World Fuel Services Corp. (NYSE:INT)
Q2 2010 Earnings Call
August 3, 2010 05:00 pm ET
Frank Shea EVP & Chief Risk and Administrative Officer
Paul Stebbins - Chairman & CEO
Michael Kasbar - President & COO
Ira Birns - EVP & CFO
Paul Nobel - SVP & CAO
Hello and welcome to today's 2010 second quarter earnings call. My name is Russell and I will be your event specialist today. Questions will be taken by the phone at the end of today's webcast, instructions on how to ask a question by the phone will be given at the beginning of the Q &A session. If you are disconnected from the webcast, you can log on again using the logging instructions provided to you, if you cannot log back in with these instructions please call support at 1-866-271-7592. It is now my pleasure to turn the webcast over to your speaker Frank Shea, Executive Vice President and Chief Risk and Administrative Officer. Mr. Shea the floors yours
Good evening, everyone and welcome to the World Fuel Services Second Quarter 2010 Conference Call. I am Frank Shea Executive VP and Chief Risk and Administrative Officer and I am doing the introduction on this evening call, with as we have been doing in recent quarters a live slide presentation. This call is also available via webcast. To access this webcast or future webcasts please visit our website www.wfscorp.com and click on the 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, it is based on assumptions that management believes are reasonable but are subject to a range of uncertainties and risks that could cause World Fuel’s actual results to differ materially from the forward looking information.
The summary of some of the risk factors that could cause results to materially differ from our projections can be found in our form 10-K for the year ended December 31 2009 and other reports filed with the Securities and Exchange Commission. We will begin with several minutes of prepared remarks which will then be followed by a question-and-answer period.
At this time I would like to introduce our Chairman and Chief Executive Officer, Paul Stebbins.
Thank you, Frank. Good evening and thank you for joining us. Today we announced earnings of $37 million or $0.61 per diluted share for the second quarter of fiscal 2010. With the exception of the extraordinary results we reported in the third quarter of 2008, these are the best quarterly results for gross profit, operating income and net income in the history of the company and sequentially we have quarter-over-quarter growth in volume and gross profit across all three segments, our returns on equity invested capital and working capital remained strong in the quarter and our total shareholder’s equity exceeded $800 million.
Well we are certainly pleased with the financial performance of the company this quarter; we are most interested in what the results reveal about the key drivers of our business model. We believe our results underscored three important factors which have contributed to our success overtimes.
Number one, managing risk is the core competency of this company. In a highly uncertain global market, we continue to emphasize throughout the company that our primary focus should be managing risks by maintaining a disciplined approach to driving solid risk adjusted returns, good results for follow us. This approach has served us well in delivering consistent growth over time.
Number two, excellence in execution and commitment for customer service are not only competitive differentiators, they are essential components in achieving sustained growth over time. This is not just a matter of corporate culture; it is the matter of continuous investment in the people, process and technology which makes World Fuel easy to do business with.
As was highlighted by our customers and suppliers, at our Analyst Day in New York, we have demonstrated an ability to build long-term relationships with customers and suppliers which has allowed us to drive efficiency, scalability and superior returns over time.
Number three, strategy matters; by understanding and anticipating the long-term structural changes taking place in the energy and transportation markets, we have firmly established ourselves with a value add fixture in the global supply chain and we are well positioned to pursue strategic opportunities across a broad spectrum of activities related to fuel, services, technology and logistics.
By staying true to our core strategy, of solving the challenges of procurement and supply in our highly fragmented global market and being highly responsive to fast changing, market conditions we have been able to deliver consistent growth throughout a volatile period.
And while we are unable to predict with precision, the future of interest rates, solving debt, GDP growth or the balance of trade or even the pace of the economic recovery, we do know that maintaining a disciplined and focused approach to rich management, execution, customer service and strategy will continue to serve us well through a wide range of market conditions. This has been a whole mark of our success as we triple gross profit over the past five years. The details can be seen in each business and our marine segment; we posted significant, sequential and year-over-year increases in volume, gross profit and operating income. In fact, our volume was up 12% sequentially and was the highest we have reported since the fourth quarter of 2008, while gross profit was up 10% which is the highest we have reported since the first quarter of 2009.
During the second quarter, we saw increased activity in the shipping market. Container rates showed sharp increases from a year ago reflecting high demand for space on ships as well as for actual containers. Rates from the dry bulk market were up sharply, so this seemed to reflect the shipping capacity not so much a sharp drop in the movement of goods.
