World Kinect Corp (WKC) 2011 Q3 法說會逐字稿

At this time, I would like to welcome everyone to the World Fuel Services 2011 Third Quarter Earnings Call. My name is Russell, and I will be your event specialist today. All lines have been place on mute to prevent any background noise. (OPERATOR INSTRUCTIONS)

It is now my pleasure to turn the webcast over to Mr. Frank Shea, Executive Vice President and Chief Risk and Administrative Officer. Mr. Shea, you may begin your conference.

Good evening, everyone, and welcome to the World Fuel Services Third Quarter 2011 Conference Call. I'm Frank Shea, Executive VP and Chief Risk and Administrative Officer, and I will be 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. 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, 2010, 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 we announced record earnings of $53 million, or $0.74 per diluted share, for the third quarter of fiscal 2011. Our returns on equity and invested capital were 17% this quarter, and our overall liquidity position remains strong.

Despite a persistently uncertain global operating environment, a number of positive factors came together for us this quarter, and we were able to deliver a great financial result. Strategic focus, disciplined risk management, and solid execution remain the foundation of our continued success, and it is clear that our strong balance sheet, robust technology offering, and highly collaborative global organization continue to be important competitive differentiators for World Fuel. It is what allows us to stay commercially agile and respond quickly to the fast-changing needs of our customers and suppliers in a highly dynamic global market.

In our Marine segment, we were very pleased to report a 9% sequential increase in volume and strong risk-adjusted returns. As discussed in prior calls, our strategy has been to develop a service offering for large, well-capitalized fleets who value our service, quality control, competitive pricing, and logistical expertise.

We continue to take market share and diversify our offering. The challenging industry market conditions have underscored the strength of our offering and further secured our position as the counterparty of choice for customers and suppliers alike. We will maintain this disciplined, targeted approach into 2012.

Our Aviation segment had a record quarter across the board, with sequential increases in volume, gross profit, and operating income. We continued to build out our sales and supply teams while expanding our customer and supply base. We also increased our investment in strategic inventories this quarter and continue in our efforts to open new markets and build a more strategic relationship with our customers and suppliers. This has helped drive our success in developing a sustainable market presence, both domestically and abroad.

With the continued retreat of the integrated major oil companies from the downstream market, we provide an essential customer service role. And for the large global trading companies, we represent a source of ratable demand for their trading platforms.

We have built the balance sheet to participate in this market at scale and we are viewed as a strategically critical piece of the supply chain in an increasingly fragmented and volatile market.

In our Land business, we continued to grow and our team delivered record levels of volume, gross profit, and operating income. We will continue to fortify and diversify the business by adding talent and evaluating strategic opportunities.

Everything came together this quarter to produce a record result and we hope to build on our success. We are excited about the opportunities ahead and appreciate your continued support. I will now turn the call over Ira Birns for a detailed review of the financials.

Thank you, Paul, and good evening, everybody. Before I provide the financial overview, I would again like to thank all our employees around the world for their continued hard work and dedication, which resulted in sequential and year-over-year volume growth across all of our segments, and a record level of net income and earnings per share during the third quarter. While the global economic environment remains quite volatile, we are very pleased with this quarter's results and we look to continue to pursue growth opportunities across all three of our business segments.

And now for the financial overview. Consolidated revenue for the third quarter was $9.5 billion, up 9% sequentially and up 91% compared to the third quarter of last year. The sequential and year-over-year changes in revenue were impacted by a 4% decrease in average fuel prices sequentially, but a more than 45% increase in average fuel prices from the third quarter of 2010.

The Aviation segment generated revenues of $3.5 billion, up $176 million, or 5%, sequentially, and up $1.7 billion, or 91%, from the third quarter of last year. Approximately 63% of the year-over-year increase was a result of higher average fuel prices, and the remainder was a result of increased volume.

Our Marine segment revenues were $4 billion, up $512 million, or 15%, sequentially, and up $1.7 billion, or 72%, year-over-year. Approximately 73% of the year-over-year increase was the result of higher average fuel prices and the remainder was the result of increased volume.

And finally, the Land segment generated revenues of $1.9 billion, up $114 million, or 6%, sequentially, and up $1.2 billion, or approximately 150%, compared to the third quarter of last year. Approximately half of the year-over-year increase was due to the increase in volume attributable to organic growth initiatives as well as recent acquisitions, and the remainder was the result of higher average fuel prices.

We were pleased to see that our volume increased both sequentially and year over year across all of our segments during the third quarter. The Aviation segment sold 1.04 billion gallons of fuel during the third quarter, up 9% sequentially and 34% year over year, representing record quarterly volume and the tenth consecutive quarter of sequential volume growth.

The sequential growth in Aviation volume was principally driven by increases in our commercial passenger, cargo, and government businesses as well as increases in our general aviation business. We have achieved the 1 billion gallon milestone for the first time in the history of our Aviation segment, a testament to all of the hard work and dedication of our Aviation employees throughout the world.

Our Marine segment's total volume for the third quarter was 6.9 million metric tons, up 9% from last quarter and up 13% year over year. The 9% sequential growth in volume represents the highest level of quarterly volume since the third quarter of 2008. Fuel reselling activities constituted approximately 87% of total Marine business activity in the quarter, slightly higher than the average of the past several quarters, as our increase in traded volume outpaced the increase in brokerage-related volume in the third quarter.

