World Fuel Services Corporation Q4 2007 Earnings Call Transcript

| About: World Fuel (INT)

World Fuel Services Corp. (NYSE:INT)

Q4 2007 Earnings Call

February 28, 2008, 5:00 pm ET


Paul Stebbins – Chief Executive Officer and Chairman

Michael Kasbar – President and Chief Operating Officer

Ira Birns – Executive Vice President and Chief Financial Officer

Paul Nobel – Senior Vice President and Chief Accounting Officer

Francis Shea – Executive Vice President and Chief Risk and Administrative Officer


Jim Larkins - Wasatch

Edward Hemmelgarn - Shaker Investments

Al Kaschalk - Wedbush Morgan

Jonathan Chappell - JPMorgan

Alexander Brand – Stephens Inc.


At this time I would like to welcome everyone to the World Fuel Services fourth quarter 2007 earnings call. (Operator Instructions) I would now like to introduce Mr. Frank Shea, Executive Vice President and Chief Risk and Administrative Officer.

Francis Shea

Good evening, everyone. And welcome to the World Fuel Services fourth quarter conference call. I am Frank Shea, Executive Vice President and Chief Risk and Administrative Officer, and as evident, I am doing the introductions on this evening’s call.

Today’s call is also available via webcast. To access this webcast or future webcasts, please visit our website and click on the 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. Some of the comments to be made on this evening’s call may include forward-looking statements under the Private Securities Litigation Reform Act of 1995.

These statements involve risks and uncertainties that could cause actual results or facts to differ materially from such statements. Detailed information about these risks is contained in the company’s SEC filings, which are available on the company’s website or from the SEC.

We will begin with several minutes of prepared remarks which will then be followed by a question-and-answer period.

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

Paul H. Stebbins

Thank you, Frank. Good afternoon and thank you all for joining us. Today we announced earnings of $18.1 million or $0.63 per diluted share for the fourth quarter of fiscal 2007. These numbers include a $1.7 million after-tax impairment charge related to the write-down of capitalized software costs from a business we acquired in 1998.

Overall, we delivered solid earnings performance in Q4, and our return on equity, excluding the software write-down, was 16.8% [inaudible – break in audio] an extremely volatile operating environment. We continued to deliver robust underlying growth across all segments.

In our Aviation segment, we were pleased to announce the acquisition of AVCARD, which offers a private label charge card and sells aviation fuel and related services to the general aviation industry.

AVCARD’s robust offering has been an excellent strategic complement to our core business. They came with great management depth, and we have already begun to leverage their expertise within our existing organization.

This acquisition has generated considerable interest in the aviation market, and we have embarked on a number of successful joint sales initiatives with the AVCARD team. We could not be happier with the AVCARD acquisition and its positive impact on our business.

We are also pleased to report that the overall aviation industry continues to prosper. Boeing set a record for plane orders in 2007 with over 1,400 commercial jet orders and deliveries of over 440 aircraft. Airbus had over 1,200 orders and delivered over 400 planes. Our own core aviation business remains strong in the quarter, with gross profit up sharply on a sequential and year-over-year basis.

Furthermore, our self-supply model continued to drive value as we benefited from increasing prices throughout Q4. Looking forward, IATA expects airline industry profits in 2008 to be around $5.5 billion, down from their previous estimate of $7.8 billion. This decline is directly attributable to the rising cost of jet fuel which increased 20% in the quarter and is expected to increase some $150 billion in 2008 and represent 30% of airline operating costs.

This market backdrop only serves to highlight the strategic importance of fuel and presents continued opportunity to expand our services across a broad spectrum of customer groups, including business aviation, cargo, passenger, charter and military service.

Our Marine segment delivered great results in Q4, posting an increase in volume and record gross profit. Volume and operating income were also up quarter-to-quarter and year-over-year.

It is clear that our strategy of deeply analyzing supply markets and promoting intense customer focus have paid dividends. Our worldwide Marine leadership team has done a great job, and we are well-positioned for 2008.

Recent industry trends favor our Marine business model. During 2007, average bunker prices rose 20% and the customers of large container liners are beginning to accept that bunker charges need to be separated from freight rates. The idea of imposing a floating fuel surcharge is being adopted by some major players in the industry, which is a significant departure from the traditional fixed term surcharge.

One industry leader, Maersk Line has announced that it will introduce a bunker adjustment factor for its fleet. The move to bifurcate fuel and freight charges is a development which highlights the importance of fuel costs to large fleets and bodes well for our services, particularly in the area of price risk management.

On a more macro level, the Marine space has demonstrated resilience in the face of uncertain economic outlook. Tanker rates rocketed in December with BLCC rates hitting levels not seen since November of 2004. The increased demand forecast for 2008 is up for tankers across the spectrum of BLCCs, Suezmax and Aframax class vessels.

