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World Fuel Services Corp. (NYSE:INT)

Q1 2009 Earnings Call

May 7, 2009 5:00 pm ET

Executives

Paul Stebbins - Chairman and CEO

Ira Birns - EVP and CFO

Frank Shea - Chief Risk and Administrative Officer

Analysts

Jon Chappell - JPMorgan

Alex Brand - Stephens Inc.

Steve Ferazani - Sidoti & Company

Mickey Schleien - Ladenburg

Edward Hemmelgarn - Shaker Investments

Operator

Good afternoon. My name is Marcello and I will be your conference operator today. At this time, I would like to welcome everyone to the World Fuel Services Corporation First Quarter Earnings Call. (Operator Instructions).

I will now turn the call over to Mr. Frank Shea, Chief Risk and Administrative Officer. Mr. Shea, you may begin your conference.

Frank Shea

Good evening, everyone, and welcome to the World Fuel Services first quarter conference call. I am Frank Shea, Executive Vice President and Chief Risk and Administrative Officer, and I will be doing the introductions on this evening's call.

Today's call is also available via webcast. For the first time, we will have a live slide presentation along with our audio call. To access this webcast or future webcasts, please visit our website, www.wfscorp.com and click on the webcast 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 materially differ from the forward-looking information.

The summary of some of the risk factors that could cause results to materially differ from our projections can be found in our Form 10-K for the year-ended December 31, 2008 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.

Paul Stebbins

Thank you, Frank. Good afternoon. We appreciate you joining us today. Today, we announced earnings of $25.8 million, or $0.87 per diluted share for the first quarter of fiscal 2009. Our earnings increased 64% over Q1 of 2008, reflecting the durability of our business model, our ability to adapt and respond to fast-changing market conditions, and achievement of a new level of organizational maturity and efficiency throughout the group.

On a sequential basis, our earnings declined 10% from Q4, reflecting our cautious view of the global economy and its impact on our core industry sectors. Our primary objective in Q1 was to navigate a very conservative course on risk and return, until we could more clearly assess where the global economy was headed. This heightened sense of caution was a critical factor in our decisions regarding volume, margin, and risk.

Given the continued uncertainty in the global market, we elected to enforce a stricter than usual discipline on all aspects of the business. While this resulted in shedding some additional volume, it also resulted in protecting our profitability and reducing exposure to bad debt expense.

The fact that despite this, we were able to deliver solid earnings performance validates the success of our approach. We also drove cost control, delivered a 95% return on working capital, reduced our trade cycle to 5.1 days, achieved 15% return on equity, and increased our cash position to $386 million.

When including our credit facilities, our liquidity position remains strong at approximately $950 million. We continue to evaluate additional strategic opportunities and expect to derive growth from acquisitions as well as organic development in our core space.

In our marine segment, our team demonstrated tight discipline and execution, as we continued to service the needs of our customers in what was a deteriorating shipping market.

Our strong risk management function allowed us to feel confident in our ability to support core customers, even as they suffered from the impact of a difficult global operating environment.

Our suppliers, more skiddish than ever about credit exposure, were able to rely on us to keep their volumes ratable without exposing themselves to more risk. As you know, we made a strategic decision several years ago to concentrate our efforts on servicing best-in-class customers.

This approach has stood us well in this market and should continue to do so going forward. Our ability to support our customers and suppliers in a very difficult period has differentiated World Fuel. We believe we are very well positioned to benefit from any positive turn in the economy.

In the meantime, we have demonstrated our ability to generate good returns, while reducing risk and strengthening our financial position. Our debt-to-EBITDA is under 15%, which stands in stark contrast to other companies in our space, whose debt levels are significant.

This is important to note as we have seen some of our competition dropped margins and increased their credit risk as they struggle to generate revenue and hold on to market share.

World Fuel's unique position in the market gave us a competition advantage of procurement. We were able to maintain margins, despite the drop in oil prices which continued into Q1.

We believe our strategy is working and we'll continue to execute with discipline and focus. We were also very pleased to announce the addition of the Henty Group of Companies to the World Fuel family.

They are a great team that uniquely complements our strategic position in the UK marine and land supply market. We look forward to Henty helping to expand our business and their experience in industry competence has already driving new value for the group.

In our aviation segment, our team did a first class job under very difficult conditions to deliver solid results in a market which experienced sharp cuts in capacity, reduced traffic, and reduced industry profitability. Our sales, supply, finance, and credit functions have worked very closely together to find ways to deliver value and protect profitability under challenging circumstances.

Our financial strength continues to differentiate our value proposition and we anticipate that our near-term growth will come in the form of increased commercial aviation volume at lower margin, but much of it on a secured basis.

