World Fuel Services Corporation Q3 2008 Earnings Call Transcript

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World Fuel Services Corporation (NYSE:INT)

Q3 2008 Earnings Call Transcript

November 6, 2008, 5:00 pm ET


Frank Shea – EVP and Chief Risk and Administrative Officer

Paul Stebbins – Chairman and CEO

Ira Birns – CFO and EVP


Jon Chappell – JP Morgan

Alex Brand – Stephens

Steve Ferazani – Sidoti

Jim Larkins – Wasatch

Edward Hemmelgarn – Shaker Investments


Good afternoon. My name is Brianna, and I will be your conference operator today. At this time, I would like to welcome everyone to the World Fuel Services third quarter earnings conference call.

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) Thank you.

Mr. Frank Shea, Chief Risk and Administrative Officer, you may begin your conference.

Frank Shea

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

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

With us on the call today are Paul Stebbins, Chairman and Chief Executive Officer; 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. Some of the comments to be made on this evening’s call may include forward-looking statements under the Private Securities Reform Act of 1995. These statements involve risks and uncertainties that could cause actual results or facts to differ materially from such statements.

Detailed information about these risks is contained in the company’s SEC filings, which are available on the company’s website or from the SEC. We will begin with several minutes of prepared remarks, which will then be followed by a question-and-answer period. For members of the press during the questions-and-answer period, please note that you should be in the listen-only mode.

At this time, I would like to introduce our Chairman and Chief Executive Officer, Paul Stebbins.

Paul Stebbins

Thanks, Frank. Good afternoon and thank you for joining us.

There is not a person on this call today who has not been impacted personally and professionally by the extraordinary event that expired in Q3, a time of unprecedented upheaval and crisis in the global financial markets.

Today, the bailout of Fannie Mae and Freddie Mac seem a distant memory when compared to the financial black hole created by the global credit crisis. The uncertainty over asset valuations brought bank liquidity to a standstill, while governments throughout the world struggled to respond and take radical action to restore confidence.

The bankruptcy of Lehman Brothers sent shockwaves through the international markets, and triggered defaults and heightened concerns about counter-part risks in every major market in the world and the rapid deceleration of the global economy caused oil prices to plummet, while shipping rates and air traffic volumes abruptly declined.

This perfect storm of events precipitated a collapse in investor confidence, a free fall in the equity markets, and the evaporation of trillions of dollars in valuation. No business model in the world was immune to these events, and World Fuel was no exception, but extraordinary market conditions call for extraordinary measures.

While our corporate finance team focused on fortifying our balance sheet and strengthening liquidity, our global commercial team focused on using our financial strength to add value to our global customers and suppliers who are confronting the most challenging operating environment of recent history. At a time of maximum uncertainty, our strong balance sheet, excellent liquidity and robust global network provided safe harbor to both customers and suppliers who are deeply concerned about counter-party risks and reeling from a highly volatile and uncertain market.

Our customers valued our ability to provide credit, operational and logistical support, and real-time visibility into fast-moving markets. Our suppliers valued our strong balance sheet, global network, and risk management expertise to help them distribute their products ratably at scale, and mitigate their own risks.

Our execution and record performance clearly differentiated World Fuel from our competition and look at the critical role we play in the global supply chain. Never has our value proposition been more compelling, or our financial strength more important than it was in Q3.

In our aviation segment, Q3 was a time of intense focus on managing credit risks, reducing exposure concentration, managing working capital, shedding low margin business, and reducing inventory. These initiatives proved successful. Our team also did a great job of maintaining and servicing a highly-diversified customer base in spite of a difficult operating environment.

Although there has been a lot of negative publicity about the viability of the commercial aviation industry, we believe the news is not all bad for airlines. Fuel price shocks experienced earlier this year prompted most airlines to take aggressive actions to reduce costs, cut capacity, and develop new revenue streams and even though IATA reports the weakening global economy has precipitated a reduction in the year-over-year growth rate in passenger traffic, and an actual decline in cargo traffic, the impact has been mitigated to a degree by the dramatic drop in fuel prices, which provided a welcome financial reprieve to our aviation customers.

Those airlines which have done the hard work to properly size their business models will weather the downturn in 2009, and benefit from the eventual turnaround. Moreover, certain markets, such as Latin America, are seeing evidence of unexpected growth. We remain well positioned to support the industry going forward.

In the area of business aviation, Q3 was a good quarter, and we continue to be cautiously optimistic about the space. Certainly, the highly-publicized demise of some very large financial institutions has negatively impacted a certain segment of the business aviation space, but the business aviation market overall has proved resilient, and we were pleased with our continued success in this market, both in fuel, card processing, and flight services.

Our marine team delivered exceptional performance in Q3 reflecting our ability to execute well in a volatile spot market environment and while the shipping industry has been negatively impacted by the drop in freight rates associated with the weakening economy, they are also benefiting from the sharp drop in oil prices. As we have discussed in past calls, our target customers have tended to be large, well capitalized groups who clearly benefited from the robust shipping market over the past five years.