Having said that, China’s demand slowed somewhat through the quarter and they remain a key driver of bulk market activity going forward. The tanker margin was up in the quarter, our projections about oil production levels would suggest an increase in tanker activity as expected in Q4 this year and into next year.
The tanker markets as you know is also sensitive to external events so unrest in the Middle East, the drilling issues in the US Gulf and the recent explosions in (Inaudible) China all have significant market sentiment impact. While these facts point to a somewhat more positive outlook for the overall shipping industry, we believe persistent concerns about the sustainability of an economic recovery are ground for caution. Our strategy is to stay focused on servicing our global customers and providing an important distribution platform for our suppliers.
Our aviation segment delivered record results with sequential and year-over-year increases in volume, gross profits and operating incomes. We saw positive developments across a spectrum of passenger, cargo, government and business aviation and continue to benefit from continuing changes in the supply markets coupled with a generally positive operating environment for the overall aviation industry. Cargo trading in particular performed well in the quarter with overall activity according to IATA of 26.5% from June of 2009.
Passenger activity has also improved by 11.9% year-over-year. Having said that, sustainable traffic is the function of business confidence and there is still uncertainty about the durability of the economic recovery. On the supply side, we see a continued trend towards open markets and infrastructure investment which present new opportunities for us to participate in the bulk supply markets. We also suspect the integrated oil companies to continue to work with us to have reduced their distribution costs and rationalize their go to market strategy.
In our land business, we saw a sequential growth in volume and gross profit. But overall performance in the segment was negatively impacted by a reduction in margins associated with targeting a more Blue Chip class of customer in our domestic wholesale rack business and some investment in the development of our UK and Brazil based businesses which are beginning to scale. We expect to have a better sense of our success in these new markets towards the end of the year.
In the meantime, our branded wholesale business continues to develop in the US market and we were very pleased to announce the acquisition of Lakeside Oil Company in Milwaukee, Wisconsin. Lakeside supplies approximately 350 million gallons of gasoline and diesel fuel under long-term contracts to more than 250 retail operators in Wisconsin and Minnesota. We decided to have Lakeside as part of the World Fuel Family.
The second quarter was a good one for World Fuel. We demonstrated as we have in the past the continuously changing markets can present opportunities to drive both organic and strategic growth. In previous calls, we have indicated that in the event the economy started to recover, we would be well positioned to benefit and we did. Our global team has prepared and executed well. Looking forward, we are excited about our opportunity set and we continue to exercise patients and financial discipline as we drive future growth.
Thank you for your continued support and I will now turn the call over to Ira for detailed revenue of financials. Ira?
Thank you Paul and good afternoon everybody. Consolidated revenue for the second quarter was $4.4 billion, up 12% sequentially and up 74% compared to the second quarter of last year. The year-over-year change in revenue is impacted by the increase in crude oil prices from an average of $60 per barrel in the second quarter of 2009 compared to an average of $78 per barrel in the second quarter of this year as well as increase in volume in all three of our business segments.
The aviation segment generated revenues of $1.7 billion, up $231 million or 16% sequentially and up $859 million or 103% year-over-year. Approximately 53% of the year-over-year increase was due to increased sales volume and approximately 47% was due to an increase in the average price per gallon sold as a result of higher world oil prices.
Our marine segment revenues were $2.3 billion, up $178 million or 9% sequentially and up nearly $900 million or 65% year-over-year. Approximately 71% of the year-over-year increase was due to the increase in the price per metric ton sold as a result of higher world oil prices and approximately 29% was due to increased volumes.
And finally, our land segment generated revenues of $430 million, up 19% compared to last quarter and up $110 million or 34% year-over-year. Approximately 65% of the year-over-year increase was the result of higher world oil prices with the remainder being result of increased volume during the quarter. Our aviation segment sold 689 million gallons of fuel during the second quarter, up 11% sequentially and up 50% year-over-year, representing record quarterly volume and the fifth consecutive quarter of growth in our aviation segment. Our aviation volume in the second quarter is actually 10% higher than the record level of quarterly volume reached in the first quarter of 2008 before the market began to decline.
Recent volume increases have been driven by our continued focus on driving growth in our commercial passenger, cargo and general aviation businesses, as well as further increases in government related business activity. The disruption caused by the volcanic eruption in Iceland in mid April did not have a meaningful impact on our second quarter results.
