World Fuel Services Corp. Q2 2008 Earnings Call Transcript

Aug. 7.08 | About: World Fuel (INT)

World Fuel Services Corp.(NYSE:INT)

Q2 2008 Earnings Call

August 7, 2008 5:00 pm ET

Executives

Paul Stebbins - Chairman and CEO

Michael Kasbar - President and COO

Ira Birns - EVP and CFO

Frank Shea - EVP and CRAO

Paul Nobel - SVP and CAO

Analysts

Jonathan Chappell - JPMorgan

George Pickral - Stephens Inc.

Steve Ferazani - Sidoti & Company

Jim Larkins - Wasatch

Kelvin Wilder - Metabin Capital

Edward Hemmelgarn - Shaker Investment

Lou Allen Bank - Pickers’ Spot

Operator

At this time I would like to welcome everyone to the World Fuel Services second quarter earnings call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instructions) Thank you.

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

Frank Shea

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

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

With me 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 at our website. Before we get started, I would like to review World Fuel's Safe Harbor statement.

Some of the comments to be made on this evening's call may include forward-looking statements under the Private Securities Reform Act of 1995. These statements involve risks and uncertainties that could cause actual results or facts to differ materially from such statements. Detailed information about these risks is contained in the company's SEC filings, which are available on the Company's website or from the SEC. We will begin with several minutes of prepared remarks, which will then be followed by a question-and-answer period.

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

Paul Stebbins

Thank you, Frank. Good afternoon and thank you for joining us. Today we announced record earnings of $20.5 million or $0.71 per diluted share for the second quarter of fiscal 2008.

In the quarter we improved our net trade cycle. Equity remains strong, and our return on equity was 16%. In the quarter marked by sharply increasing oil prices and continuing turmoil in the global financial markets, we demonstrated our ability in a difficult operating environment to manage risks, grow margins, invest working capital wisely, and maintain a strong balance sheet.

We also successfully completed our Texor acquisition, a best-in-class business in the branded gasoline space, which diversified our land business model while expanding our strategic reach.

Given the extensive discussion in the press about the overall state of the aviation industry in Q2, our jet fuel business has, understandably, been the focus of considerable interest on the part of shareholders and suppliers. We are pleased to report that our aviation segment delivered a great result this quarter, in spite of, and to some extent because of, a very difficult operating environment.

Our commercial and business aviation divisions, as well as AVCARD delivered strong performance across the board, while reducing our exposure to risk. While this may seem surprising or counter intuitive to some, considering the market conditions, we see that further validation of our business model, which emphasizes aggressive risk management, a disciplined approach to optimizing margins, and a vigorous focus on return on working capital.

To be clear it is certainly true that the aviation industry as a whole was challenged by the relentless pressure of high oil prices and a weakening global economy. This created stress fractures in the business model of many airlines, and in some cases lead to default. While we were not and are not immune to the risk associated with these trends, it is important to know that managing credit risk has been at the core of our business model for many years.

Further more, we have always told our shareholders that in extraordinary times we would look to dial back exposure and shed business as required. In this quarter we did just that. To achieve better returns on working capital, we reduced our shelf supply volumes and shed low margins business.

To mitigate risk we took a more conservative approach to risk rating, which is reflected in our increased provision. And in response to the high price market conditions, we adjusted margins.

Our ability to respond quickly and decisively on all these fronts created a strong result and demonstrated once again to our supply partner why we represent a highly reliable financial counterparty. As suppliers look to de-risk their portfolios and protect their position in the market, our ability to aggregate demand on a global scale is a significant value add-on. The strength of our performance in the current operating environment serves to highlight that value and the importance of our role in the supply chain.

In our marine segment we had an all-time record quarter. Our global network, strong balance sheet and ability to aggregate demand continues to be important competitor differentiators for World Fuel in Q2. Our unique market position enabled us to continue to provide our customers a high value offering, while may of our competitors found themselves challenged by restrictive credit line and limited working capital and a fast moving high price market.