Lower prices and our strong liquidity positions are creating an opportunity to reinvest in our self-supply model and secure additional volume while improving our profitability. This is a clear example where the economic crises are creating opportunities for those with financial strength and organizational agility to respond at fast-changing market conditions.

In our land segment, the economic downturn and some seasonality negatively impacted our business in Q1. In an effort to reduce risk in the wholesale rap market, we've maintained volumes with our best customers at reduced margins. We remain committed to this part of the business and we'll continue to explore opportunities to consolidate a meaningful position in this market going forward.

Meanwhile, our branded wholesale business performed well in the quarter and successfully held its own, despite flat volumes and slow retail sales attributable in part to severe winter conditions in the Chicago area.

TGS, which we acquired in April, has been integrated into Texor, and we feel good about the prospects for growth in this business, as the economy recovers. While our Q1 results did not achieve the same blockbuster levels we saw in Q3 and Q4 of 2008, we are very proud of our performance in this period.

Our global team is taking the very difficult task of improving returns on working capital, controlling costs, generating cash, reducing risk, achieving a good return on equity, tightening our trade cycle, and protecting profitability in an otherwise bleak market.

This is proof positive of our ability to deliver strong results in a wide range of operating environments. We were also pleased to see that in the most recent issue of the Fortune 500, World Fuel was ranked 4th in total return to shareholders in 2008, and we were ranked 11th in total return to shareholders over the past 10 years.

It is a tribute to how far World Fuel has come as an organization that in the most challenging of global markets, our team continues to innovate, execute, create opportunities, and refine our value proposition in response to ever-changing market conditions.

This is what our company is all about and we are excited about the prospects for the balance of the year. Thank you for your continued support. I will now turn the call over to Ira for a detailed review of the financials. Ira?

Ira Birns

Thank you, Paul, and good afternoon, everybody. Before I review our results, I'd like to mention that our first quarter revenues were impacted by a significant decline in oil prices, when compared to the fourth quarter and the first quarter of last year. For those of you participating by webcast, you will see our sequential and year-over-year decline in revenue tracks consistently with the sharp reduction in fuel prices on the next several slides.

Consolidated revenue for the first quarter was $2 billion, down 31% sequentially and 55% compared to the first quarter of last year. Our marine segment revenues were $1.1 billion, down 28% sequentially and 55% year-over-year. The aviation segment generated revenues of $710 million, down 37% sequentially and 62% from last year's first quarter. Finally, the land segment generated revenues of $201 million, down 23% sequentially, but up 5% from last year's first quarter, principally driven by the acquisition of Texor last June.

Our aviation segment sold 424 million gallons of fuel during the first quarter, down 6% sequentially and down 32% compared to the first quarter of last year. The year-over-year reduction in volume was principally due to our efforts to reduce exposure to low margin, higher risk accounts.

While we did see a slight sequential decline in volume over last quarter, as Paul mentioned earlier, we do anticipate volume to begin to increase in the second quarter, principally driven by increases in lower margin commercial business, much of this on a secured basis.

Our marine segment's volume for the first quarter was 5.4 million metric tons, down 18% sequentially and down 22% year-over-year. As we anticipated, softening market conditions, as well as our continued efforts to steer clear of low margin, high risk accounts, had an impact on volumes during the quarter.

Despite a period of significant demand destruction, we believe our marine volume declined at a lower rate than the overall market. Fuel reselling activities constituted approximately 76% of total marine business activity in the quarter. As you could see on this slide, this is generally in line with the average percentage of such activity over the past several quarters.

Our land segment sold 134 million gallons during the first quarter, down 4% sequentially, but up 94% compared to the first quarter of 2008, including Texor. Gross profit for the first quarter was $87 million, a decrease of $16 million, or 16% sequentially, but up $13 million, or 18% compared to the first quarter of last year.

Our aviation segment contributed $32 million in gross profit, a decrease of 9% sequentially and year-over-year. Our self-supply models jet fuel inventory position was approximately 20 million gallons or $27 million at the end of the first quarter. Our sales supply inventory remains strategic, and we regularly evaluate our inventory-driven opportunities, which could result in increases our decreases to our self-supply inventory position in the future.

The current pricing environment allows us to gain strategic benefit from such inventory without a significant working capital investment. Therefore, we do expect that such inventory position will increase in the second quarter.

Jet fuel market prices fell approximately 8% during the quarter from $1.47 to $1.36 per gallon. The small decline in prices and minimal price volatility during the quarter resulted in an insignificant negative impact to gross profit related to inventory average costing.

While off from the record results of the third and fourth quarters of 2008, our marine segment again delivered strong results, generating gross profit of $47 million, a decrease of $12 million from last quarter, or 20% sequentially, but up $10 million or 28% year-over-year.