Our marine segment’s total business activity for the second quarter was 6.17 million metric tons, up 12% from last quarter and up 19% year-over-year, while volumes in our marine segment remains stable over the course of 2009, after a modest increase in the first quarter, we experienced double-digit growth this past quarter.
Although our approach remains conservative in these fragile and still somewhat volatile core marine markets, we have begun to see improvements within many market segments. Our focus on risk management and return on investment will continue to drive our decision making processes regarding the amount of business we do in certain markets and with certain customer.
Fuel reselling activities constituted approximately 80% of total marine business activity in the quarter, up slightly over the past two quarters.
Our land segment sold the record 190 million gallons during the second quarter, up 16% sequentially and up 12% from last year’s second quarter. As we announced a few weeks ago, we have closed on our acquisition of Lakeside Oil Company and look forward to the many additional growth opportunities that lie ahead. Our land business has now nearly quadrupled this annual run rate from 269 million gallons in 2007 to approximately 1 billion gallons as you continue to become a more meaningful portion of our overall business.
Consolidated gross profit for the second quarter was $108 million, the second highest level in the company history an increase of $9 million or 9% sequentially and an increase of $16 million or 18% as compared to the second quarter of last year. Our aviation segment contributed a record $53 million in gross profit, an increase of $5 million or 9% sequentially and up $13 million or 33% compared to the second quarter of 2009.
While activity levels may vary from quarter-to-quarter, we continue to benefit from an increased level of government business, as well as overall capacity of demand increases in the commercial passenger, cargo and general aviation businesses. Our jet fuel inventory position was approximately 43 million gallons or $87 million at the end of the second quarter, an increase of 3 million gallons from the first quarter and an increase to $7 million principally due to the increased volume during the quarter.
As we had to past double quarters, we did realize the benefit from inventory average costing again this quarter. The amount of such benefit was approximately $3 million in the second quarter. The marine segment generated growth profit of $43 million, an increase of $4 million or 10% from last quarter and an increase of $3 million or 7% compared to last years second quarter results. We remain focused on driving profitable growth in our marine segment as we do across all of our businesses.
Our land segment delivered gross profit of $11.5 million in the second quarter, up $400,000 sequentially and flat with last year’s second quarter. The Lakeside acquisition will contribute to gross profit in the third quarter, which will further increase our land segments contribution to the overall profitability of our business.
Operating expenses in the second quarter excluding our provision for bad debt was $60.8 million, up $4.5 million sequentially and up $5.8 million compared to the second quarter of 2009. The increases in operating expenses were primarily driven by higher compensation expenses, driven in part by annual merit increases in April, as well as acquisition related expenses incurred during the quarter.
The level of operating expenses excluding bad debt expense as a percentage of gross profit remain generally consistent with last quarter. For modeling purposes, I would assume overall operating expenses excluding bad debt expense of approximately $62 million to $65 million in the third quarter of 2010. Including the addition of a full quarter of expenses related to the Lakeside acquisition.
Our total accounts receivable balance was approximately $1.1 billion at the end of the second quarter, up roughly $80 million from the first quarter, principally due to volume growth in all three segments during the quarter. Our accounts receivable reserve remained at approximately at 2% of total portfolio at the end of the second quarter, which is generally consistent with the past several quarter.
Our bad debt provision in the second quarter was approximately $1.7 million, up $1.3 million compared to last quarter and up approximately $1.2 million compared to the second quarter of 2009. The increase in our bad debt provision was primarily driven by the sequential and year-over-year increases in accounts receivable. Consolidated income from operations for the second quarter was $45 million, an increase of $3 million or 7% sequentially and up $9 million or 25% year-over-year. Income from operations for our aviation segment reached $28.7 million a record level to the third consecutive quarter. This represents an increase of $2 million or 8% sequentially and $11 million or 62% compared to the second quarter of last year.
Our marine segment’s income from operations was $24 million for the second quarter, a sequential increase of $4 million or 20% at an increase of $1 million or 6% from last year’s second quarter.
Our land segment had income from operations at $1.8 million down $570,000 sequentially and approximately $2 million year-over-year. The sequential on year-over-year declines were impacted in part by our region investments in our UK and Brazil wholesale land businesses as well as an improvement and mix of the credit quality of our domestic wholesale rack customer base which has had an impact on average margins.
The company had non-operating expenses of $200,000 during the second quarter, this number was comprised at net interest expense and other financing cost as well as foreign currency loses, also included in this number was a $1.9 million gain from the collection of a short-term investments, as many of you may remember in September of 2007 we took an investment impairment charge of $1.9 million related to with [81P1] rated commercial paper investments with a par value of $10 million after the issuer to profit on the payment obligations at the maturity dates.
