World Kinect Corp (WKC) 2013 Q3 法說會逐字稿

Good evening, everyone and welcome do the World Fuel Services 2013 third quarter earnings call. My name is Mandy and I will be your event specialist today. (Operator Instructions)With us on the call today are Michael Kasbar, President and Chief Executive Officer and Ira Birns, Executive Vice President and Chief Financial Officer.

At this time, I would like to review World Fuel's Safe Harbor statement. Certain statements made today including comments about World Fuel's expectations regarding future plans, performance and potential acquisitions as well as pending litigation and proceedings are forward-looking statements that are subject to a range of uncertainties and risks that could cause World Fuel's actual results to materially differ from the forward-look information. A description of the risk factors that could cause results to materially differ from these projections can be found in World Fuel's form 10-K for the year ended December 31, 2012, and other reports filed with the Securities & Exchange Commission.

World Fuel assumes no obligation to revise or publicly release the results of any revisions to these forward-looking statements in light of new information or future events. This presentation includes certain non-GAAP financial measures as defined in regulation G. A reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures is included in the World Fuel's press release and can be found on its website.

We'll begin with several minutes of prepared remarks which will then be followed by a question-and-answer period. Instructions on how to ask a question will be given at the beginning of the Q&A session. At this time, I would like to introduce Mr. Michael Kasbar, President and Chief Executive Officer of World Fuel.

Thank you, Mandy. Good afternoon, everyone. Today we announce third quarter earnings of $51.5 million or $0.72 per diluted share or $0.81 per diluted share on a non-GAAP basis. We continue the positive momentum we saw in the second quarter, many of our business lines and we ended the quarter with a solid capital position.

Our Aviation group performed very well this quarter, generating record volume. The third quarter's typically our strongest quarter due to seasonality and both our commercial and business Aviation activities were positively impacted by this trend. In particular, our commercial Aviation activities were exceptionally strong in Europe, Latin America, and Asia where each region posted double digit sequential and year-over-year growth. Our Aviation team has done an excellent job at building the segment, growing volume 13% year-over-year, significantly outperforming the broader industry.

Our core Marine activities were generally stable. Following an impressive second quarter, we once again experienced near record low volatility in bunker fuel prices as we did in the first quarter. This lack of volatility negatively impacted our derivative marketing profitability. Quarter to date, volatility levels have increased modestly which could help drive improvement in our Marine results in the fourth quarter.

While the global market is still over supplied with ships, and freight rates are generally still at historic lows, there are pockets of positive news in some sectors and our global team will be relentless in pursuing these new opportunities while executing on our long-term strategy. As projected on last quarter's call, our third quarter results in Land declined sequentially driven principally by reduced profitability in crude marketing activities. We have seen signs of improvement in this business and as the spread between Brent and WTI has widened significantly over the past several weeks.

Our core Land business is well (background noise) to perform well. We continue to see a myriad of opportunities in the Land segment and recently we made two small acquisitions which we expect will drive new opportunities for us. We will continue to pursue additional opportunities in this segment. Even though overall market conditions remain challenging, we see numerous growth opportunities in the marketplace.

In Aviation, we just returned from the National Business Aviation Association's annual conference in Las Vegas. This year, more than 25,000 people attended this event and the energy level was stronger than it has been in some time. We showcased our growing network of services and premier brands we offered to the general Aviation community including FBOs, MROs, and pilots and garnered a very strong response. Our acquisitions in this space have taken root and business Aviation has become a larger part of our global aviation business.

In Marine, our team is prepared to capitalize on the ever changing landscape of supply and demand by deploying a diversified business model across our global platform. For Land, the global distribution business remains fragmented, providing significant opportunities for continued growth in this segment. We've gained significant expertise in this area over the last few years and believe we can replicate our success to capture additional market share in the US, UK, Brazil, and other parts of the world.

In our AVCARD and multi-service billing and payment solutions business, we have only begun to scratch the surface. Our investments in this space provide us with a solid opportunity to grow this activity in each of our segments both domestically and internationally. The recent announcement regarding the expansion of our banking facility demonstrates the continued confidence and support from our bankers and provides us with an even stronger liquidity profile enabling us to further pursue strategic growth opportunities.

In the third quarter, we also executed our share repurchase program. We will continue to consider doing so from time to time. Overall, considering the current economic environment, I am pleased with our results and our performance this quarter.

