World Kinect Corp (WKC) 2016 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the World Fuel Services 2016 second-quarter earnings conference call. My name is Kelmer, and I will be coordinating the call this evening. (Operator Instructions)

As a reminder, this conference is being recorded Wednesday, July 27th, 2016.

I would now like to turn the conference over to Mr. Glenn Klevitz, World Fuel's Vice President and Assistant Treasurer. Mr. Klevitz, you may begin your conference.

Thank you, Kelmer. Good evening, everyone, and welcome to the World Fuel Services second-quarter 2016 earnings conference call. I'm Glenn Klevitz, World Fuel's Assistant Treasurer and I'll be doing the introductions on this evening's call, alongside our live slide presentation.

This call is also available via webcast. To access this webcast or future webcasts, please visit our website, www.wfscorp.com, and click on the webcast icon.

With us on the call today are Michael Kasbar, Chairman 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 would like to review World Fuel's Safe Harbor statement. Certain statements made today, including comments about World Fuel's expectations regarding future plans and performance, 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-looking information.

A description of these 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 31st, 2015, and other reports filed with the Securities and 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 also 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 World Fuel's press release and can be found on its website.

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

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

Thank you, Glenn. Good evening, everyone, and thank you for taking the time to join us today.

Today we announced second-quarter adjusted diluted earnings per share of $0.50.

In the quarter, we continued to expand our market share across all three of our business segments and grew our global platform to a 21-billion-gallon run rate.

Our Aviation business performed remarkably well and has for the first time achieved a seven-billion-gallon annual run rate, simultaneously outpacing market growth and containing cost by leveraging our integrated organization and systems to deliver full-service solutions to our customers.

Our Aviation and corporate integration team has been diligently engaged in completing the ExxonMobil transaction announced earlier this year, which will expand our commercial and general aviation network by adding physical supply of more than 80 airports through Canada, France, UK, Germany, Italy, New Zealand, and Australia.

Our Marine segment continued to experience weakness in the shipping industry, with uncertainty around the timing of any meaningful recovery.

There's a heightened focus in the industry on financial stability and liquidity as well as counter-part risk as this prolonged industry-wide downturn weighs on the entire sector.

As such, we are focused on reducing our cost structure to be aligned with the current realities while remaining well positioned for growth in the longer term.

During this extended period of market stagnation, our deep understanding of the underlying physical market, strong balance sheet, and singular global organization has helped us maintain market share and a profitable business by delivering a unique set of highly customized solutions to our clientele.

In our Land segment, we are focused on building a national and eventually worldwide CNI platform to service local and global clients.

We announced a few weeks ago that we acquired PAPCO, headquartered in Virginia Beach, and Associated Petroleum Products, headquartered in Tacoma, Washington.

The addition of these two industry-leading companies, combined with our existing retail and wholesale operations, will serve to further enhance the capability of our land fuels commercial and industrial platform to deliver energy solutions to customers across the United States.

Both companies have solid management teams and an in-depth knowledge of our end user markets they serve that will immediately augment our distribution capabilities, while expanding our supply relationships and product offerings.

I would again like to welcome the PAPCO and Associated Petroleum teams to the World Fuel organization.

Our Global Energy Management business, which provides energy advisory, consultancy, engineering, sustainability services, and natural gas and power merchant services, continues to be an important part of our strategy of expanded service offerings through a broad array of energy consumers.

We continue to be committed to providing global coverage with these products and services as we integrate newly acquired businesses onto our global platform.

Recent investments in multi-service technology solutions are beginning to yield improved sustained results. Multi Service has successfully closed a series of multiyear contracts in a variety of businesses in the US and in over 15 countries, covering payment solutions and transaction management, which will result in meaningful revenue growth in 2017 and beyond.

Multi Service provides sophisticated and cost-effective procurement, sales, and payment solutions to a broad cross-section of global clients. We are bullish about our future prospects to grow this business.

During this time of rapid global change, it seems as though the entire world is in a period of transformation. Our Company is transforming as well. We are becoming a technology-enabled company and digitizing many processes that have previously been manual.

We are leveraging global shared services and re-architecting our technology stack to leverage cloud services.

We are rightsizing businesses that require it. We are exiting businesses that are no longer core to our strategy as a Global Energy Management, logistics, transaction, and payment solutions company.

