of $15.1 million in the third quarter, up $3.6 millionor 31% sequentially, and up $3.4 million or 30% compared to last year's third quarter results. As I previously stated, our third quarter results included the results of Lakeside, which has further expanded our wholesale land distribution market in the Midwest.

Operating expenses for the third quarter, excluding our provision for bad debt, were $65.9 million, up $5.1 million sequentially and up $13.8 million compared to the third quarter of 2009. This increase includes a full quarter of expenses related to Lakeside as well as increased compensation expense. This quarter's operating expenses also included approximately $1 million of acquisition-related expenses, which had not been included in the forecast provided on last quarter's call. For modeling purposes, I would assume overall operating expenses, excluding bad debt expense, of approximately $70 million to $74 million in the fourth quarter, which includes the addition of a full quarter of expenses related to the Western acquisition.

Our total accounts receivable balance was approximately $1.2 billion at the end of the third quarter, up roughly $48 million from this year's second quarter. Our bad debt provision this quarter was approximately $1.1 million, down $600,000 sequentially, and down approximately $700,000 compared to the third quarter of last year.

Consolidated income from operations for the third quarter was $45.1 million, flat sequentially but up $4.2 million or 10% year-over-year. Income from operations for our Aviation segment reached $31.6 million. This represents an increase of $2.9 million or 10% sequentially, and $10.4 million or 49% compared to the third quarter of 2009. Our Marine segment's income from operations was $20.7 million for the third quarter, a sequential decrease of $3.3 million and a decrease of $1.4 million from last year's third quarter. And our Land segment had income from operations of $3.2 million, up $1.5 millionor 82% sequentially, and up approximately $500,000 or 18% year-over-year.

The Company had non-operating expenses of $1.2 million during the third quarter. This number was principally compromised of net interest expense and our financing costs. Included in this number was one month of increased expenses related to the amended and restated bank facility that we completed in September for approximately $400,000. The credit facility now allows for borrowings of up to $800 million and is scheduled to mature in September of 2015. Excluding any foreign exchange impact, I would assume non-operating expenses, including a full quarter of expenses related to the credit facility, to be approximately $2 million to $3 million for the fourth quarter of this year. This estimate, once again, includes a full quarter of expenses related to the bank facility.

The Company's effective tax rate for the third quarter was 17.1%, slightly lower than the 17.3% rate in the second quarter and compared to 26.4% in the third quarter of 2009. Our fourth quarter effective tax rate should be somewhat higher sequentially due principally to Western, which will be taxed at domestic rates, therefore we estimate that our effective tax rate for the fourth quarter should be between 18% and 21%.

Our net income for the third quarter was $36.8 million, a decrease of approximately $200,000 sequentially, but an increase of approximately $7.7 million or 26% year-over-year. Excluding the impact of the one-time recovery of a short-term investment in the second quarter, net income was up $1.2 million or 3% sequentially.

Diluted earnings per share for the third quarter was $0.60, a decrease of $0.01 sequentially, but up $0.01 after excluding the impact of the previously mentioned collection of a short-term investment last quarter, and an increase of $0.12 or 25% year-over-year. While our earnings per share in the third quarter was impacted in part by the additional outstanding shares related to our recently announced equity offering, as well as the previously mentioned one month of expenses related to the bank deal, EPS will be impacted by both of these items for the full fourth quarter.

While these two items only impacted third quarter results by approximately $0.01, in the fourth quarter we estimate the aggregate dilutive impact of the equity and bank transaction to be approximately $0.08 to $0.09 per diluted share, assuming weighted shares and share equivalents of 70.5 million shares for the fourth quarter.

Non-GAAP earnings per share, which excludes amortization of acquisition-related identified intangible assets and stock-based acquisition was $0.66 in the third quarter, up from $0.52 in the third quarter of 2009.

Our return on invested capital was 16% in the third quarter, compared to 18% during the third quarter of last year, remaining well above our cost of capital. Our return on invested capital will be impacted by our recent secondary equity offering in the fourth quarter, but should improve once the proceeds of the offering are deployed strategically. Our overall net trade cycle remains flat sequentially at 7.5 days for the third quarter. Return on working capital was 45% this quarter compared to 51% in the second quarter.