On the container side of the market, demand is forecast to remain relatively healthy with projections of 9.7% growth in 2008 and 9.8% growth in 2009. On the supply side, the container fleet grew 11.6% in 2007, and growth is projected at 13.4% in 2008 and 12.7% in 2009. This will create some supply/demand imbalances as capacity expansion is expected to outstrip demand growth by some 3.7% in 2008 and close to 3% in 2009.

In the dry bulk market, the year ended on a soft note with rates off from record highs seen in November. In the meantime, total fleet capacity is projected to grow at just over 10% in 2008.

Overall we feel good about the shipping market. The industry has enjoyed several very strong years and is well-positioned to weather potential downturns in the global economy. It is it worth noting that historically, we have tended to benefit in down markets as oil companies grow more conservative on credit and customers are pressured to cut costs.

In our Land segment, we were pleased to see volume growth and expect profitability to improve as our investment in people to populate the organization begins to stabilize and the new technology platform enables us to scale.

This call would not be complete without some mention of our much discussed systems implementation project. We were pleased to report that our ERP system went live early in the first quarter and it was a successful launch. The enormity of this undertaking cannot be overstated, and our success in delivering this system is an important milestone for the company.

We were grateful to our global team, whose effort and commitment were truly extraordinary. They can share in the pride of delivering a robust platform for scaling our global business. With this major project behind us, we look forward to having these dedicated members of the World Fuel team return full time to their normal duties and focus on the many opportunities we see in the market.

2007 was a challenging but transformational year for World Fuel. We saw an unprecedented level of earnings volatility associated with our successful self-supply model, which was driven primarily by significant price volatility.

We had a number of key people consumed with the challenge of putting in a global ERP platform, which distracted them from the core business. The meltdown in the financial markets contributed to a difficult operating environment and a $1.9 million impairment charge against a routine two week investment of A1/P1 commercial paper.

In spite of all this, we’ve delivered robust fundamental growth in volume, gross profit and completed a significant strategic acquisition. Notwithstanding the challenges of 2007, we believe the company’s fundamentals and global market position are stronger than ever and we look forward to 2008.

We would like to thank you, our shareholders, for your continued support and we will now turn the call over to Ira Birns for a discussion of the financials.

Ira M. Birns

Thank you, Paul and good evening everyone. Revenues for the fourth quarter was $4.1 billion, up 15% sequentially and up 58% compared to the fourth quarter of last year. Our Marine segment revenues were $2.3 billion up 17% sequentially and 63% year-over-year.

The Aviation segment generated revenues of $1.6 billion, up 12% sequentially and up 52% from last year’s fourth quarter. And finally, our Land segment grew to $181 million, up 18% sequentially and 60% from last year’s fourth quarter.

These increases in revenue were significantly impacted by the sharp increase in fuel prices over the course of 2007, with the most pronounced impact occurring during the fourth quarter.

Before I review our results by segment, I would like to point out that our Aviation results include AVCARD’s results of operations from December 1 through year-end. Our Aviation segment sold 601 million gallons of fuel during the fourth quarter of 2007, down 2% sequentially, but up 14% compared to the fourth quarter of last year.

Our Marine segment’s total business activity was 7.1 million metric tons, up 3% sequentially and year-over-year. Fuel reselling activities constituted 75% of total Marine business activity in the quarter, consistent with the third quarter.

Our Land segment continues to grow, selling 74 million gallons during the fourth quarter, up 6% sequentially and up over 24% compared to the fourth quarter of last year.

Gross profit for the fourth quarter was $73.8 million, an increase of $11.6 million or 19% sequentially and $16.1 million or 28% compared to the same quarter a year ago.

Our Aviation segment contributed a record $39.1 million in gross profit, an increase of $5.8 million or 18% sequentially, and $10.5 million or 37% over the fourth quarter of 2006.

Similar to the second quarter of 2007, the sharp rise in jet fuel prices during the quarter resulted in an imbalance between the average cost of our jet fuel inventory and a higher market price. This imbalance was the principal driver of the sequential increase in gross profit from the third quarter.

Our self-supply model’s jet fuel inventory position was approximately 33 million gallons at year end, down 7 million gallons when compared to the third quarter. The dollar value of our related jet fuel inventory decreased to approximately $86 million, from $88 million in the prior quarter.

While gallons of inventory dropped 17% sequentially, the dollar value of our jet fuel inventory only dropped 2% due to the impact of rising fuel prices. For the record, jet fuel market prices climbed nearly 20% during the quarter, from approximately $2.28 to $2.67 per gallon.

Our Marine segment also delivered solid results, generating record gross profit of $32.8 million, an increase of $5.9 million or 22% sequentially, and $5.4 million or 20% year-over-year, benefiting from significant price volatility during the fourth quarter.