The sequential decline in gross profit principally related to lower volumes. Our overall blended margin held steady, down only 2% from the fourth quarter. Our global breadth, which allows us to aggregate demand, and our balance sheet strength, which allows us to prudently offer credit to our customers, combined with our more disciplined approach to evaluating risk-adjusted returns, have all contributed to improved overall margins over the past several quarters.

Pricing, volatility, and general market conditions can always have an impact on margins as well. However, we believe there has been a fundamental improvement in our model, which allows us to offer competitive pricing at improved returns.

Our land segment delivered gross profit of $8.2 million in the first quarter, a decrease of 15% sequentially, but nearly five times the gross profit in the first quarter of 2008, once again, principally driven by the impact of the Texor acquisition.

Operating expenses in the first quarter, excluding our provision for bad debt, were $54 million. This is $2 million below the bottom of the range I provided on last quarter's call. Expenses were down 15% sequentially, but up 8% compared to the first quarter of 2008.

Even after adjusting for compensation expense related to special bonus awards in the fourth quarter, expenses were still down 7%, evidence of our continued focus on efficiently managing operating costs. As a matter of fact, operating expenses as a percentage of gross profit decreased to 62% this past quarter from 67% in the first quarter of 2008.

For modeling purposes, I would assume overall operating expenses excluding bad debt expense of approximately $55 million to $59 million in the second quarter of 2009. This estimate includes a full quarter of expenses related to Henty Oil and TGS Petroleum, both acquired at the beginning of the second quarter.

We recorded a provision for bad debt of $500,000 this quarter, compared to an $800,000 benefit recorded in the fourth quarter. Our receivables balance was $588 million at quarter end, down over $88 million from the fourth quarter and down over $1 billion from the first quarter of 2008.

Our reserve, as a percentage of total receivables, decreased slightly from 3.3% at year-end to 3.1% at the end of the first quarter. Based upon what we know today, we are comfortable that our provision for bad debt remains adequate.

Income from operations for the first quarter was $33 million, a decrease of $8 million sequentially, but an increase of $11 million from the first quarter of 2008. Income from operations for our aviation segment was $12 million, a decrease of 17% sequentially and 6% when compared to last year's first quarter.

Our marine segment's income from operations was $29 million for the first quarter, a decrease of 23% sequentially, but an increase of $12 million or 66% compared to last year's first quarter.

Our land segment had income from operations of $1.1 million, down $1.3 million from the fourth quarter, but up $1.8 million from the first quarter of 2008, again driven primarily by the impact of Texor results in the first quarter of this year.

The sequential decline related principally to the impact of sharply lower gas and diesel prices and severe winter weather conditions on Texor's results and a greater mix of lower margins, lower risk business with our unbranded wholesale customer base.

The company had other expenses of $1.4 million for the first quarter. This compares to $5.8 million in the fourth quarter and $2.2 million in the first quarter of last year. I would assume interest expense in other financing costs net excluding foreign exchange of approximately $1 million to $1.5 million for the second quarter of 2009.

The company's effective tax rate for the first quarter was 18.7%, compared to 19.2% for the fourth quarter. The first quarter rate was below the guidance provided on last quarter's call, primarily resulting from increased international earnings, generally taxed at lower rates.

We estimate that our effective tax rate for the second quarter of this year should be between 18% and 22%. Net income for the first quarter was $25.8 million, a decrease of 10% from the fourth quarter, but an increase of 64% year-over-year. Diluted earnings per share of $0.87, decreased 10% sequentially, but increased 61% over last year's first quarter.

It is important to note that we adopted a new accounting pronouncement in the first quarter of 2009 that changed the calculation of weighted average shares outstanding and therefore impacts our earnings per share calculations. The impact of this adoption resulted in a $0.01 reduction in basic and diluted earnings per share for the first quarters of 2009 and 2008, as well as the fourth quarter of 2008.

For those of you participating by webcast, please note that the numbers reflected on the corresponding slide are being shown as adjusted for all periods presented. Return on equity was 15% for the first quarter, down from 19% in the fourth quarter, but up from 13% in the first quarter of last year.

Return on assets was 10% in the first quarter, flat with the fourth quarter and double the return generated in the first quarter of 2008. While we are always focused on driving revenue and profitability, despite our very strong liquidity profile, we remain focused on our balance sheet as well, specifically the continued efficient utilization of working capital.

As evidence of such efforts, we decreased our net trade cycle to 5.1 days in the first quarter, down approximately 1 day from the fourth quarter and 4.1 days from last year's first quarter. As a result of these efforts, as well as the impact of declining fuel prices, we generated a record return on working capital of 95% in the first quarter, up from 69% in the fourth quarter.

We again posted strong operating cash flow in the first quarter of $90 million and we have now generated more than $570 million of operating cash flow over the past three quarters.