While these initiatives have been in motion for some time, we are accelerating them. At the same time, we've learned that crosscutting across the board is suboptimal. Therefore, while we have preliminarily identified $15 million to $20 million of cost reduction opportunities, we continue to invest in businesses and areas where we believe we have growth opportunities and synergies within our vast portfolio of products, services, customers, suppliers, and partners.

The consistent and continuing ability of our business model to generate positive cash flow, irrespective of business cycle, permits us to continue to invest in our growth imperatives.

Our Global Energy Management solutions, our Omni-Channel energy fulfillment capability, our transaction management and payment offerings, and, lastly, our underlying technology which ties everything together and allows us to profitably scale.

We appreciate the continued support from our shareholders, customers, and suppliers, and the tremendous engagement of our global teams.

Now I'll turn the call over to Ira for a financial review of our results.

Thank you, Mike, and happy birthday. And good evening to everyone on the call.

Consolidated revenue for the second quarter was $6.6 billion, down 22% compared to the second quarter of 2015. This decline was due to lower fuel prices, offset in part by increased volumes in the Aviation and Land segments.

Our Aviation segment volume was 1.7 billion gallons in the second quarter, up approximately 150 million gallons or 10%, year over year.

Volume in our Marine segment for the second quarter was 8.2 million metric tons, a decrease of approximately 200,000 metric tons or 2% year over year.

While Marine volume is down year over year, it returned to its highest level since the third quarter of 2015.

Brokered business activity for the quarter was approximately 12% of total Marine volume as compared to 13% in the second quarter of 2015.

Our Land segment sold 1.2 billion gallons during the second quarter, up approximately 70 million gallons or 6%, from the second quarter of last year.

Lastly, total consolidated volume for the second quarter was 5.1 billion gallons, up approximately 175 million gallons, or 4%, year over year.

Consolidated gross profit for the first quarter was $219 million, an increase of $28 million or 15%, compared to the second quarter of last year.

Our Aviation segment contributed $99 million of gross profit in the second quarter. That's up $14 million or 16%, compared to last year.

For the quarter, the Aviation segment again benefited from increases in our core resale business in North America and Europe, as well as an increase in US and foreign military-related activity when compared to the second quarter of last year.

Overall, our Aviation segment outperformed our expectations in the second quarter, as we head into the third quarter, which has historically been a strong seasonal quarter for the Aviation segment.

While speaking of the Aviation segment, I would like to provide a brief update on the acquisition of ExxonMobil's fueling operations at certain airports, which we announced earlier this year.

While we do expect to begin closing certain portions of this transaction prior to yearend, we do not expect much related income over the balance of 2016, at this point in time.

Excluding the potential impact of foreign currency exchange rates, we still expect this transaction to deliver accretion in the range originally forecast in the first 12 months following the full completion of the transaction.

I would now like to briefly comment on a matter that we will disclose in our 10-Q to be filed shortly.

On July 20th of 2016, we were informed that the US Department of Justice is conducting an investigation into the aviation fuel supply industry, including certain activities of the Company, as well as other industry participants at an airport in Central America.

We were served with formal requests by the DOJ about our activities at that airport and our aviation fuel supply business more broadly, and we are cooperating with this investigation.

We really don't know much more about this matter at this time, therefore, we don't have anything further to add.

Moving on to the Marine segment, we generated gross profit of $40 million, down $2 million or 5%, year over year. The trends that began more than a year ago of considerably lower fuel prices, a weekend offshore market, and lower price volatility continue to impact overall unit margins in what remains a challenging Marine market.

While fuel prices increased during the second quarter, we only experienced modest improvement in our core Marine resale business, and we really didn't see any meaningful uptick in demand for price risk management products during the quarter.

With that being said, we do expect to benefit from some seasonal business activity in Marine in the third quarter, which should drive some improvement in Marine results.

Our Land segment delivered gross profit of $80 million in the second quarter, an increase of $17 million or 26% year over year.

The gross profit increase relates to activity from the Pester and Bergen Energi acquisitions, and two smaller acquisitions that were not included in our prior-year results, as well as increased profits from our North American retail, wholesale, and commercial and industrial businesses.

While the second quarter is generally a seasonally weak quarter for Watson, second-quarter results this year were somewhat weaker than anticipated due to two things - extremely wet whether in the United Kingdom which impacted demand in the agricultural sector, as well as weakness with construction-related customers as the UK construction industry experienced its weakest quarter since 2009.