Continued strength in the shipping industry driven by robust demand in the commodities market contributed to volume growth in the quarter. The fact that the majority of our marine business is transacted in the spot market helped us identify market inefficiencies and improved margins, while maintaining competitive pricing to our customers.

With the fast run-up in prices, our global sale group and supply teams were focused on the importance of managing working capital, and their discipline and execution drove improved DSO and produced a very good overall return.

In our Land segment, the rapid increases in price and deterioration of the economy had a negative impact on certain parts of our existing land business, particularly in the domestic US market. We responded by embarking on a wholesale effort to reshape the business. In the process we aggressively rationalized our portfolio, we improved DSO by 9 days, and raised margins across the board.

We also acquired the Texor business in the branded gasoline market. One month of Texor numbers are included in this quarter, and the results demonstrate the ability of the Texor business for generating cash, achieve good margin, and manage risk. We believe the Texor acquisition will help fortify our position in the wholesale market by opening up a number of opportunities to invest further in the branded gasoline market. If there was ever a quarters in which our company's business model, financial fortitude and management agility were tested, it was the second quarter of 2008.

As crude oil rocked it to a 147 per barrel and the financial markets imploded, we responded by shedding risk, tightening our cash management and increasing margins. We delivered strong results in our core business and expanded the franchise with another strategic acquisition.

As we look forward we remain focused in risk, cash and return. We will also continue to help our customers to navigate a volatile market, while providing our supply partners a reliable counter party, and efficient platform, for global distribution. These extraordinary market conditions have proved challenging. But they have also helped to differentiate our offering, secure our strong position in the market, and open up a number of strategic opportunities going forward.

We commend our global team on this setback performance and thank them for the determination, dedication and passion.

Thank you for your support and I will now turn the call over to Ira for a detailed review of the financials.

Ira Birns, Chief Financial Officer, Executive Vice President

Thank you Paul and good afternoon everybody. Revenue for the second quarter was $5.7 billion, up 26% sequentially and up 73% compared to the second quarter of last year. Our marine segment revenues were $3 billion, up 25% sequentially and 66% year-over-year.

The Aviation segment generated revenues at $2.3 billion up 20% sequentially and 74% fro last year's second quarter. And finally the land segment grew to $366 million up 91% sequentially and a 137% from last year's second quarter, including the impact of the Texor acquisition in June. These increases in revenue was significantly impacted by the sharp increases in fuel prices which was the highest in the second quarter of 2008.

Before I review our results by segment I would like to point out that our second quarter results also include Texor results of operations for the month of June and a full quarter of AVCARD which also was not included in prior year’s results.

Our aviation segment sold 593 million gallons of fuel during the second quarter, down 5% sequentially put up 3% compared to the second quarter of last year. The sequential reduction in volume was principally due to our continuing efforts to reduce exposure to low-margin higher-risk accounts. We expect volume to drop further in the third quarter and such efforts continue, which includes the termination of a single account relationship as of July 1, representing approximately 30 million gallons of quarterly volume.

Our marine segment's total business activity was 7.4 million metric tons, up 7% sequentially and up 9% year-over-year. Fuel reselling activities constituted approximately 81% of total marine business activity in the quarter, 5% higher than the first quarter of 2008.

Our land segment sold 103 million gallons during the second quarter up 48% sequentially and up 55% compared to the same quarter a year ago. Once again these amounts include Texor volumes for the month of June.

Gross profit for the second quarter was $94.3 million, an increase of $20.5 million or 28% sequentially, and up $36.3 million or 63% compared to the same quarter last year.

Our aviation segment contributed $45.2 million in gross profit, an increase of 29% sequentially and 47% over the second quarter of 2007. Excluding the impact of AVCARD's results, year-over-year gross profit was still up over 33%.