Our strong cash flow generation has further strengthened our balance sheet. Cash, cash equivalents and short-term investments increased from $322 million at year-end to $394 million at the end of the first quarter, with total debt declining from $33 million to $20 million over the same period.

When you combine our net cash position with our liquidity facilities, our aggregate available liquidity was approximately $950 million at the end of the first quarter. At the beginning of April, we announced the close of two more strategic acquisitions, TGS and Henty Oil.

TGS is an independent branded distributor of gasoline and diesel fuel in the Chicago area, with 2008 volume of over 100 million gallons. This business has already been combined with Texor, continuing our expansion into the branded wholesale distribution business.

We also completed the acquisition of the Henty Oil Group of Companies in April. Based in Liverpool, England with 2008 marine volume of over 250,000 metric tons, Henty services the Irish Sea ports of Liverpool, Holyhead and Heysham. Their land business with 2008 volume of approximately 10 million gallons provides fuel and gas oil to a broad range of customers throughout the United Kingdom.

Both transactions, which formally began contributing to earnings on April 1 are expected to be accretive in the first 12 months. We are very excited to welcome TGS and Henty Oil to the World Fuel family. These transactions are testaments to our ability to identify strategic investment opportunities across all of the markets we serve and we continue to identify further potential opportunities to drive profitable growth and strategic synergies.

In closing, we delivered strong results in what we remains a challenging and turbulent market. We closed two acquisitions that expand our existing marine and land businesses. Our balance sheet remains strong and liquid and we remain poised to grow within the end markets we serve.

We strive to maintain our strong relationships with our existing customers and suppliers and see significant opportunity to develop new relationships, as our business continues to grow throughout the world.

In a market environment where credit remains extremely tight and counterparties are being scrutinized more than ever before, we continue to be the counterparty of choice and we continue to expand our position within the distribution chain, further enhancing value for all of our shareholders.

I'd now like to turn the call back over to our operator, Marcello, to open up the call to questions and answers.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question is from the line of Jon Chappell with JPMorgan. Please go ahead with your questions.

Jon Chappell - JPMorgan

Paul, you said in the third quarter that the marine margins were probably unsustainable. Here, we are three quarters later and they have proven pretty sustainable so far. Is this still a function of the tight credit environment being the counterparty of choice for your suppliers? Is there something else going on? Should we expect margins to maybe weaken as the volumes come back? Just speak a little bit about the sustainability now that we've done this for almost nine months now.

Paul Stebbins

I mean, I think as we indicated in both my own comments and Ira's, I think that to some extent we do see that the sophistication evolution of our business model as such is that something of a fundamental change in our value proposition and our position in the market and that's given us a level of procurement capability that I think is more fundamental and is reflective of kind of the new company and the maturity and the evolution of our business model.

So I would say that to some extent, it is a fundamental change in the model. There are obviously a lot of factors, but credit, liquidity, the concerns about counterparty risk, are absolutely paramount in today's market. We are fortunate to be in a position where we can, if you will, step back and take a very conservative view and exercise some caution as we wait to see how things sorted out. I think that was very much our disposition in Q1.

I would say the margins reflect on some level a fundamental change in the success of the model. We are very, very good at procurement strategy and it allows us to generate competitive pricing to our customers, but also achieve superior returns.

Jon Chappell - JPMorgan

You had also mentioned in your comments this time around that some of your competitors might be getting a little bit more aggressive on margin. Are you essentially letting that business go with, I guess the views that when things kind of normalize a little bit and when volumes pick up on their own just because of a broader macro rebound, that your proposition will help you regain or maintain market share while being able to keep profitability through the trough of this market?

Paul Stebbins

Exactly. I think we're absolutely going to be in position to maintain both market share and profitability. What we've seen in the competitive landscape, and it's something that is more significant in today's credit-conscious economic meltdown scenario is that these companies that have a lot of debt are in a position where they have obviously got to service that debt.

So there is going to be a push to generate revenues to kind of keep the business model going. That does introduce a level of market grab, volume grab, some pressure on margins. We're just not going to get baited into the game. We don't think that that makes any sense.

So I don't think that that is a long-term, success model, or model for success. I would say that for our point of view, we have to sort of not fall into that trap. We've got to stay true to our business model. We've got to stay true to our value proposition. I think it's about exercising discipline and maintaining focus and I think we're in a pretty good position to do that.

So in some ways, I mean there will always be competition, but our view is that this market very much favors us and our model. We're in a very good position and it's just about not falling into that trap of sort of chasing random market share. We don't think that's a good thing. There's certainly in this market, we've seen some examples of some pretty spectacular problems among our competitive landscape. We're just not going to follow that path.

