World Kinect Corp (WKC) 2012 Q3 法說會逐字稿

At this time, I'd like to welcome everyone to the World Fuel Services 2012 Third Quarter Earnings Call. My name is Dana, and I will be your event specialist today. (Operator Instructions) It is now my pleasure to turn the webcast over to Mr. Jason Bewley, Vice President of Corporate Finance. Mr. Bewley, you may begin.

Good evening, everyone, and welcome to the World Fuel Services Third Quarter 2012 Conference Call. My name is Jason Bewley, Vice President of Corporate Finance, and I'll be doing the introductions to this evening's call alongside our live slide presentation. To access the webcast or future webcasts, please visit our website, www.wfscorp.com, and click on the webcast icon.

With us on the call today are Michael Kasbar, President and Chief Executive Officer, and Ira Birns, Executive Vice President and Chief Financial Officer. By now, you should have all received a copy of our earnings release. If not, you can access the release on our website.

Before we get started, I'd like to review World Fuel's Safe Harbor statement. Any statements made or discussed today that do not constitute or are not historical facts, particularly comments regarding World Fuel's future plans and expected performance, are forward-looking statements that are based on assumptions that Management believes are reasonable, but are subject to a range of uncertainties and risks that could cause World Fuel's actual results to differ materially from the forward-looking information. A 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, 2011, and other reports filed with the Securities and Exchange Commission.

We'll 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 President and Chief Executive Officer, Michael Kasbar.

Thank you, Jason, and good afternoon, everyone. Today we announced third quarter net income of $51.5 million, or $0.72 per diluted share. We are pleased with the results we delivered this quarter. They are a true testament to the focus of our global team and the durability of our business model in volatile markets.

We are further developing our business reach across all of our business segments while maintaining our strong risk management disciplines. Our market expertise and comprehensive value added service offerings differentiate World Fuel as a robust solutions provider and counterparty of choice for our customers and suppliers worldwide.

Our marine segment once again delivered solid results. Sequential volumes increased modestly, as we remained selective in our reselling activities to maintain a high quality customer portfolio. The resiliency of our business model was again demonstrated this quarter in the midst of one of the worst shipping markets in memory. This speaks volumes about the quality of our global teams and their coordinated execution.

The aviation segment rebounded in the third quarter, posting record volumes as we saw our core commercial reselling and general aviation businesses all report solid volume increases. Our results were impacted positively by seasonality and a rise in jet fuel prices. While the aviation industry is challenged in many segments, our teams perform well in volatile markets and these environments provide opportunities to aggressively develop organic growth worldwide.

In our land segment, we continue to develop our diversified product offering in addition to our branded and unbranded distribution businesses. In September, we announced the completion of the acquisition of Carter Energy. Based in Overland Park, Kansas with 2011 volume in excess of 500 million gallons, Carter Energy is a branded distributor for Phillips 66, BP, Valero, Suncor, Shell, Exxon Mobil, [Cinex] and Sinclair. The company distributes gasoline and diesel fuel under long term contracts to more than 700 retail operators and is a supplier to industrial, commercial, and government customers in 14 western states.

This addition of Carter Energy takes our global land volume to more than 3.5 billion gallons, and more importantly, adds an experienced, talented, and enthusiastic team. We are excited about the opportunities that lie ahead for our land segment worldwide as we grow the business organically and through strategic investment opportunities.

While our ability to leverage operating efficiencies, technology, and in-depth industry expertise continues to serve us well as we grow our business, strategic investments remain an important element of our growth strategy. The Carter acquisition is an example of our ability to quickly execute on a strategic opportunity as we actively explore additional growth opportunities in an environment where the pipeline continues to grow.

Our strong and liquid balance sheet provides us with the ability to continue acting upon such opportunities quickly. Across all three segments we continue to expand the breadth and depth of our service offerings, whether it's deicing fluid in aviation, rail car and crude oil in land, or lubricants and logistics in [in the lane] or processing across all of our businesses, these activities demonstrate our entrepreneurialism and provides us with greater opportunities for growth and value creation for our suppliers and customers.

I am particularly proud of our global team's ability to continue to execute our strategy and plan for growth across all of our business segments. While our quarter-to-quarter results will be influenced by market conditions, price volatility, and our risk management discipline, we are very confident about the long term value creation we are driving within the energy, transportation, logistics, and transaction processing spaces.

Our balance sheet remains strong, our business development pipeline is full, and our ability to leverage operating efficiencies, technology, and in-depth industry expertise continues to serve us well as we grow our business.

I will now turn over the call to Ira for a financial review of the results.

Thank you, Mike, and good afternoon, everybody. Consolidated revenue for the third quarter was $9.9 billion, up 3% sequentially, and up 4% compared to the third quarter of last year. The year-over-year change in revenue was impacted by the 4% increase in total volume across our businesses, as well as the increase in crude oil prices, which increased to an average of $92 a barrel in the third quarter, compared to $90 in the third quarter of last year.