Our self-supply model's jet fuel inventory position was approximately 28 million gallons at the end of the quarter, down 3 million gallons when compared to the first quarter. The dollar value of our related jet fuel inventory increased to approximately $102 million, from $90 million in the prior quarter. While gallons of inventory dropped 10% sequentially, the dollar value of our jet fuel inventory increased 14%, due to the impact of rising fuel prices.

Jet fuel market prices climbed over 30% during the quarter, from $3.06 to $3.80 per gallon. Therefore the sequential increase in Aviation gross profit includes the benefit related to inventory average costing, driven by the 30% increase in jet fuel prices during quarter. Please keep in mind that this is a two-way street, as we have and experienced both positive and negative benefits to gross profit, when prices move sharply in either direction, during a given quarter.

While we do expect our aviation gross profit per gallon sold to rise due to the continued rationalization of low margin business, it will be difficult to match the result achieved this quarter.

Our Marine segment again delivered phenomenal results, generating record gross profit of $44.4 million, an increase of $7.5 million or 20% sequentially and $19.1 million or 76% year-over-year, benefiting from significant price volatility during the second quarter.

As Paul has already mentioned, our strong global network and balance sheet, and our continued ability to aggregate demand, were all key contributors to our successes in the Marine segment over the past two consecutive record quarters.

Our Land segment delivered gross profit of $4.7 million, an increase of 162% or $2.9 million sequentially and a 132% or $2.7 million from the second quarter of 2007, principally driven by the impact of the Texor acquisition in June.

Operating expenses for the second quarter, excluding our provision for bad debt, were $56.4 million, an increase of $6.8 million sequentially and $20.1 million year-over-year. This amount exceeded the range, which I provided on last quarter's call.

The principal drivers of such increase, relate to increases in incentive compensation expense, due primarily to record quarterly results, as well as Texor operating expenses, which were forecast in my prior quarter estimate. While total compensation increased, it actually decreased as a percentage of gross profit, as compared to the first quarter.

Our bad debt expense was $8.1 million, up $6.2 million sequentially and $8.5 million year-over-year. The sharp rise in fuel prices during the quarter resulted in a significant increase, in the size of our receivables portfolio.

At the same time record fuel prices clearly place a strain on certain segments of the market we serve, causing us to reevaluate the internal risk ratings of certain customers, principally with our commercial and Aviation segment. The combination of adjustment of certain customers risk ratings and the increase in the total dollar value of our receivables portfolio lead to a significant increase in our bad debt reserves.

Such increase consist a certain specifically reserved receivables, as well as an increase in our general reserves. Our total reserve as a percentage of total receivables was 1.2% at June 30th, as compared to 0.9% at the end of the first quarter. We are comfortable that our current reserves is adequate.

While our reserve has increased, please be reminded that the overall quality of our $1.8 billion receivables portfolio remains strong. Furthermore, despite numerous well publicized commercial airline bankruptcies this year, we had little or no exposure to most of these airlines and where we had that exposure, we often find ourselves in a strong position, to recoup all or most of such receivables through various forms of security and [successes] in the bankruptcy process.

As an example, we had a receivable over $1 million from a customer who filed for bankruptcy in the fall of 2007, which we have recently fully recovered through our bankruptcy claim. It is also worthwhile to note that approximately 67% of our overall receivables portfolio relates to our Marine segment and only 27% of our overall portfolio related to our Aviation segment, which once again includes sales to business aviation, charter, cargo, and government customers, in addition to the commercial passenger space.

Regardless of past successes we cannot and will not avoid every potential credit loss in a period during which we have witnessed record fuel prices and volatility. However, managing such risk remains our core competency, and based upon what we know today, we once again believe our current reserve is sufficient to cover any risks which may exist in our receivables portfolio.

Based upon what we know today, we are not expecting to have the need to report bad debt expense at anywhere near the level we did this quarter, over the next couple of quarters, assuming no further significant deterioration in the markets we serve.

On unallocated corporate overhead was $11 million, an increase of approximately $4 million sequentially. The principle driver of such increase relates to increased incentive accruals related to record quarterly results.