In Q3, these customers successfully endured the upheaval in the market. They have staying power, and are generally well positioned to survive an economic downturn. Of course, the current operating environment will prove challenging for certain segments of the market, but we take comfort in the strategic decision we made several years ago to focus our marketing and services on larger, best-in-class suites who have the financial strength and operational efficiency to weather a weak market.

Historically, World Fuel has performed well in difficult operating environments, and as we look forward, we feel good about the position we have built in the global marine market. The chaotic financial conditions have brought us closer to our customers and suppliers and validated the value we offer. At a time when our balance sheet and liquidity have never been stronger, our less well capitalized competitors have struggled with working capital issues and restrictive bank terms. We have benefited from the fact that customers and suppliers alike are now far more discerning in their selection of counter-parties and as suppliers grow more cautious, and reduce or terminate credit lines for even relatively strong customers, we are well positioned to provide service and steady supply.

Lastly, we are very excited to report that our land segment had a record result in the third quarter. We significantly improved our trade cycle, reduced risk, executed according to plan, and posted robust results. The land team is doing an outstanding job and we will be looking forward to explore new opportunities and further expand our business in the future.

We are proud of our strong results in Q3, and commend the effort and dedication of our global team. In addition to delivering record performance in all three segments, we saw a $287 million positive swing in operating cash. Our overall trade cycle improved by 1.2 days. Our return on working capital was 53%, and our return on equity was 28%. Our management team was highly focused on these key metrics and executed well across the board.

As we look forward, we remain sober-minded and respectful of the perils associated with the global recession and we have no special ability to predict what the future will bring, but we do know that we have demonstrated our ability to navigate a steady course through difficult waters. In fact, we believe the upheaval in the global markets presents as many opportunities as it does risks, and we are well positioned to take advantage of them in the weeks and months to come.

Thank you for your support during this difficult period, and I will now turn the call over to Ira for a detailed review of the financials. Ira?

Ira Birns

Thanks, Paul, and good evening everybody. Revenue for the third quarter was $5.5 billion, down 4% sequentially, but up 51% compared to the third quarter of last year. Our marine segment revenues were $2.9 billion, down 4% sequentially, but up 46% year-over-year. The aviation segment generated revenues of $2 billion, down 9% sequentially, but up 42% from last year’s third quarter and finally, our land segment grew to $483 million, up 32% sequentially and 215% from last year’s third quarter, including the impact of the Texor acquisition, which we closed in June.

Before I review our results by segment, while it may be obvious, I would like to point out that the year-over-year increases in revenue were significantly impacted by the increase in fuel prices.

Our aviation segment sold 517 million gallons of fuel during the third quarter. That’s down 13% sequentially, and down 16% compared to the third quarter of last year. The sequential reduction in volume was principally due to our continued efforts to reduce exposure to low-margin, higher-risk accounts. Such decline was also impacted by the termination of a single account relationship as of July 1, which represented approximately 30 million gallons of quarterly volume. Based upon the actions we have already taken, it would be safe to assume that our overall aviation volumes will decline further in the fourth quarter.

Our marine segment’s total business activity was seven million metric tons, down 6% sequentially, and relatively flat year-over-year. Fuel reselling activities constituted approximately 76% of total marine business activity in the quarter, generally consistent with the average percentage of such activity over the past several quarters.

Our land segments sold 142 million gallons during the quarter, up 38% sequentially, and up over 100% compared to the same quarter a year ago. These amounts include Texor volumes for a full quarter, compared to one month in the second quarter of 2008.

Gross profit for third quarter was $123.8 million, an increase of $29.5 million, or 31% sequentially and effectively double the level of gross profit realized in the third quarter of last year.

Our aviation segment contributed $50.5 million in gross profit, an increase of 12% sequentially, and 52% over the third quarter of last year. Excluding the impact of the AVCARD acquisition, year-over-year gross profit was still up over 36%.

Our aviation self-supply model’s jet fuel inventory position declined to approximately 16 million gallons. That’s down 12 million gallons, or 43% when compared to the second quarter. The dollar value of our related jet fuel inventory decreased to approximately $50 million, down over 50% from $102 million in the prior quarter. This represents our lowest jet fuel inventory level since the first quarter of 2006. The sharp decline in our inventory position, as well as inventory dollars, principally relates to our continued effort to reduce our overall investment in working capital, as well as our conscious effort to reduce our P&L exposure to the impact of unprecedented fuel price volatility.

While jet fuel market prices fell approximately 25% during the quarter from $3.98 to $2.98 per gallon, prices actually increased in the early part of the quarter, which combined with the significantly lower inventory position as fuel prices began to decline, resulted in a meaningful benefit to gross profit in the quarter. Approximately 20% of our third quarter of our aviation gross profit can be attributed to this benefit.

As stated in the past, despite our significantly reduced level of inventory, please keep in mind that this remains a two-way street, as we can still experience both positive and negative benefits to gross profit, which remain dependent upon the direction, velocity, and timing of fuel price movements, and the corresponding impact on our average costing methodology.