Jon Chappell - JPMorgan

Okay. That makes sense. One on the cost side, I just want to see if there's any way to kind of flush out the lower costs, especially as a percentage of gross profit. Is this a function of the ERP system finally driving some significant efficiencies and then seeing the top line flow directly to the bottom line? Or have you been a little bit stricter on cost control, maybe especially as reflected in compensation, just to keep the overall margin strong in what's a weakening volume environment?

Ira Birns

Hey, Jonathan, it's Ira. Thanks for the question. So we certainly have begun to gain some efficiencies from the ERP platform. So the answer to the first part of your question is yes. I'm sure there's a lot more that we could accomplish there, but we're seeing benefits now that we're over a year into the new ERP environment.

But we also have been more focused on controlling costs and that effort did result in some benefits in the first quarter, whether it be T&E, telecom expense. There are a lot of different categories that we've been focused on and have been able to do a better job at managing those costs on a day-to-day, week-to-week, month-to-month basis, and it benefited us in the first quarter.

Jon Chappell - JPMorgan

Okay. And then just one last thing, I hate to ask something that I think you said, but I can only write so fast. Did you say what the self-supply impact was, negative or positive in the first quarter?

Ira Birns

On the self-supply, I said, yes, we saw an insignificant negative impact in the first quarter, because pricing didn't move a whole lot. It was down a few percentage points, so it didn't have material impact one way or the other.

Jon Chappell - JPMorgan

Okay. But did you say that your inventory position could potentially increase in the second quarter since it's not really taxing on your working capital, is that correct?

Ira Birns

That is correct.

Operator

Our next question is from the line of Alex Brand with Stephens. Please go ahead with your question.

Alex Brand - Stephens Inc.

I guess notwithstanding the fact that we know it's bad out there, help us understand if there were any sort of changes in the quarter, whether as things got worse and maybe that bleeds over now into the second quarter? And if you have any specific thoughts, this is a very broad question, but I am wondering about aviation as well? It sounds like you're going to sort of shift strategy there a little bit. Does that reflect that you have specific weakness in parts of the aviation market that you need to maybe avoid those parts of the market for the time being?

Paul Stebbins

Yeah. Alex, I think the way to answer that is, look, I think with a company like ours, sort of the test of our character in this market is the agility and the speed with which we can respond to changes. So there's a massive macro dynamic going on now that we're trying to both understand, respond to, and continue to reinvent and refine our value proposition to be responsive to those changes.

I would say that the first order of business as good stewards of the franchise is to be cautious. We have to step back. We have to dial back our exposures. We have to kind of get back to some sort of bedrock and make sure that the franchise is safe, secure, and that we're not going to get blind sided by some unfold event that we do not anticipate. That's the first responsibility of management.

Once we've taken stock of that, we look at the landscape and as we look forward, we're trying to understand what will the dynamics of the economy mean. All airline traffic is not going to stop, despite the fact there's been drop in traffic, that there's been some drop in revenues year-over-year, that certainly we understand that it's an industry that's been stressed.

We decided that the way for us to reshape our tactics, given the value and the strength of our balance sheet, what a great opportunity to reinvest into the business and do it on a more secured pre-pay basis, so it might reduce our margin as bit, but the focus now becomes profitability on a secured basis.

The power of our buying allows us to actually deliver that value to the customers and we now kind of tweak the model yet again to be responsive to the change. One other thing that's interesting to note is that when you do get the reductions in passenger traffic, remember, every single passenger traffic is also carrying cargo.

So in some ways, this is going to create a secondary impact, where the cargo market is going to actually pick up a little bit and get a better opportunity because they are not competing with the passenger traffic planes that were carrying belly cargo. So this is a constantly evolving, changing scenario where one bad downturn has an offsetting possible corrective turn.

I think our view is that as we look forward, we definitely see that we're going to have the opportunity to generate more aviation commercial volume. It may be at lower margins, but it's certainly profitable and it's going to be on a more secured and less risky basis.

Alex Brand - Stephens Inc.

Okay. Can you just comment on the trends you saw throughout the quarter?

Paul Stebbins

I would say that the trend in the quarter is what we talked about. You saw the result of that.

Ira Birns

Well, I mean, I'll be more specific. In some cases I've got air freight contacts saying, look, it seems like it sort of bottomed. It hasn't gotten worse. It did get worse during the quarter, but it seemed to stabilize in March and seems kind of stably bad now.

Paul Stebbins

I'd say that's probably a good way to put it. We're stably bad. Look, if you talk to anybody in aviation in the industry, this has been a hell of a wallop to the head. You've got a global economy that's in full scale retreat and it's been difficult and they have all. I think the better practitioners are readjusting and slashing capacity and restructuring themselves to be responsive.

Again, all traffic is not going to stop. It isn't all going to go away. So, our responsibility is to look at all that landscape and take a very realistic clear-eyed, unromanticized view of what those realities are and try to tweak our business model so we can respond to those customers and help them out. I think we've done a very, very good job of doing that.