Non-fuel-related gross profit associated with Multi Service was nearly $13 million in the second quarter, up 7% from the second quarter of last year.

As we announced a few weeks ago, we completed the acquisitions of PAPCO and Associated Petroleum Products, or APP, and, as Mike already stated, we're very excited to welcome their teams to World Fuel.

While we still expect these acquisitions to generate $0.22 to $0.26 of accretion in the first 12 months, inclusive of deal synergies, we do not expect to begin realizing any significant synergies until 2017.

As we look forward to the third quarter, the Land segment results should improve, benefiting from the addition of the PAPCO and APP businesses, as well as improvements in our Multi Service and Global Energy Management businesses, and modest improvement in Watson, despite some currency headwinds related to Brexit.

As I continue with the remainder of the financial review, please note that the following figures exclude the impact of $5.9 million of nonrecurring expenses in the second quarter, as highlighted in our earnings release. This amount is principally comprised of professional fees and severance costs related to multiple acquisitions completed or in progress.

To assist all of you when reconciling operating income results published in our earnings release, the breakdown of the $5.9 million is as follows. Unallocated corporate expense is $2.9 million, and the amounts impacting the Aviation, Land, and Marine segment results were $2.2 million, $600,000, and $200,000 respectively.

Operating expenses in the second quarter, excluding our provision for bad debt, were $165 million, up $18 million or 12%, year over year.

I should point out that 92% of the year-over-year increase in operating expenses related to expenses of acquired businesses.

In the third quarter, total operating expenses, excluding bad debt expense, should be in the range of $175 million to $179 billion. 90% of this sequential increase relates to the PAPCO and APP acquisitions and their related expenses.

As Mike mentioned, we have preliminarily identified opportunities to reduce our run rate of operating expenses, and we have already identified $15 million to $20 million of cost reduction opportunities, which we intend to execute on over the next several months.

While we may begin realizing the benefit of these reductions later in the year, I would expect we will knot realize the full impact until 2017.

Our bad debt provision for the second quarter was $2.5 million, effectively flat with the second quarter of last year.

Consolidated income from operations for the second quarter was $52 million, up $10 million or 24% year over year. And non-operating expenses, which is principally interest expense, in the second quarter was $8.7 million. That's a $700,000 increase compared to the second quarter of last year, which principally relates to higher average borrowings, as well as slightly higher interest rates during the quarter.

I would assume non-operating expenses to be approximately $9 million to $11 million in the third quarter.

The Company's effective tax rate for the second quarter was 19.4%, compared to 13.7% in the second quarter of last year.

We expect our tax rate for the second half of the year to be between 16% and 20%.

I would like to point out that we recently identified an error in our 2015 provision for income taxes. Corrections associated with this error related to the second quarter of 2015 and other periods will be reflected on a form 8-K, which we will be filing shortly.

As noted in our earnings release, the total amount of the corrections for the full year of 2015 specifically, was $12.5 million. The second-quarter 2015 tax rate, which I just shared reflects the impact of such corrections, as do the year-over-year variances in net income and earnings per share, which I'll provide in a moment.

Adjusted net income was $35 million this quarter, up $4.3 million or 14% year over year.

Non-GAAP net income, which also [excludes] intangible amortization and stock-based comp, was $44 million in the second quarter, an increase of $5.5 million or 14% year over year.

Adjusted diluted earnings per share was $0.50 in the second quarter, and that's a 16% increase over the second quarter of last year.

Non-GAAP diluted earnings per share was $0.63 in the second quarter, which is an increase of 17% compared to last year.

Our total accounts receivable was $2 billion at quarter end, down more than $350 million compared to the second quarter of last year, principally related to the decline in average fuel prices offset in part by increased volume in our Aviation and Land businesses.

Net working capital was approximately $880 million, down $30 million compared to the second quarter of last year.

We generated $63 million of cash flow from operations in the second quarter, contributing to trailing 12-month operating cash flow of approximately $470 million, and also marking our 16th consecutive quarter of generating positive operating cash flow.

During the second quarter, we also returned $18 million to our shareholders by repurchasing approximately 400,000 shares of our common stock in the open market.

As I've stated in the past, the principal objective of our share repurchase program is to offset the dilutive impact of employee stock awards. In addition, we may also repurchase shares when we feel such shares are significantly undervalued.

So in closing, our balance sheet remains strong and liquid, benefiting from consistent cash flow generation and prudent balance sheet management.