Our marine segment revenues were $3.6 billion. That's down $137 million or 4% sequentially, and down $415 million, or 10%, year-over-year. Approximately 58% of the year-over-year decrease was a result of lower volume, and the remainder was a result of lower fuel prices during the quarter.

Our aviation segment generated revenues of $3.8 billion. That's up $275 million, or 8% sequentially, and up $283 million, or 8% year-over-year. The entire year-over-year increase is a result of increased volume, which was partially offset by lower average fuel prices. And finally, the land segment generated revenues of $2.5 billion, up $154 million, or 7% sequentially, and up $533 million or 28% year-over-year. Approximately 87% of the year-over-year increase is a result of increased volume, and the remainder is a result of higher average fuel prices during the quarter.

Despite continued volatility in the marine marketplace, volume in our marine segment increased 2% from the second quarter to 6.5 million metric tons. When compared to the third quarter of last year, volume was down 6%. And fuel reselling activities constituted approximately 89% of total marine business activity in the quarter, which is in line with the past few quarters.

Our aviation segment had volume of 1.15 billion gallons during the third quarter, up 87 million gallons, or 8% sequentially, and up 107 million gallons or 10% year-over-year. And finally, our land segment recorded quarterly volume of 786 million gallons during the third quarter, up 29 million gallons, or 4% sequentially, and up 153 million gallons or 24% from last year's third quarter.

Our land segment results this quarter include one month of the recent Carter Energy acquisition, which was completed at the beginning of September and had volume in excess of 500 million gallons last year. Including Carter, our land segment now has an annual run rate exceeding 3.5 billion gallons.

Consolidated gross profit for the third quarter was $181 million, which represents an increase of $9 million, or 5% sequentially, and an increase of $10 million, or 6%, compared to the third quarter of last year.

Our marine segment continues to deliver solid results despite continued difficult market conditions with gross profit of $54 million in the third quarter. This represents an increase of $2 million, or 4% sequentially, and an increase of $4 million, or 8%, year-over-year. Despite current market conditions, we continue to find opportunities in the marine marketplace while maintaining our strong risk management discipline.

Our aviation segment contributed $84 million of gross profit in the third quarter. That's an increase of $15 million or 22% sequentially, and flat year-over-year. As projected in last quarter's call, government activity was generally flat when compared to the second quarter, and we expect a similar result in the fourth quarter of this year.

Our self-supply model's jet fuel inventory position is approximately 92 million gallons, or $318 million at the end of the third quarter, up from $87 million gallons and $267 million at the end of the second quarter, supporting increased commercial volume during the quarter. In the third quarter, due to the increase in jet fuel prices, we recognized a benefit related to our inventory position in excess of $5 million. Aviation gross profit also benefited from an 8% sequential increase in volume across both our commercial and general aviation businesses, driven in part by seasonality over the summer months.

Our land segment delivered gross profit of $43 million in the third quarter, a decrease of $9 million or 17% sequentially, but an increase of $6 million or 16% year-over-year. The sequential gross profit decrease is principally driven by lower gross profit in our crude oil marketing joint venture in North Dakota.

As I mentioned last quarter, our crude oil business began experiencing greater competitive pressures in the latter part of the second quarter, which continued into the third quarter. The end result was a somewhat larger declining gross profit than projected on last quarter's call. Based on current crude activity levels in the Bakken region, we do not expect fourth quarter results to differ materially from what we experienced in the third quarter.

Operating expenses in the third quarter, excluding a provision for bad debt, were $106 million, which is up $7 million sequentially and $9 million compared to the third quarter of 2011. Please keep in mind that these expenses include one month of activity related to Carter acquisition. While our operating expenses exceeded the higher end of the range provided on last quarter's call, operating expenses excluding bad debt expense, intangible amortization, and Carter, as a percentage of gross profit, still declined to 56% this quarter down from 57.2% for the first half of 2012.

For modeling purposes, which will now include by the way a full quarter of the Carter Energy acquisition, I would assume overall operating expense, excluding bad debt expense, of approximately $104 million to $108 million in the fourth quarter.

Our total accounts receivable balance is $2.4 billion at the end of the third quarter. That's up approximately $255 million compared to the second quarter due to increased volume and fuel prices across all three of our business segments.

Our bad debt expense in the third quarter was approximately $3.6 million. That's up $3 million sequentially and up $1.2 million compared to the third quarter of last year. The sequential increase in bad debt expense primarily relates to the $255 million increase in accounts receivable. The quality of our receivables portfolio remains strong and we believe that we remain adequately reserved.

Consolidated income from operations for the third quarter was $71 million. That's a decrease of $1 million or 2% sequentially, but flat year-over-year. Our marine segment's income from operations was $27 million for the third quarter, down $600,000 or 2% sequentially, but an increase of $2 million or 10% from last year's third quarter.