Our marine segment again delivered extraordinary results, generating record gross profit of $63.2 million, an increase of $18.8 million or 42% sequentially and $36.4 million or 135% year-over-year, benefiting from significant market volatility during the quarter. As Paul has already mentioned, our record third quarter results reflect our ability to execute extremely well in what was clearly a highly volatile spot environment.

Our land segment delivered gross profit of $10.1 million, an increase of 117%, or $5.4 million sequentially and 371%, or $8 from the third quarter of 2007. This is principally driven by the impact of the Texor acquisition, which delivered solid results in their first full quarter as part of the World Fuel family.

Operating expenses for the third quarter, excluding our provision for bad debt, were $56.6 million. This falls within the $54 million to $58 million range, which I provided on last quarter’s call, despite the significant sequential increase in gross profit; $56.6 million represents an increase of over $300,000 sequentially, and $18 million year-over-year. Once again, both of these comparisons are impacted by a full quarter of Texor expenses included in this year’s third quarter.

Unallocated corporate overhead was $8.4 million, a decrease of $2.7 million sequentially. Once again, I will try to help you model operating expenses as we have been doing for the past few quarters. I would assume overall operating expenses, excluding bad debt expense of approximately $56 million to $60 million in the fourth quarter.

Our bad debt expense was $6.8 million, down $1.3 million sequentially, but up $5.5 million year-over-year. While we have done a remarkable job navigating through a turbulent market environment, most specifically in the aviation sector, our bad debt expense remained well above historic levels this quarter due to the need to reserve for write-off certain receivable balances; $5.4 million of this amount specifically related to our aviation segment.

Bad debt expense related to our land segment was down significantly quarter-over-quarter, as our land team did a solid job reducing risks and significantly reducing DSO. While our total bad debt reserve as a percentage of total receivables had declined as our receivable balances grew in the first half of this year, such reserve is now 1.9% of total receivables, which is up from 1.2% in the second quarter, and based upon what we know today, we are comfortable that such amount is adequate.

There has also been much public discussion regarding counter-party risks, so I would like to briefly address this element of risk as well. We continue to focus on this area of risk as it is an integral element of our daily risk management activities. Given the much publicized weakness in the market, we clearly placed an even greater focus on this area over the past quarter.

Our counter-parties are balanced fairly evenly between energy companies, customers, physical suppliers, and financial counter-parties, and based upon what we know today, we remain comfortable with all of the counter-parties with whom we have ongoing relationships.

Income from operations for the third quarter of 2008 was $60.3 million, an increase of 102% sequentially, and up 170% from last year’s third quarter.

In our aviation segment, income from operations was $23.9 million, a 34% sequential increase, and an increase of 31 when compared last year’s third quarter. Our marine segment’s income from operations was $42.4 million in the third quarter, an increase of 79% sequentially and more than four times the level of operating income generated in last year’s third quarter.

Our land segment had income from operations of $2.4 million, an increase of $3.1 million from last quarter’s slight loss, and $2 million year-over-year, again driven primarily by the impact of the first full quarter of Texor results.

Overall, we had record results across the business this quarter, driven by our ability to execute very well in an extremely challenging operating environment.

The company had other income and expense net of $5.3 million for the third quarter compared to $2.2 million in last year’s third quarter. This $3.1 million increase principally relates to the year-over-year increase in net interest expense, as well as the up-front financing costs associated with our new accounts receivable facility, which was completed at the end of the third quarter. I would assume interest expense of approximately $1 million to $2 million for the fourth quarter.

The company’s effective tax rate for the third quarter was 27% as compared to 24% in the second quarter. The higher effective tax rate resulted from a shift in the mix of the results of operations in tax jurisdictions with higher tax rates. This includes the impact of the first full quarter of Texor results, which were taxed at US rates. Our estimated effective tax rate for the fourth quarter should again be between 24% and 28%.

Net income and diluted earnings per share were also records for us. Net income in the third quarter was $40.1 million, an increase of 95% sequentially and 170% year-over-year. Diluted earnings per share of $1.37 increased 93% sequentially, and 169% over last year’s third quarter. Return on equity, as mentioned earlier, was 28.1% for the third quarter, compared to 15.9% in the second quarter of 2008, and our return on assets for the third quarter was 10.6%, more than twice the 5.1% achieved during the second quarter.

As I have mentioned on prior calls, we have been very focused on reducing our net trade cycle and increasing our return on working capital. As a result, days’ sales outstanding in the third quarter declined over two-and-a-half days. As a matter of fact, our DSO declined in all three of our segments for the second consecutive quarter.

Our payable days outstanding declined two days from last quarter, and inventory days were also down almost a full day from June 30. Therefore, as a result of our continued focus on managing working capital, our overall cash conversion cycle decreased over a full day from the second quarter, and is now down two-and-a-half days over the last two quarters.

Our net working capital position declined 43% from $555 million in the second quarter to $317 million at the end of the third quarter. As a result of our significant working capital efforts, and strong EBITDA generation, combined with the positive impact of declining fuel prices during the quarter, we delivered record operating cash flow of $287 million in the third quarter, and a very strong return on working capital of 53%, up from 24% in the second quarter.