This should continue to serve us well as we identify further organic growth initiatives which require capital, and as we target additional strategic investment opportunities.

With the ExxonMobil transaction expected to be completed over the next several months and the completion of the PAPCO and APP acquisitions just after the second quarter close, combined with the expected impact of identified cost reduction opportunities, we have an even stronger foundation for growth and meaningful increased profitability as we look towards 2017 and beyond.

I would now like to turn the call back over to Kelmer, our operator, to open up the Q&A session. Thank you.

Thank you. (Operator Instructions) Jon Chappell with Evercore ISI.

Both questions are around trying to figure out kind of [right] run rate as we kind of weed through seasonality and then the outset of strategic investments and, I guess some, potentially, organic cut.

So first, if we look through last year as a guide the seasonal decline in 2Q, it looks like this year maybe it wasn't as bad.

But just wondering about the third-quarter snapback then. Ira, in your comments, you mentioned Land should see a seasonal recovery, little bit in Watson, and then also in Marine.

But the magnitude that we saw last year, was that clean on an organic basis? Was there any inorganic or M&A bounce to that? How should we think about that for this year relative to 2015?

Good question. Thanks, Jonathan. I think, rather than looking at relative to 2015, I think I would focus more on the specifics of this year because the actual comparisons are not going to be exactly the same.

Okay.

So going through the three segments again -- I'm happy you asked the question. Aviation always has or traditionally has their seasonally strongest quarter in Q3.

So we expect Aviation results will improve. Although, I'll caveat that by saying that second-quarter Aviation results were stronger than expected, so the improvement will not be as dramatic as it was last year. But we do expect to see seasonal improvement in the Aviation business.

In Marine, we, unfortunately, don't expect a whole lot of improvement based upon where the market is today and where the market's been.

But we do have some seasonal business that we also had last year that's specific to one individual contract that comes through in the third quarter that should add a couple million dollars of profitability to Marine in the third quarter. Aside from that, we're not necessarily expecting much more.

And then, if you go to the Land business, while you remember Watson traditionally [season of] the most significant increases in the colder winter months, since the third quarter concludes September and some people start gearing up for the winter, Watson should do a little bit better than they did in Q2.

But we do have some headwinds from Brexit. We didn't see much of the currency impact in Q2. We'll see more of it in Q3, assuming the pound stays where it is.

But we'll also see the benefit APP and PAPCO, which both closed on July 1st.

So you'll see a pickup from the acquisitions. You should see a little bit of pickup from Watson. And we also expect to see a little bit of pickup in our Global Energy Management business and in Multi Service.

So the most significant quarter-over-quarter increase should be in the Land space.

So that's the summary of all the three segments. Hope that answered your question the way you were looking to have it answered.

Yes. Very helpful. Thank you. And then, obviously, with $15 million to $20 million of identified cost cuts, I'd imagine most of that is going to be fat.

But kind of the way that Mike described it as being kind of non-core businesses, divestitures and, quote/unquote, rightsizing, it seems like maybe some organic growth may be stripped away from that as well.

So, obviously, a lot of accretion coming up from Exxon, from PAPCO, et cetera. But is the kind of core organic business as we look forward going to have a much lower organic growth rate as you right size businesses?

Well, I think that's the art of it, right? So you want to make sure that you're doing this the right way.

So we have exited some business, the crude oil side, anything that is no longer part of the core activity.

We got involved in structured finance after the financial crisis 2008, 2009. We weren't really getting sufficient returns on that, so we're redeploying that capital.

But the trick, obviously, is to not take too much of the muscle away, and that's what we've been focused on.

But the organic side obviously is buy and build. And I'm feeling better about our ability to drive more organic growth.

So we hope to be reporting that to you and be able to show that to you as a function of not only leveraging the acquisitions we have, but with some of the additional horsepower that we brought into the Company to drive some of that.

Okay. And then finally, with my hopefully super-quick follow-up, Mike, you mentioned some multiyear contracts signed by Multi Service that will start to have a meaningful impact on the top line in 2017.

Is there any way to kind of quantify the magnitude of this growth in Multi Service next year?

Yes. I would say we're always breaking out gross profit for Multi Service in my remarks every quarter. And if all those contracts come through to the extent we anticipate, their gross profit could be up 20%-plus in 2017.