And the third quarter income from operations in our aviation segment was $40 million, up $14 million, or 53% sequentially, but down $1 million or 3% compared to the third quarter of 2011.

And finally, our land segment had income from operations of $18 million. That's a decrease of $10 million or 36% sequentially, and $500,000 or 3% year-over-year. Once again, third quarter results were negatively impacted by weaker results in our crude oil marketing and logistics joint ventures during the quarter. Please also note that the $10 million sequential decrease in operating income was offset in part by a $4.9 million decrease in minority interest.

Consolidated EBITDA for the third quarter was a record of $80 million. That's an increase of $6 million or 7% sequentially, and an increase of $1 million or 2% year-over-year.

Non-operating expenses primarily consisting of interest expense were $3.5 million for the third quarter, down $2 million compared to the second quarter and $3 million in the third quarter of last year. The decrease in non-operating expenses this quarter was principally a result of lower average borrowings during the quarter. Excluding any FX impacts, I would assume non-operating expenses to be between $4 million and $5 million in the fourth quarter.

The Company's effective tax rate for the third quarter was 21.7%. That's up from 17.9% last quarter and 16.5% in the third quarter of last year. As a result of a fairly significant increase in domestic income during the third quarter, which is obviously taxed at much higher rates. However, year-to-date our tax rate is 17.5%, generally consistent with our 18% rate for the first nine months of 2011.

For modeling purposes, our tax rate in the fourth quarter should be between 19% and 23%.

Our net income for the third quarter was $51.5 million, which is an increase of $2.9 million or 6% from the second quarter, but a decrease of $1.2 million, or 2%, year-over-year. Non-GAAP net income, which excludes amortization of acquisition related identified intangible assets, as well as stock based compensation, was $57.9 million in the third quarter, an increase of $5.1 million or 10% sequentially, but a decrease of $1.3 million, or 2% year-over-year.

Diluted earnings per share for the third quarter was $0.72, an increase of 6% sequentially and a decrease of 3% year-over-year. Non-GAAP diluted EPS was $0.81 in the third quarter, up 9% sequentially, but down 2% year-over-year. Please be reminded that we believe our non-GAAP diluted earnings per share, which excludes costs associated with share based compensation and amortization of acquired intangible assets, is a better measure of our core operating results and trends.

Our overall net trade cycle remained flat sequentially at 8.2 days, and our internal working capital was 31%. We generated $105 million of cash flow from operations during the quarter, compared to negative operating cash flow of $106 million last quarter, and negative $79 million in the third quarter of last year. Year-to-date, operating cash flow is now positive $48 million.

With respect to cash collateral deposits related to derivative contracts, since there was a lot of discussion following last quarter's call, I'd like to go back to the results reported in our second quarter for a moment. So let me repeat the facts. Over the past several months, we began transacting a meaningful percentage of our derivative activity over commodity exchanges, reducing over-the-counter activity, resulting in improved profitability from this stream of business and reduced counterparty risk associated with over-the-counter counterparties. While this move reduces counterparty risk, it also reduces the benefit of margin thresholds common in the OTC market, as there are no margin thresholds for trades over the exchanges.

In the second quarter, as oil prices declined significantly, we were required to post more than $100 million in cash collateral deposits, which contributed to $106 million of negative cash flow in the second quarter. In the third quarter, however, as prices increased, where we generally require cash to fund increased working capital requirements, cash collateral deposits decreased to $4 million from $140 million in the second quarter, and this is the principal contributor to $105 million of positive cash flow for the quarter.

So in summary, we very closely monitor our activity levels, both over the commodity exchanges and with OTC counterparties, on a regular basis. Currently, our positions with the exchanges are significantly lower than in the second quarter. Therefore, a sharp drop in oil prices today would not have the same short term negative cash flow impact we saw in the second quarter.

Please remember, however, that future oil price declines could still result in short term negative impact to cash, and oil price increases should result in a short term positive cash flow impact, as we saw this quarter. This, of course, is dependent upon our positions with the various commodity exchanges and OTC counterparties at any point in time. Because of the positive cash flow this quarter, despite the acquisition of Carter Energy, we finished the quarter with no borrowings outstanding under our $800 million revolver providing significant liquidity to fund the organic business and additional strategic investments like Carter Energy.

So in closing, we continue to execute on our long term growth strategy by capitalizing on organic growth opportunities and strategic investments. We are pleased to have completed another accretive acquisition in the land segment, which will provide new growth opportunities, and brings with it a very talented management team.

We continue to maintain a solid liquidity profile and a strong balance sheet, which allows us to differentiate ourselves in this volatile economic environment. And finally, we will continue to explore opportunities across all of our businesses in order to maximize value for our customers, suppliers, and our shareholders.