I'm proud to see the engagement of our global team as we continue to grow our customer base and remain the counter party of choice with our suppliers. While market conditions have constrained organic growth in the short term, we believe we have significant opportunities for growth with an increasing portfolio of products and services and expansion opportunities into new geographies. Whether it's the growing global business Aviation platform, or specialty products such as lubricants and de-icing fluid, or transaction management services, we remain focused on driving profitable growth across our businesses. We have the capital and internal talent to make this happen.

From an M&A standpoint, our acquisition pipeline is stronger than ever. Driving even further opportunities for growth as we look toward 2014. Our entire team remains focused on growing our value proposition and fuel services and billing and payment sectors across all three of our business segments, driving greater value for our customers, suppliers and shareholders. We want to thank all of you for your continuous support. With that, I'll turn it over to Ira for a financial review of our results for this quarter.

Thank you, Mike. Good evening, everybody. Starting with revenue, consolidated revenue for the third quarter was $10.5 billion. Up slightly on a sequential basis and 6% compared to the third quarter of last year. The year-over-year change in revenue was entirely attributable to the increase in volume across all three of our business segments.

Our Aviation segment generated revenue of $4.2 billion, up $434 million or 12% sequentially and $356 million or 9% year-over-year. The year-over-year increase was entirely due to increased volume.

Our Marine segment revenues were $3.6 billion. Beyond $391 million or 10% sequentially and $54 million or 1% year-over-year. The entire year-over-year decrease was a result of lower volume.

And finally, the Land segment generated revenues of $2.7 billion, down $29 million or 1% compared to the second quarter but up $281 million or 11% year over year. The year-over-year increase principally relates to the Carter acquisition, completed in September of 2012.

Our Aviation segment sold a record 1.3 billion gallons of fuel during the third quarter, up 96 million gallons or 8% sequentially and 145 million gallons or 13% year-over-year. Volume in our Marine segment for the third quarter was 6.2 million metric tons, down one million metric tons or 15% compared to last quarter and 240,000 metric tons or 4% year over year. During the third quarter, decreased volatility was the principle contributing factor to the drop-off in volume.

Our Land segment sold 885 million gallons during the third quarter, down 18 million gallons or 2% sequentially but up 100 million gallons or 13% from last year's third quarter. This decline principally relates to the decline in crude oil volumes as previously forecast. Excluding crude, Land volumes actually increased by 4% from the second quarter. Consolidated gross profit for the third quarter was $186 million. Down $2 million or 1% sequentially but up $6 million or 3% compared to the third quarter of last year.

Our Aviation segment delivered a strong quarter. Generating $90 million in gross profit, up $14 million or 18% sequentially and $6 million or 7% year over year. In the third quarter, we experienced strong seasonal growth in both commercial and business Aviation as projected on last quarter's call with government activity effectively flat. Net revenue was principally impacted by an 8% increase in volume, higher average margins on spot business activity as well as an improvement in derivatives activity. As we look to the fourth quarter, global passenger jet fuel consumption typically experiences a 7% to 9% sequential decline in volume. While we do expect the seasonal decline in volume in the fourth quarter, we hope to out perform the broader market as we have regularly done in the past.

And while government activity was stable in the third quarter, we will likely experience further declines in Kyrgyzstan and Afghanistan volumes in the fourth quarter and through 2014. Our jet fuel inventory position from our self-supply model was approximately 121 million gallons or $347 million at the end of the third quarter. Up from 98 million gallons or $270 million at the end of the second quarter. The increase principally relates to increased volumes and timing of certain cargo deliveries around quarter end. While the spread between jet fuel and heating oil prices experienced modest volatility during the quarter, this dynamic had no meaningful impact on third quarter results.

Our Marine segment generated $40 million in gross profit. That's down $12 million or 23% sequentially, and$14 million or 25% year-over-year. While volatility levels picked up somewhat in the second quarter, they reverted back to near historical lows in the third quarter. This lack of volatility negatively impacted our derivative marketing activities which principally drove the sequential decline in gross profit. While the macro environment remains challenging, our Marine team generally navigated the markets well in the third quarter with core traded activity remaining stable. We'll continue to seek new opportunities while balancing the risk profiles of new and existing customer accounts.

Our Land segment contributed gross profit of $56 million in the third quarter, down $4 million or 6% sequentially but up $14 million or 32% year-over-year. Fuel-related Land business activities generated gross profit of $46 million. Once again, this represents our total business activity in Land with the exception of multi-service. Our core Land fuels distribution business delivered sequentially higher profits in the third quarter, however, as projected on our last call, the profitability in our crude business declined sequentially, resulting in a net decline in gross profit this quarter.