Our Land segment delivered gross profit of $2 million, a decrease of 8% sequentially, but an increase of 10% from the fourth quarter of 2006. Operating expenses for the fourth quarter were $49.3 million, an increase of $9.3 million or 23% sequentially, and $10.4 million or 27% year-over-year. Of the sequential increase, $2.4 million was related to compensation and $7 million was due to an increase in general and administrative expenses.

With respect to compensation, the sequential increase included the impact of newly hired employees in the third and fourth quarters of 2007. As we have stated over the course of 2007, we have been consciously investing in our infrastructure by building our global team to support growth initiatives in all three segments of our businesses throughout the world.

We have added over 100 employees to our global team in 2007, excluding the impact of the recent AVCARD acquisition, and we believe the heavy lifting is now principally behind us. While we will always be seeking out talent to further strengthen the organization, we expect the pace of head count growth to slow over the course of 2008.

Our bad debt expense was $1.3 million, down $1 million from last year’s fourth quarter, but consistent with the third quarter. The sequential increase in general and administrative expenses includes the impact of the $2.4 million non-cash impairment charge relating to the write down of capitalized software development costs associated with an aviation flight planning company, which we acquired in 1998.

The increase also includes the impact of $1.1 million of depreciation related to software used in the data conversion process related to our ERP project, which was all booked in the fourth quarter, as well as one month of AVCARD operating expenses.

Unallocated corporate overhead was $8.1 million, an increase of approximately $600,000 from the corresponding quarter a year-ago and up approximately $1.6 million sequentially. Regarding our ERP project, which Paul mentioned earlier, we incurred an aggregate cost of $5.7 million during the fourth quarter, of which $2.9 million was capitalized and $2.8 million was expensed.

Both amounts are only slightly above the amounts estimated on our last earnings call. For the full year 2007, we capitalized $10.5 million of project costs and expensed $7.7 million. As we will incur some stabilization-related expenses in the first and second quarters of 2008, in addition to beginning to depreciate the capitalized project costs, our IP related cost will actually increase in the first and second quarters, before decreasing in the second half of the year.

Also, please note that costs related to employees who have been directly associated with the development of the project were capitalized in 2007, who will once again impact compensation expenses beginning in the first quarter.

I understand I just covered a lot of pluses and minuses. So I’m going to try to help you model our operating expenses going forward. I would assume overall operating expenses, including AVCARD, of approximately $46 million to $50 million in the first quarter and full year operating expenses of approximately $185 million to $200 million for the full year 2008.

Income from operations for the fourth quarter was $24.6 million, an increase of 21% sequentially and 43% from the fourth quarter of last year, excluding the impact of the $2.4 million impairment charge recorded in the fourth quarter.

Income from operations for our Aviation segment was $18.1 million, an increase of 13% sequentially and an increase of 40% when compared to last year’s fourth quarter, once again, after excluding the impact of the $2.4 million impairment charge.

Our Marine segment’s income from operations was $14.6 million for the quarter, an increase of 44% sequentially and 24% year-over-year. Our Land segment had slight loss from operations of under $100,000, consistent with the loss in the fourth quarter of last year but down from a $400,000 profit in the third quarter, due in part to higher compensation related to new key employees, who are driving global business growth strategies.

The company had other income net of $600,000 for the fourth quarter, compared to other income net of $2.3 million for the same quarter a year ago. This $1.7 million change was primarily due to a decrease in interest income due to lower average cash balances and lower interest rates on our investments when compared to the fourth quarter of last year.

Heading into 2008, we expect to incur net interest expense, principally related to capital employed to purchase AVCARD and to support increased working capital requirements driven by higher fuel prices. For modeling purposes, I would assume interest expense of approximately $1.5 million for the first quarter.

Sequentially, other income net increased by $2.8 million, primarily relating to the $1.9 million impairment charge recognized in the third quarter related to a commercial paper investment. Using methodology consistent with the third quarter, we estimated the market value of this investment at $8.1 million at the end of the fourth quarter, consistent with our valuation at the end of September.

Therefore, no further write-down was necessary in the fourth quarter. This information remains subject to change, and depending on the ultimate resolution in this matter, additional impairment charges may be required in the future in connection with this investment.

As discussed last quarter, we have no other similar investments and it is also worth noting that we also have no auction rate security investments, which are no longer permitted under our short-term investment policy.

The company’s effective tax rate for the fourth quarter was 27.4%, as compared to 17.5% for the fourth quarter of 2006. The higher effective tax rate resulted from additional provision related to FIN 48 as well as a shift in the mix of the results of operations derived from our subsidiaries in tax jurisdictions with higher tax rates, principally the United States.

For modeling purposes, you can use an estimated effective tax rate for the first quarter and the full year of 2008 of 23% to 27%. While we are on the topic of accounting pronouncements, as you may know, in September 2007, the Financial Accounting Standards Board issued FAS 157, which focuses on the fair value measurement of assets and liabilities.