I would now like to turn the call back over to Dana to begin Q&A. Thank you.

(Operator Instructions) Your first question comes from the line of Jon Chappell.

Hey, Jon.

The first question is on the aviation side. As we look at the progression of the gross profit in aviation, the $84 million you did in the third quarter, very similar to the $84 million you did in the third quarter of 2011. But then, you lost the very profitable government business. We saw a couple of big sequential downticks in the fourth quarter and in the first quarter. So can you just talk a little bit about the big sequential increase in the aviation business? Has there been a replacement of that high margin government business? Is this strictly just the benefits of your commercial business? How does that compare kind of to 12 months ago with a very similar gross profit level?

Well, I'll start and I'll let Mike elaborate after I'm done, Jon. So for starters, I called out the positive impact. Yes, they made a positive impact this quarter from volatility. Since there was a significant upward movement in prices in Q3, we certainly benefited from that, and as I said, in excess of $5 million. You may remember that in the second quarter, we made kind of the opposite comment. Because of declining prices we had a negative impact of between $6 million and $7 million. So if you look at the absolute value, that's an $11 million to $12 million delta quarter-over-quarter. So that makes up a pretty large chunk of the sequential increase.

On top of that, we had 8% growth in--across both our commercial and general aviation businesses, excluding government, so once again, government was generally flat, and picked up some additional profitability there. So Mike may want to elaborate on the longer term beyond that.

Well, I think the only comment that I'll add is as we continue to diversify our business and look for opportunities, the inventory side in that story has been a long term story as we've looked to obtain competitive pricing and work the supply logistics certainly in the United States, and we've started to do that in other locations. And certainly, our government story we've talked about that quite a bit. The name of the game ultimately is to continue to grow and build scale and diversity, so that essentially we're getting noise cancelling in all of our business activities and we're continuing to get growth in all of our areas. It's just that some of the business activities are just not as smooth and readable as others. But we're certainly oriented to continue to drive into all of these areas that create value and look to establish us further within the supply chain on transportation fuels.

Great. Thanks, Mike. And then, on the marine side, I tend to always come back to this. But you've clearly been a little bit more I think conservative probably with your risk management there as the volume's down relatively meaningful year-over-year and have been pretty flat based throughout this year, not showing any seasonal benefits. Can you just talk a little bit about how your risk management in an industry that's really down on its luck is progressing, and then, kind of how that lower volume may or may not relate to the big step up in provision for bad debts in the third quarter?

Certainly, our risk teams are very engaged in the business. They are traveling around a hell of a lot more these days than these used to. As I've said in previous phone calls, it's a lot of engagement. So the demand is off as you know. We've got a good amount of slow steaming. We're pleased with the results within the business activity on the reserve. I don't know if you want to make any particular comment on the reserve.

Yes. On the reserve you'll notice that the $3.6 million expense we took this quarter was the highest that we've seen in a while. The principal driver of that, as I alluded to in my prepared remarks, was a fairly significant increase in receivables, which has an impact on our provisioning process. That is probably about two-thirds of the impact of this--in terms of this quarter's reserve. And then, believe it or not, marine had a very small impact in terms of write-offs. If we had--we actually had a couple write-offs, but they were on the aviation side of the business. So a testament to our marine credit team, risk management team, navigating this very difficult marketplace. We continue to perform very well, once again, using our somewhat conservative profile from a risk management perspective, which I think one needs in this type of environment and we've avoided the minefield, so to speak, so far.

Great. And just as my follow-up, Ira, you talked about the liquidity in your last couple remarks. Can you just kind of help us think about what your fire power is for investment, whether it's external investments or acquisitions or organic investment in the business versus the amount of cash that you need, or that you're comfortable with, on the balance sheet as we go through a volatile kind of oil price environment?

Look, we have a revolver that's basically untapped. We have a few million dollars outstanding on letters of credit. So I think that speaks volumes - an $800 million revolver pretty much fully available to us, on top of--I'd say in terms of short term swings in day-to-day business, that's what the cash is there for. So $130 million-plus in cash is generally the range of where we look to manage that number. We generally run between $100 million and $150 million. So that really leaves the revolver as a tool to invest organically and invest in strategic acquisitions.

This quarter, as an example, we bought Carter, but positive cash flow covered that well beyond the money that had to go out the door to cover Carter. So we actually improved our overall position despite making an acquisition. But we continue to review our capital structure on a regular basis, analyze the opportunities that we have out there. And for now, we're very comfortable, but that could change based upon dynamics of the business or opportunities that arise sometime in the near to medium term future.

Great. Thanks a lot, Ira. Thanks, Mike.

Your next question comes from the line of Kevin Sterling.

Hey, gentlemen.

Hi, Kevin.

Ira, it looks like your tax rate was a little bit higher this quarter. What was the primary driver of that and how should we think about the tax rate going forward?