And finally, our Land segment sold a record 633 million gallons during the third quarter, up 11% sequentially and up 76% compared to last year's third quarter. The year-over-year increase was driven by both organic growth initiatives as well as the acquisition of Western Petroleum, which was not included in our third quarter results last year.

Consolidated gross profit for the third quarter was a record $171 million, an increase of $6 million, or 4%, sequentially, and an increase of $59 million, or 52%, compared to the third quarter of last year.

Positive market dynamics contributed to a record $84 million in gross profit in our Aviation segment, an increase of $2 million, or 2%, sequentially, and $28 million, or 50%, compared to the third quarter of 2010.

Our self-supply model jet fuel inventory position was approximately 64 million gallons, or $181 million, at the end of the third quarter, up from 55 million gallons and $168 million at the end of the second quarter. We again realized a gross profit benefit as a result of the volatility and timing of jet fuel price movements during the quarter. The amount of such benefit was similar to the gain we realized over the past two quarters.

The Marine segment generated gross profit of $50 million, a decrease of $600,000, or 1%, sequentially, but an increase of $9 million, or 22%, year over year. Although we have now posted volume increase and sustained profitability in our Marine segment over the past two quarters, industry conditions remain volatile, so we remain cautious as we continue to navigate through what remain volatile market conditions.

Benefiting from emerging logistics opportunities, our Land segment once again delivered a record level of gross profit, of $37 million in the third quarter, up $4 million, or 14%, sequentially, and $22 million, or 144%, year over year. We are extremely pleased with the performance of the Land segment, which contributed 22% of our consolidated gross profit this quarter, as compared to only 13% in the third quarter of last year.

Operating expenses, excluding bad debt expense, were $97.5 million, up $2 million sequentially and $31.5 million compared to the third quarter of 2010. Our expenses were above the high end of the range I provided on our last call, but in line with the sequential increase in gross profit.

Looking at operating expenses excluding bad debt as a percentage of gross profit, we again saw a decrease, from 57.8% in the second quarter to 57.1% in the third quarter. Operating expenses, excluding the amortization of acquired intangible assets and bad debt as a percentage of gross profit, was 53.4% for the quarter, the lowest level since the fourth quarter of 2009, down from 53.6% last quarter, and 56.5% in the third quarter of last year.

For modeling purposes, I would assume overall operating expenses, excluding bad debt expense, of approximately $94 million to $98 million in the fourth quarter of this year.

Our accounts receivable balance was just under $2.2 billion at quarter end, up approximately $184 million from the second quarter, due to the 10% increase in volume across all three of our business segments.

Our bad debt provision in the third quarter was $2.4 million, down $1.1 million compared to last quarter, but up $1.3 million compared to the third quarter of 2010. Our total reserve in the third quarter was $24.9 million, which is up from $22.7 million in the second quarter.

Consolidated income from operations for the third quarter was $71 million, which is an increase of $5 million, or 7%, sequentially, and $26 million, or 57%, year over year.

For the quarter, income from operations for our Aviation segment was $41 million. That's up $4 million, or 10%, sequentially, and $10 million, or 31%, compared to the third quarter of last year.

Our Marine segment's income from operations was $25 million for the third quarter. That's a decrease of $900,000, or 3%, sequentially, but up $4 million, or 21%, year over year.

And finally, our Land segment generated extraordinary results, with income from operations of $19 million, up $5 million, or 33%, sequentially, and up $15 million, or nearly six times the level of income generated in the third quarter of 2010.

Consolidated EBITDA for the third quarter was $78.6 million, an increase of $2 million, or 3%, sequentially, and an increase of $29 million, or 57%, year over year. On a trailing 12-month basis, we have now generated EBITDA of $273 million, up $78 million, or 40%, compared to the same period a year ago.

The Company had $6.4 million of nonoperating expenses, which consisted primarily of interest expense and other financing costs. Total nonoperating expenses were higher than the amount forecast on last quarter's call, principally due to higher average borrowings during the quarter, driven by increased volumes as well as foreign exchange.

Please note that our interest expense and financing costs now include interest related to the $250 million term loan that we issued during the third quarter. I would assume net interest expense to be approximately $4.5 million to $5.5 million for the fourth quarter of this year. As always, this excludes any potential foreign exchange impact on our results.

The Company's effective tax rate for the third quarter was 16.5%. That's down from 17.9% in the second quarter and down from 17.1% in the third quarter of 2010. Our third quarter rate came in below the range that I provided on last quarter's call due to an increase in profitability generated in jurisdictions with lower tax rates. We estimate that our effective tax rate for the fourth quarter should be between 17% and 19%.

Our net income for the third quarter was a record $52.7 million, an increase of $2.5 million, or 5%, over the second quarter and an increase of $15.9 million, or 43%, year over year. Non-GAAP net income, which excludes amortization of acquisition-related identified intangible assets and stock-based compensation, was $59.3 million in the third quarter, an increase of $1.6 million, or 3%, sequentially, and $19 million, or 47%, year over year.