These efforts helped to further strengthen our balance sheet with our cash, cash equivalents, and short-term investments increasing from $63 million in the second quarter to $167 million at September 30, while our total outstanding debt declined from $251 million at the end of the second quarter to $69 million at September 30, leaving us in a net cash position of nearly $100 million at the end of the third quarter.

In addition to improving our cash position in a period of unprecedented market volatility and instability in the banking sector, we further increased our liquidity position by entering into a two-year syndicated trade receivables facility that provides for up to $160 million of funding through the sale of receivables on a revolving basis. This receivables facility supplements our $475 million revolving credit facility which matures in 2012. Our ability to complete this transaction considering the state of the financial markets demonstrates the strength of our banking relationships and balance sheet, as well as the quality of World Fuel’s receivables.

Combined with our cash position, aggregate availability under our two liquidity facilities exceeded $700 million at the end of third quarter. This very healthy liquidity position should provide ample capital to support working capital requirements, as well as strategic investment opportunities.

Also as you may be aware, we announced the $50 million share buyback program on October 13. The timing and amount of shares to be repurchased remain dependent on market conditions, our share price, and other factors. As Paul stated earlier, this program demonstrates our continued confidence in our long-term growth prospects, as well as our commitment to delivering value to our shareholders.

In closing, despite unprecedented market conditions, we delivered record operating results across the business and significantly strengthened our balance sheet and liquidity profile. We remain poised to continue capitalizing on our relative size and strength in the markets we serve, providing value-added solutions to our customers and enhancing value for all of our stakeholders.

Paul Stebbins

Operator, we can now open it up for questions.

Question-and-Answer Session


(Operator instructions) Your first question comes from the line of Jon Chappell from JP Morgan.

Jon Chappell – JP Morgan

Thank you, good afternoon guys. Paul, you gave some color at the beginning. I was just looking for a little bit more detail. The way I understood it, your higher risk customers were your higher margin customers, needed to charge them more to take on that risk. In this quarter, your margins are through the roof, and you’ve improved your counter-party risk or your exposure towards quality customers, how are you able to kind of get the best-case scenario out of both of them?

Paul Stebbins

Focus, I mean you’ve got an entire marketing team that’s trying to navigate one of the most extraordinary operating environments in the history, certainly unprecedented, and I would say that we are, we take a lot of comfort as I mentioned in my opening remarks about having made a strategic decision a couple of years ago to really concentrate our sales and marketing efforts on a best-in-class sort of part of the market.

So we never made a migration deeper into the pool because we decided that really our value-added services were going to be appreciated by these large global fleets, that that should be the focus of our effort, and I think that by more deeply entangling ourselves with those customers by our better understanding of the markets, we were able to basically deliver a good result, and also add competitive value to those customers and allow them a great deal of comfort navigating a difficult market.

So I think it’s just a combination of all of these factors coming together, a complex and volatile market, a fact that the competitive landscape has changed because in a market where there’s a tremendous amount of focus on counter-party risk and liquidity and balance sheet and visibility and transparency, some of the more, some of the privately-held groups that perhaps don’t have that same visibility were being challenged. Certainly, everybody is concerned about credit and counter-party risk in this market, which is a huge competitive differentiator for us given our transparency and the strength of our position.

So there is a value to what we provide, and I think it’s a matter of just understanding that we can deliver that service, we can add the value to both customers and suppliers, and deliver a good result at the same time.

Jon Chappell – JP Morgan

Is this the kind of market where you just, you don’t even care about market share, and how do you balance going after new customers or do you just focus on the customers you have right now, the ones that you know are the blue chips, you don’t mind trimming some of the lower margin risk of your business, and you can just focus on your value-added products with the current customer base?

Paul Stebbins

Yes, no I think you said it pretty well. I think as we think about where our sweet spot is and where you should focus your energy, obviously in a market, if we’re going to be stewards of this franchise, which I believe we are, our focus should always be on mitigating risk. So from our perspective, it’s first, last, and always understanding who those customers are, understanding how much appetite we have, understanding how we can manage that and staying away there’s no need to go chase volume in a market that we perceive to have a degree of risk that’s different from perhaps a more stable market.

So I would say that we’ve done an excellent job. I tell you, hats off to our credit team and to the business teams, who really have deep understanding of what they’re doing, and yes, we’re going to have our challenges from time to time, but I would say it’s all about deep focus, a lot of commitment and expertise, and then the ability to execute. So I think we’ve done a good job of navigating that, and market share per se is not so much the issue, although what I would say is that in a market like this, it does create opportunities to pick up some market share just because of the change in disposition of the oil companies.

As you might imagine, their core competence is really looking at return on capital in the upstream market. So they don’t have a huge appetite for a lot of risk downstream, and I think they’re looking at us as a real value-add partner to help them navigate that market, to help insulate them from some of that risk, allow them to move volume, while reducing their own risk.

