World Kinect Corp (WKC) 2016 Q3 法說會逐字稿

Ladies and gentlemen thank you for standing by and welcome to the World Fuel Services' 2016 third-quarter earnings conference call. My name is George and I will be coordinating the call this evening. (Operator Instructions). As a reminder, this conference is being recorded Thursday, October 27, 2016.

I will now 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, George. Good evening, everyone, and welcome to the World Fuel Services third-quarter 2016 earnings conference call. I am 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 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, 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, we announced third-quarter adjusted earnings of $45 million, or $0.65 adjusted diluted earnings per share. For the third quarter of 2016, our aviation segment posted record results in volume and profitability. This segment further accelerated the momentum established in previous quarters of 2016, delivering 13% volume growth over the third quarter of 2015. Our government fueling operations contributed to our consolidated results, and we continue to leverage our advanced logistics capabilities to solve complex problems for our customers.

In the fourth quarter, we began the phased acquisition of the previously announced transaction through which we will purchase from ExxonMobil fueling operations at more than 80 airports. As noted in prior communications, this transaction represents a significant expansion of our global aviation platform, further establishing us in the supply chain in numerous international markets.

The marine segment continued to experience more of the same macroeconomic environment that has plagued this sector for some time. Poor market dynamics in the container, dry bulk and tanker sectors have weakened the financial position of owners and operators, which has further contributed to the deterioration of the marketplace. Consequently, the marine industry continues to reorganize itself through consolidations, partnerships, and bankruptcies.

Although our business is built to endure levels of industry cyclicality, as previously advised, we are taking steps to reduce our cost structure while simultaneously sharpening our market focus and commitment. This will position us to more effectively serve our customer base, identify opportunities, and enhance the value we bring to the shipping industry as a financially stable partner at a time of economic uncertainty. Reliable, transparent counterparties that can offer competitive global supply and operations are increasingly more critical for buyers and sellers in the shipping industry.

We continue to grow our market share in the land segment. We are now at an annual run rate of more than 5.5 billion gallons across the United States, UK and Brazil. Integration activities are well underway at PAPCO on the East Coast and APP on the West Coast as we continue the build out of our national, commercial and industrial platform alongside our Midwest wholesale distribution business. Our team remains focused on further market penetration and expansion of our service offering as we head into the seasonally strongest quarters for the segment.

Investment in our global energy management business is an important part of our long-term growth strategy, helping customers navigate the changing energy marketplace through advisory, procurement, engineering, sustainability, conservation, and dynamic energy management services.

Multi Service continues to bring customized, scalable solutions and operating efficiencies to global and national companies for their sales procurement, payment and transaction management needs. Our overall strategy of ubiquitous global energy management, fulfillment, payments and transaction management is designed to help our global, national, regional and local customers navigate the ever-changing and complex energy distribution and payments landscape with a comprehensive offering that is reliable and competitive.

With the deep domain expertise of our global team and a solid balance sheet, our Company is well-positioned for profitable growth and market penetration. Our diversified business model allows us to more effectively respond to changes in market conditions and business cycles. Our diversity truly breeds stability. Our commitment to long-term shareholder value creation is manifested in expanding our markets driven value-added services and driving sustainable return and growth within our portfolio.

As I look to 2017 and beyond, the foundation that we have built and continue to build will enable us to take advantage of the abundance of opportunities that lie ahead for our Company. 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 our Executive Vice President and Chief Financial Officer, Ira Birns, for a financial review of our results.

Thank you, Mike, and good evening everyone.

Consolidated revenue for the third quarter was $7.4 billion, down 5% compared to the third quarter of 2015. This decline was due to slightly lower fuel prices compared to last year's third quarter offset in part by increased volumes in the aviation and land segments.

Our aviation segment volume was 1.9 billion gallons in the third quarter, up approximately 220 million gallons, or 13%, year-over-year. The aviation segment continues to organically gain market share and is now at an annual volume run rate of more than 7.5 billion gallons.

Volume in our marine segment for the third quarter was 7.8 million metric tons. That's a decrease of approximately 700,000 metric tons, 9%, year-over-year. The decline in volume relates to the continued weakness in the overall marine market. The marine segment's brokered business activity for the quarter was approximately 11% of total marine volume as compared to 12% in the third quarter of last year.