We adopted FAS 157 in January, and as a result, recorded a cumulative adjustment of retained earnings of $2.8 million pre-tax, related to the deferred gains of derivative transactions. These transactions were entered into in 2007, but do not settle until 2008.

Accordingly, the related revenue in gross profit related to these transactions will not be recognized as income in 2008. Please be aware this accounting change can create some lumpiness in earnings going forward, as revenue and gross profit related to certain of our derivative transactions must now be recognized up front rather than over the life of a transaction.

The following statistics exclude the impact of the impairment charges booked in the third and fourth quarters.

Net income for the fourth quarter increased 22% sequentially and 15% year-over-year, and diluted earnings per share increased 22% sequentially and 15% over last year’s fourth quarter as well.

Return on equity was 16.8% for the fourth quarter, compared to 16.6% for the same quarter a year ago, and our return on assets for the fourth quarter was 4.8%, compared to 5.6% for the corresponding quarter last year.

At December 31, our cash, cash equivalents and short-term investments were $44 million, compared to approximately $143 million at September 30. Please be reminded that our quarter end cash position was impacted by the December acquisition of AVCARD, or approximately $55 million.

Despite the unusually sharp spike in oil prices in the fourth quarter, which rose from $81 at the end of the third quarter to $96 at year end, our net operating cash flow was only negative $51 million, and our liquidity position remains strong − a testament to the strength of our balance sheet, which remains a competitive advantage for us during this period of volatility and rising prices.

To further enhance our liquidity position, in December, we amended our existing credit agreement, more than doubling the size of the facility from $220 million to $475 million and extending the maturity date of this unsecured facility through December 2012.

This provides us with significant liquidity to support both organic growth initiatives and strategic investment opportunities. For the complete details regarding our amended and restated credit agreement, please refer to the Form 8-K that we filed on December 26, 2007.

DSO in the fourth quarter was 28 days, up one day from the third quarter, and our payable days outstanding were unchanged at 23 days. Inventory was $103 million, down $11 million from the third quarter, representing two days of sales, down one day from the third quarter.

Therefore, our overall cash conversion cycle remained unchanged quarter-over-quarter. Inventory days in our aviation self-supply model were five days, down two days from the third quarter.

In closing, Paul cited several challenges we faced in 2007. We are proud of several key accomplishments achieved during the year, which will pay dividends for years to come. We have significantly strengthened our team by filling several key positions within the company. We upgraded our systems capabilities, working very hard all year to prepare for the successful rollout of our new ERP platform at the start of 2008.

We acquired AVCARD, adding to our suite of service capabilities in our Aviation segment, and we finished the year with strong results in the fourth quarter. I would like to thank and congratulate my fellow employees for their contributions toward these accomplishments over the past year.

And on that note, I will turn the call back over to Paul Stebbins.

Paul H. Stebbins

Thank you, Ira. Marcelo, if you’d be kind enough, we’d like to open it up for Q&A. Thanks.

Question-and-Answer Session


(Operator Instructions) Our first question is from the line of Alexander Brand – Stephens Inc.

Alexander Brand

Good evening. Congratulations on a nice quarter.

Paul Stebbins

Thanks, Alex.

Alexander Brand – Stephens Inc.

Paul, I’d first like to just get your comments on the environment. It sounds like you had some working capital that was drained but I assume that’s just rising fuel; looks like your terms were stable. Are you getting any kind of push to pay sooner; is it affecting credit terms? And if not for you, what are you seeing with other suppliers in the market?

Paul Stebbins

Certainly a good question. I would say that, no, we haven’t seen so much of that on our front, but again, we enjoy the benefit of a huge competitive differentiator, which is our balance sheet and our liquidity. I think if anything I would say that from a supply perspective we represent sort of Safe Haven and Safe Harbor.

That balance sheet’s very important to our suppliers. They look at it and it becomes the competitive differentiator for us and it gives us some significant competitive advantage. Certainly, for smaller, privately held companies that are less well capitalized, this is not an easy market to be doing business in. There’s lot of volatility, prices have been high. And we’ve seen some evidence that it’s certainly put some pressure on some of the competitive landscape.

So from our point of view, I think that we’ve said all along that we knew that prices could remain high, and if nothing else, they would be certainly up and down. And we wanted to keep our powder dry and able to play in the space, and I think we’ve done that very well.

As Ira said, the uses of cash sequentially were the acquisition of AVCARD, so it’s nice to be able to pony up the cash and buy an acquisition and not have to worry about our balance sheet or our ability to protect our core, and we also put $51 million into the business, and that was an over 20% jump in prices.

From that perspective, prices could jump again and we would be in a position to play. Now that’s not something that everybody else in the market can say. So I think we’re in a good position, and we’re going to stay focused on that mission.