Until recently we had estimated the market value of this commercial paper investment to be $8.1 million. But after nearly three-year litigation process we had collected the entire $10 million and took back $1.9 million into income that’s modest litigation fees, net of taxes, this gain equates to approximately $0.02 cent per share for the second quarter. Excluding any foreign exchange impacts, I would assume non-operating expenses to be approximately $1 million to $1.5 million for the third quarter of this year.
The company's effective tax rate for the second quarter was 17.3% lower than the 18.5% rate for the first quarter and 21.4% rate in the second quarter of last year, below the lower to my range as well which I'll provide on last quarter's call.
We estimated that our effective tax rates for the third and fourth quarters of 2010 should be between 16% and 20% remaining in the lower end of is historical range based upon on our current mix of business.
Our net income for the second quarter was $37 million, an increase of approximately $3.3 million or 10% compared to the first quarter and an increase of approximately $9.2 million for 33% year-over-year.
Diluted earnings per share for the second quarter was at $0.61, an increase of $0.05 or 9% sequentially and an increase of $0.15 or 33% year-over-year.
Non-GAAP earnings per share which excludes amortization of acquisition related identified intangible assets and stock based compensation was $0.66 in the second quarter.
Our returned invested capital was 19% this past quarter compared to 18% in the first quarter and 17% in the second quarter of last year, all consistently well above our cost of capital.
Our overall net trade cycle increased from 6.5 to 7.5 days during the quarter driven in part by an increased level of government business. Return on working capital remained above 50% to the second quarter at 51% compared to 57% in the first quarter. Despite the increase in volume and slightly higher fuel prices during the quarter, we generated approximately $7 million of operating cash flow during the quarter. This resulted in an ending cash position of $307 million. Combined with our generally undrawn credit facilities, our balance sheet remains strong and liquid.
So in closing, we saw volume improvements in all three business segments as a result of increased organic growth. We capitalized on our solid market positions as global economic conditions began to improve. We continue to evaluate and execute on growth opportunities both organically and through strategic investments including the acquisition of Lakeside Oil which we closely integrated last month.
And finally, our strong and liquid balance sheet and global presence and expertise provided with the tools to continue to return value to our customers, suppliers and shareholders.
I would now like to turn the call over to Russell to open up the call to questions-and-answers.
(Operator Instructions). Our first question comes from the line of John Chappell.
Okay, Paul, so I wanted to ask you a little bit on the aviation side, the volumes continue to impress and I know you guys had spoken about doing some of this prepaid business where you get a lot of volumes and the little bit lower margin, because we're getting paid in advance, but the volumes like I said, are very significantly. So I want to know, is this pretty pay business exceeding your expectations or are you may be going out a little bit more of the core kind of normal margin business as you are going a little more comfortable with the broader macro backdrop?
Yes I would say it represents a pretty diversified mix Jonathan I think we are feeling pretty good about the current climate in aviation if you look at the underlying balance sheet and some of the earnings results of the airlines, if you look at the pick up and traffic year-over-year I think we’ve got a pretty good feeling for the companies that did the hard work to restructure themselves during the worst of economic climate have come out a lot stronger. We have set a leaner and meaner and more efficient operations. I would say that as they also appeared back that created new opportunities to develop relationships with some of those airlines that was at a time when the oil companies were often sort of recapturing their own cost structures and rationalizing some of their go-to-market strategy.
So when you put all that together it provides us an opportunity to grow the commercial volumes significantly we are very pleased about that. And I would say that this is a very diversified portfolio the one for whole gamut and I think that’s the most exciting part to us as this represents a pretty good cross section of the entire spectrum of aviation activity.
And as a prepay idea then catching on, are you getting customer.
It really depends on the specific locations there are some of that but I think it would be wrong to characterize that that’s the great majority of it, what happened in our trade cycle Jonathan is that we’ve narrowed our terms a lot and so the whole way that we manage that portfolio is a lot tighter but it is an all prepay type there is certainly a credit component in there but even to the extent that when we do issue credits that’s a much tighter term cycles to allow four larger [product] lines.
And then if I can ask another one on the marine side, last one. Just to make sure I don’t leave anyone out. The marine side has historically been more of a spot business but as you said the activity is starting to get a little bit better, is there any way to kind of lessen the volatility in that business are you going to your business setup it needs to be kind of spot exposed to marine?