Our land segment sold 1.4 billion gallons of fuel during the third quarter, up approximately 160 million gallons, or 13%, from the third quarter of 2015. The increase was predominantly the result of the acquisitions of PAPCO and APP, both of which were acquired at the beginning of the third quarter.

Lastly, total consolidated volume for the third quarter was 5.4 billion gallons. That's up nearly 200 million gallons, or 4%, year-over-year. Consolidated gross profit for the third quarter was $237 million, an increase of $10 million, or 4%, compared to the third quarter of 2015.

Our aviation segment contributed $112 million of gross profit in the third quarter, an increase of $5 million, or 5%, compared to the third quarter of last year. For the quarter, the aviation segment benefited from increases in their core resale business in North America, Europe and Asia, as well as an increase in government related fueling activities when compared to the third quarter of 2015. The aviation segment has performed extraordinarily well over the past year, growing volumes organically by leveraging our scalable business model while taking advantage of opportunities in the market. As we look forward to the fourth quarter, we expect the aviation segment to experience the traditional seasonal decline in profitability coming off another strong record third quarter, similar to the sequential decline which we witnessed last year.

As we look to the fourth quarter, we continue to plan for the acquisition and integration of ExxonMobil's fueling operations at certain airports in Canada, Europe, Australia and New Zealand, which we announced earlier this year. We should be closing on most Canadian and French locations next week with the balance closing later in the fourth quarter and into the first quarter of 2017. As we stated on last quarter's call, we do not expect any meaningful profit contribution from this acquisition until 2017.

The marine segment generated gross profit of $37 million, down $11 million, or 23%, year-over-year. Although we did benefit from some expected seasonal business this quarter, as previously forecast, we lost some business related to customers that have discontinued operations and growing economic concerns in the marine sector have also tightened our credit appetite, both negatively impacting marine volumes and profitability. Sales of price risk management products were weaker than anticipated as well. Based on quarter-to-date activity, we have no reason to believe that the fourth-quarter result in marine will be much different than what we experience this past quarter.

As we mentioned last quarter, we are taking actions to reduce expenses in order to adapt to what appears to be the new normal for now in marine to help achieve the best possible outcome for 2017 and beyond. We do not expect an impact on such cost reduction activities in the fourth quarter but rather beginning in early 2017.

Our land segment delivered gross profit of $88 million in the third quarter, an increase of $17 million, or 23%, year-over-year. The gross profit increase relates to activity from acquired businesses offset in part by weakness in the UK principally driven by historically warm weather conditions in the latter part of the quarter. Looking to the fourth quarter, we should realize the benefits from seasonality, principally from our Watson business in the UK. The extent of such benefit will depend upon winter temperatures throughout the UK.

Nonfuel related gross profit associated with our Multi Service business was $13 million in the third quarter, up 4% from the third quarter of last year.

As I continue with the remainder of the financial review, please note that the following figures exclude the impact of $2.6 million of nonrecurring expenses in the third quarter, as highlighted in our earnings release. This amount is principally comprised of professional fees related to multiple acquisitions completed or in progress and severance costs.

To assist all of you in reconciling operating income results published in our earnings release and 10-Q, the breakdown of the $2.6 million is as follows. $1.7 million is related to the aviation segment and the amounts impacting the land and marine segments' results were $700,000 and $200,000, respectively.

Operating expenses in the third quarter, excluding our provision for bad debt, were $174 million, up $19 million, or 12%, year-over-year. The entire year-over-year increase in operating expenses is related to acquired businesses.

In the fourth quarter, total operating expenses, excluding that debt and one-time expenses, should be in the range of $178 million to $182 million. Our bad debt provision for the third quarter was $1.5 million, effectively flat with the third quarter of last year.

Consolidated income from operations for the third quarter was $61 million, down $8 million, or 12%, year-over-year. The decline in operating income is the result of the decline in year-over-year results in our marine segment. And in land, while APP and PAPCO added to profitability, this was offset by weakness in the UK. These results were partially offset by the increase in aviation profitability.

Non-operating expenses, principally interest expense, for the third quarter were $9.8 million, an increase of $3.9 million compared to the third quarter of 2015, principally related to higher average borrowings during the quarter. I would assume non-operating expenses will be approximately $10 million to $12 million in the fourth quarter.

The Company's effective tax rate for the third quarter was 11% compared to 29% in the third quarter of last year. We expect our tax rate for the fourth quarter to be between 15% and 19%. Our third-quarter tax rate was much lower than anticipated principally due to significantly lower than forecasted results in the US where our tax rate is highest.