I'd tell you the aviation team did an absolutely first-class job of re-shifting this model, taking our very strong cash position, beginning to (inaudible) reinvestment in our inventory position, so that we can use our self-supply to create value for some of these contract customers. I couldn't be more delighted with what they have done under the circumstances and the fact that we delivered the performance we did given the backdrop, I think it's phenomenal.

So I feel very good about where we're going directionally and I think that the rest of the year looks promising and that we may have hit the bottom. I don't absolutely know that, but certainly our sense is somewhat like your own.

In marine, we did again a very good job. You know what's happening in the shipping industry, but I think our discipline and focus on our best-in-class customer base has been the right strategy for the last couple of years. It's a very high value add. We feel that we held on to market share more than the overall demand destruction given the decline in the shipping markets. So, we're ahead of the game from our perspective and very well positioned going forward.

So, again, tight execution. A lot of focus. Continued deliverance of real value in a difficult market and being able to help those customers weather the storm and be their partner through this I think is a very good thing and puts us in a great position going forward and the same thing for our suppliers. So I would say overall, this was a quarter that was all about discipline and positioning for the rest of the year. We feel pretty good about the rest of the year.

Alex Brand - Stephens Inc.

Thanks for that color, Paul. And just sort of one more point of clarification. I'm guessing you guys didn't try to calculate this, but when I look at marine down 22% and aviation down, I think it was 32%. Is it fair to say that almost all of that is the customers doing less business or is you are taking risk out of the model a bigger part of that than I realize?

Paul Stebbins

Yes, that's exactly what it's about, Alex.

Alex Brand - Stephens Inc.

So it's mostly just the customers and only marginally you guys taking risk out?

Paul Stebbins

No, it's the opposite. We made a calculated decision. We made a choice to be very selective, given, look, as you think about where we are in the history, there's a lot that's happened and how fast it's all changed. So you go back to January 1 and you try to understand what this landscape is going to look like and what had is going to happen in the economy, in the new administration, the bank crisis, lots of things going on.

The most prudent thing that we can do is management of this franchise, is to take a step back, take a very conservative, cautious view. As I said in my opening remarks, we took a stricter than usual discipline was imposed throughout the entire organization, because the better part of valor is to live to fight another day.

Now, because we don't have that perfect visibility on what was going to happen throughout the quarter or even into the balance of the year or how the banking crisis might get resolved or how the liquidity markets might open up, or what was going to happen in trade or what was going to happen in growth in China, these were all things that were announced.

So, what's the most important thing we can do? Dial back, take a very rigorous approach, maybe even too conservative approach, but that is the responsible thing to do. So we made calculated decisions to really dial back, reduce it to a bedrock and take a cautious view. I would say we executed that strategy superbly.

Now it's a question of as we look forward, I think it's going to be up to us to choose and sort of open up the gates going forward, based on how we feel about trends and I think we've already begun to see this in the aviation space and I think we're going to see it in marine as well.

Alex Brand - Stephens Inc.

I appreciate your time, Paul. I thought it was a nice quarter and you guys did a great job. I appreciate it. Thanks a lot.

Operator

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

Steve Ferazani - Sidoti & Company

Good evening. I just want to follow up I guess on the last few comments. On the marine side, risk level probably even at a peak immediately in Q1 impacting volume. Have you already seen that lessened by the end of the quarter? How cautious are you moving forward in the next couple of quarters?

Paul Stebbins

I think that our disposition, Steve, right now is more competent than it was in the beginning. Again, it's not that we have any divine insight into what the world economy's going to be. But if you go back to the beginning of Q1, the most important responsibility we have as management is to protect the franchise at all costs, right? That's the discipline that this company is all about.

So we aren't sure where it's all going to go. We said, okay, let's take the conservative view and if we happen to be a little over conservative, well, okay, so be it. That's a better position to be in than to bet the farm and regret it. As we get out of Q1 and we start going to Q2, I would say, yes, it's an accurate statement that we feel more confident about the landscape, we get a better sense of our customers and their ability to navigate and weather the storm.

It helps us tremendously that our strategy over the last couple of years has been to focus at the best-in-class. So these are the better capitalized companies that have done very well over the last several years. They are certainly in a position to financially weather this storm, and, yes, they may be suffering from some of the downturn in trade and some of the volumetric, shift in cargo activity, but it isn't going to kill these companies. They are going to make it through. So it's our responsibility to be their partner and help them navigate that. So I would say now our disposition's more confident and I think that I'm glad we went through the exercise we did in Q1. It was the right thing to do.

Steve Ferazani - Sidoti & Company

On bad debt expense, obviously another segment, the shipping side, under greater weakness, was that you learned from the aviation that allowed you to be more conservative that we didn't see a rise in bad debt expense?