Yes this is been served the Holy Grail of the World Fuel’s story for year, I wish I could give a level of precision and accuracy with forecasting what that market will do because it is primarily spot business and we are very close to our customer base, our fortunes in this activity tend to rise and fall over the adjusted pre-activity of our customers and just from your own deep expertise and the transportation space what’s going on over lets say the last five to six years in shipping, we had a huge bone, tremendous amounts of activity, a huge goal of expansion, you saw a radical contraction into ’09 as the shipping rates sort of fell off a cliff and a lot of shipping companies were losing money.
I think that the thing that we are most proud of is that we have been able to maintain very deep relationships with a diversified sort of class of blue-chip customers throughout all that and been there to help them supply. But at the end of the day the overall consumption patterns or what sort of drive our patterns, if NYK or A.P.Moller or KLine or APL in Singapore you never maybe Hapag Lloyd, the tanker operators if their overall volumes are down regardless of how good our relationship maybe with those customers, our volumes tend to be impacted as well. I would say the thing that we noted was some interest is that throughout the prices we are pretty confident even though its hard to get very precise statistics, we have a pretty good indication that we were not losing as much volumes as the overall market is losing.
So as the demand destruction was taking place, we were sort of in a slower case of decline and impact the upheaval on the market gave us an opportunity to forge I would say more durable relationships with some of these customers that were so distressed as they made sense of the crisis.
So I think its just the nature of that business that its not going to be easy to give you clarity with precision on what those volumes look like, we do a little bit trade with the economy and our customers.
But I do know that our value proposition is more deeply entangled. We are providing a broad cross spectrum services on operations, logistics, quality control and support, derivative balance sheet management all that stuff is going on. So I would say the relationships are deeper and more sophisticated than they have ever been. So as the economy turns in shipping terms we will so well for sure.
Got it and then lastly on my end, both of you mentioned in your comments that the impact of the ramp up in the UK and Brazil on the land margin, we call a time not too long ago, when you intend to ramping up infrastructure and systems in the other businesses and then once that was done the business came back and margins started to explode.
Do you think that this ramp up is, is there six more months left? Is there twelve more months left? Is it completely dependant on any acquisitions you make? Wouldn’t you expect all I’ll seek on the volume side start to see the benefits of that infrastructure ramp up and some margin expansion on the land side?
Turning to that, it’s Michael Kasbar. I think that we are starting to see the beginning of the land business reaching some critical math and then it’s still what we have been subscale for a while by virtue of late slide we’ll have improved purchasing economics helping support the investment in the proxy line and basically get it to a level where we will be able to see an impact in the space. Its maturing with, we are starting to leverage our growing branded business into our unbranded activity and vice-versa. So that now involves in more products, that are driving some improved profitability in protein, and lubricants so, the market wants to see us in this phase, the buyers and the sellers, they like our balance sheet, they like our value proposition, they see that we are committed to growth. So we're starting to get some efficiencies, it takes a while to build this global platform that we are starting to see the beginning to a duplicating in the land space, what we did in the aviation and marine markets. So I think that we're not too far. I think we are around the corner from starting to see this break into a pace and its certainly taking a hell of a long time. We are not really satisfied with what we’ve been producing so far but we are confident that we are going to start to see a more significant contribution for the bottom line.
Our next question comes from the line of George Pickral.
Paul can you give us an update on the sales supply model. I think last quarter you talked about expanding into Europe and maybe Asia, has that started first of all?
Yes, and we are seeing opportunities as these markets open up. Depending on where you are in the world, airport infrastructure has historically been closed. So it’s been kind of controlled either by a local airport authority or a consortium of oil companies that might have had concessions at those airports. But in the world of sort of general deregulatory movement and sort of the changes in the EU and also these economies which are opening up like the former Soviet Union, most specifically Russia, it has opened up opportunities for us to actually get into these markets and begin to bring our own barrels in. Now there is an economy of scale of that that drives some efficiency on to the cost side which means we're more competitive to a broader class of customer in these opening airports but as these airports are now becoming more agnostic in terms of who comes in to supply.
So right now we don’t have any inventory investment, so that doesn’t show up in our inventory numbers, but I would say over the next six months you're going to see a movement in that direction. We're pretty excited about some of the changes we are seeing, this is a great news, these are changes I can tell you that we were sort of dreaming about hoping, predicting a couple of years back and there are all sort of coming to fruition. This is very positive news for us so I think that as we look forward, this is the part of our growth strategy on the aviation side that we think is very promising.