Adjusted net income was $45 million this quarter, down $800,000, or 2%, year-over-year. Non-GAAP net income, which also excludes intangible amortization and stock-based compensation, was $57.2 million in the third quarter, an increase of $3 million, or 6%, year-over-year.

Adjusted diluted earnings per share was $0.65 in the third quarter, flat when compared to the third quarter of 2015. And non-GAAP diluted earnings per share was $0.82 in the third quarter, which is up 6% compared to the third quarter of last year.

Our total accounts receivable balance was approximately $2 billion a quarter end, effectively flat with the third quarter of last year, principally relating to the increased volume in our aviation and land business segments. Net working capital was approximately $989 million, an increase of $166 million compared to last year's third quarter, principally due to working capital acquired through recent acquisitions.

We generated $19 million of operating cash flow in the third quarter, contributing to trailing 12-month operating cash flow of $343 million and marking the 17th consecutive quarter of positive operating cash flow.

As announced earlier today, we have further strengthened our liquidity profile as we have extended the maturity of our revolving credit facility in term loans to October 2021 and increased the size of the overall facility by approximately $500 million to $2.1 billion, and also renegotiated terms, which further increases available capacity under the facility today. The transaction was significantly oversubscribed by our existing bank group as well as several new lenders that have entered into our syndicate and is a true testament to the banking community's confidence in our long-term strategy, and we remain very appreciative for their support.

So, in closing, our strong and liquid balance sheet continues to benefit from positive cash flow generation and our amended credit facility will significantly increase liquidity available for growth. Our diversified business model continues to serve us well as we grow segment market share through organic growth initiatives and strategic M&A.

While the fourth quarter should benefit from seasonality in land, we will also experience a seasonal decline in aviation with marine not likely to see much of a change, either positive or negative. However, as we look towards next year, the addition of the recent acquisitions of PAPCO and APP and the upcoming closings of the ExxonMobil transaction, aided by our previously announced cost reduction initiatives, add to our excitement about the prospects of strong performance in 2017 and beyond.

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

(Operator Instructions). Jon Chappell, Evercore ISI.

Mike, my first two questions are going to be about marine, as you may have expected, and my follow-up will be for Ira. But risk and opportunity. So, first, on the risk side, it's probably very difficult to quantify, but obviously a pretty unprecedented issue this quarter with Hanjin. How much of an impact is that having on just the global shipping market from a supplier's standpoint? And I'm not asking for your direct exposure to Hanjin or how certain arrests are going. But is it really kind of hurting trade flows, elevating counterparty risk, and how long does this potentially last into next year?

You've given me a hell of a compliment, Jonathan. So, you know, it's hard to say. We know what the impact is on us with the low price of fuel. The underwriting aspect of our value add has been muted because the receivables are significantly lower, and that has prompted a number of folks to wade into the marketplace, including physical suppliers.

We think that there's still significant risk, and certainly you've got a significant concern with intermediaries. We think that we stand out amongst all of the participants, or at least most of the participants, in the marketplace. So, we do think that we've got a unique value proposition not only because of our financial position but also because of the extensiveness of our service offering.

Certainly, the economic conditions are pretty awful. I've been in the business for a long time and I've never seen them this bad. So, we think that we're in this mode of operating for quite some time. And again, that I think speaks volumes to the fact that we've got a diversified business model. We are certainly committed to the marine space, and we are taking a slightly different tack in terms of how we're participating in the marketplace as it relates to the types of activities that we'll get involved with.

So, the derivative activity is fairly lackluster. The price is low. Not too many folks are hedging. The same applies on the aviation side, so that is pretty quiet. But global economic activity is not great, so I think that we are in this for quite some time.

In the past, these cycles have been quicker. So, it's going to be lower for longer, and we're just hunkering down but we'll continue to participate. The industry needs good counterparties.

You do have a significant amount of changes coming into the marketplace in terms of barging with mass flowmeters. That's created some change in various different markets. IMO just announced with the Marine Environmental Protection Committee confirmed 0.5% sulfur on 2020. That certainly is going to change the fuel diet. It's going to become more complex. You're going to have global imbalances in terms of various products. Ship owners are going to have lots of different decisions to make on investments and price differences, the availability of products. So, that I think speaks well to us in terms of being able to navigate through that. So, that definitely is going to be a change that's going to come down the road. LNG certainly is going to be part of the equation. We understand that by virtue of natural gas participation, and certainly the interaction within our land business in terms of distillates.