Diluted earnings per share for the second quarter was a record $0.74, an increase of 6% sequentially and 23% year over year. Non-GAAP diluted earnings per share was $0.83 in the third quarter, an increase of 2% sequentially and 26% year over year.

Total diluted shares for the third quarter were 71.6 million shares.

Our return on invested capital was 17% in the third quarter, which is flat compared to last quarter and up from 16% in the third quarter of 2010. Our returns continue to be well in excess of our cost of capital.

Our overall net trade cycle was flat at 8.8 days, and our return on working capital in the third quarter was also relatively flat with the 31% generated last quarter.

Cash flow from operations was negative $77 million in the third quarter.

While DSO, or days sales outstanding, were flat sequentially, our receivables increased nearly 10%, or $184 million, principally driven by a 10% increase in quarterly volume.

Cash increased from $150 million at June 30 to $152 million at the end of the third quarter, while debt increased from $183 million in the second quarter to $293 million in the third quarter. Our net, once again, now includes the $250 million term loan funded in July, which matures in 2016.

So our net debt position at the end of the third quarter was $141 million, as compared to $33 million in the second quarter. While our net debt position increased during the quarter, our overall liquidity position remained strong, with more than $900 million of available liquidity as of September 30.

So in closing, we were extremely pleased to report volume increases across all three of our business segments. We posted a record level of gross profit, net income, and earnings per share.

Our operating efficiencies continue to improve and we remain committed to gaining operational scalability.

And finally, we continue to focus on our long-term strategies and core competencies in order to continue to add value to our customers and suppliers while generating above-average returns to our shareholders.

I would now like to turn the call back over to our operator, Russell, to open up the question-and- answer period. Thank you.

(OPERATOR INSTRUCTIONS). Greg Lewis.

Yes. Thank you and good afternoon.

Good afternoon, Greg.

Paul, I'm just thinking about -- I mean, clearly, volumes were up across all three of the segments. Could you provide a little bit more color on -- clearly the Marine volumes really had a nice move up quarter over quarter. Could you talk a little bit about what's happening in Marine and why those volumes sort of spiked up?

Sure. I think there are two things going on. There's a pull and a push happening here. On the one hand, you've got a market environment in which, as you know, strategically we've been more highly focused on building market share with the larger fleets. And I think that what we saw was our ability to execute well, to continue to maintain close ties to those strategic partners, and that's allowed us to continue to create opportunities in a difficult market for them to realize cost savings. So I think there's a little bit of a pull from the customer to have us continue to provide solutions.

On the push side, I would say that just the overall backdrop in the market, the fact that the suppliers are a lot more sensitive to the role that we play as a valuable counterpart. It means that we're, I think, doing very well on our supply economics, I think the fact that the competitive landscape is somewhat challenged just because of what's going on with the overall economic backdrop. So I think that perhaps we enjoy a little bit of an advantage there.

But you put all that together and it's just -- really more than anything else, it's about staying very focused on our customer base.

Okay, great. And then, clearly in the press release you talk about tight execution, Michael talked about solid risk management. In the environment we're in right now, clearly there's a lot of uncertainty out there. What additional steps, if any, is World Fuel taking to sort of mitigate potential risks, potential counterparty risks? Are we at a point now where you're pulling back capital from some customers? Could you talk a little bit about that as well?

Greg, hi; it's Mike Kasbar. It's always been about engagement. As Frank Shea has famously said, you never back away from a kicking horse. So it's really about staying close to our clients. It's physically getting into the marketplace, and we do this in all of our business segments. I've had numerous suppliers comment to us that, gee, it's a little bit unusual. But we kick the tires. It's a combination of looking at a tremendous amount of microeconomics on the actual customers, the macroeconomics, and then a gut feel.

This is basically a lifetime of looking at these spaces and there's really no substitute for being there. I really can't sort of explain it any more than that. It's definitely the core of what it is that we do; it's a core competency for sure. We wouldn't be here if we didn't take that seriously every single day.

Every single salesperson is an assistant credit manager and we've made the investment into the systems and the people. So it's just an important core area all of us keep a focus on. It's just a hell of a lot of engagement. It's certainly very much focused on that area.

But it's also cultural. When you look at our Company, we are basically one big risk management company, whether it's delivery risk, price risk, credit risk -- you name it. We identify, manage, absorb, and try to monetize the risks.

Okay, great. And in thinking about that, it's been a couple million dollars for the last couple of quarters. Is that sort of -- in this environment, is that sort of a level that we should think about going forward?

And then, to that -- are we at a point now where World Fuel has stopped providing liquidity to customers? And if so, I'd be interested in what sectors those might be in.

That's pretty hard to predict. I mean, it's something that -- you just need to be on your toes. I think one of the things that -- we will always be as responsive. So if a situation presents itself where we need to respond, that's what we'll do. If you look at 2008, that was a fairly crazy environment and we were basically in the war room every morning at 8.00 and we were on video conferences.

So we just look at it and in this crazy environment, anything is possible. We're very focused on it, we understand the business models of our clients, we understand our weak (inaudible) in various different geographies, and where we've got a multi-functional, multidisciplinary team in terms of our legal and financial, both internal and external. So it's really just constant monitoring.