With Brent and WTI spreads widening once again -- the actual spread as of this morning was more than $12 --it provides an opportunity to some improvement in crude-related profitability in the fourth quarter. Multi-service once again performed well and we continue to work with the multi-service team to grow our fuel card program and multi-services billing and payment solutions.

Operating expenses in the third quarter excluding our provisions for bad debt were $120 million. That's up $3 million sequentially but down $1 million after excluding multi-service and Carter energy when compared to the third quarter of 2012. The expenses this quarter were on the higher range of what we projected last quarter, principally due to approximately $2 million of operating expenses related to a small acquisition completed during the quarter. We remain focused on improving our overall operating efficiencies over the next several quarters.

And looking forward, I would assume total operating expenses excluding bad debt expense of approximately $118 to $123 million in the fourth quarter. Turning to the balance sheet, our total accounts receivable balance was $2.5 billion at the end of the third quarter. That's down $73 million compared to the second quarter and up approximately $134 million compared to the third quarter of last year.

Bad debt expense for the third quarter was approximately $1.9 million down $800,000 sequentially and $1.8 million compared to the third quarter of 2012. The sequential decrease in bad debt expense was principally related to the decreased level of accounts receivable.

Consolidated income from operations for the third quarter was $64 million, down $5 million or 7% sequentially and $7 million or 10% year-over-year. For the quarter, income from operations in our Aviation segment was $41 million. That's up $7 million sequentially and $1 million compared to the third quarter of 2012.

Our Marine segments income from operations was $17 million for the third quarter, representing a decrease of $7 million sequentially and $10 million compared to last year's third quarter. And finally, our Land segment had income from operations of $15 million down $6 million sequentially and $3 million year-over-year. EBITDA for the third quarter on a consolidated basis was $76 million. A decrease of $3 million or 4% sequentially and $4 million or 5% year-over-year.

Non-operating expenses which primarily consist of interest expense were $5.7 million in the third quarter, that's up $900,000 compared to the second quarter and $2 million from the third quarter of last year. Both the sequential and year-over-year increases were principally driven by higher average borrowings during the third quarter. Excluding any foreign exchange impact, I would again expect non-operating expenses to be approximately $5 to $6 million for the fourth quarter.

Our tax rate, our effective tax rate for the third quarter was 14% compared to 21.7% in the third quarter of last year. While there is a significant variance in our year-over-year quarterly tax rate, our year-to-date tax rate through the third quarter is now 17.3% versus 17.5% in 2012, effectively flat.

The sequential decrease this quarter is principally due to a lower contribution of US-based earnings to our forecasted annual results. We expect our tax rate to be in the range of 16% to 19% in the fourth quarter. Our net income for the third quarter was $51.5 million. That's a 1% increase sequentially and it is effectively flat year over year.

Non-GAAP net income which excludes amortization of acquisition-related identified and tangible assets and stock-based compensation was $57.9 million in the third quarter. A 1% increase sequentially and also flat year-over-year. Diluted and non-GAAP earnings per share for the third quarter was $0.72 and $0.81 respectively. Both increasing $0.01 sequentially and both flat year-over-year.

Our overall net trade cycle was flat sequentially at eight days and down from 8.2 days in the third quarter of last year. As Mike mentioned earlier, during the third quarter, we repurchased $20 million of our common stock in the open market. While we had not done so for some time, we will now consider buying back our shares from time to time when we feel our shares are undervalued, principally to offset any dilutive impact of employee stock awards.

We still have $30 million available under our existing authorization to repurchase additional shares. Regardless, we ended the quarter with $333 million of cash compared to $232 million at the end of the last quarter and $139 million in the third quarter of last year. While our cash position increased by $101 million, our total debt increased by $107. Therefore our net debt position was effectively flat and our cash position this quarter was positively impacted by its very strong cash flow at the end of the quarter which didn't come in time to repay some of the outstanding debt on our revolver. We expect our cash position to return to its historical range in the fourth quarter.