So, that's not exactly answering your macroeconomic shipping question, which we don't pretend to know the answers on, but we always just stay flexible and look to provide solutions to the industry. So we'll continue to stay in the game and just roll with the punches.

Yes. Well, you actually somewhat anticipated my second question on the marine side, which was the IMO announcement today. It seems like there's going to be a massive amount of disruption, which should be right in your wheelhouse in a very short period of time. So let me just then rephrase the question and kind of combine the two then.

How do you think about the cost cutting and rightsizing your business for 2017 during this incredibly difficult market while also maintaining the capacity then to take advantage of the potential opportunity with the IMO phase-in in 2020?

Okay. So, listen, every company has a lot of things going on with it. So, we are really taking a close look at just doing more with less, looking at our fixed costs, our variable costs and reviewing our participation in the marketplace, leveraging technology. Technology is incredibly important. We have been in the energy management business now for about three years. We really like that space. It applies to anyone on planet Earth that uses energy. We've got engineers and advisors in terms of energy, certainly on the natural gas side, the power side, you name it. So, as I previously said, synergies with our land business, sourcing distillates. So, it's really combining a lot of the cross-selling and some of our internal synergies.

We've done a lot. We've acquired a number of companies and putting them all together is not a casual activity, and it just takes a little bit of time before everything gels, people know each other. They can figure their way around our company. We spend a lot of time and energy bringing folks together so that we can really leverage all of the internal capabilities. So, we really look forward to these types of changes because it really allows us to show what we can do. So, change is our friend and I think it's a good day for the planet. It's a win for sustainability. We are all about sustainability in our Company. So, you know, all of that basically is fundamentally a good thing for us because of our deployment and the diversity of us being able to bring together different solutions.

So, LNG, we know a hell of a lot about that. We're moving a lot of natural gas. We've invested into liquefaction in our construction. So it kind of goes on and on, but the fact remains that it's still a tough environment and we need to be a hell of a lot more cost conscious today than we ever have been before. So, we've got to work it out for us.

Got it. And then my follow-up for Ira, I think there was probably like a timing event around maybe Accounts Payable or receivables or derivatives that the cash balance jumped pretty huge. So when you take that big cash balance now with the new overall bank facility, it's kind of a good problem to have. But really the question is how much cash is too much cash? You probably have to have a little bit more than typical as you integrate these three acquisitions, but at what point does it become maybe less efficient to the balance sheet and hopefully doesn't force you to make acquisitions that you're not comfortable making but start to think about other ways to deploy capital.

Great question, John. I'm not sure I'd ever argue that too much cash is too much. But one thing to point out, first of all, a big chunk of that cash is sitting offshore and not necessarily available to make investments in the US. We'll be using a chunk of that cash, some of it as early as next week, to fund the various closings of the ExxonMobil transaction. So that will bring that number down a little bit and leave us with maybe about $0.5 billion worth of cash over in Europe and much less than that sitting in the US.

I don't think we would ever decide to make an investment that didn't make strategic sense for us just to take some of that cash off the balance sheet. I think we'll always find ways to utilize that and hopefully, over time, find additional ways to bring some of that cash back to the US where we have a significant amount of debt that we'd be able to pay off with some of that cash.

There are a lot of smart things we could do that cash over time and it's probably one of the problems that I don't mind having, or we don't mind having, in terms of having more cash than we've had in the past.

Adding the bank facility to the equation or the increase in the bank facility is great because changes in the facility under the amendment provide us more capacity today just because of the way some of the covenants have changed and it also extends the life of that deal out to 2021, which provides us a significant comfort level for quite some time in terms of having the liquidity there to grow the business, both domestically and internationally, over time without having to go back to the well at times when the banking market may not be as strong as it is today. So we're very appreciative to all of the banks that have supported us in that deal and they have been with us for a long time and we expect to be with them for a long time to come.

Got it, all right. Understood. Thanks Ira. Thanks, Mike.

Gregory Lewis, Credit Suisse.

Ira, could you talk a little bit about any impact that you've been seeing as it pertains to Watson, given the issues that we've seen with the British pound? Was that sort of -- was there any sort of negative impact in Q3 that we potentially could see reverse?