Okay, great. Thanks for the time, and congratulations on a good quarter.

Thanks, Greg.

Thanks, Greg.

John Chappell.

Thanks. Good afternoon, guys.

Hey, John.

Hey, John.

Paul, if I heard you correctly, I thought you mentioned adding talent in both the aviation and the Land side. I have kind of a short-term question for that and a long-term; I'll hit the long-term first. What kind of markets are you targeting here? Are you just looking to broaden your geographic diversity? Are you looking into getting new types of customer bases? Any gaps in your current service or product offerings that you're looking to fill in the light of the aviation businesses?

Sure. As you know, I think we've always prided ourselves on being a magnet for talent. Mike Kasbar has always said that World Fuel is a franchise for entrepreneurs. So as we've scaled the market and continue to expand, it's about populating this enterprise with people that can help us not only navigate the current environment but to get us to the next level that we view as strategically critical to our sort of trajectory in the Company.

And I think what we're very proud of is that the number of people that have been knocking on our door to participate in this particular enterprise is very gratifying where you consider where we were sort of 10 and 12 years ago. So I would say what Mike's been driving over the last year or so has been strategic hires in these key areas. These are not only in the airline space but it's oil companies, it's also new geographies. We've gone deep into some very high-level financial talents. We've got the kind of expertise coming out of the procurement world that we never could have attracted before.

Anyway, you put all that together and it's just a very exciting time. Because I would say in a market that is generally characterized by massive upheaval, this has represented huge opportunity and we have been a place that's been able to attract a lot of great talent.

We're a team-oriented culture; Mike talked about culture. It sounds a little corny, but it's a pretty important part of our competitive differentiation. We have a very deep corporate culture. I think people who join here feel they can have a lot of fun as well as execute well, and we provide them a platform to kind of realize what they're good at. So we're going to continue to make that investment; it's probably the most important thing we've ever done over the history of the Company and it's the best single return on investment we ever get. So we'll do that.

And I know you manage the business on a longer-term basis; clearly, not quarter to quarter. But if I recall, one point over the last six or seven years when you were adding a significant amount of talent there, I think the cost kind of ramped up disproportionately to the increased revenue, or gross profit.

I recall that had more to do with the systems.

Probably. But do you think that might be the case in the near term?

No, I don't think we see that, Jonathan. I appreciate that sensitivity. We certainly went through that time and I would tell you that from our point of view, we're always going to be vigilant to that. We're always going to make sure that we've got the kind of growth trajectory in what we're building to allow us to make those investments.

John, it's Ira. I would say that if you compare World Fuel 2011 to 2007, which is the period that you're referring to, the Company has more that quadrupled in size. So we think -- we now have the scale to make those investments in key talented individuals around the world and still manage to the metrics that we've been talking about on a regular basis every quarter -- operating expenses as a percentage of gross profit, comp as a percentage of gross profit. So you may not see that number drop dramatically, but it's unlikely that that number grows significantly over the long term because of the scale that we've built up in the business.

And I would add, John, that if you go back to the time I think you'll recall that one of the great challenges of every growth company is, can you actually achieve maturity as a functional organization? And we were far more entrepreneur than we were functionally set up. And I think one of the things that Mike identified at that time when he was leading that charge was he said, look, there's no way that we're going to be able to transcend being a small operation that's entrepreneurial and commercially agile if we don't make the investments to allow us to scale this thing.

And that meant we had to buckle down and do the hard work of putting in a global system, and that we had to build in a level of functional expertise that would allow us to scale. If we had not made those investments and we weren't committed to doing that, we wouldn't be the enterprise we are today.

Okay. And along those lines, I think it was around that same time when we first heard about strategic inventories or self-supply. And you'd mentioned in your prepared remarks that you're kind of increasing that as well. And I think Ira said you went from 55 million gallons to 64 in the third quarter. What type of magnitude are you looking at for the strategic inventories? Is this something that will become a larger thing than, I think, just the Northeast aviation market and a little bit in [UP] and marine?

Remember, we've used it primarily to be sort of a stalking horse for our back-to-back model as well. So it's a little bit of kind of keeping the system honest. I think Mike talked about that in our last call, where oftentimes we're using that in a sense to keep our core back-to-back business in check on making sure we're getting the kind of competitive pricing. And it allows us a level of visibility on the supply chain and the cost structures that are important to us running our model.

But the other thing that I would add is that as we look at these expanding markets in Asia and in Europe, our ability to make these investments becomes a very important strategic part of opening up new markets.

And when we look at our relationship with our customers, they're looking at us a lot more like a strategic partner than they are simply a vendor. Not only are we handling sort of the care, custody, control, logistics, and servicing components, but our ability to invest in inventories to open up new airports has made us -- has sort of changed our entire profile in the market.

So to that point, it's still very strategic. It doesn't mean there's some sea change here in the level of investment but we'll -- I think we're realized that there's a lot of value in being able to target those investments and get us in a position where we can build scale over time.

