World Kinect Corporation (WKC) Q4 2015 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the World Fuel Services 2015 Fourth Quarter and Full Year Earnings Conference Call. My name is Christy and I will be coordinating the call this morning. During the presentation, all participants will be in a listen-only mode. After the speakers' remarks, there will be a question-and-answer session. And instructions on how to ask a question will be given at the beginning of the Q&A session. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Mr. Glenn Klevitz, World Fuel's Assistant Treasurer. Mr. Klevitz, you may begin your conference.

Thank you, Christy. Good morning, everyone, and welcome to the World Fuel Services fourth quarter and full year 2015 earnings conference call. I am Glenn Klevitz, World Fuel's Assistant Treasurer and I’ll be doing the introductions on this morning'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 the results to materially differ from these projections can be found in World Fuel's Form 10-K for the year ended December 31, 2014, and other reports filed with the Securities and Exchange Commission. World Fuel assumes no obligation to revise or publicly release the results of any of these revisions to the 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 and good morning, everyone. This morning, we announced adjusted full-year earnings of $193 million or $2.73 adjusted diluted earnings per share. Adjusted earnings for the fourth quarter were $53 million or $0.75 adjusted diluted earnings per share. The backdrop of global economic turmoil, world [ph] oil prices and foreign currency devaluations had a significant negative impact on the results of many businesses. However, our diversified energy solutions business model has once again delivered solid results for us. We have proven that during the perfect storm of oversupply, slowed demand and deteriorating balance sheets, we were still able to gain significant market share. We concluded the year with nearly 20 billion gallons of fuel sold, an increase of almost 20% year-over-year. That’s about 1.5 million barrels per day or 1.5% of the world’s liquid fuel flowing through our company each and every day. The financial health of our company remains strong and we maintain ample liquidity to fund a multitude of organic growth opportunities as well as strategic investments across all of our business segments worldwide. As illustrated by our press release earlier this morning, we announced that we have signed a definitive agreement to acquire aviation fueling operations at more than 80 airport locations from ExxonMobil affiliates. The transaction represents a strategic expansion of our global aviation network and brings us a portfolio of business, general and commercial aviation customers in Canada, the United Kingdom, Germany, Italy, Australia and New Zealand. Our aviation segment had a solid year, posting record volume of 6.3 billion gallons while continuing to expand our product and service offerings throughout our commercial, general and business aviation operations. Government related activity principally from our NCS business produced a better than anticipated result this year as troops remained in the region longer than was originally expected. Although this activity is expected to decline in 2016, our NCS team is actively pursuing other larger scale projects, while they continue to apply their skills to our commercial needs and opportunities around the world. The low price fuel environment has translated into improved profitability and stronger balance sheets from many commercial airlines and we believe that World Fuel’s global fuel supply chain and services offering is well-positioned to capitalize in the continuing increase in passenger growth and route expansion. The collapse in the oil and commodities markets has together with slowing economic growth in emerging markets had a profound impact on global shifting in offshore exploration. Many sectors of the shipping and offshore markets are struggling with lower freight rates and cancellations of projects, a byproduct of the steep decline in commodity and energy prices. While no one is immune from these powerful macroeconomic forces World Fuel’s business model and financial strength have afforded us the opportunity to demonstrate our continued commitment to the shipping community as evidenced by the 27% year-over-year volume growth. Over the past 18 months the industry has developed a better appreciation for the risks borne by a bunker purchaser in dealing with an undercapitalized supplier. These risks often remain hidden until an economic downturn exposes them as has the recent shock to the oil markets. While the current fuel price environment lowers the financial barriers to entry into the bunker market we have nonetheless successfully grown our market share over the past year and foreign bunker purchasers have increasingly recognized the value of World Fuel as a preferred financial counterparty capable of insulating their companies from performance and default risk. We expect that shipping in offshore markets will remain under pressure for the foreseeable future making