Alexander Brand – Stephens Inc.

Now you mentioned how it might be affecting the smaller players. Are you seeing any bankruptcies yet?

Paul Stebbins

No. But I don’t think that’s typically what would happen first out of the box, Alex. What you’re going to see with some of the smaller resellers and stuff in the space, it just means that their credit lines get squeezed.

The oil companies are more sensitive to this. We certainly have had conversation with large global oil companies whose financial departments are concerned more than they have been in the past about some of the more fragmented smaller intermediaries that they historically had relationships with. And they are looking to rationalize their relationships and consolidate them with larger players.

Certainly, we feature very prominently in their calculus as it relates to what kind of counter-parties they want to do business with. So again we enjoy very good dialogue with these people at the top of their financial organizations. But it hasn’t manifested itself so much in bankruptcies as it is that we know some of these smaller players are being squeezed. And it’s difficult for them to do the volumes. So we think it benefits us.

Alexander Brand – Stephens Inc.

Does it manifest itself, though, in smaller players being more willing to sell at reasonable prices? Is it good for your acquisition opportunities?

Paul Stebbins

There’s no question. I think that when you look at what’s happened in this last year, the complete disappearance of the private equity machine and lot more sensitivity on the availability of credit. And kudos to Ira, who understood that by changing that bank facility it opened up a world of opportunities for us in terms of being able to view the landscape in a way that others just don’t have access to the resources to do.

So yes, we think it presents opportunities. And again, we’ve kept our powder dry. We think it’s a competitive differentiator. And as Ira points to the 8-K, we’ve got a lot of flexibility under our bank covenants, and we’ve got a very supportive group of banks. So we have a lot of latitude in terms what we can do in this market.

Alexander Brand – Stephens Inc.

Okay. And I’ll list a housekeeping and then let someone else have it. The software write-off in the quarter, can you just confirm what that was? Is that all that needs to be written off?

Paul Stebbins

Yes. That’s the end of it. This has to do with an acquisition that goes back to 1998, when we did the aviation acquisition of Baysoft, which was a service group, along with that came some flight planning software.

And every year, as you know, we spend a lot of energy going through a major systems review this year and at the end of the year it’s a just a routine review of impairment charges. But we don’t have anything else like this in the system. This was unique and had a very specialized application and we continue to use it. But it was the right thing to do relative to the overview that we did (inaudible).

Alexander Brand – Stephens Inc.

Okay. Good color. Thanks a lot.


Our next question is from the line of Jonathan Chappell - JPMorgan.

Jonathan Chappell - JPMorgan

Paul, I found on your comments about Maersk and some of the container lines using these floating fuel surcharges pretty interesting, and it’s just because I’m a shipping guy. But, you mentioned it would help your price risk management business. But could you give little bit more detail as to how this may benefit World Fuel, from first of all your core fuel basis, but also some of the other value added products that you offer to your customers.

Paul Stebbins

Sure. I think these large global fleets have realized that they’re under enormous pressure because the shipping companies themselves have had a very hard time managing this volatility. This has become a really big nut and represents a huge part of their operating costs. And it’s moving all over the place, so it’s hard to quote these freight rates with any reliability.

So there’s been a move to say, look, this is just getting so big that we’ve got to break it out. And unless the big guys were willing to begin to do this, it becomes difficult for everybody; no one’s going to follow suit. But it’s just become too important an item. And I would say that there are a couple of things that interest us.

Number one, it highlights the fact that this has basically garnered attention at the highest levels of these companies in a way that I would say is unprecedented. They realize how important fuel is. So there is a sense of, we have got to pay attention to this.

The “not invented here” resistance to getting outside help has certainly changed and it opens up opportunities, given our very large global platform, our very diversified base, our large ability to aggregate volume and our expertise in using derivative instruments to help manage the forward curve. All of this becomes, again, a place for these companies to turn as they look to manage these things.

Remember, fuel historically is not their core competence. Their focus is on the movement of goods. So to the extent that this represents a considerable challenge for them to manage internally, we’ve got the expertise and we represent a clean one-stop shop for them to achieve some visibility on a very difficult part of their costing.

So we’re watching the trends with interest. We are seeing that our access to very high levels in these companies continues to expand. I think we are viewed with considerable differentiation by these large global fleets as being able to add value at scale.

It’s not only on the financial side but it’s also on being able to manage visibility in these complex markets but it’s also the value add of being able to add very sophisticated and very acute solutions on the operations side, because at these very high rates, time is money. So these ships are very exposed to not only just the price of the fuel, but all the operational support. Again, on all of these fronts we think these changes are good for us.

Jonathan Chappell - JPMorgan

It sounds like a lot of people are starting to look at the Middle East and the Far East from a supply basis. I would think because a lot of new refineries are pegged to be ramping up in those areas over the next couple years. We saw that Vitol is entering that market and Chemoil plans some expansions there.