We had an operating cash outflow for the quarter of $57 million, primarily related to the working capital required to support the record levels of volume achieved in our Aviation and Land businesses during the quarter. Despite this outflow, we closed the quarter with $425 million of cash, which was also impacted by proceeds from our recent equity offering and the funding of the Lakeside acquisition in July. On a pro forma basis, including the purchase of Western in October, when combining our cash with availability under our credit facility, we have more than $1 billion of available liquidity.

In closing, we have made great strides to fortify our balance sheet this past quarter, driven by the success of bank financing and equity offering. We remain in a strong financial position, armed with liquidity, to continue to grow both organically and through acquisitions. We closed and integrated the acquisition of Lakeside in July and just recently completed the Western acquisition.

With an unprecedented level of growth opportunities available to us in the Aviation, Marine and Land segments, we plan to utilize the proceeds of our recent equity offering to make further strategic and accretive acquisitions, driving additional value for our shareholders. We continue to produce strong results despite continued market uncertainty. And lastly, we believe our continued investments in people and technology are building a solid foundation that should allow us to continue to improve our value proposition to our customers and suppliers and allow us to capitalize on further opportunities for growth in the future.

A this point I would like to turn the call over to our operator to up the call to questions and answers.

(Operator Instructions). Your first question is from the line of Jon Chappell with the line of JPMorgan.

Good afternoon.

Hey, Jon.

So, Paul, you've probably heard this question about 200 times in the last month, which means I've probably heard it 100 times. So I'm ask it and then kind of give you an empty slate to kind of talk about it, and then maybe I'll ask a little bit more details around it. But with all this liquidity, can you speak to the acquisition opportunities that you see today? And maybe compare it to 12 months ago, not just the amount of opportunities, but how close you are to maybe pulling the trigger on some things. And then also, if you can prioritize by segment, that would be very helpful.

Sure. What I'd say as a general statement, the operating environment globally represents tremendous opportunity. As Mike Kasbar said many, many times the world is for sale. And I would say there's a lot of truth in that when you look at what's going on in the supply chain, and a lot of what was precipitated by the economic upheaval of the crisis was a complete rethink of the integrated oil companies about their commitment to the downstream market. And so when we look at the landscape of opportunities, it is not confined to any one segment. We see significant opportunity and unprecedented levels of opportunity, as Ira mentioned in his remarks, in all three of the segments.

In terms of we prioritize it, we're very focused on accretion. We're focused on returns. We're looking for the best possible return for the deployment of those dollars. So I would say that the strategic template that Mike Kasbar has been driving in terms of doing a disciplined review across the spectrum, being able to help us rank and prioritize those investments, I would say that we're exercising a whole new level of discipline and maturity in this enterprise with regard to how we process those opportunities.

So our objective is not to do acquisitions just for the sake of it. We're interested in acquisitions that are going to drive are strategic value, that are going to drive synergistic opportunities for the Company, but our primary focus is return, and we want them to be core and adjacent to our underlying strategy, which is to be the most important player in the branded and unbranded distribution of fuels internationally. And I don't think we've ever seen as much opportunity, andI've got to say it's an awfully exciting time.

So what I think is great is that the investments we've made in terms of functional support within the enterprise, our systems capability, means we have a level of ability to review in a disciplined way those metrics in a way that we never had before. So it's kind of an interesting convergence of our capability and the market opportunity. So I hope that helps you, but we're excited. In terms of ranking them by segment, we think there are opportunities in all three that generate what we think are very attractive returns.

Okay. well, if we can focus on land for just one minute, there is --you mentioned twice, so I was able to write them down after two times, but you said ethanol, propane, lubricants, railcar logistics. Those are four different areas that you've expanded into through the Western petroleum acquisition alone. Using those four as a base, but then also other things that you're thinking about, are the next stages of development and expansion kind of different from the core kind of World Fuel that we've known for like the last five years? And let me just -- more assets, different types of fuel, clean energy, stuff like that. I know it's a broad question, but you highlighted it twice through the Western Petroleum new addition, so --

Sure.