Once again, I will try to help you model operating expenses as we have been doing for the past few quarters. I would assume overall operating expenses excluding bad debt expense of approximately $54 million to $58 million in the third quarter. This estimate now includes Texor's operating expenses for a full quarter, which are running between $4 million and $5 million on a quarterly basis.

Please note that there is a certain level of variability in our cost structure, principally incentive compensation related, which is tied to the amount of gross profit we generate in a given quarter. Therefore, such estimate is clearly subject to the impact of such variability quarter-to-quarter, as you have seen in the second quarter.

Income from operations for the second quarter was $29.8 million, an increase of 34% sequentially, and 35% from the second quarter of last year. Income from operations for our Aviation segment was $17.8 million, an increase of 44% sequentially and an increase of 6%, when compared to last years second quarter.

Our Marine segment's income from operations was $23.7 million for the second quarter, an increase of 34% sequentially and a 112% year-over-year. Our Land segment had a loss from operations of $600,000, primarily due to an increase in their bad debt provision. The loss in our Land segment was partially offset by income generated from Texor's profits for the month of June. Texor performed as expected in the month of June, and we are very happy to now have them as part of the World Fuel family.

The company had other expense net of $2.7 million for the second quarter, compared to other expense net of $2.2 million in the first quarter. This $500,000 increase primarily relates to the cost of funding the Texor acquisition and an increase in interest expense as a result of increase borrowing related to rising fuel prices.

For modeling purposes, I would assume interest expense of approximately $3.3 million for the third quarter. This amount excludes any impact of foreign exchange currency movements, which also are reported on this line. The company's expected tax rate for the second quarter was 24% as compared to 21% for the first quarter. The higher effective tax rate resulted from a shift in the mix of the results of operations to the tax jurisdictions with higher tax rates.

This includes the impact of Texor, which is taxed at US rates. Our estimate of effective tax rate for the third and fourth quarters should be between 24%and 28%.

Net income and diluted earnings per share were also records for us. Net income for the second quarter was $20.5 million an increase of 30% sequentially and 21% year-over-year.

Diluted earnings per share of $0.71 increased 29% sequentially and 22% over last year's second quarter. Return on equity was 15.9% in the second quarter compared to 12.8% in the first quarter of this year and our return on assets for the second quarter was 5.1%, compared to 4.7% during this year's first quarter.

At the end of the second quarter our cash and cash equivalents and short-term investments were approximately $63 million compared to approximately $84 million on March 31st. The record spike in crude oil prices in the second quarter, which arose from a $102 at the end of Q1 to a $140 at the end of the second quarter was the principle driver of our negative operating cash flow of $85 million.

Despite such use of cash, our liquidity position remains strong. A testament to our overall strength of our balance sheet, which remains a competitive advantage for us during the period of unprecedented price volatility. We have also been very focused on reducing our net rate cycle and increasing our return on working capital. As a result, day sales outstanding in the second quarter declined 1.5 days to 28.4 days.

As a matter of fact, our DSO dropped in all three of our segments. Our payable days outstanding were 22.5 days, down slightly from last quarter, and inventory days were 2.3 days, effectively flat quarter-over-quarter. Therefore, our overall cash conversion cycle decreased by a full day from the first quarter.

Our return on working capital was 23.4% for the second quarter up from 19.6% in the first quarter. As a result of our focused efforts to further reduce our trade cycle and our related working capital investment as well as the recent drop in oil prices we have already generated positive cash flow during the first month of the third quarter.

In closing despite volatile market conditions our Marine and Aviation segment delivered record operating results and the recent acquisitions of Texor will significantly enhance the financial profile of our land segment going forward.

Unlike many others our balance sheet remains strong and liquid despite the impact of unprecedented price volatility in the fuel markets. We remain poised to continue capitalizing on our relative size and strength in the markets we serve. Thank you.