How does this impact you from a competitive standpoint? Is it more competition as others take more product in that area? Or is it more opportunity for you, as you could partner with these companies to help take the supply and actually get it to the right people?

Paul Stebbins

I would say it’s the latter, Jonathan. Again, we represent a very important platform for these companies. If you look at a company like a Vitol historically that’s operated in really the trading market, the retail distribution and managing retail credit and being able to manage retail relationships and all the complexity of fuel quality control, follow-up operations – this is not their core competence.

So I think they view us as very important parts of the supply chain because they can rationalize huge amounts of offtake in a very, very clean way through us.

I think these kinds of trading groups have made it clear that their core competence is moving on the bulk side. It’s difficult for them to retail to scale. So again with our balance sheet and our global platform and our distribution network and our multiple offices and our deep customer domain expertise, this represents a very natural complement to them.

Again, these guys are primarily cargo traders, but it allows them to distribute opportunistically into the retail side in a very, very easy way. So again, I think all this change is good for us, as we’ve talked, at a macro level.

As the major international companies have moved upstream and have focused on return on capital it’s opened up all sorts of creative opportunities further down in the supply chain. And again this is good for us. I think all this change simply validates our model and continues to create opportunities for us to expand our value proposition.

Jonathan Chappell - JPMorgan

Good. One last one for you just on the acquisition front. Obviously AVCARD seems to be pretty successful, and also if I could just ask Ira briefly before I get to the main part of this question, if there is any way to quantify the impact of AVCARD on the Aviation gross profit in 4Q?

Ira Birns

It had a pretty minor impact because we only had one month of activity in the quarter. So it didn’t have material impact on the overall results. I could try to give you that number after the call.

Jonathan Chappell - JPMorgan

Okay, great. And then the main point of the question though is, as you look at other acquisition opportunities, do you see more core business whether it’s people, whether it’s new regions, geographies, whatever? Or are you also looking at maybe secondary or tertiary parts of the business that may be value add; that may provide maybe a not so apparent complementary part to your core business?

Michael Kasbar

I think, Jonathan, in terms of the acquisition opportunities, there is certainly a broad range of opportunities to us. And we evaluate these more broadly every day, so adjacencies and extensions, as long as they are a good solid strategic fit, we’d certainly consider. Obviously our core acquisition, similar to the AVCARD acquisition we did recently, are certainly our sweet spots and they’re a no-brainer as long as it’s the right people and the right price.

Jonathan Chappell - JPMorgan


Ira Birns

A quick follow-up. The AVCARD impact on our GP in the fourth quarter was about $1 million.

Jonathan Chappell - JPMorgan

Thanks, Ira, and thanks Paul and Michael.


Our next question is from the line of Al Kaschalk - Wedbush Morgan.

Al Kaschalk - Wedbush Morgan

Just a follow-up a little bit on the Marine and pardon if this is an elementary question, but revenues and dollars were up substantially, so we view that more just on the pricing aspect or were there new customer wins in the quarter? Because it certainly performed a little bit better in the top line relative to where I was expecting.

Michael Kasbar

You’ve had some volume growth which we’re happy about so quarter-over-quarter we were up about 2.5% both sequentially and year-over-year on a quarterly basis. On a year-over-year basis, we were almost 9% increase in volume. Certainly, prices increased significantly so a big chunk of that is coming from price. But I think the more important thing that we’re pretty happy about is that we managed to gain market share.

Al Kaschalk - Wedbush Morgan

Is the share up in tier one level?

Michael Kasbar

Yes. It’s tier one. We didn’t go bottom fishing.

Al Kaschalk - Wedbush Morgan

Okay. I want to focus on the balance sheet in particular. The inventory level I caught from Ira in regards to Aviation, it looks like inventories are up a little bit. I know they’re down sequentially, but a little bit higher than I had thought we would be at. Could you comment on what comprises the balance of the inventory other than the aviation self-supply?

Paul Stebbins

The largest other chunk is there is some inventory on the Marine side. Aside from that, the rest of the numbers would be relatively small. So, most of the change related to the change in Aviation.

You thought that number would come down more, but as I mentioned as an example on self-supply, even though we were down from 40 million gallons to 33 million gallons, because of price, the dollar value of that inventory was basically the same.

So, clearly the price impact had a material impact on the changes that you are looking at in inventory dollars.

Al Kaschalk - Wedbush Morgan

Okay. The sales were up 15% sequentially if I did my math right, but AR was up 26%. Is that more a timing issue end of the quarter or what’s going on there? It seems relative to the number that you calculate it out on the quick math, it seems a little bit higher than percentage-wise. I know the DSO details you gave us.