So to some extent, I think that they could be the benefit of picking up some market share, but our real focus is not just getting market share. It’s protecting the franchise, mitigating the risk, and focusing on good performance and return.

Jon Chappell – JP Morgan

Okay, one last one and I’ll turn it over. Opportunities to pick up new customers are probably pretty evident, but are there also opportunities to pick up either complementary businesses or direct competitors in your core businesses, and have you looked at maybe all three segments differently than you would have maybe six months ago now that you’re in a far better financial position than most of your competitors?

Paul Stebbins

Yes, yes to all. I think that when you consider the landscape that we’re in, there is no better position to be in. in this kind of a market to have the kind of liquidity that we have and the financial strength that we have because I would say that there are going to be a number of opportunities available to us.

Certainly, this kind of a market proves very challenging to a lot of companies, and some of them are very good companies, but they are being whip-sawed and pummeled by the chaos out there, and that’s going to create sort of some wounded antelopes that represent hunting opportunities.

So, yes, we absolutely think that this market will open up strategic opportunities, and this is where all of the hard work of fortifying the balance sheet and focusing on liquidity and all that really comes back in a very positive way. So I would say that we are in a kind of unique competitive position in that sense in our markets, and we’re very excited about that.

Jon Chappell – JP Morgan

Okay, very helpful. Thanks a lot, Paul.

Paul Stebbins

Thanks, Jon.


Your next question comes from the line of Alex Brand with Stephens.

Alex Brand – Stephens

Thanks, good evening guys. I have to say when a company beats my estimate by 130%, that’s not bad, not bad. Great quarter.

I guess one thing that comes immediately to mind for me is just trying to understand some of the sustainability here. I mean, it looks like on the cost side particularly really getting the leverage now off of the systems and if you can just give some color. I know the market is always tough in terms of the top line, but is this really the first quarter of the benefit of the systems, and how good should we feel about sustainability here?

Paul Stebbins

Look, it’s very difficult to give you a precise answer to that, and give you any position because we can’t read the future, and it’s not so easy to forecast, and you’ve just lived through a quarter like everybody else in the world where I’m not sure anybody would have quite forecasted exactly what happened.

So, I think that I would say that we are cautious, and our disposition is cautious as we look forward. I think we’ve executed well in a very difficult environment. I think that we’ve demonstrated that we’ve got a skill set that is sort of second to none when it comes to protecting our interests and being able to navigate.

Exactly what happens in the coming quarters with the changing economic environment and what that represents in terms of sustainability in the model, I don’t know. Do I believe that we’re getting some leverage off our efficiencies and about the tightening of our organization? I would say that the organizational work that Mike Kasbar has been driving for the last couple of years has just been phenomenal. It’s done more to tighten sort of the collective teamwork and the organizational maturity that’s come to bear across all functional areas. I would say it’s having a huge impact in terms of our ability to execute as one team all over the world.

I would say certainly being able to have a powerful platform at our disposal, and having now worked out some of the integration kinks of going live with our ERP is beginning to reveal that there is definitely some leverage out of that. It’s hard to quantify, but certainly we see it in day-to-day operations.

I think that Ira on board has done a good job with his team of making sure that we got sort of rational approach to costs, and being able to sort of get that under control in a way that I think we feel better about than we have in the past.

So, all of these things combined, I would say, are what shapes our future and I would say that in this quarter, the planets were sort of all aligned. It was a matter of commercial execution, the functional discipline internally, the organizational maturity that Mike’s been driving, the financial discipline that Ira and his team have been driving, all sort of have come together, to say nothing of the great work Frank and his team have done on credit management.

So, anyway, I would say it’s a collective effort. I’d loathe to give you any great vision about the future, but I think that, I’m certainly pleased about our operating temperature as a group.

Alex Brand – Stephens

Let me just ask sort of a different way, specifically on marine. No volume growth, but sort of a good profit per metric ton. Is that what the environment affords you as a financially sound player? Capacity has tightened a lot in the bunker vessel market. Is that something that we should look forward to that you can continue to drive the gross profit per metric ton in this kind of environment?

Paul Stebbins

Yes, I mean I would say we’ll just sort of revisit some of the core themes. I mean, you can imagine with the world going through what it went through in this financial meltdown, counter-party risk is a serious issue. Liquidity is a very difficult issue. Banks were in – banks weren’t even lending to each other, let alone some of their customers.

So when you consider that backdrop to be a company that had a lot of transparency, great corporate governance, deep relationships with suppliers and customers, very strong balance sheet, tremendous liquidity and being kind of, if you will, the value-add partner of choice, certainly that opens up opportunities for us to execute perhaps in a way that we might not have had the benefit of doing in other environments.

I would say also you’ve had unprecedented volatility, and as you know, the marine business is a spot market. So it has a little bit different dynamic than aviation or land. So I think that that’s part of it. The ability to add all that value and be a good counter-party becomes an important part of how we generate our value.

So I think it’s like I said before, I think all the planets aligned. I think it’s about execution, again I’m loathe to give you any sort of forecast on where that could go, but I think we’re certainly focused on the fact that we have tremendous competitive differentiation for our suppliers in the market and for our customers, so.