World Fuel Services’ strong credit worthiness, demonstrated reliability and innovative supply chain management strategies increasingly attractive as an experienced and proven risk management partner in a market cropped with uncertainty. Our land segment posted record volume of 4.9 billion gallons an increase of 16% year-over-year. We acquired Pester Marketing and Bergen Energi both of which were solid strategic enhancements to our global land platform. Our global energy management operations which include natural gas supply and energy consulting services for natural gas and power remain a strategic focus on and we expect this business to be a key driver for growth in this segment. We continue to make investments in people and technology for transaction management and payment processing as we're beginning to realize synergies with existing customers as well as developing new product offerings and services for a growing portfolio accounts. In summary, our diversified energy solutions business model has shown resilience in the toughest of market conditions. We maintained a strong balance sheet and ample liquidity to fund our growth and investments in these challenged markets. Our reputation as a strong financial counterparty is positioning us well, particularly in the marine segment with customers and suppliers realizing and recognizing the importance of financial strength. Our global energy management business is creating long-term relationships with commercial and industrial customers worldwide, which consume 70% of all energy demand. Internal and external customer facing technology is the backbone of our solutions oriented asset-light business model. We will continue to invest in this area to harvest back office efficiencies and create value in the marketplace. As always, we appreciate the continued support from our shareholders, customers and suppliers and we remain very excited about the abundance of opportunities for future growth. Now, I'll turn the call over to Ira for a financial review of our results.

Thank you, Mike, and good morning, everyone. Consolidated revenue for the fourth quarter was $6.7 billion, down 31% compared to the fourth quarter of 2014. This decline was due to lower oil prices offset in part by increased volumes across all three of our business segments. For the full year, consolidated revenue was $30.4 billion, down 30% compared to last year. Again, this decline was also due to lower oil prices offset in part by increased volumes in aviation, marine and land. Our aviation segment volume was 1.6 billion gallons in the fourth quarter up 160 million gallons or 11% year-over-year. For the full year, aviation segment volume was a record 6.3 billion gallons, up 625 million gallons or 11% year-over-year. Volume in our marine segment for the fourth quarter was 8 million metric tons, up approximately 900,000 metric tons or 12% year over year. Broker business activity for the quarter was approximately 12% of total marine volume as compared to 10% percent in the fourth quarter of 2014. For the full year, our marine segment volume was a record 32.6 million metric tons, up 6.9 million metric tons or 27% compared to last year. And what continues to be a very weak operating environment, our marine team did an outstanding job growing volume and market share to record levels, while maintaining our credit discipline and expanding our global offerings. Our land segment sold record 1.4 billion gallons during the fourth quarter, up approximately 260 million gallons or 23% from the fourth quarter of last year. For the full year, land segment volume was a record 4.9 billion gallons, up nearly 700 million gallons or 16% year over year. Lastly, total consolidated volume for the fourth quarter was 5.1 billion gallons, up 650 million gallons or 14% year over year. Despite continued instability in many of the markets in which we operate, our global team did a tremendous job driving volume growth in 2015 with total consolidated volume at nearly 20 billion gallons, up 3.1 billion gallons or nearly 20% compared to 2014. Total volume has now grown at a compound annual growth rate of 14% over the past five years. Consolidated gross profit for the fourth quarter was $228 million, an increase of $8 million or 4% compared to the fourth quarter of 2014. For the full year, consolidated gross profit was $860 million, an increase of $49 million or 6% compared to last year. Our aviation segment contributed $87 million of gross profit in the fourth quarter that's an increase of $12 million or 16% compared to the fourth quarter of 2014. For the quarter, although we witnessed the expected seasonal decline coming off of the strong third quarter, year over year, the aviation segment benefited from increases in their core resale business principally in North America and Europe as well as an increase in government related activity when compared to the fourth quarter of last year. While government activity was stronger than expected in 2015 and finished the year strong, we still expect this level of activity to decline in 2016 due to an anticipated decline in demand as the year progresses. For the full year, aviation gross