I would now like to open up the call for questions and answers.

Question-and-Answer Session

Operator

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

Jonathan Chappell - JPMorgan

Good afternoon.

Paul Stebbins

Hey John.

John Chappell - JPMorgan

Paul the marine business finally broke through a pretty good threshold there, the reselling business as a percentage of the total volumes. Was that a function of less broker business, more reselling and more importantly is this 80% plus figure a good run rate to use going forward or could it get back to the mid 70s?

Paul Stebbins

Yes, I mean accurately reflects the fact that we made a conservative shift to further into the trade and the brokerage was reduced. Its tough to give you with any precision John whether that is going to be ratable in the future, sometimes it is a function of the market conditions, but I would say that we are pleased with an overall increase in volume in this period, most of which reflected in the traded volumes. So brokerage was off slightly but we really had a concerted pick up in the trade volumes. So I would like to tell you that it will be ratable but we just do not have that, on the spot market, it is tough to predict it with any precision.

John Chappell - JPMorgan

Okay, another question, I do not know if you have this number either. Is there any way to quantify the self-supply inventory impact on the second quarter aviation results?

Ira Birns

I would say Jonathan, the best number I could give you is approximately half of the sequential increase in gross profit in aviation could be attributed to that.

John Chappell - JPMorgan

Okay, that is very helpful. Then finally the current credit conditions out there; from a competitive standpoint and then for an opportunity standpoint are you seeing any competitors who are not able to really compete with the most vigor in this type of market. Does that give you opportunities both in just winning business overall and then potentially from an acquisition standpoint anybody who is looking a lot more vulnerable.

Paul Stebbins

There is no question that the current environment has clearly differentiated our strength in the market. Now, when you had the rapid increase in prices and the tremendous volatility, this has certainly a lot of the less well-capitalized, small privately held companies out there who are really struggling with the Tsunami shock and that caused restrictions on credit lines. They caused tightening pressure on working capital and we were able to take advantage of that and be the strong guy standing in the market. So there is no question from an competitive perspective this market was capable in terms of differentiating us. In terms of, if you were to wound an antelope out there, there is no question that there are some people who are being stressed by this and we clearly believe there are opportunities from the strategic front.

John Chappell - JPMorgan

Is there one market in particular whether it is marine, aviation or land where you are seeing potential vulnerabilities?

Paul Stebbins

I would say their opportunities when operate.

John Chappell - JPMorgan

Okay great thank you Paul, thank Ira.

Ira Birns

Thanks John.

Operator

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

George Pickral - Stephens Inc.

Hello. This is actually George Pickral for Alex.

Paul Stebbins

Hi George.

George Pickral - Stephens Inc

I got a few land questions for you actually. Do you know what the land profitability would have been excluding the provision for bad debts? In other words, I am asking what Texor would have added to that?

Ira Birns

On a consolidated basis excluding the provision for bad debts, the number would have been about $1 million on the plus side. A good of big chunk of that coming from Texor.

George Pickral - Stephens Inc

Okay, great. Also within Texor, in your call, the greater Chicago area market in the two months you have had them, have you seen any slowdown in gasoline sales in any other areas?

Ira Birns

If we focus on the month of June in particular, the result of operations with Texor was right inline with what we expected. So we did not see meaningful impact in that regards.

George Pickral - Stephens Inc

Okay great. Let see switching over to marine I know it is a minute part of your business but have you thought about or have you expanded any asset-based supplies anywhere, or have you thought about doing that?

Mike Kasbar

Yes, hi George its Mike Kasbar. we have not expanded that and certainly we are open to those opportunities as they present themselves and as Paul just said with the amount of capital required, a lot of these smaller independent companies, do not necessarily have the appetite to play the game so much that is an opportune time for them to exit then, we are certainly looking there.

George Pickral - Stephens Inc.

Okay great, and lastly, a big picture question how much is the ERP system contributing to this being able to call the low margin business and I do not know if you can call it timely fashion, but being able to quickly identify the low margin business and get rid of it be able to shift pricing and what not around to improved margins.