Alex Brand – Stephens

That’s good color, Paul. Thanks for that. Just a housekeeping item for Ira. Can you tell us what Texor added to the quarter in terms of revenue and operating income?

Ira Birns

I would say, I gave the operating income for the whole segment. That is principally a very large percentage of that is Texor is what I could tell you there on the operating profit. So you want that operating profit and?

Alex Brand – Stephens

And revenue too.

Ira Birns

And revenue, from a revenue standpoint, they contributed about a little over $250 million of revenue, which is consistent with the numbers that we shared on a full-year basis when we bought the company.

Alex Brand – Stephens

Great, all right guys. Thanks for the time.


Your next question comes from the line of Steve Ferazani from Sidoti.

Steve Ferazani – Sidoti

Good evening. I wanted to follow-up a little bit on some of the questions that were just asked in terms of the marine segment. The previous dynamic that you used to talk about was that segment tends to balance out over the course of a year. You have one strong quarter, but over the course, it balance out. Would you say that dynamic is out the window now, or how should we look at that segment?

Paul Stebbins

I mean it’s difficult, Steve, I would say the thing that we’ve actually said in the past is that it’s variable because it’s a spot market and while there’s no specific seasonality, it isn’t like we could identify any one quarter that’s going to be up or down. It’s just the nature of the spot market. Remember there’s a lot of micro dynamics going on. You’ve got trade patterns within the fleets, so we might get concentrations depending on the arbitrage between certain markets that sometimes has an impact on the volume that we generate in any given market.

So, if the West Coast is cheaper than the Far East, they might be lifting in one market or the other, and we might or might not be doing that volume. There’s a lot of variability just due to the fundamental nature that the marine is a spot business, but ultimately, I would say that throughout the year, it does kind of balance out. I think I would be very reluctant to characterize this quarter as being some new norm. I just don’t think that would be accurate. Obviously, Q3 was fraught with circumstances that were just remarkable for everybody in the world, including us.

But, so I’m not sure I can give you the comfort that you want that this is somehow some new ratability or that there is going to be a natural balancing out, but I wouldn’t ascribe too much to this one quarter as being a ratable norm.

Steve Ferazani – Sidoti

Okay, then moving forward, you mentioned the IATA numbers and then sort of the difficulties in the marine market. Is there any way to ring more profitability out if volumes don’t grow, and I guess the alternative question is do you think in a tighter market, you have the ability to grow volumes, or is that not a concern?

Paul Stebbins

Well, as I said in one of the earlier answers, that hasn’t been our primary focus because I think, look when you go into the uncertainty of what’s a global recession, when you go through the economic upheaval that we’ve had, again, this is unprecedented. We haven’t had any event like this in this century, perhaps the Big Depression being an exception.

So we’re navigating territory just like you’re navigating territory that’s a little hard to put in any real true perspective. So to ascribe any kind of norm out of what we’ve just been through is difficult, but I would say that there are definitely opportunities ahead for us because of what we’ve done to fortify our position in the market. I think that volume is going to come to us because I think the uncertainty caused by these markets definitely make us the partner of choice. Prices falling certainly make it easier for us to pick up volume because we can do more volumes under a credit line that we decide is appropriate.

I would say that you know the shipping, there is a certain durability to shipping. Goods are not going to stop moving altogether. It’s just the nature of the beast. They may or may not always be full, the ships, but I think the fact remains that trade is not going to grind to a halt and again, we’re very focused on these highly capitalized fleets and I would say that more or less, when you consider what happened over the last five years, the financials health of the shipping market is quite extraordinary. We all grew up in the business years ago, it was feast and famine in shipping, and there would be long periods of real drought. Well, shipping had a five-year run that’s just unbelievable.

So I would say that the amount of money made and the quality of the balance sheets and the well capitalized nature of a lot of these fleets, increasing number of fleets that are in the public domain that are highly transparent, all of this favors us, because again, our position as a public company that’s highly transparent, the focus on good governance, good controls, all that stuff represents a competitive differentiation for us.

So I think we see the opportunity to pick up market share because of softer prices because of our value as a counter-party, and our demonstrated ability to add value on our platform globally, and help these customers navigate a very difficult market.

And I would also say that as the oil company’s appetite is variable for even having the volume, that we’re the logical preferred partner of choice to which they will guide that volume, so yes, there is opportunity ahead.

Steve Ferazani – Sidoti

And speaking of opportunity, on the land side, the Texor acquisition, that certainly at a minimum met your expectations, what’s considered probably a very difficult market over the last quarters sort of what happened there, and does that sort of whet your appetite to expand in that segment?

Paul Stebbins

No, I would say that actually we were really pleased with what Texor delivered, and I would say that they executed very well in this market and I think that it’s testimony to their business model, it’s part of what attracted us in the first place. And I would say that what we’ve learned is that we like the space and we like how that business works, and we’re going to be looking to do more.

Steve Ferazani – Sidoti

Fair enough. Thanks a lot guys.