Ira Birns

At the end of the day you have the impact of rising prices and DSO was up one day and that translated to the AR position that we went up with at the end of the period. That’s probably the explanation.

Al Kaschalk - Wedbush Morgan

I’ll follow up after. Finally, on the receivables, derivatives were up about 50%. Is that a little bit more aggressive bad timing, what’s happening there?

Paul Stebbins

Al, can you clarify that? I don’t know what you mean by derivatives were up 50%.

Al Kaschalk - Wedbush Morgan

If you look at the balance sheet, according to what was released, the receivables related to derivative contracts were $86.5 million at the end of December. They were $37 million last year, and they were $47 million and change or so at the end of Q3. So as we we’re trying to get down to a little bit more analytics on the numbers, I’m wondering how much of that translates in the operating profit, but I thought I would start there as an initial question.

Ira Birns

You see Al, we’ve got it on both sides of the balance sheet, in receivables and liabilities side. I think the increase is principally related to volume and price. Once again, price is up significantly in the quarter. So on mark-to-market basis it impacted both the asset side and liability side of that equation.

Al Kaschalk - Wedbush Morgan

Okay. Very good. Thank you.


(Operator Instructions) Our next question is from the line of Jim Larkins - Wasatch.

Jim Larkins - Wasatch

Good afternoon. A couple of detailed questions, I missed a few of the second numbers. I wondered if you could repeat those for me. Did you give the operating income for the three segments or did I miss that on the press release? I didn’t catch it.

Ira Birns

Aviation was at $18.1 million; Marine was $14.6 million and Land had an operating loss of just under $100,000.

Jim Larkins - Wasatch

Okay, great. And could you give the gallons on Aviation again?

Michael Kasbar

33 million gallons in jet fuel inventory at the end of the period.

Jim Larkins - Wasatch

I am sorry the gallons sold.

Michael Kasbar

I am sorry, total volume? That was 601 million gallons.

Jim Larkins - Wasatch

And as I look at the gross profit numbers this quarter on Marine, can you give a little bit of color on what drove those margins up? Was there more contractual versus spot business this quarter?

Michael Kasbar

On the Marine side good amount of reselling activity; inventory we had some robust opportunities there and good amount of volatility in the beginning of the quarter.

Jim Larkins - Wasatch

I know you’ve talked a little bit about customers being hesitant with bunkers at record prices of engaging in forward transactions. Did that change at all during the quarter?

Michael Kasbar

In fact, one of the things that we were pleased about and that in spite of the fact that the derivative activity did not go up significantly for exactly the same reasons. If you look at what was going on within Q4 we saw the same reluctance in a fast spiking market. But I would say that the underlying ability to just garner margin out of a highly volatile market paid dividends in the quarter.

But again, we saw the same reluctance. Of course this is the funny thing when we’re out there talking to customers, we’re always arguing that managing the forward curve is discipline. It’s like getting in shape. You don’t just do it once and forget it.

And of course, there’s always still a reluctance, that people feel like they’re chasing the market up and yet it goes again and there they are, trying to figure out when’s a good time. So, we’re making better inroads, we’re beginning to get people to realize that it is part of just good procurement strategy to have dialing in derivative coverage as part of your program.

It doesn’t matter so much whether it’s high or low, you should just be doing it as a matter of discipline. So, it’s getting better, but I would say again, we saw fairly dormant activity on that front because of the fast rising prices. But we did very well on the underlying, just absolute margin on the barrels.

Jim Larkins - Wasatch

And so when you talk about inventory opportunities there, these are still covered transactions. You saw a certain supply opportunity, you matched it up with a demand opportunity and that’s not a speculative-type position, is that correct?

Michael Kasbar

That is correct.

Jim Larkins - Wasatch

Okay. One other detailed question I missed was the unallocated corporate overhead for the quarter ?

Ira Birns

It was $8.1 million I believe in the quarter.

Jim Larkins - Wasatch

And then, on the systems side, you mentioned this quarter maybe a little bit of implementation costs or setup – I don’t know how you’d describe that, but still a little bit more cost this quarter. Can you talk about, aside from freeing up your people from having to work on the implementation, what are the benefits that we might see going forward from those systems?

Michael Kasbar

I think one of the main things, Jim, is work that would take us weeks and months to produce in terms of enhancements and changes, those changes are now taking us hours. So we have one global system around the world; one software, one source of data coming out of our systems.

A lot of our financial analysts who’ve been working very hard over the years to just extract information and be able to interpret it, we’re going to have that at our fingertips. So, it’s going to be tremendous power. We’ve got a significant volume of activity in our two main business segments.

So allowing our sales guys and our customer-facing guys to be able to get to the answer quicker is going to be a huge pickup. And our Land business, that business relies very much on automation. We haven’t had the systems to be able to execute that business activity.