Well, as I said in my prepared remarks, Kevin, we had--it all has to do with the mix of income in any given quarter. This quarter, the mix of income was much more heavily tilted towards the U.S., which obviously has a much higher tax rate. I won't make any political statements. And that drove the tax rate up to a bit over 21%. Our current expectation is that we'll probably remain in that zip code in the fourth quarter and once we get through next quarter I'll telegraph what things look like in the first half of next year. So I believe I said 19% to 23% would be the range for the fourth quarter.

Okay. And you talked about some competitive pressures in your crude oil marketing joint venture. What' causing that and how long do you think it will continue? I think you said it should continue into the fourth quarter, but do you have any visibility beyond fourth quarter?

Kevin, I think probably the right way to look at that, this is a fairly standard market reaction. Wherever there is hay being made, you get a lot of people rushing in and you get a lot of competitive pressures. So whether it's the crude oil market or whether it's a new grade of fuel that in the beginning of that market dynamic isn't readily available and there is significant margin opportunity, you get competition coming in. So that's exactly what's happened there. We don't feel bad about it. We think that we've got a good long run. We're positioning ourselves. We like the expertise that it's given us in terms of logistics in another product. So we believe that will now just start to evolve into a more normal margin business activity, will continue to grow the volume, and it will become another business line that we look to expand. So I think we commented and called that out last quarter and we expect that it will carry on much the way it is today.

Okay. Thank you, Mike.

It will take on the profile of one of our normal lines of business. We'll look to grow it. How big it will get, I can't exactly tell you right now. But that phenomena I think is here to stay, as I've spoken about in previous phone calls. But I think it will take a more normalized profile.

Okay, thank you. And as kind of a follow-up here, Ira, you spent some time talking about your derivative exposure. In a nutshell, have you reduced your derivative exposure and do you feel better about kind of where you stand with that so you won't have the wild swings like we saw a couple quarters ago? Is that the right way to think about it? I guess you're more comfortable with your new derivative exposure.

Yes. Thanks. It's good that you asked the question, Kevin, because you probably can't talk about this enough after all the questions we got last quarter. I wouldn't necessarily characterize it as derivative exposure. It's the nature of the positions that we have over the exchanges versus over-the-counter positions, which are generally offsetting positions that we have booked with a customer, where--which is a profit stream for us. So that number will bounce around. I can't go and tell everyone that we won't necessarily have a position in the range of what we had in the second quarter ever again, but one thing to point out is the movements related to the positions that we have, whether it be over the exchange or OTC, driven by price increases or decreases, are very short term movements. So as an example, last--in the second quarter, the price decline tended to be steepest towards the end of the quarter, which resulted in cash going out the door faster than our working capital position would naturally decline because of lower prices, which would pretty much more than offset--not pretty much, but more than offset the impact of those derivative positions on cash.

So there are timing elements to this. At the end of the day, a price decline is still going to result--should almost always still result in an overall positive impact to cash. But the impact with the exchange is immediate and working capital declines take 30 days, 40 days to occur. So I think that's something that we're just trying to educate everyone on. That's an important part of our business and a growing part of our business and we're obviously very focused on understanding the related cash flows and forecasting what they may and managing them very intelligently. So that's the best way that I can describe that for you.

Oh, that's helpful. Thank you. So it sounds like you--it really is just kind of timing issue. So thank you for that color and clarification.

Your next question comes from the line of Jack Atkins.

Good afternoon, guys. Thanks for taking my questions. First off here on the Carter Energy deal, was that acquisition accretive at all to earnings at all during the quarter? Could you maybe comment on that? And then, also, sort of where you stand in the integration of the--of Carter Energy into the overall business?

I'll answer the first part and let Mike cover the integration piece. It was only a month, Jack, so I would say it had a negligible impact on EPS. Because if you just look at what we've projected for the annual accretive impact of Carter and divide by 12, you're not going to get much of a number. You're going to get less than half a penny.

On the integration, Jack, one of the beautiful things about Carter Energy and many of the companies that we've acquired is they're well run companies with very competent teams. Carter was a pretty evolved organization, pretty well thought of in the marketplace, considered one of the better operators, if not one of the best. So integration is pretty easy. We closed on that transaction I think in record time simply because they were so well organized. And we're continuing to build out our platforms and plug in the systems. So I'd say that we are certainly culturally--it's a bit of a love fest and the organizations have come together very nicely. So to a certain extent, that's the most important element of integration. So the teams have been working together extremely well, and that's the beauty of this space is it's a bit of a regional business that we're adding a bit of a national dimension to. So all of these companies are running their operations and benefiting from our larger scale and the depth of our functional departments that bring a level of expertise.

So we're well along the way and there's a lot more to come. So there's a good amount of innovation, there's a good amount of growth synergies. So that's probably more than you asked. But I think the answer is yes.