We generated $61 million of operating cash flow during the quarter, bringing total year-to-date operating cash flow to $214 million, compared to operating cash flow of $48 million during the first nine months of last year. This now marks the fifth consecutive quarter of positive operating cash flow which continues to strengthen our liquidity profile. Our liquidity profile was further strengthened earlier this month as we now have extend the maturity of our revolving credit facility to October of 2018, and increased the size of the facility which $300 million to $1.1 billion. We also extended the maturity date of our existing $243 million term loan to October of 2018. The overwhelming support we receive from our bankers is a true testament to their belief in the success of our business model and we're very appreciative of their support.

Between the additional $300 million and positive changes to terms and conditions of the amended facility, our total liquidity is now increased by approximately $500 million, further increasing our financial flexibility and providing even greater support for organic growth and strategic investment opportunities going forward. Now, before closing, I would like to provide a brief update on matters relating to the July train derailment in Quebec. As a reminder, our connection to this incident stems from our being the owner of the crude oil and the lessee of the tank cars that were being transported by the railroad at the time of the derailment. We held title to the crude oil on behalf our crude oil marketing joint venture and had subleased the tank cars for the joint venture for use in its operations.

As we mentioned on our last earnings call, at the time of the accident, our crude oil and the leased tank cars were under the care, custody and control of Canadian Pacific railway, the railroad with which we contracted, and Montreal Marine and Atlantic, a railroad separately subcontracted by Canadian Pacific. Concerning regulatory actions, we continue to contest the order issued by -- issued against MMA, CP, and World Fuel by the Quebec environment ministry. The principal basis upon which we're challenging the order is that it is a misapplication of Quebec law. Since our last call, we have formally contested the order and expected a hearing before the [TAC] an administrative body responsible for hearing such contestations will take place in the first half next year.

While we believe we have strong arguments against the order, were the [TAC] to rule against us, we would seek administrative review of the decision and if unsuccessful, would then challenge the decision in civil court. We intend to aggressively pursue all available rights to contest and appeal the order. It is our understanding that it could take several years before all appeals are exercised by the parties and a final decision is reached. While we'll continue to contest the legality and validity of the order, we continue to take actions that we believe are appropriate to meet our obligations under Quebec law and after that end, submit a technical plan to the ministry, proposing to undertake a role in certain activities at the site that we believe is consistent with our responsibilities under the law.

We expect any costs which may be incurred by us in connection with this limited role would be covered by insurance. We have been in contact with various other Canadian and US regulators since the first days of the accident and continue to cooperate with these authorities. With respect to the lawsuits pending in Illinois and the class action pending in Quebec, we're among various defendants in such suits which, in addition to Canadian Pacific and MMA include affiliates and insurers of MMA, various rail car manufacturers and lessors and the party which contracted to purchase the crude oil.

All of the lawsuits are at a very early phase, making it impossible to estimate any potential liability. We continue to believe the claims against us are without merit and intend to vigorously defend ourselves against these actions.

Apart from these lawsuits, we've received demands for indemnification from certain tank car lessors pursuant to the relevant lease agreements. We're are still assessing the demands, but we do not anticipate any significant exposure associated with these indemnification obligations. At the same time, we are assessing claims we may have against certain third parties.

With respect to insurance, notice has been provided to our various carriers who have been very cooperative. We understand that the investment community is interested in understanding the limits of our policies. However, we do not believe it is in the interest of the Company or its shareholders to disclose such information at this time. As we have stated previously, we in our joint venture affiliates maintain insurance covering the activities in which they're engaged which include coverage for environmental damage and clean up costs as well as third party liability and defense costs. We expect that substantially all defense costs incurred in defending the orders, the Canadian class action lawsuit, and the US lawsuits will be covered by insurance.

In the third quarter, we expensed just under $800,000 related to this matter which includes deductibles under our insurance policies and certain limited legal fees not covered by insurance. Lastly, with respect to questions that have been raised publicly concerning the makeup of the crude oil and the packing group classification of the oil, while we're not able to comment specifically on these topics due to the pending legal proceedings, we can say there is nothing we're aware of currently with respect to those topics that we believe contributed to the cause of the derailment or its consequences. We remain deeply saddened by this tragic accident and our thoughts and prayers remain with the citizens of Lac-Megantic as they seek to recover from this terrible accident.

While you may have remaining questions regarding this incident, unfortunately, at this time, we cannot provide any additional comments beyond what I just shared and the information which we've included in our 10-Q disclosures. So in closing, despite the obvious distractions associated with Quebec, our team remains focused on driving our business and we're pleased with the overall results we delivered this quarter. Capitalizing on our core competencies, we remain strategically focused on delivering profitable growth, driving solid returns, and creating additional shareholder value. Our strong cash flow performance, coupled with our expanded banking facility, put us in an even stronger position to execute on accretive, organic, and strategic opportunities as we head into 2014.