Jonathan, I'm going to take that question. This is Mike Kasbar. One of the luxuries that we have today with the opportunities being so rich is we do have the ability to be quite a bit more selective. So I think it's a combination of a lot of divestitures, as well as a lot of these companies were set up 20 years ago, 30 years ago, and it's time for an exit for a lot of these entrepreneurs that started these businesses.

So our approach now is really to be look at all the classic methods that you would in terms of accretiveness. We're certainly expanding from the core. A big part of what we're doing is looking at these acquisitions that bring talent into our Company. We've said it before; we're a franchise for entrepreneurs. We're looking to fit strategic pieces into our expanding platform. So the physical logistical competencies that we get with Western in terms of railcar in terms of pipeline, in terms of their terminal competencies really bring a lot of value to the organization.

The other commodities, in terms of ethanol, we're certainly using that within our gasoline business. Propane is a great market for us to be in. The lubricants business that they bring certainly adds to our Marine lubricants, and biodiesel. So all of these really fit in. Western was really a marvelous addition to our group because of their team and because it really gives us a lot of extensions, as well as giving us critical mass within our US land business.

Okay. Thanks, Mike. Then one last one to get Ira involved and to focus more on the organic side. You mentioned that the self-supply volumes were up about 24 million gallons from the end of the second quarter, and was something I think you were going to plan to continue through the rest of this year. How big do you plan on having this self-supply model get? And is this an opportunistic opportunity -- initiative? Can it get bigger next year? Is there a more efficient way to hedge this? Are we still going to have the mark to markets? How do you see that evolving?.

Well, I'll start backwards. And thanks for including me and allowing me to participate. I appreciate it.

In terms of hedging, I think, as noted over the past couple years, we've done a much better job in hedging that inventory position, and you've seen that in the results quarter in and quarter out. So whether we have 40 million gallons or 60 million or 70 million gallons, I think that answer will remain the same, as we're very focused on doing that well.

In terms of opportunities, I think it's an opportunistic situation. If there are opportunities to drive growth through self-supply, as we have over the past 12 months, and they deliver the returns that we need achieve based upon our own hurdle rates, et cetera., that number could indeed grow. Will it grow consistently quarter in and quarter out? It's really too early to say that, but there are certainly opportunities to grow in that space, and ifthe returns are there, we have every intention of doing so.

Yes. Jonathan, I might just add, as you know the history of the of that of that model, we've always got an arbitrage between the back-to-back model as well as our self-supply. Part of it also is that we've used it as a way to build a short position in certain critical airports. So you've heard us talk about in other calls about one of the exciting things going on in the supply chain is we see the opening up of new markets on airports that used to be more closed, like in Europe and Asia. We think that this is a trend that's going to continue, and our ability to self-supply into some of those markets is going to be good.

Okay. Thanks, Paul. Thanks, Mike and Ira.

Your next question comes from the line of George Pickral with Stephens.

Hi, George.

Hey, guys. How is it going?Paul, you talked about, as you do every quarter, the majors getting out of the downstream market. I was wondering if you could talk a little about -- a little bit about the Avitat agreement you signed. Now, I know this one JV isn't a needle-mover per se, but can you maybe talk about the opportunity in the market and maybe the opportunity to take this model were you kind of partner with a major into the marine or land space.

George, I'm going to take that. This is Mike Kasbar. You'll recall that we acquired AvCard in 2007, and they were a closed-loop card processing system. We really liked that business, and we've been developing that ever since.

The Avitat piece, it's not large piece of business, but it's meaningful, and as you say, because -- whatit is, quite simply, is an online transaction processing system. We're leveraging our ERP system, and we're utilizing that transaction processing for discount contract fuel, and providing those cardholders with reduced processing fees at about 1,600 locations where they can get business aviation fuel. So we eliminate paper and point of sale machines and faxes for fuel confirmations, so we reallylike this space, the transaction processing side of it. It very much fits into our model. We process hundreds of thousands of transactions monthly, to the tune of about 400,000. It's quite enormous.

So that operational intensity is huge. It's a very big part of our value proposition. Easy to do business with. It's taken us a long time. It's been a very painful road. So we're pretty excited. We are rolling this out in a number of different areas. So we're pretty happy and excited about it. Not only for business aviation space, but in other markets as well.