So there’s going to be big front office pickups and big back office pickups. So we’re very excited. You can’t be successful on these types of projects unless you have a first class team. We’re very happy with the group that we brought in not so long ago, and that’s certainly going to help us. And for the type of business we are, that is a significant asset for us.

Jim Larkins - Wasatch

Great. I had one other question, but I’ll go ahead and get back in line.


Our next question is from the line of Edward Hemmelgarn - Shaker Investments.

Edward Hemmelgarn - Shaker Investments

It’s regarding your outlook and how you’ve increased your operating expenses quite a little bit. At the low end would be about the same as you increased it last year but at the high end it would be about 26%. Can you talk about how we would expect to see the improvements in gross profit? Should we see it in terms of you doing a lot more volume? Or should we see it in terms of margin expansion?

Paul Stebbins

Thanks, Edward, I appreciate the call. I think it probably merits a little bit of background. As you know, and I’m not sure how long you’ve followed us, but 2007 was a very important transitional year for us.

We were pretty open with the investing community about the fact that we felt that to really transition to the next level of business expansion, we needed to make significant investments in people processing systems. That we had grown like a weed. We were a classic entrepreneurial company that accelerated very rapidly, but we were commercially out over our skis in terms of being able to support the whole structure and begin to maintain our efficiency at scale.

So we were both investing as a maturing organization both the need to put in a global platform on systems. We also had to invest in people and we also had to invest in better business processes.

So I think all of those things were going on and that’s why you saw the increase in expenses. We feel very confident that that investment is going to give us a very good return. How it actually directly translates into specific gross profits, I would say that you saw very robust gross profit growth throughout this year.

Granted, it was eaten up quite a bit by the investment and we’re not happy about that. But we knew that the investment had to be made. But we certainly have confidence that platform is going to add efficiency, that we’ll be able to increase volume and we’ll also be able to improve margin through that efficiency.

So, we’re quite confident that the investments will pay off, and that’s part of being good stewards of the franchise over the long term. You got to make those investments or you can’t expect to scale the platform.

Edward Hemmelgarn - Shaker Investments



And you have a follow-up question from the line of Jim Larkins - Wasatch.

Jim Larkins - Wasatch

I wonder if you can talk little bit more about AVCARD and what they’re going to bring to your customers? Should we view this as a credit product? Should we view it as a consolidated billing service or a platform for additional services? Can you go into more detail as to what it’s going to offer that you did not previously have on the Aviation side?

Michael Kasbar

AVCARD is a number of different things. First of all, we get a great organization that’s been run by a superb management team. By and large that’s our major consideration whenever we look at a company.

But you’ve got, in addition to the basic business activity of selling fuel in very similar manner to the way we sell fuel to the business aviation or corporate aviation market, you’ve got three value adds. One is to the FBO in terms of processing the transaction to business aviation right there on the fueling side of that FBO.

Second is convenience to that pilot to be able to swipe that card and present that card at any of a thousand locations around the United States and internationally. And then third, management reports in control for those corporations that are running a fleet of aircraft. So that convenience of having that web interface.

So, those are the three pickups in terms of convenience and the value add. And it was a lot more intelligent for us to go ahead and invite them to be part of our organization, as opposed to spending the time and money to specialize in that particular area.

Now by virtue of our ERP, we’ve got greater capabilities, so we’re pretty happy about the union. In addition, we get some operations in the U.K. that are showing us that they have some management depth.

Jim Larkins - Wasatch

So with this acquisition, can we think of it in terms of you’ve picked up additional FBOs that are now willing to pick up World Fuel as a fuel provider?

Michael Kasbar

Yes. Certainly, they have broad relationships. They’re in different areas. They’re doing government business. You’ve got a company that the unique thing that they’re bringing that is unique is their processing and their charge card processing system.

They have different relationships and certainly we picked that up both on suppliers, vendors and customers. And now we jointly, as I think Paul commented in his introductory remarks, have got joint initiatives to go after some of those larger business aviation clients and put that package together to be a more robust offering.

Paul Stebbins

We’re delighted to have their processing capability and they’re delighted to have our very strong access to fuel.

Jim Larkins - Wasatch

Right. Can I pretty much go to any FBO with this card as a pilot right now or will there still be select FBOs that will accept this card?

Paul Stebbins

In the United States, it’s pretty broadly accepted. I may not want to say any FBO, but thousands of FBOs in the U.S.

Jim Larkins - Wasatch

The 80/20 rule would apply…

Paul Stebbins

Yes, that’s right. There you go.

Jim Larkins - Wasatch

All right, thanks for the color.


(Operator Instructions).

Paul Stebbins

Marcelo, sounds like we have no other questions.


Yes, sir. There are no further questions. Do you have closing comments?

Paul Stebbins

Just thank you all for joining us today and we will look forward to talking to you at the end of Q1. Take care.

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