Good and obvious question that we expected to be asked. So, a little complicated, but I'll try to keep it simple.

First of all, from a pure currency translation standpoint, in the weaker quarters in the UK, which are Q2 and Q3, when we don't see the strong seasonal uptick from weather-related activities that we are hoping to see in Q4 and Q1, our British pound related profits and expenses, because we have a decent amount of expenses in the UK, outside of Watson, just for our UK office, which has a couple of hundred people that are all paid in pounds, for example, that balances out pretty well. So in a quarter like this one, the impact was negligible, plus or minus.

When you get into the fourth quarter and the first quarter when we expect the gross profit for Watson and the balance of the UK business to grow, that's where our dollar-denominated profits which translate over will be impacted by the significantly lower value of the pound.

Over the course of the full year, the impact, if you look at it on an annual basis, is not significant, but it's bumpy. We'll see a negative impact in the next six months, and six months after that, it will balance back out again.

The bigger question is how that's affecting the macroeconomic environment in the UK. And that's a bit tougher to measure but I'm sure we've had some impact to our business just because of the conditions in the UK and the construction industry cutting back. We serve that industry over the course of the year. So there are some economic factors beyond the pure currency translation that is certainly impacting us that are tougher to quantify.

Okay. So we should be thinking about Watson a little bit more cautiously as we head into the winter. Okay.

And then just as I think about PAPCO and APP, I guess those acquisitions closed in the third quarter. Just sort of if you could talk -- Mike, maybe you can provide a little bit of an update on how that integration is going?

And then as I think about modeling out, I mean, clearly, you guys gave the forward EPS guidance when you did these acquisitions. Is this going to -- should we be thinking about this more in terms of volume or could we see these -- does the bolt on of these businesses actually increase margins?

I'll start and Mike could follow-on. These businesses are relatively small, so it's not a big volume play. Combined, the volumes aren't overly material. So, I would say there's a margin opportunity because the mix of business in these two businesses, their margins on average or higher than our overall land margins going into these two deals. So, they should certainly positively impact margins over time.

Mike may want to talk a little bit about what these two businesses do for our domestic commercial and industrial platform on the East and West Coast.

So, I think it's important to appreciate the strategy of looking at both of these companies. And as I said in my prepared remarks, these are now the West Coast and the East Coast with commercial and industrial clients. So, you'll recall that our previous activities were concentrated in the Midwest on wholesaling to gas stations. Today, we have about, I do know, about $1.6 billion of branded gasoline and diesel distribution under long-term contract to gas stations in the Midwest.

We like that business a lot. We wanted to complement it with C&I, that is commercial and industrial, users. It's a nice fit with our energy management business, our natural gas and power. So, the two of them share some clientele. It's very compatible with our aviation and our marine business where we are selling directly to end-users. It's not wholesaling, but it's servicing those end-users. So, these were two significant moves into that space. We ultimately want to cover the 48 states and be able to handle national accounts. So we're pretty excited about that.

So, when you look at that and then you look at our global energy management business, our natural gas, the thing that I find very exciting is there really isn't anyone on planet Earth for the most part that we can't supply their energy management products to. So that I find pretty exciting. It is a big part of the diversification. When you look at aviation, marine -- obviously great businesses. We'll continue to stay in those businesses, but it was really taking the capabilities and the competencies that we got in liquid fuel management and then applying it to land-based customers.

And obviously, as the energy diet is changing, looking at natural gas and power, which are two of the growth products that we see forecasted, and really trying to get on to those bandwagons so to speak, there's a commonality across the entire energy complex and leveraging our competencies into those different spaces.

So, it's very compatible with our retail bases we are buying from, obviously the same supply community. We've got a good amount of synergies in terms of transportation. So that was really the whole C&I story, was to bring it together, some amount of inventory, a good amount of logistics, and obviously, hopefully, having delighted customers. We've got fuel cards in there.

So, there's a lot of synergies. And we are really in the early innings of bringing that together. A lot of moving parts, a lot of integration, a lot of technology. We are still digesting a heck of a lot of integration and technology. These things don't happen quickly. We've been building out our Oracle platform and we're pretty excited about that, but it is -- these are not simple systems to build out. They cost a good amount of money, but once you get them going -- you know, Katie bar the door because we're expecting a good amount of scalability and the ability to manage our costs, but it's a little bit of a road.

All right guys. Thank you very much and have a good evening.

Ken Hoexter, Merrill Lynch.