With that, I would now like to turn the call back over to Mandy, our operator, to begin the Q&A session.

(Operator Instructions)Our first question today comes from Jon Chappell with Evercore. Please pose your question.

Thanks, Mandy. Afternoon guys.

Hi, Jon.

Mike, first question, the Marine business. You talked about it. About lack of volatility etc., however it was still a pretty large sequential decline in gross profit and just looking at historicals, it's been about two and a half years since you put up a quarter so low. Just trying to figure out how much of this Marine weakness is strictly just volatility in prices. I know there's a lot of spot market business there versus how much of it is your proactive manner in treating the difficulties in that market and based on that, when do we start to see a ramp in risk on your side where we can start to see an improvement in volumes again and (inaudible)?

Thanks, Jon. Jon, you know as well as anyone the state of the market. I guess I've been talking about this for quite some time. Slow steaming is not insignificant. We estimate there is probably about a 30% drop-off in demand. You've got a lot of dislocations going on. Larger ships are taking bunkers of pure locations, freight rates are pretty precarious for a number of different sectors. So it's still a fairly risky environment out there.

So we're being reasonably careful. On the volatility side the market is remarkably stable. And when -- the price doesn't move so much, little bit more difficult to be able to provide that value in the marketplace. So I think we've got one of the better mousetraps in the marketplace and it's the benefit of our diversified business model in terms of being involved in a lot of different end markets and being able to work the different business cycles. So I don't suspect that the market is going to stay as stable as it has been. And our group is pretty innovative.

We've been working a variety of different geographies, entering new markets. You've got a lot of dislocation going on in terms of the musical chairs of the oil industry, the departure in various different markets and new suppliers coming in and new supply sources coming in. So with some of the economy picking up and with some volatility coming back into the market, I'm optimistic that we'll start to see some better results but I still think we have a little ways to go. So maybe that's not a very specific answer but it's about the best one I can give you.

No, I understand. For my follow-up, you also mentioned at the end of your comments about pretty much -- I think you said the most robust M&A in the pipeline you've seen in some time. Obviously Ira gave us a little bit of an update with your financial flexibility right now. As you look at non-organic growth, are you looking at things that are similar to what you've done with multi-service and AVCARD as far as higher margin, less fuel related -- less direct fuel-related type businesses or are you still thinking about bolt-ons to your core fuel business?

We're very open-minded. Once again, I think as I've said before being able to diversify and provide solutions, a big part of the name of the game for us is to take the pain away from our clients. So transaction processing, billing solutions, underwriting. Being able to deal with some of that back office side of the equation is something that is very appealing to us. We had experience with AVCARD that we acquired in 2007. Multi-services has been a great experience so far.

So we like that but we'll also continue to look within the Land business, an enormous marketplace, the Aviation that we acquired seven or eight companies, I think maybe even nine that we put together within our business aviation space. And that's really starting to come together. We really are getting a platform there.

So anything that is related to that distribution into the end market, expanding our customer base, getting involved in the natural gas side, the energy side, it is really quite extraordinary what's happened in this market here with shale oil and shale gas. Tremendous amount of dislocation. You've got compressed natural gas coming into the picture. We're participating in that. It is quite broad.

Okay. I appreciate it. Thanks a lot, Mike.

Thank you. Our next question comes from Jack Atkins at Stevens. Please pose your question.

Good afternoon, guys. Thanks for taking my questions.

Hey, Jack.

Mike, to start out with, depending on how the fourth quarter shakes out, looking back over the last couple of years, 2013 earnings per share is going to be fairly similar to 2012 on an absolute -- excuse me, 2011 on an absolute basis. I know for a company that has such a great track record of organic growth, it's got to be frustrating. I know the market has had a lot to do with it. I was curious if you could lay out for investors and the analysts on the call what you all are doing organically, if you could layout a couple of strategic initiatives that you guys are pursuing internally to return the Company to the historic levels of organic growth that you guys have achieved over the years.

That's a good one, Jack. As we look at -- you know, as we look at the platform that we've got we feel pretty good about the growth that we've driven and certainly the volume side of the equation. The commercial Aviation side has grown almost exclusively organically. A big chunk of it, I think is repositioning the Company in a number of different ways. You've got a lot of transition going on within the spaces, within the global marketplaces.