Okay. Fair enough. Good answer. Maybe sticking with you, Mike, on the Western acquisition, you bought a little piece of branded piece in aviation. Can you maybe talk about strategically, from a supplier standpoint, how that changes your branded business when you're competing in locations where you have both the branded versusunbranded?

Well, it's -- listen, we have coexisted in so many different ways, in so many different markets. At the end of the day we're serving a lot of masters. So you've got different suppliers; they'relooking to achieve different end results. And the beauty of our model is that we're aggregating the demand, you understand our business model in terms of dealing with the credit and the distribution, all of the labor intensive customer activity and servicing, ad simply answering a phone 24/7.

So whatever that oil company, that integrated oil company, that state oil company, that major oil company, that independent, if they want a brand, then we've got the ability to give them a brand. If they want to go unbranded, if they want to just deal with that equity barrel and basically get distribution, we can do that. We pretty much roll with the punches. So one of the exciting things is that we're having a lot of fun, because we've spent our entire lives basically building this platform, because we identified the spaces requiring a ubiquitous global brand, and now large oil companies are really moving upstream where they're marking a lot of money, the opportunity has never been greater.

So the business aviation space is a nice space. We've had our base ops business. Acquired that in 1998. That's been kind of a slow burn. AvCard was an addition to it. We've got other partnerships, so we like the space, we'd like togrow in the pace, and Western -- thebeauty of Western is that it brought us land. It brought us business aviation. It brought us a great organization. It brought us some physical logistics competencies. So it's just the march to really grab as many of those downstream distribution models as possible in transportation fuels.

Got you. Last question, thenI'll get back in line. Mike, again on the Land side here. If I remember -- and sorry if I missed this in your prepared remarks. I think a month or two ago you were talking about a 1.5 billion run rate in Land, and now we're up to 2 billion. Is that because of underestimating the acquisitions, or are you starting to see organic growth in your --

George, you'll recall our many years of moderate embarrassment as we were looking to do our greenfields, our de novo land business. And it was a pretty expensive education for us. So that growth is from a lower margin, lower risk business model where we're starting to mimic a little bit of what we do on aviation. So that is organic growth. It's taken us a long time to get there. The ideas is to basically get the position, get the volume, satisfy the clientele, and then figure out how to add the value later.

Got you. Good quarter. Thanks for the time.

Thanks, George.

Thanks, George.

Your next question comes from the line of Gregory Lewis with Credit Suisse.

Good afternoon.

Hey, Greg.

Hi, guys. Yes, my first question is, Ira, you talk a little bit about the Marine volumes and how those look to be somewhat flat to challenging as we move into Q4. Could you provide some similar color on how we should think about aviation volumes? In other words, aswe move in toward the end of the year and the holiday season, do we traditionally see a pickup in aviation volumes through the last two months of the year?

No, not particularly. I think I mentioned, Greg, seasonality. I mentioned two things on the call. So just to repeat them both, to maybe add some color. We've seen a significant rebound from the bottom when the aviation markets bottomed out, and wee had dropped from what had been a run rate at one point of about 650 millions a quarter down to about 425 or so at the low point. We've barreled back very successfully over the last four or five or six quarters.

I think the growth has been extremely solid, if you will, and consistent, but I think as we get into the fourth quarter, as you guys think through the end of the year, I think I mentioned on the call that we expect things to level off a bit from a seasonality standpoint, you probably have a bit more seasonality in the summer months from a positive standpoint than in the winter, which is more limited to a couple of holiday weeks, where there's obviously a lot of commercial passenger volume that ramps up over the summer. So if you combine those couple of factors, we will get a bit of a boost, although it's small numbers on a quarterly basis from Western's aviation business. We expect the result from volume to be flattish in Q3.

Okay, great. And then just lastly, in thinking about the oil majors, and clearly they've been vocal in their decisions to exit the downstream. When we think about where they're exiting the downstream, would you say it's safe to say that it seems like they're primarily exiting the downstream in more international locations or are you seeing opportunities just as domestically as you are internationally by [the oil managers] (inaudible -- multiple speakers)?

Greg, it's a great question, butwe're seeing it in both domestic and international. I think that when you look at the highest level of these enterprises, they're making a strategic decision. It's our perception that's integrated major oil company is more focused about its competition with large government-backed enterprises like PetroChina than they are thinking about who is at the next gas station, or who is at the next seaport, or who is at the next airport. So from that perspective it's a strategic decision that is universal. It's global in scope.