Okay, great. Thank you for that color, Mike. I appreciate that. And then, when we think about additional M&A, or just the M&A pipeline in general, Mike, I'd just be curious to hear your thoughts on sort of what the pipeline looks like for additional acquisition opportunities here now that you have Carter Energy closed. And then, more broadly, when you think about the balance sheet - and I know you touched on this earlier - what level of leverage would you be comfortable putting on the balance sheet maybe temporarily, maybe longer term, as you think about investing in M&A?

Well, I'll let Ira deal with the leverage and hopefully he'll answer it the right way. But on the pipeline side of the equation, it's a very interesting marketplace. I've said it before. And there's a lot to sell in the marketplace. So whether this is a generational thing, whether it's just timely, there has certainly been a tremendous amount of structural change over the last four or five years with a significant amount of divestiture and a lot of musical chairs. So that's created a huge amount of opportunity, as well as maybe this is just the boomer--baby boom sort of generation now looking to transition. So there's a heck of a lot of activity in the marketplace, and we certainly are very actively engaged in all of our businesses and all of our geographies. And I'd say the biggest challenge we have is now selection of the best opportunity. So our screening is becoming I think a bit sort of finer and a bit focused. The number of opportunities that we have in all of our spaces is rather extraordinary.

So we're enjoying the position that we're in. We're a little bit different than a lot of other companies. A lot of other companies are either for sale or they will be for sale. They're not necessarily permanent establishments. I mean, I [don't] know that they're for sale. But as they look at the generational changes and some of the private companies that are operating in the marketplace have got difficulties, because there are certainly significant challenges in terms of price and credit. So you've got--whether it's a structural consolidation going on in the marketplace, it's--there's a lot of action. So our capabilities are far greater. Ira's financial team around the world is very engaged. Our business development team is very engaged. So we feel pretty good about where we are and our ability to grow through certainly external investment as well as more aggressive organic growth. That's going to certainly take time, but we feel good about where we are and what our position is today.

Just to follow-up--it's Ira--on the leverage question, Jack. It's always a difficult question to answer, but for starters if you look at our--one of the key metrics in defining leverage is debt-to-EBITDA. So if you annualize our EBITDA in the third quarter and look at our debt, we're below one time, which is certainly nowhere near the definition of leverage. So I think we have a pretty long way to go in terms of opportunities, et cetera, to capitalize on opportunities like a Carter without necessarily adding any meaningful leverage to the balance sheet. We're certainly constrained by covenant and I don't think we have any desire to get anywhere close to that number. But clearly, going from less than one to two, 2.5 times, somewhere in that neighborhood is still I believe in the marketplace not considered to be much balance sheet leverage at all, which provides us with significant availability, if you will, to make additional investments without adding leverage in a big way.

Okay, that's great. Thank you for all that insight. And then, last question and I'll jump back in queue. Just curious if you guys could maybe talk about do you see any sort of market disruption or maybe even an opportunity caused by the hurricane earlier this week, and whether or not you think that could be--I hate to even say this--like a positive to the P&L, or a negative to the P&L?

No. I think that fortunately--and the oil industry and the logistics industry, really I think is somewhat an underappreciated industry. What the industry does in order to move oil around in this country is quite extraordinary. So while there are certainly outages, I don't think you're going to have the type of scenario that you've had in similar natural events. So this one I think is going to be a bit milder and we're not really expecting that there is going to be significant impact.

Okay. Thank you for the time, guys.

Your next question comes from the line of Ken Hoexter.

Hey, Ken Hoexter. How are you?

Good. Thanks, Ira. So just following up on--well, actually, let me just jump subjects for a second. Can--Ira, can you give an update on the air side on the Afghanistan and Pakistan--anything going on with that border. Are volumes trending down now that U.S. troops continue to withdraw? Can you just provide kind of going back a couple of quarters and update on that?

Yes. I think what I mentioned earlier. Mike alluded to it as well. I would characterize it as generally steady right now. We don't expect the results in the fourth quarter to be materially different than the third quarter. Look, that could change on a moment's notice. But based on what we see today, the expectations are that things remain steady. There is word that the Pakistani border may open up, but that doesn't necessarily mean more opportunity, because we've been getting fuel in through the northern routes over the past several months.

So we watch that every day. We're obviously focused on continuing to capitalize on the skill set that we've built in delivering in those--in that marketplace. But I would say in the short term, if you're looking at the next quarter or two, the expectations are that the level of activity should remain in the same general neighborhood.

And then, the same thing on marine. Obviously, you've had a great pull back with the demand declining within the sector. Can you talk about anything going on inside of that in terms of share gains or new customer wins, or is that a business that not much should be expected until the operations itself turn around?