You've got different regulations coming in within the bunker side where you're going to see 0.1% sulfur being supplied in 2015. That's going to cause tremendous amount of disruption in the marketplace. It's going to make what is already a complicated Marine sourcing business significantly more complicated. I think our development within our diesel and gasoline business puts us in a great position to be able to service that Marine business.

We're certainly expanding new geographies, that we've got a fairly robust government business. We knew that that was the sunset activity within Afghanistan and Kyrgyzstan. We're actively looking to take that competency and apply it to our government clients in different geographies. We set up shop in different locations.

The market is a bit more broadly based today than it used to be. It used to be a little bit more straightforward where you have your standard bunkering locations. You had a certain amount of fragmentation. That's changing to a certain extent. You now have simultaneously a lot of concentration with larger ships and larger suppliers. in some of the main ports but some of the volume has been taken up by bunker supply showing up in a number of different locations. So we're participating in every part of the marketplace and looking to drive efficiencies, work the cost side of it.

But I think you have to have some appreciation that the demand is somewhat tepid. So some part of what we're doing is trying to add more of those solutions to the equation, really looking to differentiate in the marketplace. I think that we're widely perceived as a superior platform that has the right financial positioning and one of the best teams in the marketplace. So our Land business will continue to grow. Our Aviation business will continue to grow. The Marine space has certainly been challenged.

We've been careful on that. Just because there's a significant amount of risk and you have to be a little bit careful about how you proceed in that marketplace. Our expansion into other products on lubricants, de-icing fluid, natural gas, I think is going to serve us well to be able to get access to a broader base of clients. So we're moving from a fuel company to an energy company, looking to provide solutions, expanding the definition of our marketplace from airlines and shipping companies to that broad-based ground fuels business and then looking at commercial and industrial users and really managing industrial risk with their energy products and providing it in a complete solution. We've got a sophisticated offering on the derivatives side which gives us risk management. We understand underwriting.

I think we continue to provide a great distribution platform for the supply community. And we're redefining our customer base. We continue to penetrate different geographies so the beat goes on. Granted the growth has not been as strong as it has been but I guess we're investing into a slow dime rather than a fast nickel and I -- I think that you'll start to see some of those things come through in 2014.

Okay. That's very helpful, Mike. Thank you so much for that. For that color.

I guess for my follow-up question, on the military side of the business, our checks on various government websites have indicated that I guess you guys have some major fuel contracts with the military related to Afghanistan. And your activities there which are either expiring I think some of them are expiring today or early next year with one large one. I guess first off, is that the case? And then secondly, I know you guys have talked about the military activity winding down in your business in the fourth quarter and in 2014. Ira, how much of a step down should we expect in terms of profitability, I guess gross profit sequentially just to help us understand how that flows.

It is a moving target on a day-to-day basis in terms of the additional demand that is still forthcoming from the military. So it is tough to forecast -- it certainly looks today like the number will be lower than the third quarter by at least a few million dollars, it is tough to give you an exact number.

Sure.

And then it will likely drop further in the first half of next year. There will probably be something that will continue on indefinitely, even after most of the troops pull out. Obviously that is going to be a much lower level of activity than what we're seeing today.

Okay. Okay. That's helpful. As far as the contracts, are those going to renew? The ones that are expiring in the near term or are those just ending at the end of this month?

There's a lot of -- some of them are rolling off. Some are getting extended. Some may be going away. At the end of the day that's secondary. The best way to look at it is the way I described it earlier in terms of the reduction in volume. Because we may lose some on one contract and pick up some on an extension or a new piece of business in the short term.

Okay, great. Thanks again for the time.

Thank you. Our next question is from Gregory Lewis at Credit Suisse. Please pose your question.

Thank you. Good afternoon.

Hi, Greg.

Hey, Greg.

Mike, you mentioned two small acquisitions in Land that you were able to execute during the third quarter. Should we be thinking about those in terms of bolt-ons or are those -- you mention you see some adjacent opportunities with those acquisitions. Could you provide a little bit of color and what you're thinking in terms of those?

Sure. One company is called US Energy and they're in the natural gas, electricity, and water side. They're an energy management services business and they're focused on those markets for commercial, industrial and government clients. They provide procurement, advisory, risk management services and in select cases, they'll act as a merchant to their clients. So we like that. Some of our diesel clients, such as our distilleries in Scotland, or trucking companies in the US have been switching to compressed natural gas and we didn't have a horse in the race so this was a leading group of professionals with a solid portfolio of customers and they've provided services in natural gas and electricity for many years.