Now, they're obviously going through that process in -- which is true to form, in a very disciplined, rational way. These are not precipitous decisions. There's a system review and execution that goes in with this. These are very well-run enterprises, so asthey begin to dismantle this operation, it is a programmatic approach, and they do it segment by segment, region by region. And it's our perception that they're actually active in this across the board. So we see operator -- opportunities related to this in all three segments, and it's international in scope.

Okay, guys. Thanks for the time.

Thanks, Greg.

Thanks, Greg.

Your next question comes from the line of Ken Hoexter with Merrill Lynch.

Hi, Ken.

Hey, good afternoon. Could you talk about the Marine. The operating income seemed to be squeezed a little bit. Was there something going on with the gross profit per metric ton relative, because it didn't seem like the Aviation or Land got squeezed as the Marine side did.

No, I think -- I mean, look. As I said in my opening remarks, you've got a market that has just been -- anybody who has in -- I think, you focus on transportation, you know. Look what the tanker operators have been going through. Look what's happened in the bulk market. We've just been bouncing around a tough market environment, and I think that our perception is there was nothing particularly extraordinary quarter-to-quarter over that slight change over our margin.

I think that our focus has been you've just got to kind of weather this out. We can't make the global trade bounce back. It's off a little bit, but this isn't something from our perspective that is a huge swing related to some particular event. I think it's more reflective, Ken, of what we see to be just a persistently different market for the shipping guys. And anybody who is talking to operators and owners today know that it's just challenging out there. They just can't get a bead on where the rebound's going to be, and how consistent it will be. And, yes, container rates came back, but then they weakened a little bit. Then you've got new trade developing in certain markets, but then it disappears on you. And then you get iron ore into China, but then gets weak with capacity on the bulk side. The tanker guys have struggled with the rates, and they're hoping that things get a little bit better by the end of 2011, and that has a lot to do with the rebound in the economy and what happens in energy.

So from our perspective, our strategy has been we can't control the total economy on global trade, so our focus is just stay very close to your customers, who are the guys who will be the survivors and are going to be in this market regardless, and continue to just execute well. And when the thing turns around, we're in a great position to benefit from that. But in the meantime it's just kind of steady as she goes.

Okay. And then, Ira, on the -- when you were going over the Aviation segment, you talked about an increase in short-term low-margin business. Can you elaborate on what you meant there?

Sure. We started talking about this in the third quarter of last year. When we began rebounding in volumes, we began doing more business, not a majority of the business we do, but more business than we had done historically on either a prepay business -- prepay terms or very short terms, albeit lower margins. So we may achieve lower margins, but it winds up being either very low risk or no-risk business and produces a pretty healthy return because the capital investment is much lower than it would have been on a historical basis, because the DSO is two, three, four, five days or less. So that's what we've seen in terms of the growth drivers over the last quarter. Solid from a return standpoint, generating incremental GP, without any meaningful risk attached to it.

Okay. And then lastly, just a follow-up on Jon's earlier question, which talked about the $1 billion of liquidity and addressing the market. It sounded like, Paul, when you were kind of hitting the road there was a lot of opportunities, a lot of opportunities developing internationally.

Yes.

Should I take it from your terms, though, it sounds like you're doing more studies on some of these. Has the dynamic of that market changed at all, or is there something that is maybe not as imminent as we should expect? That kind of like when you were on the road, it sounded like there was excitement and a lot of opportunities building that you wanted to attack. Why the (inaudible -- multiple speakers) step back and take a look at that?

No, no, Ken, I would say -- no, all I meant to suggest was by the review is that when you are -- when you have more opportunities than you could actually possibly execute on, the rigor and the discipline with which you review those opportunities becomes a much more strategic exercise. So I would say that, no, on the contrary, whenwe talked on the road about the pipeline of opportunities being robust, that is absolutely true and is current. Nothing has changed at all. I would say, if anything, it's expanding.