Michael, just to wrap up on -- hey, Ira -- a little bit. Were you just talking about kind of the integration and what is still left to do? When you think about the six acquisitions over the last three years, just more recently, and you talked about bringing people in. But what is left to do on just not the Watson investors going all the way back to Western Petroleum, Carter's, are they all on the same systems? Is that where you're getting these cost savings from, or is that already done and there's different things you're working on?

No, they are on bits and pieces, they've got commonality, but in terms of building out the whole system, no. So, I mentioned some of the new folks that have come into the Company. And I mentioned Michael Crosby as the EVP of our Global Land business. And fortunately, he's got a good technology background that's his number one priority. So, there's a lot of things that, as you can imagine, we have to do, but nothing is getting in his way, or at least he's trying to make nothing get in his way almost on a daily basis of really building out our global Oracle land platform. And that will be revolutionary for our Company, but it's, you know, it's not a casual affair.

And simultaneously, as we previously announced, we've got our enterprise transformation project. So it's a laugh riot here in terms of building out global technology. It is really a heck of a lot of work and requires a lot of patience. It costs money, but we are convinced with Masood Sadiq building out our cloud, you know, we're moving to the cloud and not everybody knows how to do that. It's pretty complicated. But we've got a phenomenal technology team and we are continuing to stay the course in terms of moving our systems.

And the big picture is ubiquitous global energy management, fulfillment in terms of third-party, handling it physically ourselves. We have inventory. We have physical assets as well as using technology with Multi Service with payment and cards. So that's the big picture.

Like I said previously, I wish I was 35, but we are on a mission. And obviously, you've got to do it every day. You've got to do it for every customer and really understand, as Dave Milligan, who heads up our Retail business in Overland Park, you have to understand what it's like to be our customer. So that customer experience is important and technology is a big, big part of that, both for our internal efficiency as well as giving the customer what they want, when they want it, how they want it. The customer is certainly king today. So we're committed to it. We've got a lot of people who have got a lot of passion for it, but it takes a lot of time and it's not free.

Are there missed opportunities as you roll -- you work on this, or can the capacity (multiple speakers) each individual?

Every single day. We've got -- I mean the potential is significant but, sadly, we have a ways to go. We are significantly more competent in this area than ever before. And it's not so much about technology or IT. Well, it's a combination of things, and it requires a lot of business engagement. And you've got to do it while you're running your business. And we're acquiring companies at the same time.

So, you know, sometimes companies come up for sale, and if you don't buy them, well, you've missed that opportunity. So we're not in complete control of what the timing of when very interesting properties come up for sale.

So I think the question was kind of skipped before, but in terms of the bad debt, can you talk a little bit about your Hanjin exposure and kind of what the process is here and what we might see in the next couple of quarters?

So, Ken, you know that, if there's anything we know something about, it's marine underwriting. So we've been doing a long time.

Right.

And so I think -- do you want to comment on it (inaudible)?

Sure, sure. As Mike said, it's certainly a core competency of ours, especially in marine, where we are very adept at handling the matter of maritime law in terms of collecting receivables. In Hanjin's case, as will be disclosed in our Q, which will be filed very, very shortly -- my controller is sitting here right next to me nodding his head. Our exposure is about $18 million as of a couple of weeks ago. And what we'll be saying in the Q, which I could tell you now, is we believe we will recover all or substantially all of the amount outstanding or otherwise mitigate any related losses through either maritime liens, again using our competency in maritime law, or using other avenues of recovery for loss mitigation, including insurance.

But as always, there's never any assurance that we'll be able to recover everything, but we're pretty comfortable, based on what we know today, that we should come out in a reasonable position. But it will be a time-consuming process.

Maybe just a last -- I mean with the big picture on the marine side, just as the customers integrate and, Mike, you talked about the alliances and the partnerships -- do they gain more leverage in negotiations with you and it puts more pressure on profit per metric ton?

Yes, I mean, listen, it's -- you are going to have a continuing mix. The pendulum is going to swing.

So, being larger doesn't always necessarily mean that you do it better. You may just have a bigger problem and everybody sees you coming, so it really varies.