So in addition to leveraging their natural gas competencies, their client list gives us great opportunity to service their liquid fuel requirements across the United States. So I expect that in 2014, they'll make a meaningful contribution so we're excited about that diversification. It is very much consistent with what we do in terms of providing solutions. And then another company -- wasn't in the third quarter -- but another company that we picked up was a lubricants distribution company in Scotland. Again, that is consistent with providing solutions. They provide the lubricants for commercial and industrial customers, passenger and commercial vehicles, and the Marine and Aviation industry. So it straddles all of our businesses.

It gives us the opportunity to leverage our supply chain with the supply community and broadens our customer base. So we like both of those businesses. Anything that is on the distribution downstream -- distribution be able to aggregate demand is consistent with our long-term strategy and then selectively figuring out how to optimize the supply chain to be able to grab a margin and provide an enhanced solution to our increasing customer base.

Okay, great. Then just as I'm looking at the balance sheet, it looks like over the last couple of quarters, PP&A has been moving higher. Is that -- this quarter was up I guess $15 million, $16 million quarter over quarter. Is that related to these acquisitions or is there other assets that have been acquired as part of the overall strategy?

Greg, I'll answer that. It's Ira. A big chunk of the number you're seeing this quarter and you'll see a similar number again in the fourth quarter, relates to the expansion of our infrastructure in North Dakota that supports our crude operations. That was announced by our joint venture partner earlier in the year. So that's somewhere between a $40 million and $50 million investment. We're about halfway through it as of the end of the third quarter. I don't know if Mike you want to elaborate on that?

In terms of PP&E?

No, just In terms of the project.

That crude project, is an interesting one for us. It again puts us into the distribution logistics side and being able to supply our supplier with crude oil I think is -- puts us into another interesting dimension within the supply community, provides some interesting offsets so once again, getting deeper into the supply chain is good. It's very interesting. In this country, just tremendous amount of change. With the Bakken they expected that to double. We had a first move or advantage there. We've got a distribution network there and our suppliers are connected with our facility there so we feel pretty good about that diversification within that crude oil side.

Okay. Thank you for the time.

Thank you. Our next question is with Kevin Sterling at BB&T Capital Markets. Please pose your question.

Hey, guys, this is actually William Horner on for Kevin.

Hi, William.

Thanks for taking my questions. Ira, going back to Jack's question a minute ago on the government activity and maybe asking this a little bit differently but I know on previous calls you all have talked about the opportunities that this business has afforded you in terms of leveraging your relationships and logistics and I was wondering if you could touch on maybe what sort of traction you're getting with this and given the ramp in your volumes this past quarter, in light of your flat government activity, are you starting to see a pickup in leveraging this with your government customers or maybe a little layover into your commercial business as well?

The government activity I think is by now, these are requirement contracts and we've been involved in that government activity since the late 1980s. We like it. It is a bit of a challenge. You certainly have to have your Is dotted and your Ts crossed. It is like formula one racing where you're testing your ability to perform and being able to apply that back into your more civilian business activity, if you will. So we'll continue to do that then as I think I've mentioned many times before.

When we went into the acquisition of NCS, we knew that was going to be a sunset opportunity. But it was a great crowd of people and it gave us advanced logistics to be involved in different theatres. So we've been actively pursuing those types of activities in other locations and we've had some small winds, nothing material, nothing really to replace what we've had either in Afghanistan or Kyrgyzstan. So they'll be -- phasing down as Ira commented on.

And we'll continue to grow our commercial business and to expand into different areas, anything that fits into a distribution model that -- has that energy dimension to it. Where we're dealing with price risk. Delivery risk. Quality control. Quantity control. Timely delivery operations. Management information, transaction processing, underwriting, any one of those businesses really is very much (inaudible). Obviously we've got a deep focus on the commercial aviation, the business aviation, the full spectrum of marine supply and now ground fuels distribution. So I'm not sure if you're looking for something specific but that's the general disposition.

No, no, that's very helpful, Mike. That's what I was looking for. Nothing too specific. Just -- the cross selling opportunities and then just leveraging the logistics across your entire platform. For my follow-up, just on the share repurchase, I don't know if you can answer this or not but if you repurchase any shares quarter to date?

No, we have not.