Mike Kasbar

George, this is Mike Kasbar. Well, we have always had the visibility on that. That is not that difficult to do, we are fortunate in having a pretty good marketing research team that works pretty hard to give us visibility on that. The ERP is an interesting set of scenario because this is really not a whole lot of fun, global initiative and this was really a very interesting quarter for us its a perfect storm in terms of credit crunch, rising oil prices and during, February 6, with our ERP, which is something that takes a good six months to digest and stabilize. So while we are happy that we did not go through the pain, we are not really seeing the full impact of those initiatives just yet.

We are on our way and our ambitions for that are quite significant, visibility in any number of different areas is certainly one of the things we are looking for, as well as a number of other products that we hope to be able to produce. And, certainly with the acquisition of AVCARD that gives us greater technological reach. The beauty of acquiring these small companies is, their people are very close to the business. So they are functional people, pretty much stewed in the business activity and we are pretty happy with what we have picked up with that part of the technology side.

George Pickral - Stephens Inc

Okay. Do you still have all the outside consultants down there helping you and do you still have all of your in-house employees focused on the ERP system and not their main job still?

Mike Kasbar

I am happy to report we have zero outside consultants –wee employ maybe two or three. So we are pretty much down from the 50 to 70 that we had at the peak. I think we have got about handful, Paul what is it? Is it less than..

Paul Stebbins

Five.

Mike Kasbar

Okay. No, our group is really focused on the business side. So, ERP is done and its really now, there has been huge amount of work, I mean one of the benefits by going through this is, you can do it unless you have a superior IT organization. So, we have really upgraded that, to probably at about a level 3 organization on IT and we are on our way up. So, we are very optimistic on what technology can do for us, it is very important to our company.

George Pickral - Stephens Inc

Great, thanks for your time. Good quarter.

Mike Kasbar

Thanks George.

Paul Stebbins

Thanks.

Operator

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

Steve Ferazani - Sidoti & Company

Good afternoon. Question on, we are seeing at least a slowdown in growth in Aviation traffics. Certainly we have seen a bit of turnaround in terms of Asia-Pacific freight traffic. Given the slowdown in growth, what do you think that does to transaction volumes in that segment going into the second half of the year?

Mike Kasbar

I think that we are going to have to watch it just like everybody else is watching it. Certainly it is going to have an impact from our perspective as Ira already mentioned we already anticipate and then back with full deliberation of reducing some of our volumes. I would say that we feel pretty good about being able to remain – we have got fairly diverse portfolio. So we active in cargo and charter and military in a lot of different components of the business where, interestingly enough we have not really seen the slowdown yes. Impact, I would say that if you look in this quarter, we actually saw pickup from some our cargo and charter in the government activity. So I think from our point of view I do not think we view that the overall economic conditions are going to be the driver there. Its going to be more of our decisions about what business we landscape and how we manage it.

Steve Ferazani - Sidoti & Company

Okay. You touched a little bit on the bunker fuel obviously this that this is consolidation with physical suppliers. Does that affect the price shopping idea, given that there will be fewer suppliers, physical suppliers out there and what is the impact short-term versus long-term?

Mike Kasbar

When you think consolidation is physical as far as what you were referring to?

Steve Ferazani - Sidoti & Company

It is a bigger bunker fuel physical suppliers without naming, buying up some of the smaller guys and being few of the bunker fuel, the barge operators out there?

Paul Stebbins

Yes I would say that. I mean I hear you, I think that is the more anomalous I would say to, if we were to characterize the bunker supply market its still extremely fragmented. I do not see that changing time soon. While there has been some examples of what you characterize in terms of consolidation, I would say generally speaking that is not the trend, it is still very fragmented.

Steve Ferazani - Sidoti & Company

Fair enough and then on Texor two months under your belt now, given some of the difficulties with the land-based markets, the $0.08 to $0.10 accretive in the first full year. Is that still there?