Your next question comes from the line of Jim Larkins from Wasatch.

Jim Larkins – Wasatch

Couple of housekeeping items. Can you talk about the amortization expense that was in the quarter, and the stock option expense?

Ira Birns

Going to the video tape here. Just a sec here. Jim, we’ll get that to you in a moment. Do you have another question? We’re just looking for the two numbers for you.

Jim Larkins – Wasatch

Yes, could you just give some color on how bunker fuel and aviation fuel has been tracking crude? Maybe last quarter and into this quarter, how is it behaving?

Paul Stebbins

Again, it depends on how narrow you dial the telescope. It’s sort of the, if you look at a normal chart, they would look like they track. I think that when you get into more discreet markets, you’re going to see that there is, that the bunker prices did not drop as quickly as crude was dropping because there were dynamics in the residual fuel market based on what’s going on on demand for middle distillates that has tightened up the resids space independent of what was going on in crude. So even though crude was coming down, there was a bit of a lag on bunker prices. It did not drop as quickly.

So it depended on the particular markets, but in general, bunker prices have come down quite a bit from their highs of around 750 and 800. You’re now seeing in the high-200, 300 a ton. That’s a pretty sharp drop, but I would say that it lagged the move of the crude.

Ira Birns

Hey Jim, I could give you the two numbers you were looking for on a tax adjusted basis, which is actually reflected not eh GAAP to non-GAAP statement in our earnings release. Stock-based comp after tax was just under $2.1 million, and the intangible amortization expense was $1.4 million.

Jim Larkins – Wasatch

Okay, and then on your receivable facility, can I assume that you used the full 160 during the quarter, so when I look at the drop in receivables that you showed from quarter to quarter, that a $160 million of that was through the facility?

Ira Birns

No, actually Jim we just closed that facility at the very end of the quarter. We haven’t utilized it for even $1 at this point, so the drop that you’re seeing in receivables is the result of two things principally; improvement in the trade cycle. I’d said earlier that we picked up two-and-a-half days in receivables, and the positive impact of the decline in fuel prices on our overall working capital division.

So that’s all real reduction, which led to a big chunk of the $287 million of operating cash flow.

Jim Larkins – Wasatch

Okay, so you have it there more as a source of liquidity when needed, you can shift receivables into that facility.

Ira Birns

That’s right. It’s a very capital-efficient borrowing tool which supplements our revolving credit facility.

Jim Larkins – Wasatch

And then just to understand the environment a little bit and what has happened with counter-parties, I understand that some investment banks pulled out of fuel trading maybe towards the end of the quarter, even after the end of the quarter. Is that some of the counter-party activities that you described that have driven maybe some volumes and profitability to your services, and maybe just kind of walk through the value chain and how that makes you more attractive to your customers?

Paul Stebbins

Well yes, I think certainly there were, there’s the demise of some financial institution out there. For some of our customers that might have limited, if you will, the stable of people that they went to, and therefore we represent perhaps a more attractive alternative, if that’s what you’re driving at. I think we may have benefited from that. Was that the heart of your question?

Jim Larkins – Wasatch

Yes, and does this mean that you are providing lines of credit or just terms that they couldn’t get elsewhere, or is it simply they weren’t even able to buy fuel any longer and they came to you because somebody else had just completely disappeared?

Paul Stebbins

Yes, I mean I think, look I think the value-add that we provide as a global distribution group that’s got operational support, logistical support, all of that value-add I think is just simply more pronounced in this kind of an environment. So I don’t think that the fact that some of these big names went under specifically drove customers to us, but certainly it makes them a lot more alert to who they are doing business with, and again, our transparency becomes a huge competitive differentiator, not only for customers but also for suppliers.

So I think we’ve benefited in a sense from the climate in that regard.

Jim Larkins – Wasatch

Perfect, and has that environment changed much quarter-to-date so far?

Paul Stebbins

I would say that perhaps we’ve not seen quite the drama that we were going through a month or so ago, with the front page was Hank Paulson every single day, but there’s a lot of anxiety, and I think that this genie isn’t going back in the bottle, I think any time soon. I think that there is anxiety. There isn’t a management team of any company that we know that isn’t asking their procurement department, “Who are you doing business with? Are they reliable? Are they transparent? There isn’t a supplier out there that isn’t sort of vetting their entire portfolio, and making decisions, hard decisions about who’s got the wherewithal the be a durable player over time.

And I think that when those analyses get done, we end up rating at the absolute top of everybody’s list. So I think it’s good for us. There is anxiety. It’s certainly going to wash out some of the sort of mediocre players, or the players who weren’t as well capitalized or the players that were able to kind of go ahead and do business and nobody was really so focused on it. So I would say that the competitive landscape is changing, and as I said in my opening remarks, people are a lot more discerning now.

So I would say that there is just a general sense of skittishness and anxiety, and as they look forward, I think it favors us because we’re going to stack up pretty good in that analysis.