Okay, so would it be a fair characterization to say that the oil majors are continuing to move upstream? This is kind of the next step up for you all and not to get too far ahead of ourselves here, but could this kind of take your aviation spreads to the next level and I guess take your volume growth to the next level too?
It would be premature to comment on that George. I appreciate your enthusiasm and from your mouth to the Almighty's ears we would welcome that but it would be premature to talk about how that’s going to drive margin specifically. Certainly to the extent that ourselves from my supply model has allowed us to build up positions, you know the success of it, domestically in the Unites States, our ability to build inventory positions and if you will, sort of trade around that barrel position has allowed us to optimize margin and still deliver a very competitive value to our customers. It's also given as a renewed kind of relationship with the oil community because we represent a short position, that’s very important to them that we represent of course a product and ratable demand that becomes important for them in terms of managing their overall balance of system.
So from that perspective, we see similarities as the markets open up around the world, so its promising, but it would be premature to give you any commentary as to what that's precisely going to do to margin looking forward.
No problem. So sticking over to your military business, actually one of your customers this morning seemed pretty bearish about military flying in the back half of the year. They may be in a different place in terms of kind of market share and percentage of their business, as it relates to military. But can you maybe talk about your expectations for your military business. Is it something that's reached an economy of scale and could decline, if we see a true pull-out from Afghanistan or Iraq or are we still kind of in the beginning stages of you all figuring out your military business and how to supply more to the military?
George hi, its Michael Kasbar. We've been in the military segment since 1986 and we've consistently grown our expertise owing to that 25 years. The discipline required to service that segment has strengthened lot of parts of our business, a quality control, a market management, supply logistics, contracts, administration, while it is difficult to predict you know, where military or released demand may go, we're pretty experienced in this space, we're very responsive. We've grown our capabilities and its difficult to predict, what's going to happen in this world. Unfortunately, we don't think world peace is going to breakout anytime soon. So, we should have looked at it as complicated logistics and being able to supply and deal with contracts. We really specialize for many years in the US, but we've expanded that our group and our team is quite a bit larger than it has been before and the same about our risk team has grown as we’ve seen, if we can provide a solution. So, it’s impossible to figure out where it’s going, but certainly it’s improved quite of our capabilities and very much incorporated into commercial business.
And I would say George, its Paul, let me just add to that. You’ve alluded to some customer who’s thought their flight traffic might slow down. And that’s a highly granular slice of what’s going on in that business. When you look at it as the diversity of our activity in that space, it isn’t just in there, you’ve got multiple militaries all over the world who are running maneuvers, I mean we’re sponsoring support for maneuvers and logistics for training exercises all over the world. They involve troop movements as Michael referred to. These are relief efforts. There’s all sort of NGO’s that are involved that institutional sales that fall under that category. It’s a pretty diversified complex of stuff, but our expertise is pretty well recognized. I think we’re perceived as being a counter party for these various militaries who are very fast, very responsive, give a very good service and have that sort of 24/7 on top. So, it wouldn’t be as granular to get some particular airline that may have some commitment to a military that’s going to cut back. That would be something I don’t think that’s how we think about it.
Last question and then I’ll turn it over. When you look at your competition and the acquisition environment a year ago versus today, can you may be talk about what’s changed I guess for the better or for worse?
I would say that the company is in a position to evaluate a broader suite of opportunities than probably even in the history of the company. And that is probably one of the perverse benefits of having a real tectonic upheaval in the global economy. That has ruptured all sorts of traditional business paradigms and it’s caused a lot of change in what’s going on in the supply chain. All of that disruption quite frankly has been very good for us and it’s obviated and made more clear to the criticality of our role in that supply chain. So, whereas the prices are certainly something that’s been challenging for the global economy, it’s still challenging for our country and for our citizens and for banks in Europe and all over the stuff. I would say that the underlying opportunity that’s generated out of that crisis is this kind of opportunity.
So, for companies with our kind of a business model who are well financed and have a global platform and have established a pretty critical part of the value chain, I would say that, that community of opportunity has expanded, not contracted. I would say that on the competitive landscape, I'm always a little reluctant to comment on that, but I would say that our perception is that this crisis has created some considerable challenges for them. Anybody who is going out to get finance knows the cost of change, they know the availability is tight, and they know the credit insurance market is changed. So, all those things have made cost to capital rise and who we are, but I would say that given our scale and the quality of our discipline financially, it gives us a distinct competitive advantage in that landscape. So, as we look forward, I would say overall the opportunity plate has expanded.