Ira Birns

Yes, that numbers is still an accurate number, somewhat between $0.08 and $0.10.

Steve Ferazani - Sidoti & Company

Great, thanks a lot.

Paul Stebbins

Thanks a lot.

Operator

Our next question is from the line of Jim Larkins with Wasatch. Please go ahead with your question.

Jim Larkins - Wasatch

Good afternoon. Just a couple of balance sheet questions. I wanted to make sure I get the detail which might not have been on the press release, but goodwill and intangibles what were those through at the end of the quarter?

Ira Birns

Just a sec let me get that.

Jim Larkins - Wasatch

I also wanted to get that breakup of the number?

Ira Birns

Goodwill was $119 million and intangibles were $63 million.

Jim Larkins - Wasatch

Great. Then on the debt, I saw the short- term debt broke down. On the long term, could you give that as well?

Ira Birns

The long term debt was $246 million, principally bank debt and there is a note in there related to the Texor acquisition.

Jim Larkins - Wasatch

Okay. Should not we think of that as the revolver that is going to ebb and flow with commodity prices and what is going on in your working capital?

Ira Birns

Yes that number moves around during the quarter. As we said, we were making significant progress, we brought the trade cycle down in the second quarter. We are very focused on return on working capital and as I also mentioned, we generated cash in the first month of this quarter, which is moving that number further in the nice direction, the right direction. So does that answer the question you had.

Jim Larkins - Wasatch

Great. Then on the derivative just in terms of the size it seems like the activity is picked up how much is that simply driven by the commodity versus did you get involved doing more derivatives for some of your customers?

Paul Stebbins

We did see a little bit of increase in activity in the derivatives going into Q2, [but it did not stop] and there is also been an impact on the price as well.

Jim Larkins - Wasatch

Was that material in terms of the gross profit improvement we saw in marine especially?

Paul Stebbins

No not in overall basis, it was not.

Jim Larkins - Wasatch

Okay very good thank you.

Ira Birns

Thanks Jim.

Operator

(Operator Instructions) Our next question is from the line of [Kelvin Wilder with Metabin Capital]. Please go ahead with your question.

Kelvin Wilder - Metabin Capital

Thanks to you as well s congratulations on a very good quarter. Three questions, and wanted to quantify the earning per share benefit from the depreciation and the value of the inventory in the second quarter.

Ira Birns

Yes I think I mentioned previously that approximately half of the sequential increase in gross profit could be attributed to the inventory evaluation.

Kelvin Wilder - Metabin Capital

Okay, okay.

Ira Birns

I am sorry half of the sequential increase in our aviation gross profit which is where we had an impact, which is where most of the inventory is.

Kelvin Wilder - Metabin Capital

Okay. Fair enough and the question about the ERP system, nice to see that is moving on. Looking at the guidance for third quarter operating expense for $54 million to $58 million versus the second quarter actuals of about 56.3, it looks like you are projecting that the operating expense for the third quarter where you have Texor on the books. So should we assume that there is a big drop in ERP spending or what is getting, what is dropping in expense going into the third quarter.

Ira Birns

There is nothing significant in its own right, one of the biggest drivers would be – there was a bit of a catch up in incentive compensation in the second quarter because of the record results and that number would come down a little bit naturally in the third quarter. Aside from that there are a couple of smaller items that bounce around, but on the ERP side there probably was some consulting expense that we still hanging on in the beginning of the second quarter, that is now out completely in the third quarter So that it would be another – that would be another item as well.

Kelvin Wilder - Metabin Capital

Okay and then final question relates to increase in employee compensation expense. Yes there was some leverage you mentioned that looks like in the neighborhood of 20 basis points. Should we be expecting the same bringing leverage on the employee compensation line where that is going, slower than gross profit. Was there anything in the character, for those in enrollment, leveraged in the second quarter. What you really expect to see in terms of leverage on the employee to generate and create and gross profit?