Paul Stebbins

That's a good question. I don't think it's so much, we have certainly learned something from the aviation space, but I would say that wasn't the primary focus. As you know, historically, these are very different models. I would say, what was going on in shipping that was of particular concern as you had a huge amount of upheaval going on in the dry bulk markets, charter markets, the container activity was weakening.

So the question was, what was the class of customer that you were focused on? I would say that, again, it's been the discipline of this company in the last couple of years to stay away from sort of middle, lower tier players in the space because we don't feel that long term that they respect the value add that we deliver and that it's really the best investment of our capital.

So if we are going to make the investments in a very high level of service offering to these global fleet, let's focus on the best of class. I would say that what we learned was that some of the competitive landscape out there, certainly had some trouble out there with some of the middle and lower tier. That's not a space we're trading in. So I think we largely bypassed all of that and it was really this question of being a little more selective as we looked at risks, but I'll go back to the original statement.

I think we feel more confident now that Q1 was the right thing to and do and we look at the landscape going forward and I think we feel pretty good that all of that discipline's paid off.

Operator

Our next question is from the line of Mickey Schleien with Ladenburg. Please go ahead with your question.

Mickey Schleien - Ladenburg

Good evening, Mickey. Couple of questions. One is with respect to volatility of your prices. We all know that generally the more the better for you. Given what we've seen so far this year, I was wondering what your expectations are for volatility and fuel prices for the balance of the year, not necessarily the direction but the volatility?

Paul Stebbins

Now, I understand. Again, if I had that crystal ball, perhaps we would all be calling you from a hotel in Bermuda where we would be enjoying a very nice life. Getting visibility on what is really going to happen in the oil market is a little tricky. But I would say directionally, it's an upward bias in trend. You've seen it in the last short near-term period. I think that any sort of a turn in the economy is going to trigger a rebound in oil prices.

I think one thing you can be sure of is that there's going to be a little bit of confusion and noise in the oil markets over the next several months as the economy tries to sort itself out, as the stock market tries to sort itself out. There's going to be some volatility.

Whether that volatility is materially different from what we saw in Q1, again, the primary bias in Q1 was a drop in prices and it wasn't a heck of a lot of volatility, but I would say it is an upward bias. I think that there will be some volatility throughout the year, how the level compares in absolute terms is very difficult to give you with any precision.

Mickey Schleien - Ladenburg

My next question is related to the two acquisitions. You did put out the accretion that you're expecting, but I was curious what sort of assumptions you've made in terms of redundancies or synergies of those two businesses with your existing platform when you calculated the accretion?

Paul Stebbins

Well, they are both different. Starting with TGS, that was really a traditional bolt-on where we were able to add the additional volume customer base from TGS to our existing Texor model. So there was significant synergies there, very little cost came across with that additional business.

Henty, while there are strategic synergies, it's not the same bolt-on variety, so there are a lot of opportunities for us to benefit from the expertise they have in the markets they serve, which should provide us with benefits going forward, but not, not the same type level of cost synergies that we saw in TGS.

Mickey Schleien - Ladenburg

My last question is regarding share repurchases. I had thought that given the authorization the board gave you and where the share price was, we might have seen you repurchase some stock. Could you give us your thoughts on where you stand in terms of share repurchases?

Ira Birns

Good question as well. We've had something that we discussed with our board on a regular basis and make determinations of what price points we think make sense for us in terms of buying back our own shares versus making other types of strategic investments. To-date, you know, fortunately where we are today, we're honestly nowhere near that level, as if we had the unfortunate circumstance of our stock dropping down significantly from where we are today, that's something that we would reevaluate. So, I guess, that's the best answer I can give you on that one right now, Mickey.

Operator

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

Edward Hemmelgarn - Shaker Investments

Two questions. One, Paul, are you making any progress or and working with your customers to develop more sustainable hedging programs for them in both the marine and aviation segments?

Paul Stebbins

Yes, it's a very good question. There's no doubt that the use of derivative instruments to help manage exposure to volatile oil prices in any kind of market, be it up or down, is a pretty integral part of strategic procurement today. I would say by and large, all of the advance companies are at least looking at this, if not actively doing it. Sometimes it varies a little bit depending on what the balance sheet opportunity is or what the financial position of the company might be and what their sort of caution or disposition might be.

As you might imagine, prices are low right now. It's our sense that over the next couple of quarters, we're going to see a renewed interest in wanting to take advantage of the ability to lock in some of these historically low prices. I think that most of the senior management of the large groups believe that as the economy turns and trade begins to increase, logically you're going to see a return to somewhat higher oil prices. They may not go back to 147 oil that we saw in 2008, but they are going to I think the upward bias, as we said, is there.