Okay. All right. Thanks, guys.

Thank you.

Thank you. Our next question is from Jack Atkins at Stephens. Please pose your question.

Thanks, guys for taking my follow-up questions. Just two quick items here. First, on the joint venture with Dakota Plains, it looks like just looking at the minority interest line, that was a loss making entity in the quarter. Would you expect that to return to profitability in the fourth quarter or do you think that's going to be break even or maybe at a loss in the Q4?

Good question. Just to be completely clear, the operating results were right around break even this quarter and that was driven by the dynamics that we explained during the call. The competitive pressures as well as the fact that the spread between WTI and Brent evaporated, and that lasted for a good part of the third quarter. The reason the number was negative relates to the $800,000 I mentioned in insurance costs, deductibles and some uncovered legal fees that relate to the Quebec incident. And those flowed through the joint venture. So that took that to a negative.

Based upon what we're seeing so far in the fourth quarter, with spreads widening once again, the spread between WTI and Brent was over $12 this morning. There's certainly an opportunity for us to return to profitability. It is quite likely we'll return to profitability. How much, I can't tell you. But we should make a few million dollars in that area in the fourth quarter.

Okay. That's helpful. Last question is a housekeeping item. Ira, do you have the quarter end diluted share count?

The actual quarter end number?

Yes, just so we know what the run rate is going forward because of the repurchases.

Give it to you in one second. It is 72.261 million shares as of October 24th. And I don't think that's much different from the September 30th number.

Okay. Thank you.

Thank you. Our next question is coming from Shawn Collins at Bank of America. Please pose your question.

Great. Thanks, guys. Thanks for taking our questions. I think at the beginning of the call, you said that you were seeing strength in Europe and Asia. I don't know if I have that right or wrong but can you talk about what you're seeing regionally and compare the US versus Europe versus Asia and how the businesses are evolving there?

The comment was relative to our commercial Aviation business. Latin America, Europe, and Asia did quite well in the quarter. So one of the benefits obviously of operating in all of these theaters is that we do get good amount of diversity in terms of those different regions. I think Europe is still not doing all that well. Asia's obviously doing better. Latin America didn't get infected obviously with the downturn.

So I think it is very much a commentary of us being able to ride the markets in Asia and Latin America, and I think it is quite a strong commentary in terms of our performance within Europe. So we've got a significant position within the US market and we continue to get involved in the supply chain here. Which we're happy with the position that we've established here but markets increasingly are more global and as new markets open up, we've got a lot more appetite to be in those markets as a first mover. Our team globally is pretty talented at being able to look at these markets and enter them. But the macroeconomic future of these markets is not necessarily my specialty. But we did well as it relates to the ones that we identified earlier in the call.

Okay. Great. That's helpful. Thank you. Just a quick follow-up on M&A. I know you touched upon that.

But what are you seeing in terms of valuation out there, private valuation versus public valuation? You mention we certainly have a tepid economy. A challenging business environment. But at the same time, we have pretty robust credit markets as well as equity markets that are reaching new highs. I'm curious what you guys are seeing from an M&A valuation standpoint based on the things you're seeing out there.

It varies, obviously, depending on the situation of the company, the size. I think it is fair to say that the valuations generally speaking are higher now than they were in 2008. statement of the obvious. But I think that we're quite a good buyer. I think that people appreciate doing business with us because they know that we are serious buyer and they know that their companies are in good hands. When they become part of our group.

So I think we do enjoy some benefit compared to another acquirer, but values, I don't think they've gone down. So MLTs have raised the valuations on certain properties because of the tax treatment and the lower cost of capital. But it runs the full gamut and it really just depends on a case-by-case basis.

I would just add on average, I would say valuations are still reasonable and therefore there's still a lot of opportunities out there that we're looking atthat aren't value themselves to some ridiculous level where the deal would make no sense for us. They're still in the reasonable range. They do vary but they're not out of control at this point in time from our perspective.

Great. Thanks a lot for the time, guys.

Thanks.

Thanks, Shawn.

Thank you. That was our last question. I would now like to turn the floor back to management for closing comments.

Well, thank you for listening to this call. We do appreciate the support that we get from the community. We're hard at work and optimistic that we'll be back on growing the Company in a way you've been accustomed to. Thank you very much.

Ladies and gentlemen--

Thank you operator.

Thank you. Ladies and gentlemen, this does conclude today's conference call. We thank you for your participation. You may now disconnect.