And so all that does is speak to that I think, Mike Kasbar in particular over the last couple years had been driving a much more sophisticated business process review and development, and that review process has been very important to helping us be more selective so we get the best return. So that's all I meant, is thatI would say we're better equipped to sort what those opportunities are about strategically. No, on the contrary, I would say since we saw you, since we did the road show, if anything, the opportunities have increased.

And It's both domestic and international. Not just international.

Not just international.

Plenty of opportunities within the US as well.

Did that answer the question? Hello? Hello, operator?

I'm sorry, his line was remove from the queue.

I'm sorry.

Your next question comes from Kevin Sterling with BB&T Capital Markets.

Hey, Kevin.

Hey, Paul and Ira and Mike. How are you guys doing? Congratulations on a nice quarter. Nice to talk to you once again.

Thanks.

Thanks, Kevin. Welcome back.

Thank you. Paul, I maybe just wanted to dive in, maybe ask the acquisition question a little bit different. Talking about the opportunities on the Land side, would you prefer branded or unbranded opportunities for Land acquisitions, or are you indifferent?

Well -- Mike, go ahead.

I think we're indifferent. We certainly like the blend. Some part of it is geographic. It's our attention to focus on the United States, Brazil and the UK. That's the current footprint of our Land business. So it's really case-by-case, and it'swith the intention of really reviewing each opportunity to come up with an overall blend that cuts across both branded and unbranded.

They are complementary strategies, Kevin, so we see it as important to pursue both.

Okay, great. And looking at the Western acquisition, it looked like it gave you many different service offerings, from ethanol to pipeline to propane. And you mentioned railcar logistics. Could you explain about what that type of service is that you provide regarding railcar logistics?

The great thing about railcar logistics is you basically can create your own pipeline wherever you need it, so --and it's a bit of an art. Not everyone understands exactly how to operate those railcars. So Western has a particular expertise in that area, anda big part of the value add and the big part of our margin build-up is on the freight. So we have significant position within that railcar business that allows us to move product where we need to get it.

So it allows us to work various different arbitrages, north-south and east-west, and to create value on the supply side for our customers as well as our suppliers. So if we've got product that happens to be in Canada that needs to be in the Gulf Coast, or vice versa, we have the ability to move that with railcar as opposed to some of the traditional methods, and sometimes railcar is the only one to get it from point A to point B.

So it's not something that everybody knows how to do, and Western brings that skill set to us as well as some enhanced pipeline logistics competencies. That's really -- as you know, our business model is understanding those petroleum logistics combined with credit and financing and all of the other value-added services just in terms of processing. So that railcar now is just a phenomenal addition to our square feet of logistical services.

Kevin, it basically derives from the fact that no system is balanced. And perfect, right? So it's not as if ever that you have a matched molecule on these systems; from distribution, from the refiners, or from the end user. So the ability to move quickly and help the distributors, realize a return is what it's all about.

Thank you. And it seems like as the rails get busier and they introduce more railcars out of storage, I imagine that's a pretty good opportunity for you guys. Is that the right way to think about it?

Yes.

Sure.

Okay. And, Paul, just going back to the Marine side a little bit, are you seeing any stiffer competition, particularly in larger ports, or is it really just due to the fact that the Marine business is still kind of rather sluggish?

Yes, I mean, we've seen a little bit, certainly in the major ports, because those tend to be the highly transparent and heavily traveled, so there's some there I think. But I would say the overall landscape is about the fact that you've got an industry that is just still struggling to get its feet and get its bedrock. That's not something that we can do for the world. I think that until you get a more sustained and more competent recovery that's global in scope -- right now you've got the [rabini] thing. Are we a coupled world or an uncoupled world?

In the same way that everybody was hoping that when the United States had its crisis we were uncoupled, it turned out it's not true. It's truly an integrated global economy. Some of that is true with the emerging markets. Still a coupling with Europe and the United States. This does impact trade. It impacts the competence of trade. It impacts the certainty with which business is investing in the supply chain. It's all an integrated thing.

And I would say you see these kind of fits and starts; up, down, back, forth. And I would say the primary issue is until the global trade space sorts itself out we're just going to have to kind of hang in there and be there for our customers and help them to execute as best as they can in the challenged market.

Okay, great. And just one last question, on the Marine side, too. We heard about slow steaming now for the past couple years. Have you seen a material impact on your Marine volumes from slow steaming?