Ira Birns

Well I think you have a poor base of compensation expense that that is there, I think the only reason we highlighted the incentive comps of these quarters was the extraordinary increase in profitability in Q2. So its not simple to direct a with a type correlation between the correlation between gross profit. That is not example but there is some leverage on that line but you got to be careful in terms of how you model that.

Kelvin Wilder - Metabin Capital

Okay Lets say, congrats on another quarter.

Ira Birns

Thanks

Operator

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

Edward Hemmelgarn - Shaker Investment

Sure. Thanks have I had one question regarding the aviation segment. You indicated I think you got rid of a customer there was 30 some million gallons per or something?

Ira Birns

Correct. Has quarterly volume.

Edward Hemmelgarn - Shaker Investment

Its quarterly volume, Okay typically there is an increase so in terms of volumes in the September quarter so should we still assume some pick up in volumes in the September quarter absent to 30, if we ignore the 30 million we could back that out later but historically you can anywhere from almost a 5% to 10% pick up, flights can be just greater in the third quarter.

Paul Stebbins

I mean I would say that the interest, its not just the 30 million remember our needs are also not normal at times, so would say that you cant really model this in front of a conventional picture about what is going on in the business as you can imagine its been a pretty dramatic shock to that industry and we have watched that very carefully so what we have made an effort to do is the price is rising so quickly is that we walked away from business that we just thought, that might have even been good return when it was put together some period ago but given the high prices just does not give us the firm we think merits the investment on the capital side so we are just walking away from it. So I think that, well our objective right now is the rationalized risk which we talked about and I think we have been pretty focused on that. We are looking to reduce some of the higher volumes the thin margin business, which I think that we are also actively doing that 30 million that Ira mentioned that expires on June 30 that was a field management contract. We think that that is consistent with it but there is other business as well and then our real focus is to tighten it all up and focus on smaller the whole volume but better return. So its difficult to give you a statement that says that in the September period were going to see an increase, I just cant tell you that is going to be the case overall, depending if one of the mix shapes up.

Edward Hemmelgarn - Shaker Investment

Okay.

Paul Stebbins

To be fair we are gaining volume in some segments but we are also shedding volumes. So there is some offsetting penalties, that is certainly true.

Edward Hemmelgarn - Shaker Investment

Would you expect to see given that you are shedding some low margin business. Is it safe to say that your trend is up in the margin area, absent any inventory pick up?

Paul Stebbins

Yes.

Edward Hemmelgarn - Shaker Investment

Okay. Thanks. Good quarter.

Paul Stebbins

Thanks.

Operator

Our next question is from the line [Lou Allen Banks with Pickers’ Spot]. Please go ahead.

Lou Allen Bank - Pickers’ Spot

Hi, this is Lou Allan here. I have a question for you, it is regarding credit terms. You got a – fuel bad debt provision. Just wondering if you like quite a few other people are around the world considering talking in credit terms, may be give some 30 days as normal in bunkering then to maybe 21 days, 14 days or less. Or whether you are just stuck with it and carried on with the 30 days?

Paul Stebbins

No, I think we pretty much stuck to our policy and historically which is depending on –-– we are dealing in fairly substantial blue chip portfolio around the world. I do not think we have made any changes materially in that area. Maybe a couple of exceptions for that depending on special locations, but in general I think we have stayed with our policy and again we are servicing a fairly strong parts of customers, that seems to be the right thing we do in this market.

Lou Allen Bank - Pickers’ Spot

Okay. Well thank you very much.

Ira Birns

Thank you.

Operator

We have no further questions at this time. Mr. Shea do you have any closing comments you would like to make.

Frank Shea

No. I think we appreciate everybody joining us this afternoon and we look forward to speaking to you at the end of Q3. Thanks again.

Operator

Ladies and gentlemen this concludes World Fuel Services second quarter earnings call. We thank you for your participation and you may now disconnect.

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