I use the word meaningful because, obviously, we're working off of a relatively small base. But I think that meaningful in many ways, because I think it's the beginning of Multi Service starting to step out.

And we put fantastic teams there. And this is a number of different contracts that they have that's fairly broad-based.

So we feel really good about that and we expect to see more and that to start to be a real contributor to the Company.

Great. And I'm sorry. Ira, what was it in 2Q, the Multi Service contribution?

$13 million.

$13 million, all right. Thanks so much for your help, Ira and Mike.

Greg Lewis with Credit Suisse.

Mike, it seems like the Company's trying to finally turn the page. You talked about this $15 million to $20 million.

I guess from your view, what has changed that has sort of made you -- I mean, this seems kind of like a step out for you where you're going to be shedding some businesses. I guess I'm just curious on the timing and why now?

Well, if you look at -- there's a combination of things. So one is, you do have a fairly prolonged downturn within the Marine business and one aspect is just simply a recognition of that and dealing with that.

The other part of it is as -- every company looks to scale, they have challenges with costs exploding. So you need to cut back from time to time and look at those activities that were not giving you the return that you're looking for.

And the combination of our organization growing up and getting that increased discipline in today's marketplace where you don't have robust growth, you need to operate extremely well.

We've been fortunate through the history of the evolution of our Company that we've never had to be in this position. So it is a little bit of a new move. So you're right, Greg.

And I answered this question a little tentatively. And the remarks I made in my prepared comments, in the past, I mean, we have done some cost-cutting but it's been across the board. And we've got to learn that that was not necessarily the best scenario.

So we're getting more selective, looking to maintain organic. But it's really a commitment in every company, I think, as you grow. We don't do everything right and it's going back and doing spring cleaning.

So I think this becomes an annual sort of review and it's also driving a more professional performance culture in the business.

So it's a combination of things and it's just simply a recognition of the global environment that we're in and the challenges of scaling and going from what was very entrepreneurial to just being entrepreneurial.

Okay. And then I think you kind of mentioned it when you called out Marine. But as we think about taking out these costs and scaling out of businesses, are there any sort of sacred cows where, hey, we really like Aviation and we're not going to pull anything out of Aviation, or is it kind of going to be little business derivative services across the whole spectrum?

It's really, this is equal opportunity performance management. So it's really trying to create a higher standard in the Company, more financial discipline, and really having a finer strategic screen and economic screen where we are converging and getting focus with fewer things that we'll allocate more resources on to get scale and competitive advantage.

Okay. And I guess my follow-up would be just in thinking about the decision to sort of scale back, I know in the past Ira and Glenn have talked about the opportunities for acquisitions.

Should we think about acquisitions being on hold as sort of the Company looks internally --

That's not an --

-- to right size itself?

Absolutely not. We certainly have a lot on our plate. And I'll tell you I'm very proud of this organization. It's quite extraordinary the commitment and the engagement that the organization has, and the level of professionalism. This Company is different today than it was three months ago.

So we've built up significant muscle, intellectual capital. Some of the folks, you've heard me call them out in previous phone calls. Some of them are new, some of them aren't. We've got a fantastic mix. And with the acquired companies comes additional talent, and those companies have acquired companies.

So organic growth, obviously, is something that we're putting serious focus on, and that's where some of the folks that we brought into the Company are driving that in a systematic way. Leveraging technology is an enormous driver in this Company.

But our capability on the acquisition side is significant. Ira has brought on some additional folks. So we feel pretty good about that.

So we're not going to stop. And I think that our acquisition and integration capability has just gotten stronger.

And we have, I think, the financial wherewithal to continue that dynamic as we expand our EBITDA and our capability.

Okay, guys. Thank you very much for the time. Sounds good to me.

Jack Atkins with Stephens, Inc.

So I guess, Mike, just to follow up on your answer to Greg's last question. But you said that this is a different organization than it was even three months ago.

Could you maybe expand a little bit on sort of the catalyst for that change? What's driving that?

It's human capital. I mean, it's maturity of a lot of young people, really smart, young people that we've brought into the Company and some senior folks, and really shuffling the deck.

So I think that we've got a much tighter focused organization, and things take time.

I mean, we have brought a lot of things into this Company. We brought a lot of people into this Company, and things simply take time.

And we now have, I think a greater focus on business. We've got a better management team. We've got a better management process.

So it doesn't take -- well, it does take a lot, actually. But this is all coming together and we've been spending years working on this.