I think it's a component. It's not the component, but certainly a component, because when you look at these large 10,000 TEU vessels, or any different size, if you consider an engine that's built for 24 knots at a peak speed, and then you've got a vessel that's going to decide to operate at 18 knots or 16 knots, you're going to get significant savings. On a percent basis you're going to get 20%, 25%, 30%, maybe even 35% savings on your fuel.

So, look, in a cost-conscious age, and it's the absolutely the intelligent thing to do. In fact we talk to our customers about it, we're encouraging them to do that, because it's a way for them to protect their financial viability. And if they can impact that by slow steaming, it's a good way to just manage their cost side. So that is a component. It's not the only component. I would say you've just got just the overall backdrop of not a robust trade market. Look, if the energy market takes off and you see $100 oil next year and a recovery in the economy, the tankers going to move a lot more actively than they are right now.

This is true throughout the entire economy. If the arb between Brazil and China really heats up because of more imports, well, you'll see more activity out of big carriers carrying iron ore out of Brazil into the Far East. So we're waiting for that to happen, but I would say competition is certainly part of it, because there is some -- there is a little bit more of that, particularly in the big markets. But it's probably mostly the backdrop.

Okay. Great. Thanks so much for your time this evening. I really appreciate it. Congratulations once again on a nice quarter.

Thanks again, Kevin.

Your next question comes from the line of Steve Ferazani with Sidoti & Capital (sic).

Good evening, everyone. On the Marine side -- and I know the issue here is primarily on the global macro and just general global bunker demand. But what's the impact on very, very stable bunker prices? I know we've been in a period stable pricing, but 3Q in particular you saw very little day to day or weekly movement. Does that have a negative effect?And could we see upside, if we saw at least a little bit more volatility, even without demand growth?

Sure. It's a great question, Steve. Very, very good question. In fact, as you know, historically we certainly benefit from the volatility in the market. When there is a volatile market, we certainly benefit from that. I would say the most extreme example of that is you saw what happened in 2008 when you had an extremely volatile market that was going up and down. We tend to benefit from that.

But I think one of the things I would tell you that speaks to the endurance or the strength of our model is that in a very flat nonvolatile market we continue to execute very well and deliver a very consistent performance despite a very stressed macro environment and a flat market. So from our perspective, if you get either any kind of recovery in the actually macro picture and you get any kind of reintroduction of volatility, yes, those things benefit us. But I would say in terms of the strength of our ability to execute and the strength of our overall model, we're pretty proud of the fact that we continue to deliver a pretty damn good performance despite both those factors.

So I think when we do see the volatility, it also renews the customers' interest in price-risk management, because there is a lot of volatility in the market -- volatility tends to trigger anxiety about forward curve. So that also allows usto add value. As you know, historically, when we see an active price-risk portfolio, that tends to enhance margin just because of the nature of it.

But when you have got kind of a tough backdrop and no volatility, there's not a lot of anxiety about the forward curve, people are just kind of hanging on trying to survive, all that works against us. So we think we're delivering a pretty solid result in a tough operating environment, but, boy, if it turns, we'll do very well.

[Good enough]. I guess want to go back to -- it was asked earlier, but I think the biggest surprise to me was the dramatic organic growth on the Land business after a couple years of maybe not seeing on the organic side. How much of that growth is systemic in terms of, all right, you made the acquisition of Lakeside, now you fill in geographically around those Lakeside customers? Or are you grabbing customers geographically wherever you can grab them?

Well, it's a combination. The whole idea of -- we're acquiring a company, we are getting a nucleus of activity, and we're looking to add to their suite of services and their product [load]. So, for example, some of the companies that we have acquire they have fantastic business -- well, they all do. That's why we're acquiring them. But they may not have a knowledge of price-risk management. They may be involved in branded and are not looking at unbranded. They may not be involved in end delivery. They may not understand inventory. So it's a combination of our own organic operation, where we're set up across the country, pretty much. So it's a mix. That's the way it will always be.

So can you -- what types of growth can you -- how much more growth do you get following an acquisition versus -- I'm trying to word this in a way -- when we see an acquisition like Lakeside, can we also think you might get a lot more growth that wasn't in the Lakeside numbers versus quarters where you're not necessarily making an acquisition.