No. Listen, I think that we are extremely well positioned. And our team I think does a phenomenal job. They are I think recognized as being a superior marine fuel counterparty having a significant amount of sophistication, whether it's outsourcing fuel management, expanding our lubricants activity, the logistics side of it, certainly the financial counterparty, the risk management side. So our team continues to develop and evolve and there's not great statistics on the actual consumption in that space. I'm sure that we've gained market share. I think that's unquestioned. So as things start to come back, I think we're extremely well positioned. And certainly for those companies that are financially challenged, we've got a level of sophistication where we can work with them to get them through some of the darkest days and we've done that. Our legal team and our risk team understand how to make good choices there. But certainly as we look at the space, we continue to refine our capability in all of the areas. And we've got an extremely engaged marine team with a pretty solid global culture. So we continue to make advances, but it's a very difficult marketplace. You've got to be careful about how much appetite you have in all the different places.

Let me just wrap up I guess on the derivative side. I know, Ira, you mentioned a lot of questions during the quarter. So maybe flesh this out just a little bit more, because here's an example where you reduced your exposure to the exchange and if oils come down now, you're also seeing a lower accounts receivable. (Inaudible - technical difficulty) did I hear you mention that your--you did extend more credit, I guess as business or as prices came up a bit. Can you kind of just flesh that out in terms of is this one of those up quarters, and then depending on where we go we could see a sizeable cash change, or does something as time goes on reduce that fluctuation on the cash there?

Look, there are two different pieces of the puzzle here. If you look at traditional long term basics of the business, working capital is a very big part of what we do and working capital will clearly move up and down with oil prices. Just case in point, you had an increase in prices this quarter, and our working capital balance didn't increase significantly, but it increased because you didn't have an overly significant increase in price point to point. You just had a lot of volatility during the quarter. So I think that's a major part of your question. So with the lower position at the exchange this quarter, if prices continue to decline, that should point to a positive. But obviously there are a lot of moving parts in terms of what generates cash flow - our inventory position, et cetera. Our trade cycle, that's an easy piece of the puzzle because we've been keeping that very consistently constant - just over eight days for the last several quarters. So it's really all about the price movement, which is impacted a bit by this cash collateral story, which I think I've explained in enough detail today, which could have some short term impacts going in the other direction from time to time. But over the longer term in a declining price environment, we should still be cash flow positive in a rising cash flow environment--a rising price environment. Depending upon how steep that increase is could indeed result in the use of cash. That story hasn't changed.

Ira, I'm sorry, if you mentioned this earlier. I came on just a couple minutes after you started speaking. But was there any impact from the hurricane on how you're looking at operations or volume into the fourth--into the next quarter?

We're not expecting significant impact on the hurricane.

Okay. Appreciate the time.

Your next question comes from the line of Alex Brand.

Alex, how are you?

Actually, this is [Doug Meadwater] in for Alex. But I actually had a broader question, and you can choose to go as narrow or as wide as you want in the answer. Just looking at everything seems to be just kind of puttering along in terms of economic growth and you're sort of right there alongside of it. The U.S. trucking segment is getting--has very slow volume growth. There's very publicized troubles in the marine segment. And air cargo traffic and passenger traffic isn't exactly doing very well. So you--how are you getting--or do you--what are your prospects for organic growth in this kind of environment and where is it coming from? Is it more from the emerging and frontier market? I know you mentioned that you got some in the U.S., although some of that might have been acquisition related. So if you could just sort of outline that, that would be great.

Well, some part of it is as I--whatever I said--musical chairs or just the changing dynamics of the marketplace. If you are a national oil company and you are in one country or you are an independent company, maybe you're a local company, you're orientation to extending credit is probably going to be quite constrained. As you're reading the newspapers and seeing the information coming across, and you're seeing some failures or you're seeing late payments, you're going to wonder if it's better for you to sell to those companies or to work with someone who can give you a little bit of credit enhancement. So while the economic downturn and demand destruction is certainly not great in one way, it provides an opportunity an opportunity. And that's a little bit of the beauty of our business model. By being an asset light company, having the intellectual capital, having our global network with significant engagement with our legal and financial and risk and commercial and supply teams working in concert, we've all worked together for many years. And having that entire organization tied globally on one system and having this global community work to deal with international trade and commerce really gives us a leg up and a benefit in down markets.

So certainly we enjoy the benefit of better markets, but we also historically have done well in down markets because we provide the solution to those problems. So that's one of the ways that we do it. And then, as I said previously, with the significant amount of divestiture, large integrated oil companies had global operations. As those companies get divested into local companies, they're looking for global marketing solutions and global risk solutions, so the more change, the more fragmentation, the more opportunity for us to provide solutions. And we increasingly provide a full suite of solutions that are bundling almost turnkey approaches to some of these suppliers, as well as the purchasing community. So all of that wrapped together allows us to continue to grow in times that are not necessarily all that favorable.

Thanks very much for that very comprehensive answer. And that was my only question.

Thank you.

You do have a follow-up from Jack Atkins.