Some large companies make an intelligent decision to outsource things. We're fairly large. We outsource a lot of things because we know that specialist companies are going to do a much better job at a certain activity than we are. They're going to do it better and they're going to do it more cost effective. We believe that's true. We convince some of the largest companies in the world that that's true. Our best customers are the most confident and smartest customers as far as I'm concerned. So it varies and just because they are bigger doesn't mean that they're not going to be our customer. So they've got a lot to do. Some of them will take some piece of it and farm out the rest. So it's a bit of a mixed bag.

And generally speaking, they're so absorbed with sorting things out that they actually do a worse job on it. Some of them keep it very fragmented. They'll have all of their operators do their own thing.

So, size does not necessarily mean intelligence or an improvement in operations. It kind of gets down to a company by company and sometimes down to a procurement person by procurement person. It becomes -- unfortunately, in some cases, it becomes what aftershave you're wearing.

That's an interesting way to end it. Thanks, Mike, Ira and Glenn. I appreciate the time.

Jack Atkins, Stephens.

Thanks for taking my questions. I guess, to kind of start off, can we kind of go back to the land business for a moment? And Ira, I think, if I heard you correctly in the prepared comments, like you said, there was some underperformance in you European operations there but I'm not quite sure. Could you kind of just dive into the sequential decline? And I know, was it last year, if I remember correctly was a difficult comp. Just sort of what's happening in that segment to drive that year-over-year decline in operating income?

Sure. The principal thing that I alluded to on the call which was the single biggest driver on the sequential side and a meaningful factor year-over-year as well -- two things. One is we sell gas oil either directly or through sale to distributors who then sell into the agricultural space either directly or through some other distributors. And the gas oil is generally used for drying crops, but this summer was exceptionally dry and that business was off. That wasn't massive but that was one factor.

The larger factor was, even though we always talk about seasonality on kerosene or heating oil picking up in Q4 and Q1 as the weather gets colder, if you've ever been to the UK in September, it's not necessarily nice and warm. But this year, it was the warmest September in 100 years. So even though it's not a gigantic number compared to what we may see in a December or January, we usually do start selling a reasonable amount of that product in September. But because of the extremely warm weather, those sales were nonexistent.

So those two things combined had an impact of somewhere around $4 million. So, again, that was clearly the single largest driver.

If you look at the year-over-year, we had announced earlier the sale of the [Piester] retail asset that came with that acquisition a year plus ago. And that had some GP in 2015. That of course is now gone. That was another factor. Everything else was relatively small. Our legacy land business in the US was a little bit weaker but nothing material, and there were another couple of bits and pieces but now you're down to hundreds of thousands of dollars of variance as opposed to millions. So the UK by far was the biggest driver in terms of the -- of sequential and year-over-year comparisons.

Okay, okay that's helpful, Ira. Thank you for that color. And then, you know, when I think about the impact from the various initiatives, whether it's the cost savings initiative that you guys announced on the last conference call or the new IT platform that is in the process of being rolled out, were there any costs associated with that in the quarter that were unusually large that maybe we should kind of think about in terms of just trying to normalize this quarter for just underlying operating performance?

Now, remember, we call out what we deem to be nonrecurring, and that's the $2.6 million. We wouldn't put the big IT or the enterprise transformation project in there, but the amount spent in the third quarter for that activity wasn't exceptional. Those numbers will increase in 2017 as we start moving to more serious stages of that project. But in Q3, that number was relatively small. So there wasn't anything extraordinary that was substantial that would have impacted the third quarter.

Of course, you had expenses associated with the two newly acquired businesses that added to our expenses if you are looking at the numbers sequentially in the third quarter. But so that would be the single largest sequential and year-over-year driver of expense increase, but nothing else extremely large.

Okay, great. And then just kind of following up on the cost savings announcement last quarterly call, can you give us an update in terms of how much you've been able to take out of the business so far? And then that $25 million to $30 million number that you announced several months ago, is that still the right number to think about as you execute on that over the next couple of quarters?

I think you have an inflation factor at Stephens. I think last quarter we (multiple speakers)

I'm in the cloud, I'm in the cloud.

Nice, nice. I can smell your aftershave from the cloud. So $15 million to $20 million is the amount that we made reference to last quarter.

That's correct, yes.

And very little of that has been achieved so far. A big chunk of that is in marine, and we expect to start seeing the benefits of that in the first quarter of 2017, and the next largest chunk is in land, and the same thing there.