Interesting; that's very helpful. One last really quick thing -- the reselling percentage of the Marine business continues to increase -- up to 87% now. Are you really kind of de-emphasizing the brokerage business? Should we expect that to kind of shrink to the single digits as a percentage of the Marine business, eventually?

Yes. I think it's a number that, to be perfectly honest, we don't focus on a lot. It just happens to come out where it does. The traditional business of the brokerage role still has -- in a couple of markets still plays a role; it's kind of more a tradition.

I think that the power of our model has been that we're driving such economies of scale on the supply side that most of the procurement world is sort of indifferent; they're agnostic to our particular role, structurally, as a broker or trader, a reseller. So in that sense, we don't spend a lot of time focusing on it.

There are just certain markets where by virtue of the account and the traditional suppliers, the brokerage role still works. That's okay; we'll do it. It's a service offering that we're good at. It's where we started in our roots, and it was a lot of where the service ethic that, if you will, animates our entire service offering now came from was a lot of those early brokerage roots. So we like the tradition of it in terms of the service ethic. But 87 versus 85 versus 91 versus 72 -- we aren't particularly focused on that, John.

Okay. Very helpful, Paul. Thanks, Ira.

Thanks.

Ken Hoexter.

Hi, good afternoon.

Hi, Ken.

Paul, in your opening comments you talked about -- I guess in John was talking about more on the employee side. In Aviation, you talked a bit about looking to open some new markets. Can maybe you expand on that a bit?

Sure. You may remember strategically that one of the transformative events in our Aviation business model was when we began to take advantage of the fact that the oil companies had moved off controlling assets on the airports and allowed open supply markets. This allowed us to basically arbitrage between our back-to-back model, where -- just buying a price out of a supplier, versus our ability to buy our own barrels at a refining complex, ship it up a pipeline, and move it into our own inventories and then supply on an airport.

Now, the benefit of that in the US market was it gave us a lot more understanding about the supply chain work and it allowed us scale. And I think that ultimately that was a very successful strategy that allowed us to transform from being kind of a small regional reseller in Florida to a more nationally established player in a number of markets.

But what we found is that overseas, we had a difficult time going back sort of five years ago where the international markets were still closed, airport assets were still controlled by a short list of suppliers, and it wasn't so easy to get into those markets other than being on a back-to-back basis.

What we have found, though, with the European Union and some of the deregulatory trends, you've got a series of markets that are now opening up where those assets are more accessible. And the dynamics of refining and oil flows are changing. So if you look at what's going on in European refining, there's now a much more robust import market where the role of the (inaudible) refinery in India is a lot more important to parts of Europe than, let's say, the traditional refining base.

When those markets open up, it means you've got import markets, it means you've got access into the infrastructure that allows you to open up your own supply capability. And that allows us kind of a new strategic position in these markets that we couldn't have achieved a few years ago.

You add to that the fact that we've got balance sheet, we've got scale, and we've got much deeper relationships with the customers; we're now in a position to help them manage their procurement on a much broader global scale.

So there's a lot of things going on in that question, Ken, but we're very excited and it represents, I think, significant opportunities as the Company continues to transform over time.

Have there been recent wins in expanding that market? Is that what's driving that?

It's a component of it, but there are a lot of things going on. As you know, we've got many different cylinders in the engine, all of which -- as we said in the opening remarks, we had a lot of things all sort of come together at once and that was pretty exciting. So I would say that that was a component, but it's not the component; there are many. And I think this is what happens when you continue to stay pretty focused on execution -- every once in a while, things sort of line up and you get all your pieces clicking at once, and that just happened to be one of the components.

But strategically, it's an area that's important longer term. As the Russian markets open up, as the Asian markets open up, it's just important to be able to drive barrels and throughput into these new markets and that's valuable to our customers.

I just want to dig into that because when you say everything kind of hit at once, I just want to make sure that's not something that -- hey, this quarter everything hit on all cylinders but it never happens like that ever quarter. Or are these secular trends that you're suggesting that are kind of all starting to work in your favor?

I think Frank Shea is probably the source of all knowledge here. If you look at the 15-year history you've got a 96.5% r-squared trajectory in our gross bottom line. So I would say that we have a lot of confidence in the overall ability of this enterprise to continue to grow and expand and build a position over the long term.

Whether there's very variability quarter to quarter -- Ken, as you know, we've never really built the business that way and we don't really focus on it in that micro a level. I mean, obviously you have to have some attention to it or we couldn't have a conversation with guys like you without some trouble. But overall, we tend to think about investing in the enterprise for the long term.

And that's what we've done and I think that the proof of the pudding is this isn't some anomaly where we've had a bunch of one-offs. I think it's been a pretty consistent trend over a long period of time. And I think now we're sort of 16 quarters in a row of continuing to deliver pretty phenomenal results. So I think that speaks to the reliability and sustainability of the overall business model. Quarter to quarter, we're not as focused as a management team on those particular results; we're focused on the overall enterprise that we're building and the longer-term opportunity to build scale.

Let me follow up that because -- I appreciate that answer, thank you. On the Marine side, you've had great volatility in the gross profit per metric ton, down to it looks like 7.25 from 8. And I know last quarter you said it was abnormally high. Can maybe directionally you talk through what we should look for in that -- what drove the volatility within that line?