I would just like to add one thing George, just following on your previous question here up in Asia, in terms of the shedding of assets. We are certainly participating as we have demonstrated and we intend to continue that. And for those opportunities that we don’t participate and in or choose not to, that’s creating new players. So, we have seen more fragmentation in the marketplace. And that certainly sees their business model. So, we benefit from the change as Paul commented in more than one way.
Our next question comes from the line of Steve Ferazani.
Paul, obviously a very strong volume quarter on marine side, you still seem to express some caution. What signs do you need to see to say that you are going back into a growth phase in that segment, and I know quarter-to-quarter with the spot market there can be some volatility? What do you need to see to say, okay, we could start really growing volumes consistently again?
I mean Steve, as I try to indicate in the previous comments. It’s the nature of this business, I’ve been in the marine business since I was 28 years old and Mike Kasbar and I started a little business in New York and I think we survived every single shipping cycle there is. It is cyclical, it goes up, it comes down it is a function of the global market. And so, again I would say that one of the challenges of our particular business model is that people would love to give us some precision around and clarity around what would constitute ratable consistent growth in that state. The nature of the trade, the nature of the arbitrage, if I could get sort of divine clarity on what global trade would be, if I could get absolute insight into what China’s consumption patterns would be and what they are going to do with their economy and their currency, and what they are going to do with their steel and their infrastructure spend. And I could get an insight into what relief aid efforts were going to be and what was going to happen in the grain trade. It would be easier to give you that ratability. Unfortunately, it is kind of not.
So, on a more general statement I would say that shipping which carries 80% of world’s goods is pretty fundamental for the global economy. It is not going away, it is core. And I would say that one of things that we are quite proud of is we built a model over the last 15 to 20 years. It is unique, there is nobody in the space that does what we do and can add the value that we do at scale. So, in that sense I think what we try to represent to the investment community is that as the economy churns and as trade grows, we are in sort of uniquely positioned to benefit from that positive change and I think at this last quarter is prime example, we indicated over the last couple of quarters that we were taking a cautious due shipping with struggling as you know and if you qualify the transportation saw the losses that we are being recorded last year in ‘09 they have been dramatic, so we figured that the better part of our the prudent thing to do was to be cautious to service our core clientele over the blue chip on a global basis, that we would take some of our cautious step back and wait to see how things turn.
But we did tell people that as the economy began to recover we would benefit and I would say that’s exactly what happened in this quarter as rates began to improve and the trade patterns began to improve, we benefited, we saw a 12% increase in volumes and we saw 10% increase in gross profit as the economy continues to recover, we continue to stand the benefit.
So again beyond that it’s very difficult to give you any precision about how to predict that ratability.
Five quarters now with Henty, can you give the sense of the trends of the contributions from that acquisition?
I don’t know if we can get that ground, but let me tell you we have been very pleased with the Henty acquisition it’s complemented our marine segment quite well, we see the opportunities for growth there and generally it’s been a solid investment for us than where we think it come.
It’s a good company they are strategic, it allowed us to integrate our activities throughout the Baltic and the UK area. So again it was about a strategic move to build the platform and the region and as you know from our previous conversation that we are beginning to develop infrastructure on our land side there, so we think Henty is achieving all the things that we hope for both in terms of returns and also strategy.
On the land side, you mentioned you are trying to pursue blue chip customers, can you talk about what the sort of turnover that customer base is given the sort of the sense I have the first time with long-term contracts with your customer base.
Yes. We don’t have a lot of granularity on that and we don’t discuss that kind of level but I would say that the general disposition has been as we discussed before but as we developed this market and as we begin to curb out that part of the states that we thought was our state. We had to do an evaluation as to what our counterparties would be and where we thought our sweet spot would be in terms of servicing customers. And I think that, we’ve begun to sort that out in a way that we feel its pretty positive. And as we go forward I think that as Mike said now that we are beginning to get the scale that we wanted and we got a platform that allows us just as we get an aviation you mean Michael alluded to this. We are beginning to see some of the repeat of what we saw on our aviation market. When you go back to 10 years ago and you begin to scale aviation, we will delay from a higher risk part of customer, we begin to get scale of supply that allows us to buy more competitively, that allows us to sell through better cost of customer and over time we build a considerable change in that model and its been very successful. And ultimately we see some parallels as Michael alluded to earlier and that self supply model has some parallels in the land space as well. So in some ways we’re just a little bit further back on the curve than we had that on aviation but we are excited about where that can go looking forward.