So I think we've got a unique company. I don't think there's anybody in the world that does what we do. We've got two established global businesses, Marine and Aviation, that are doing business in 200 countries. We've got two businesses that hunt globally, Multi Service and our Global Energy Management. We've got in-country businesses on the physical side where we've got significantly better practitioners. We've set up councils to focus on important areas, so technology, sales, supply.

So it's just a maturation of the Company, and we've been working on it for a long time. And I certainly feel pretty proud to come to work every day. And the level of progress that we're making is significant.

So we have a long way to go. We want to be delivering better results, I can tell you that. But it's not easy. There's a lot going on in the world, and we are looking to get much keener focus on a limited set of activities.

Like I said, we've been pretty entrepreneurial and now we're looking to converge on core activities that we can really drive technology. That's something that has taken a long time.

We didn't do it in a perfect way, putting technology into existing businesses and, particularly, when you've acquired a myriad of businesses, it's like putting rebars in dried cement.

So this is something that we've been working on for a long time, and our senior management team is very driven on process improvement and leveraging technology, and we're starting to see the beginnings of that bear fruit.

So really early innings still, sorry. But we think we are turning the corner.

Okay. That's helpful color there, Mike. And then just to kind of get some clarification of the $15 million to $20 million in cost reduction opportunities, I mean, is that $15 million to $20 million a net operating profit improvement target or -- I mean, I guess I'm just a little bit confused since there's some divestitures going on there. Are these profitable businesses that you're divesting? Are these [loss-making] entities? I'm just trying to understand what --

It's OpEx, but it's --

Yes, it's really not -- just to avoid any confusion, I think. We're talking about a couple different things.

But when we mention the $15 million to $20 million, that's OpEx takeout. Now, we may take some of that and reinvest in a couple areas that we think have substantial growth opportunities where we may be under invested. So that's what that's all about.

To the extent we make some decisions to exit something down the road, that's a different, arguably, a different analysis that could increase our cost reduction and may have an offsetting GP reduction as well, but that's outside the $15 million to $20 million.

Okay. That's helpful, Ira. Thank you for that. And then, I may have missed it if you talked about it. But with the restatement due to the income taxes, was there a restatement for the first quarter as well? And could you go through that if there was?

It wasn't a restatement. It was a revision, just to --

A revision, yes. Excuse me.

-- clarify.

Yes. Yes.

And I could go through the numbers with you. But what I'd prefer to do is that'll be out in the 8-K, which is going to be filed shortly, and you'll see the impact on all the quarters of 2015.

There was very limited impact in the second quarter. The most substantial impact was in the third quarter, followed by the first. And there was next to no impact in the fourth quarter. So two of the quarters last year is where that $12.5 million that I referred to resided, pretty much.

Okay. I've got one follow-up. I'll just jump back in queue. Thank you.

Ken Hoexter with Merrill Lynch.

Ira, real quickly on that tax, what led to that tax catch? What was the -- ?

The best way I could explain it, Ken, is it related to interpretation on a very complex tax matter that we made several years ago and the impact over the years was fairly minimal, and then the number got a lot bigger in 2015.

As we started planning for some related activities because it related to some intercompany loans that had a foreign-currency element attached to them, we discovered that the interpretation that was made years ago was not correct.

So that's really how we caught it. It was, we caught it in the process of some tax planning that was going on during the second quarter for the latter part of the year into 2017 and 2018. So that's --

So by calling this out yourself, there's no penalty or could there be a penalty or anything else that could follow from this?

Don't believe there'd be any penalty related to this. Under the process that you need to go through with your auditors, which has a quantitative and a qualitative element associated with it, it's deemed to be immaterial. And that's why there was no reason to restate our financials.

But a situation like this, still very wise to provide revised information. So that's what we did.

Okay. That's helpful. Ira, did I catch you to say that Exxon was delayed in terms of the benefit? Or were you just pushing the gains and integration from PAPCO, Associated, and Exxon into next year? It sounded like you were saying maybe Exxon was a little bit delayed.

I think I was saying two things. So I'm happy you asked to clarity it for everybody. So I think at one -- well, I know at one point either during Q&A or in my prepared remarks, I try to give all of you a feel for the impact that we preliminarily expected to see in the second half of this year.

And then I gave another number, which was expected accretion for the first 12 months following full completion of the deal, which probably won't happen until at least the end of the first quarter of next year.