Sure. I'll go back to probably every script we've had in the last I don't know how long has focused on that we don't, as a management team, focus on that per-unit gross margin. That is not the focus of what we drive as a business model. What we're driving is overall gross profit opportunity.

And again, that is always -- if you will, it is tempered and it's moderated by what we perceive to be our appetite for risk. So we're always looking at risk-adjusted returns. So when we invest that working capital into the model, when we think about the relationships and how we're going to drive scale, we're always managing our sort of appetite for risk around the core customer base. And that's at the heart of how we think about gross profit.

But at the end of the day, it isn't something that we focus on the actual unit. It has a lot to do with the mix of business. Remember, we've got a very diversified portfolio and it varies considerably from the large international global Danish container fleet all the way to the offshore drill rig to the fishing fleet to a military contract.

All of that's going into that mix of business and it can be variable from quarter to quarter, which is why we as a management team don't focus on the per unit. What we are interested in is whether our business model continues to generate a robust, risk-adjusted, overall gross profit return over time, and I think we've demonstrated that we can do that pretty well.

All right. My last question is a technical one for the quarter, if I may. It looked like, if I add up the difference of your operating income for the three categories, and the difference between that and your opp EBIT is kind of your corporate overhead. It looked like it was about $14 million in this quarter -- a little bit of an increase from the last year and a half. Is there anything to that that we should -- stock options or anything other that kind of kicks in?

No, Ken -- it's Ira. I would say incentive accrual is probably a little bit higher this quarter, but nothing else overly material in terms of what may have impacted that number quarter over quarter. It was about $13.8 million in the nonallocated corporate overhead. So it's a little bit higher, but really nothing that stands out in a big way other than incentives.

Okay. Appreciate the time; thank you.

Thanks, Ken.

Kevin Sterling.

Good afternoon, gentlemen.

Hey, Kevin.

Hey, in the press release you talk about emerging logistics opportunities in the Land segment. Paul, could you maybe expand on that a little bit?

Kevin, let me take that. One of the things that has been a great contributor over the course of our corporation -- we've grown through acquisition and organically and within our Land business -- we started that in 2004 as a very slow and painful burn. We managed to pull ourselves up by our bootstraps and then identified a couple of great companies and have put them together.

The beauty of acquisitions is you get -- we've always been selective and have picked up good people and good companies and have kept them engaged and managed to help them develop new areas of business activity.

So as the group expands its network of engagement in the marketplace, we'll come up with different opportunities from time to time. We're very focused on them. We work with our new colleagues and partners to pursue them. Oftentimes, they're pursuing them themselves because they're competent practitioners. Paul used the engine analogy, and it's kind of like my golf game -- it's a little bit inconsistent; but unlike my golf game, the business is generally improving. So we manage to take advantage of some opportunities in the marketplace because we have some smart folks. We just have more sort of traps in the marketplace to be able to catch opportunities. So we've benefited from that this quarter.

Okay, great. Thank you, Mike. Are there opportunities on the Land side with maybe propane, shale oil, and rail cars? Are those some of the opportunities you see out there?

Yes, we talked about that. We've talked about rail car logistics. We picked up those competencies from Western, and propane, and a little bit of crude oil. So there's a number of different commodities that we focus on now. Again, they're not material but they certainly allow us to expand our capabilities so we're excited about it.

Okay, great. And let me ask the volume question maybe a little bit differently. You had great volume growth across all three of your segments. Given the current environment, with all the uncertainty, credit concerns, etc., are you now seeing suppliers come to you because of your balance sheet and all of the risk that exists today? Is that kind of what we're seeing?

Well, it's always been the case. I mean, that has always been sort of our calling card and our trademark. It started out lower down on the food chain and now simply because of the market environment and conditions, the price of oil and the sheer volume, it's something that is a significant sort of number. Everyone picks their poison, and most folk don't really like what we do; sometimes we don't even like it. But we are basically absorbing those credit risks and all of those logistical pieces. So without question, that's how we're looked at and that's what suppliers look to us for.

Okay, great. And if I'm not mistaken, you guys, I think, recently won a new Department of Defense contract, I believe with the Air Force. When does that kick in?

Okay. It's funny -- sometimes you -- we've been doing this for a while. And with that activity we picked up NCS, whenever we picked them up, and they're part of our operation. We've been in the government business now since 1985. So we've been doing it for 25 years. I think the one that you're referring to is -- which one? Security Span? Okay. So that one will start in Q1 and --

The original announcement, I believe, said October, but there won't be any volume until the beginning of the first quarter.

Right. And the one thing is as you look at that, all this stuff is pretty variable. What we'll actually supply is unknown. As I've said in the past, our approach on government business is to simply pursue all the opportunities as part of what we do.

Okay. So it sounds like that contract is going to kick in the first of the year. I think what they gave -- I think what the Department of Defense said was an maximum amount. And I guess, like you said, it's variable and you normally don't hit that. Is that the right way to think about it? That it could --

Yes. It's a requirements contract. We've won many, many contracts of which many of them, we haven't supplied a drop of oil. So it's just the way it is. They're requirements contracts so we've got a bit of the machinery but we've been doing it for many, many years. So we obviously look to go after the contracts that we think are going to have some requirements; that they're actually going to lift. So this one is a bit unknown. I'm sure we'll deliver some product there.