Just a couple quick follow-ups here. First, Ira, with bad debt expense in the fourth quarter, do you expect that to be roughly similar to the third quarter?

It's a very tough question to answer because, once again, it's impacted by multiple factors, including what our overall receivable balance position might be. So depending upon what happens with prices over the next two months, depending on what's happening in the day-to-day management of the business from a receivables management standpoint, it would be way too early to make that call.

Okay. That--I got you there. And then, more broadly with regard to just kind of going back to the joint venture you guys have on the crude marketing and [rail call] logistics joint venture, when you think about opportunities to maybe expand that business, whether it's into other geographies in the U.S. or maybe grow it with what you're doing there out of the Bakken, could you maybe talk about just sort of some opportunities to--that you see that you could expand that particular business line?

Well, sure, I'll just talk about it generically. It certainly does apply to this situation. But the geographic one, that's a no-brainer. So those opportunities do exist in other parts of the United States. And then, the other part of it, I think the name of the game--it's always the name of the game--is trying to be one step ahead of where the market is going, right, sort of skate to where the buck's going to be. So that market is changing and all markets change. Nothing stays the same. So I think the logistics aspect of it you've got different modes of transportation, so I think when you look at our company you need to think about a multi-modal petroleum logistics and finance company. So we're looking to provide a service to producers in this case and receivers and deal with all of the logistics of the finance and the handling. And there's a significant amount of logistics expertise that is required to move that product from point A to point B, and there's a lot of points in between.

So most folks pick their poison. So refiners are typically focused on refining and producers are focused on producing. And there's a whole lot in between. So we certainly have our game plan. It's changed in the short time that we've been involved with it, but we'll continue to evolve and we've got plans underway to reshape that business and to extend it. Only time will tell if we're making the right calls on it. So it's not an enormous part of our business, but we liked it because it sort of demonstrates our ability to take our core competencies and apply them to different markets that have similar characteristics. So I think the greater message is that type of capability exists for us around the world. And we're doing a number of interesting things to take all of our competencies and to logically apply them to the best opportunities that have the biggest growth rates or the biggest returns and the right financial characteristics.

Okay. That all makes sense. And then, last thing for me. Ira, when we think about the (inaudible - technical difficulty) supply business, we saw I think you said an $11 million swing sequentially in that business. Just sort of curious if you could give us just some metrics that maybe we could follow on a day-to-day basis or month-to-month from the outside as to maybe how that particular piece of business is progressing, because that's a pretty big swing from quarter-to-quarter and can move numbers around. Is there any--are there any metrics that maybe you could point us towards that could help us just get an idea how that business is trending during the quarter?

I wish there was an easy answer to that. I could give you a couple pieces of it, which we've covered in the past with the Wall Street community. Clearly, if you look at the position that we report, that gives you a feel for how many gallons are involved, so obviously, as our level of inventory in our self supply model in the U.S. in particular has increased, that just creates opportunity for that number to get a little bit bigger. We've talked about basis spreads in the past, so I know--I won't mention any names, but I see a couple of our investors have gotten pretty proficient in tracking basis spreads on a day-to-day basis.

So we've had a couple of quarters--I think it was three quarters ago--where we talked about that in some level of detail because there was an aberration and basically--once again, what I mean by that for those that may not be as familiar is there is no perfectly efficient way to hedge jet fuel, so the market convention is by entering into heating oil contracts because the long term correlation between jet fuel and heating oil has been very tight. But sometimes that falls out of whack. And that's available information. I think Platts is subscription based, but I think you could even pick up information like that on Bloomberg. It may not be 100% accurate. So that's another piece of the pie. And then, there are also short term meaningful gyrations in price, either up or down, that will generally have an impact on results in the short term. So if there's a somewhat orderly declining price over the period of three months versus a one-week decline of 5%, that signifies a more likely--or more--it signifies it's more likely that you'd have an impact on the inventory side of the business either up or down when that happens.

So those are a few of the kind of leading indicators, if you will. I can't say it's the easiest thing to track externally, but there are some pieces that are easier than others to at least give you a feel for is this going to be a quarter where the result is going to be positive, or is this going to be a quarter where the result is going to be negative. You're never going to nail it to the nearest million dollars. So I hope that helps a bit.

Still there, Jack? Operator, are we--.

--Did we pass our hour?

Are we done?

Okay. There are no further questions in queue. Presenters, if you'd like to do closing comments.

Right. Okay. Well, in closing, I think I'd just like to say that we have a positive and strong culture and a tremendous global community of professionals oriented towards and having demonstrated continuous value creation over a long period of time. So it's taken a generation to create and it's difficult to replicate. So it's certainly a source of strength and continued growth and we feel very good about it. So on behalf of the 2000 team members, operating from 60 offices around the world, I thank you for your support and look forward to talking to you next quarter.

Thank you for joining us. This ends our formal presentation. You may now disconnect.