Jim Larkins – Wasatch

And then just a last question. It appears that marine has held up from a credit perspective as well as any of your businesses, and historically I don’t think marine has ever really popped up its head as a problem part of your business in credit. It seems like that’s a much more stable credit profile. Is that accurate?

Paul Stebbins

Well historically, it’s been the cases, and again, there are a couple of things I would comment on. One, these are, typically our target customer has been a larger well capitalized global fleet. That’s just been a decision that we made as a company a couple of years ago even knowing that there might be opportunities to trade sort of in the middle or lower tier, but we made a decision not to do that.

You will recall also that one of the things that we talked about for over many years is that there is an underlying maritime lien in shipping, where in the event that there is a default of a fleet, we do have the ability in some circumstances to exercise the maritime lien and arrest that vessel and secure our asset, which is the bunker receivable. So we’re pretty good at that. We have a lot of expertise. We have a great team. I would say that even though that’s not a silver bullet, it doesn’t solve every single situation there’s no guarantees, but the fact remains that it’s, this is an all hands-on focus kind of proposition.

So there are two things going on. We feel good about our ability to protect our interests when things do get difficult. We believe that our leverage in the market gives us a competitive position that’s pretty strong, and we can be more selective and more discerning about the customer base we’re going to work with.

I would also say that because of what’s happened in shipping over the last five years, Jim, you’ve got -- there’s been very, very good success. I think a lot of our target market is going to be in a position to weather the storm even if there is a deep recession through 2009, and certainly rates are going to come down and what have you, and that is going to stress the business models, but again, I think they’re pretty well fortified and most of our target customer base is going to be in a position to weather that storm pretty effectively.

Jim Larkins – Wasatch

Thanks for the comments.


Your final question comes from the line of Edward Hemmelgarn from Shaker Investments.

Edward Hemmelgarn – Shaker Investments

Yes, just wanted to ask a question, well a couple of questions, one about the aviation segment. I know you’ve talked about trying to reduce low-margin, I guess larger relationships. What I’m curious about is are you expanding, have you seen an expansion in the number of I guess lower-volume relationships that you’ve gotten, and is that one of the reasons why your gross profit per gallon sold has gone up?

Paul Stebbins

I mean there is certainly a lot, yes, there is a lot of benefit to having a diversified portfolio in this kind of a market. We do focus a lot on concentration. So, again, it’s a little bit just good portfolio discipline. You just want to have a broad spectrum of diversified customers without huge concentrations and obviously, given what was going on in oil prices this year, we were very focused on return on working capital, and we didn’t want to be funding large-volume turnovers that ate up a lot of cash but low return, so we were pretty disciplined about moving out of that.

And we also took a very disciplined approach to our inventory positions, which is to say the amount of self-supply that we had, we didn’t want to have huge amounts of cash tied up. It would tie up a lot of working capital if we weren’t just getting the return.

So I think it’s been a combination of things, and I feel that the team has done a very, very strong job, and I think that you have to bear in mind too that when you look at the overall profitability as Ira mentioned in his notes, there’s been some impact just from the nature of how we, not only with the volatility, but that’s corresponding impact to that volatility on the way we do our accounting methodology and our average costing on inventory.

So, there’s a couple of dynamics going on there, but as we look at the market opportunity, I would say that the last couple of years were a real shock to the aviation industry. The newspaper has been filled with all the difficult challenges that the aviation world has gone through.

But these companies have been forced to take some pretty radical action, and I think they’ve done a lot to cut costs and reshape their business models, and I would say that they’re, many of them are actually better prepared than let’s say a year ago to handle some of the changes.

So to us, it’s about focus, it’s about mitigating risks, it’s about making sure that we’re very disciplined on terms and collection, and again, very, very tight portfolio management disciplines.

Edward Hemmelgarn – Shaker Investments

Okay, could I be a little bit more specific. I mean what, can you give us any indication of how the mix of general, corporate, and government business as a percentage of the overall aviation has changed from what it was one year ago to what it was in this quarter?

Paul Stebbins

We don’t break that out in that kind of detail. I would just say generally that if you look at our fuel management portfolio, that’s probably an area that we’ve reduced somewhat. I mean, as we talked about, Ira talked about in the early remarks, some of our large contract business, one in particular that we ended in July, was 30 million gallons a quarter. We’ve shed some of that business.

Edward Hemmelgarn – Shaker Investments

Okay, lastly, you talked about the opportunities; I know you can’t forecast acquisitions down the road. What sectors do you think likely will prove to be most attractive for you?

Paul Stebbins

We see opportunities in all three segments.

Edward Hemmelgarn – Shaker Investments

Okay great, thanks. Great quarter.

Paul Stebbins

Thanks very much, appreciate it.


And there are no further questions. Are there any closing remarks?

Paul Stebbins

We’d like to thank everybody for sort of standing by us during a wild quarter, and we know it probably wasn’t easy for our investors out there to be managing all that you’ve been managing in this volatile time, but we appreciate your support, and we look forward to speaking to you on the Q4. Thanks.


Ladies and gentlemen, this concludes today’s World Fuel Services third quarter earnings conference call. You may now disconnect.

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