But they always post it as a gross level, Kevin, so it's misleading. That's just the way the protocol works in these government things. So they give you a big number but that's not how we think about it. As Mike says, we've had many contracts that come out just like that and you don't lift a thing.

So when I saw that number it was a gross number.

Yes. It happened to get identified, but as Mike says, this is the ongoing ebb and flow of our business. We've got contracts coming and going year in and out. Some roll off, some roll on. It's just kind of an ongoing part of the business; this one just happened to get flagged for whatever reason -- I guess it has to do with what's going on in Kurdistan just being more high profile. But to us, it's pretty much routine.

Okay. Well, that's all I had. Thanks so much for your time today.

Thanks.

Thanks, Kevin.

Alex Brand.

Hey gentlemen, good afternoon. This is Sterling in for Alex. I wanted to ask about free cash flow. Obviously, the Company is growing volume really well and for several quarters now -- sorry, I don't know if you could hear me earlier. But for several quarters now, free cash flow has been negative. I just want to ask -- if we're in a period of slow GDP growth for the next couple of years, is there an ability, the way the model works, to generate free cash flow in that kind of environment if that's the economic growth part of our cycle?

I think the answer to that is certainly yes. However, if you look at where we are today, we've got a very strong balance sheet. We're operating in a volatile market environment and we've been able to take advantage of that balance sheet to grow the business. As you saw, we grew volumes 10% across all three segments this quarter. So that involves using some working capital, but we kept our overall trade cycle flat, which is important to note. Our returns were stable quarter over quarter, and obviously we were able to generate a higher level of profitability for the overall business.

So I think what we demonstrated back in 2008 when the markets really went haywire and liquidity became a big issue, that we were able to reduce our trade cycle dramatically and generate tremendous amounts of cash. So I guess the answer to your question really depends upon what's going on in the market.

I think in the short term, we prefer to aggressively use the balance sheet to drive growth prudently, applying our very conservative risk management principles in terms of who we're selling to. As Paul mentioned before, we're very focused on risk-adjusted returns. So if the economy is kind of flattish and a bit sluggish, that doesn't mean that World Fuel is flattish and sluggish, as we've proven over the last few years.

And if there are growth opportunities, we'll go after them. And that could affect cash flow over a couple-quarter period or over the course of a year. Over the longer term, I think we should be able to generate free cash flow. But once again, as we're growing at a rapid clip, it's a little more difficult to do so in the short term and our balance sheet could well afford the use of $70-some-odd million worth of cash, as we used this quarter.

Great. So if I were to summarize that -- tell me if I'm wrong -- in the growth phase of an economic cycle, if it's flattish like this, you're going to continue to pursue growth opportunities that's going to require working capital. And free cash flow probably should be negative because it's just an indication of how good the growth opportunities are with World Fuel, and the cash cycle will change if the economy starts to decline. Is that a fair summary?

I think -- you could get a lot more deeper into that, but I think at a macro level, that's a fair summary. If prices went through the roof and we were using up some of our liquidity, we may rein in the trade cycle, which would improve the cash flow dynamics. But assuming a stable pricing environment with the growth opportunities that we hope to continue to pursue, I think your answer is generally correct -- or, your assumptions are generally correct.

That's very helpful; thanks. Taking it down a level or two or more, I was wondering if you could give us some insight into volumes in October, particularly in the Aviation segment. I know you have broad exposure across aviation segments, but a lot of us are trying to figure out what's going on in air freight in particular. I'm just wondering if you're seeing seasonality in October; if you could talk about that at all.

We generally don't get that granular, Sterling; but historically there has been a bit of seasonality over all in the aviation business as you head into the fall coming out of the stronger summer period, especially on the commercial side. But that's all I can really tell you at this point.

Okay. And wanted to ask about corporate overhead -- it was up $2.5 million sequentially from the second quarter. Was there any acquisition-related expense in corporate overhead, either in the second quarter or in the third?

There was a modest amount in both quarters. More of the acquisition expense this year occurred in the very early part of the year. So as I think I answered earlier to another question, I think the greatest impact was incentive compensation-related quarter over quarter.

Okay, great. Thank you very much for the time; appreciate it.

Brian Delaney.

Hi. Thank you for taking the call. As a follow-up to the previous question, if you look back to 2008, a big part of the free cash flow generation I think was because of what happened to fuel prices. If fuel prices stay at this level or go higher, in a slow-growth environment, what does that do to the free cash flow outlook for the business?

It all depends upon volume growth, Brian, as I just explained a moment ago. So if we're growing volumes at a healthy clip, even if prices remain flat, with the net trade cycle remaining stable at nine days, you need more working capital. So depending upon -- it's really a mathematical formula, at the end of the day. Depending upon the level of volume growth, how much is that working capital compared to the EBITDA that you generated over the course of the quarter? And at a certain level of growth, the incremental working capital requirement will exceed EBITDA.

So it's all about how quickly we're growing. And once again, hopefully, if we are growing quickly and using some cash, hopefully that means we're profitable, or more profitable than we are today.