So what I mentioned earlier was that the expectation now, just because, principally, because of timing, is that we won't see much accretion. We won't see any accretion in the third quarter. We may see a few pennies in the fourth quarter.

And then, as we approach Q2 of next year, we should get in stride with the run rate originally projected, with one caveat. Most of this income is coming through in foreign currencies, including the pound, for example. So currency exchange rates could have an impact on what that number may be and depending upon views of exchange rates as you get into 2017.

For PAPCO and APP, we had provided a first 12-month accretion estimate, which included some synergies of $0.22 to $0.26.

And the point I was trying to get across earlier is that I didn't want people to necessarily fall in the trap and just simply dividing that by four and assuming we necessarily see half of that in the second half of this year, as we're not going to achieve many of the synergies that are built into that number for the first 12 months until the first and second quarters of next year.

So we'll get a little less than half of that this year, with a greater peace of that in the first two quarters of 2017.

Great. And I guess instead of a second question just two clarifications here.

Your comp at $10 million -- I'm sorry. The $5.9 million charge you talked about in comp, or was that in comp and benefits? Is that kind of why that was high? Is that $4.8 million net of taxes taken out of comp?

Approximately half, or approximately $3 million of the $5.9 million was in compensation and the rest was in G&A.

Okay. And then, I guess just as a clarification or a question. But cash at $737 million, you brought back only $18 million, is that because you spent the $260 million for Exxon that's coming up and the $230 million for PAPCO is this quarter not last quarter? Is that -- I think you said July 1st. So you've got $200 million left, if my math is right then, or somewhere around there.

Does that mean, to Mike, I think you were answering this question before. But do you need some time then to rebuild the cash before you do acquisitions?

So to answer your first question first. Ken, great question again. So of the $737 million, we'll be using some of that for Exxon in stages over the next few months. So the first chunk will probably come out around the end of Q3, and then the rest of it'll come out into the first quarter of next year. That'll use up some of that cash.

Again, most of our cash is sitting offshore, as you remember. So when we closed PAPCO and APP on July 1st, after the quarter ended, that was funded with borrowings.

But even after that, our net debt and our total liquidity position is still strong and the acquisition pipeline, Mike may correct me, but I would say is probably the strongest it's ever been.

And while we remain selective as we always have been, we're not seeing a need to slow down in that analysis. We find opportunities that we think are strategically accretive to the business and financially accretive to the business. We're still pursuing them with tremendous amount of passion. And so that really hasn't changed.

Great. Appreciate the time and insights. Thanks, Ira.

Jack Atkins with Stephens, Inc.

Just a couple quick follow-up items. Ira, when you were going through the expected improvement in the different business segments sequentially, is that net of the, I think Aviation was $2.2 million of that $5.9 million in nonrecurring items.

Were you talking about improved off of that second quarter plus the add-back of the $2.2 million? Or just want some clarification on that point.

Yes, I would say I'm talking about improvement off of the adjusted number, excluding the impact of the $2.2 million.

Okay. Okay. That's helpful. And then in terms of the $15 million to $20 million in cost-reduction actions, could you kind of go through that again, when you would expect to see that sort of show up in the P&L? It doesn't sound like it's going to really be until 2017. Is that correct?

That's right. I mean, we may see a little piece of that in the very latter part of the year. So part of the way through the fourth quarter.

Okay.

But the reason I said 2017 is because I wouldn't expect you to really see the significant impact of that until you get into the first quarter of next year.

Okay. Thank you again for the time.

And something else I'll just add on because I think it's meaningful, is technology platforms are important and not easy to build. And just as a reflection on the maturity that we got throughout a higher organization, our Land business we started awhile ago, but we never really had a global platform, which is a tough way to run a business.

So in 2017, we will be rolling out a global Oracle [LAN] technology platform at US, UK, Brazil, probably towards the end of 2017. And that will be connected to truck automation.

So that's what some folks will call the industrial Internet, where you're now getting information and data, massive amounts of data that's going end to end. So that's also going to give us pretty significant efficiencies and allow us to be a lot more cost-effective.

So we have those types of initiatives going throughout the entire Company, where activity that was manual is now going to be automated, and that's going to have a significant impact.

Mr. Kasbar, there are no further questions at this time. I will now turn the call back to you for closing remarks.

Well, thanks, everybody, for your support and staying late. We look forward to talking to you next quarter.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.