It's going to vary.

Okay.

So it's really going to be case-by-case. We can't really give you any set answer.

Right.

Each market is different. Some market may be more ripe for organic growth, for any number of different circumstances. So some markets are more competitive than others. So it really just depends. So we really can't say, based on Lakeside, we're have X percent amount of organic growth. We're building a global platform. It's a huge amount of work and effort. We're trying to build really a global scalable business. And as I said before, for better or worse, some part of that growth is coming in at rather low margin, and we'll figure out how to add margin aswe add value. So I can't really give you any particular answer on that.

That's fair, Mike. Thanks a lot. Thanks, everyone.

Okay, Steve.

Thanks, Steve.

Your next question from the line of Edward Hemmelgarn with Shaker Investments.

Yes, just a bit of a more of a follow-up on Steve's comment. Your land gross profit margin, at least by my calculation, fell rather precipitously. Is that -- are you trying to say that was all due to Lakeside?

No. I think, as we've echoed on the call so far today, Lakeside has an impact on it, and the organic growth that Mike was just talking about, that we realized during the third quarter, was principally of the lower margin, lower risk variety. So shorter-term, similar to what I described on the Aviation side earlier. So both of those contributed to our reduced overall average margin, but also contributed to a significant increase in gross profit.

And a better risk profile across the whole portfolio.

Do you expect to retain those lower margin volumes in Land? Because your core growth was up, what, you said 40%, I think. I mean, that was rather unusual. Is that like more of a one-time event, or is that going to be --

I wouldn't say it's a one-time event. I mean, the numbers could move around as they have in past quarter-to-quarter, but I think some of the initiatives have taken hold and should produce higher levels of volume that we had seen going back a couple quarters, but that's something that we're evaluating on a day-to-day, week-to-week, month-to-month basis in terms of where are those opportunities, what are the returns. If they're there, and they continue to be there, we'll continue to go after that type of business, which could sustain the volumes that we have or lead to further increases down the road.

Right. Also with the acquisition of Western, for example, and the unbranded, we've now got a more robust platform to expand that. So we see opportunity there, Edward.

Do you think you'll be able to improve the margin back to your more normal profile, or is this the drop that we saw -- I mean, it was about -- I think by my calculation about $42 per 1,000 gallons. Is that going to be a more typical level that you would expect to see, or do you think you'll get back to -- gradually move back up to more your $70?

It's driven by a mix of business. What we're more focused on how do we sustain growth in gross profit on a quarter-over-quarter, year-over-year basis. So, for example, Lakeside acquisition was strategic and valuable, and clearly they have a lower margin profile, but that still was a sensible piece of business for us. It's producing nice returns. It's doing as well as we expected to it. It may impact the overall weighted margin, but that's not our principal focus. So it's really more, from a strategic standpoint, about driving growth in gross profit dollars and operating income over time than it is about the raw margin. And we're also focused on risk-adjusted returns. So, coming along with the lower margin that you noted, is the reduced risk profile, which should benefit us down the road as well from a working capital perspective.

And our approach has always been to go into the market with the diversified view, as opposed to just picking one particular customer segment or supply segment, to basically get a diversified view of it, because we're not exactly sure which one is going to move, and we want to be able to optimize between all the various different market segments and geographies. So the approach we're taking is to get scale, to get global scale ultimately, to have the number one platform. So there are going to be differences in margin, and the mix is going to evolve over time.

Okay. Just lastly, then, is the Western acquisition. What's the gross profit profile like of that business relative to your existing business?

On the Land side we generally don't get that granular, but it's very similar to our core historical margin on the land-based business.

Are some of the -- they also offered you some specialty type businesses. Are those higher margin businesses, or --

Well, my last answer was more on a blended basis. So if you put it altogether, it's in the same general area as our core business.

We wouldn't be breaking out those other pieces, Edward.

No, I was just -- I realize you weren't going to break them out, but just curious. Okay, thanks, appreciate it.

Good. Thanks.

At this time, sir, we have no further questions.

Okay. We appreciate everybody's time today. Thanks for all your support. We'll look forward to talking to you at Q4. Take care.

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