So if you look back, though -- you used the example of 2008 -- am I wrong in the way I'm looking at it, that a big part of the working capital generation was just from the fact that fuel prices came in so hard?

No. In 2008, there were two components. Obviously, fuel prices coming down will always have a positive impact. But at the same time, we proactively made a bunch of moves which had a dramatic impact on our net trade cycle. Going into what occurred in 2008, our trade cycle was a little bit higher than where it is today -- I believe it was about 9.5 days -- and we brought it down to a low point of under five days. So we basically reduced -- even at the flat -- without prices going down, we theoretically reduced our working capital requirement by 50%, which generated a tremendous amount of cash. That was then aided and abetted by prices going down considerably, and that's why we generated a ridiculous amount of cash over that time period, because both of those needles were moving in the right direction.

And remind me -- is there a certain level of cash that you guys do not want to either exceed on the net debt side or a level of cash that you do not want to go below?

I think we like to keep $100 million-plus on the balance sheet, which we've done consistently. I think we may have missed that one quarter by a couple million dollars, but that's what we focus on from a cash perspective.

I think that the debt number is very correlated to our level of EBITDA -- that's one of the reasons why we started talking about that a little more. So having $100-some-odd million worth of net debt this quarter with a run rate of close to $300 million of EBITDA translates into an extremely low level of leverage.

We don't want to, at any time, become anything close to what some would refer to as a highly leveraged business, but right now, with that metric, we've got a long way to go before anyone would ever think of looking at us that way. So I can't give you a raw number, but we do focus on that leverage equation. And as our EBITDA grows -- and hopefully that will continue to grow over time, over the next several years -- that provides us with more debt capacity in a scenario where we're still a very under-leveraged business.

And that's important to us. It's important to us in the face of the supply community and even our customers to continue to demonstrate that we have an extremely strong balance sheet, which has been a big differentiator for us for many years, as Mike described earlier.

Okay, great. And one last question -- the spread between accounts payable and accounts receivable, the positive spread that has historically been there -- is that something you guys monitor? Is there a correlation we should think about in terms of how much AR-AP should offset each other?

The trade cycle today is about nine days. I think inventory is about four. So the number's been running, net, about five days. I mean, you've got five days more in receivables than you do in accounts payable. And that's generally the ballpark of where we've been for a considerable amount of time.

Actually, that number has probably even contracted over the last couple of years. It had been greater. So while we've built up inventory, we've brought down the delta between receivables and payables, keeping our overall net trade cycle at the same level it was before we had the inventory position that we have today.

Edward Hemmelgarn.

Yes, Paul. Mike, this question is for you. You had a bigger pickup in volumes than one would typically expect by the seasonality of the third quarter, although you usually see an increase then. You talked about this, but how much of it was really a pickup, or due to a pickup, in risk premiums and therefore suppliers wanting to use you more for the cost for buyers versus how much has been really due to you're expanding into new markets, and from that standpoint being able to take a greater share of the available business?

Sure. If I understand your question, if the question is, does the increase in volume reflect the fact that we decided to take on more risk, I would say that's absolutely not what it's about.

No. I meant, not that you took on more risk, but rather that suppliers -- or, the market would be turning to your more just merely because of their wanting somebody that's a better risk evaluator.

Sure. Let me try to break it down so that you get a flavor for some of the components. There are a couple of things that are going on here. One, you do have a component in which the supply community is viewing us as a most favored nation. We are sort of a Rock of Gibraltar in the storm of all this economic upheaval. The balance sheet is strong, the platform is very robust, the service offering is excellent. Our distribution, go-to-market efficiency is very, very important to these suppliers.

They're trying to do more with less. They are also under stress and the fact that they can kind of partner with us and rely with us to be a source of distribution, marketing, and efficient go-to-market, allowing them sort of a good net back on their barrel; that's one component of it.

Another component is that as the customers are also going through the same evaluation of who they want to be going into business with, who's got the most robust domain expertise on these very granular and very volatile markets, we represent a very good window of transparency on what's driving these market fundamentals.

From a procurement point of view, as most of the people on this call know who follow transportation, there's a little bit of stress already in the economic model. So every bit of savings is important. And their ability as a customer to rely on us to give them discreet understandings of these very fragmented and volatile markets is part of why they're allowing us to take on more market share because we're sort of a safe pair of hands for them in terms of understanding these markets.

Then you add just the executional skills. We've got the best team in the world. They've got tremendous expertise in these areas; their ability to manage those relationships. We've got long-term stability in that team so the customers know that this is not a high-turnover model. So there's a sense of trust, relationship, regard for what we can deliver; a real professionalism around the offering.

So you put all that together and add to it the general anxiety of a difficult backdrop -- we represent, I would say, the best safe harbor in town in terms of being able to do it. So all combines to mean we're in a position to drive better volumes and better market share than others might be in our space. So it's a bunch of different factors, Ed. But I think it certainly speaks to the differentiated offering; that's the most important part.

There are no further questions at this time.

Okay. Operator, thank you very much. We appreciate everybody joining us today and we look forward to talking in the future. It was a great quarter and we appreciate all the help from our team and thanks for your continued support.

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