One last one for me and I just came up and was discussed in the last quarter. But now you are guiding potentially on the low, have you been lower for the effective tax rate. Can you say is that purely for markets are now serving and strengthen certain markets? Is that clearly the issue?
Yes we look at our forecasting internally and where the revenue streams and profit streams are telling from and they are expected to be generally consistent with where we came out in the second quarter and therefore we don’t expect significant movement in the tax rate but concerning the marine and spot business and things are always changing that could always wind up being a bit different but based upon what we know today, we feel comfortable with that 16 to 20 range for that second half of the year.
Our next question comes from the line of Mickey Schleien.
The airlines generally have sort of generally reported very strong profits in the second quarter and I was curious what the trajectory was like in the second quarter in terms of demand from the airlines and how that's affecting, most specifically your outlook for that segment for demand and profitability in the second half.
Thank Mickey, thanks for calling. If you look at some of what’s going on in the market, you've seen some of the aircraft that have been in storage, and have been essentially laid up, that would be the shipping term laid up. As the economy has gone into its difficulties, a lot of the airlines were trying to cut back capacity and rationalize costs. There are basic trying to get aircraft out of the air and park them so that they didn’t have the operating cost.
Now what's happening is as the demand has picked up, you’re seeing those aircraft reactivated and the numbers are pretty significant. So off course that logically increases consumption. Now that doesn’t necessary translate into specific volume for us. As you know the way our aviation business works, is that its a series of tenders and the tender cycles are on going rotating basis, month in and a month out depending on what cycle the particular trade happens to be on.
But what we like about the business is I would say that the tender process reveals that our customers are buying at more locations which means their service offering is expanding and they are buying larger volumes at existing locations which means their capacity at those locations is expanding. So to the extent that we win on the tender, we are looking at a larger overall aggregated volume at certain locations than we did let's say a year ago.
So we think that’s positive. We think its part of what's contributing to the trend as well as some of the other issues that we discussed earlier. So we think it’s a positive development.
And on the land side I appreciate your remarks regarding new investments. I think you said in Brazil and I forget the other country, it effected your unit gross profit or gross profit per gallon. As those investments mature in those countries, do you expect the profitability of that business to sort of return at historical levels or we are at a new level going forward.
Well I think the thing you have to realize is that this is a business that is evolving and as Michael Kasbar you've got to appreciate the fact that there is investment in scale and you know instead of moving up and a little bit around the food chain, there is a certain contraction of margin as you are going after better class of customer and then the expansion of that margins as those value creation and we provide an important ingredient in the marketplaces etcetera earlier to the supply community in terms of a viable financial counter-party and service counter-party and to our demand plans out in terms of logistic, diversity of supply, risk management and a number of different components that we can bring to the equation that getting to that size requires a certain amount of investment and we're still working our way through that and evolving into a fairly sophisticated offering into the marketplace. So and that’s all I can say at this stage of the game but I am confident that we are less around the corner from having a much more robust sort of result.
And again, Mickey, this is Paul, what Michael is saying is important because if you think about the history of this company, there is an overarching and overwriting thematic investment seen here, which is that we are benefiting from the structural sort of changes that are going up and down the entire supply chain. We are being invited into this space as much as we are sort of pushing ourselves into this space. And I think that what we’ve proven in our aviation and marine models is that we’ve become a very significant player in that area and what we found is that land is just the next sort of generation of this, and it could go ultimately even beyond land, it could go beyond gasoline and diesel, it could go to other commodities as well.
But, right now I think that we are excited because again if you look at the macro picture, you look what's happened to the supply chain, all the macro factors are encouraging us to expand and invest in this space and which is right with opportunity. So, we'll get there, and we are pretty confident. We've done it before; we know what these milestones are. Unfortunately, the nature of these developments just don’t happen in the 90-day cycle that we all live with here, but we know from experience as entrepreneurs and then business builders that this has got legs and we are pretty excited about the opportunity we are building.
And our final question today is from the line of Edward Hemmelgarn.
Thanks. My questions have all been answered. But great job and look forward to more results.
And we have no additional questions at this time.
Right, we'll just do closing comments. Thank you very much for everyone joining us tonight and we are excited about the quarter and the opportunities for World Fuel and we look forward to talking to you at the end of Q3. Thanks very much.
Thank you again for all participants for your participation. We hope you find this webcast presentation informative. Have a great day everyone.
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