So I think the thing that we're probably going to see is more activity in this space. It's been kind of quiet over this current period because everybody was trying to find their way. The same way that we took a dial back and we're cautious in Q1, just to sort of take a let's wait and see. I think a lot of the client base that we were consulting with at a very high level on the financial side were also saying, look, let's just sort of wait and see where all of this is going.

Now that we've kind of weathered that, I think it is a good time. I think that we're going to be certainly encouraging strategically all of our large customers to be taking a hard look at that. There's certainly opportunities and I think it's the responsible thing to do in terms of managing exposure in the long-term.

Edward Hemmelgarn - Shaker Investments

How does that factor into revenue and earnings for World Fuel, for example?

Paul Stebbins

Sure. I would say that when we have active patches of investment in using derivative instruments to help manage the forward curve, it tends to enhance our ability to work both profitability on the margin side as well as its volume, that's in addition to the traditional physical, so it tends to be a positive.

So I think that in Q2 there was pretty much an absolute absence of that activity, not 1000%, but pretty darn close to none. Everybody was just waiting. So I think that I think that as we look forward, though, I think it would be a positive thing to see more activity in that space.

Edward Hemmelgarn - Shaker Investments

Okay. Lastly, Ira, I know that you mentioned I think in the last call or something that you had a strong desire to be very risk-free in the cash investments, but it does appear if the, you know, liquidity situation is getting to be better and when might we expect to see a return, if any, on the large cash position that you've got? I mean it's kind of puzzling that you've got net cash position and yet you end up with an interest expense each quarter.

Ira Birns

Sure. Well, probably a great question to ask just about any Fortune 500 corporate treasurer in America today. I think everyone has a similar view, although there are probably still some people out there that may tend to be aggressive, despite lessons learned over the past 12 to 15 months. We've chosen in this period of market instability on the banking side, although it seems that that's beginning to improve, to be very conservative and in this market environment, even the aggressive windup with maybe 1 percentage point more in return.

The question is, is that 1 percentage point worth risking what's a significant chunk of your assets on your balance sheet. So it's something we evaluate on a regular basis. As market conditions improve, we may find ways to be a bit more aggressive without taking on significant risk and of course we would want to do that, but for now, we're remaining conservative in terms of the types of investments we're making, the banks we're placing our cash with, etcetera.

But that could change over time. So, respect your point, but we have taken both the high road and the conservative view just because of all the volatility and uncertainty out there in the market today.

Paul Stebbins

Ed, just a follow-up on the hedging. To be clear, we certainly used the derivative instruments to manage our own inventory and pipeline movements, as you know, so you'll see activity in that perspective. But to be clear, in terms of marketing into the customer base, that's something that we want to have them use to protect their position going forward. That went quiet in the quarter, but we expect some activity going forward.

Edward Hemmelgarn - Shaker Investments

I guess that's what I'm just interested in. Now that prices are low, you would think that it would be a good time to start the forward hedging program as opposed to when prices are high.

Paul Stebbins

We absolutely agree. I think, again, the psychology of the market was sort of stunned and cautious. Everybody's kind of reeling in this market. So Q1, just in the same way we were kind of taking a breather to just see where everything was going, I think a lot of the customer base is doing the same thing. But you're absolutely right, when prices are historically low, that is an opportune time and it is part of any good strategic procurement program.

Edward Hemmelgarn - Shaker Investments

I would think that this would help you to enhance your value proposition to these and customers.

Paul Stebbins

We have tremendous expertise in this space. We were one of the pioneers of using derivative instruments in this space. We've got the balance sheet and the relationship with the writers that is very, very strong. So in the same way that we've become an aggregator of a preferred nation status, sort of most favored nation status.

For the physical suppliers, we are also very much enjoy that status from the counterparty side, from the writers. As you can imagine in the last year with all the focus on counterparty risk, the strength of our balance sheet, our deep expertise in derivative instruments makes us a very reliable counter party.

The customers are looking to us more than they ever have to actually provide that role because we're a tremendous source of liquidity for them to use those instruments to manage their forward curve. So we enjoy I would say sort of a unique position in that regard and it does bode well for our ability to make that part of our value going forward.

Edward Hemmelgarn - Shaker Investments

Okay, thanks. Congratulations on another good quarter.

Operator

There are no further questions at this time. Gentlemen, do you have any final remarks you would like to make?

Paul Stebbins

We appreciate your support. This was obviously a challenging quarter, not just for World Fuel, but for the world. I think we executed very well and I think we feel pretty confident about the balance of the year and we appreciate your continued support and look forward to talking to you at the end of Q2. Thank you.

Operator

This does conclude the World Fuel Services Corporation first quarter earnings conference call. We would like to thank you for joining us today. You may now disconnect.

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Source: World Fuel Services Corp. Q1 2009 Earnings Call Transcript
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