You know, to Ken's question earlier about integrations, we're making some progress. Mike talked a lot about it a few moments ago. And some of those initiatives will drive some savings in land as we get into probably the second, third and fourth quarters of 2017. So we may see a little bit of benefit in the fourth quarter, but it won't be much. We should start seeing almost the full benefit. If you take the $15 million, $16 million, $17 million and you divide it into four chunks, we should start seeing that in mid-first quarter going forward.

Okay, okay, that's great. If I could sneak one more in, that would be great.

Sure.

That's on Multi Service. You guys talked last quarter about some exciting opportunities there in Multi Service in terms some business you are going after. Can you give us an update on sort of how that is looking and would you expect that GP line for Multi Service to maybe ramp into next year with this new business wins I think you guys were targeting?

Absolutely. Multi Service is doing a great job. They've landed a bunch of new contracts over the last quarter plus. Some of them are just really getting set up now. We've actually hired some people to support those programs. So there is a little bit of an expense that we will see before we start seeing much of the profit. But if you look to 2017, I believe we said this last quarter so we could reiterate it there, their GP should jump by somewhere around 20%, driven by organic growth plus the impact of those projects kicking in as we start the new year.

So 2017 should be the single largest step up year-over-year for Multi Service since we acquired them.

Okay, that's great. Thanks again for the time, guys.

(Operator Instructions). Ben Nolan, Stifel.

I wanted to follow-up, if I could, on one of Jon's questions earlier about the new IMO fuel regulations or emission regulations. It seems like a lot of people didn't think that the 2020 deadline was going to be realistic and that the implications on fuel prices and availability of fuel and a lot of other things were just a leap too far, but here we are today and it's been ratified. Is it really that big of a deal or what -- could you maybe walk me through what you guys are thinking on the implications of this, this year?

I'd say it's really kind of interesting. When we got into what we call the land business, it was really an eye-opener for me because we really didn't pay a lot of attention to our US energy space or infrastructure space. And I was amazed at how much our oil industry does in this country in order to keep this country powered. And you've got a significant amount of regulations, particularly within the gasoline space. And there was always -- obviously a lot of discussion and pushback in terms of what was possible. And what always occurred is the industry figured out a way to get it done.

So, certainly, there is going -- this one is significant and sizable, so you are going to have some increase in costs without question. A number of people, depending on where they are, are going to take different solutions from scrubbers. There's obviously a payback. You've got infrastructure in terms of LNG. You are going to have some blended fuel oil. So a lot of that is going to come into the market. So, that will occur. You are going to have a heck of a lot of that going on without question.

Some folks will just go with distillate. So, it's really going to be all of over the place. It's going to be all over the board. You've had some point-to-point go to LNG in the Baltic, but it'll get done. And of course compliance and monitoring is a big part of it.

So, there's going to be a lot of opportunity for a lot of folks to figure out solutions. Segregation is going to become an issue. So, it will create opportunity for some and pain for others, but it will get done. And you know, you just had the Paris Accord, so I think it would have been perceived as extremely politically unfavorable and outside where the trend is now to not approve that for 2020. So, officially, it is tomorrow, but of course the news came out today.

Okay, so that's helpful. But generally speaking, it's fair to categorize this as a really, really, really big deal that could be at least a moderate game changer for that business? Is that a fair read do you think?

Oh, totally. This turns the whole industry upside down without question.

Okay. That was sort of what my take was, but it's good to have somebody that knows a little bit more about it to kind of verify that.

The other thing I was going to ask actually for you, Ira, you guys just about a month ago or so updated your repurchase program. I was just curious if there's been any moving parts on that front or now that you've sort of updated the platform little bit, how you think about your activity on share repurchase moving forward?

Nothing -- we haven't done anything since that announcement. We just want to take the opportunity to replenish what was available to us because we never know when the opportunity might make the most sense for us to go in and repurchasing some shares. Again, we generally do that to simply offset the dilutive impact of employee stock awards, and that's a number of somewhere around maybe $40 million year. So we haven't necessarily done that ratably, but we've averaged somewhere around that number the last couple of years. So we just wanted to make sure we had -- we were running down to just barely enough for kind of one year's worth of purchases based on those averages. So that's all that that announcement was about and we'll continue to go down the same path. I don't expect any major changes to that philosophy anytime soon.

Okay, perfect. Well, I'll stick with just two, so that will do it for me. But thanks a lot, guys, for taking time for me.

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

Well, thanks for participating in our call. We have a tremendously committed and engaged organization and look forward to talking to you next quarter. Thanks very much.

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