profit was $363 million, an increase of $42 million or 13% compared to last year. Speaking of the aviation segment, as we announced this morning and as Mike mentioned earlier we have entered into a definitive agreement to acquire Exxon Mobil's aviation fueling operations at 83 airports in Canada, the UK, Germany, Italy, Australia and New Zealand. We also expect to acquire three additional locations in France subject to certain required reviews associated with such transaction. The purchase price of approximately $260 million including the French locations is expected to be fully funded with cash on hand. As these are all international locations, the acquisition is expected to be funded with foreign cash or offshore cash which represented $445 million out of our $583 million of consolidated cash at the end of the year. I’d like to provide some more color on the timing of the closing as well as timing of one-time charges and related accretion. The transaction will close in phases with the first phases of the transaction expected to close no earlier than the third quarter. While non-GAAP accretion should be close to the $0.32 to $0.36 provided in this morning's release in 2017, it is likely that the transaction will only generate $0.07 to $0.12 of non-GAAP accretion in the second half of 2016 due again to the anticipated timing of closing the various phases of this acquisition. With respect to the $10 million of one-time acquisition-related expenses, we expect to spend approximately $8 million during 2016 with the balance expected to be incurred in 2017. Moving onto marine, the marine segment generated gross profit of $45 million, down $14 million or 24% year over year. The main driver of the variance was the extraordinary market conditions in the fourth quarter of last year partially associated with the bankruptcy of a large competitor, material volatility and a sharp spike in demand. For the full year, a year in which bunker prices plummeted by nearly 50%, marine segment gross profit was $190 million, down $16 million or 8% year over year. Our land segment delivered gross profit of $96 million in the fourth quarter, an increase of $11 million, or 13% year-over-year. The gross profit increase is principle related to increases in our natural gas supply business and energy consulting services for both natural gas and power as well as the activity from the Pester acquisition that was not included in 2014 results. We generally experienced the seasonal benefit we expected from our UK business and to see another seasonally strong quarter in the first quarter, depending in part on the climate in the UK during the quarter. For the full year, our land segment generated gross profit of $310 million. That's an increase of $23 million, or 8% year-over-year. Non-fuel related gross profit associated with our Multi Service business was $12.4 million in the fourth quarter, effectively flat compared to the fourth quarter of last year. For the full year, however, Multi Service gross profit exceeded $49 million and was up 5% year-over-year. The team in Multi Service has recently secured new strategic customer accounts, some of them leveraging existing royalty relationships, which are expected to contribute to the future profitability of the business and help drive growth in 2016 and beyond. Operating expenses in the fourth quarter, excluding our provision for bad debt and one-time items were $157 million, up $11 million, or 7% year-over-year. The year-over-year increase in operating expenses was related to expenses of acquired businesses. Excluding the impact of acquired businesses, operating expenses actually declined $4 million, or 3% year-over-year. We remain focused on improving operating efficiencies as well as driving greater operating leverage from acquisitions going forward. As part of these efforts, we have recently embarked upon a multi-year project, which will include an upgrade to our global ERP platform, which will help drive greater improvement in operating efficiencies, optimized scalability and further facilitate integration excellence. We are now in the early planning stages of the project and related costs incurred to date have not been significant. Expenses related to this project in 2016 are expected to be approximately $6 million, with an additional $6 million of related capital expenditures. The total cost of the project over the next three years is expected to be between $30 million and $40 million. Total operating expenses, excluding bad debt expense and any one-time costs related to acquisitions, should be in the range of approximately $163 million to $167 million in the first quarter and this includes the impact of expenses related to two small acquisitions completed during the past two months. Our bad debt provision in the fourth quarter was $2.3 million, up approximately $2 million year-over-year. For the full year, actual write-offs were $8.3 million, which is generally consistent with 2014. Our credit team continues to navigate difficult markets exceptionally well, as evidenced by our provision for bad debt, which was below 1% of gross profit for the seventh consecutive year. Excluding one-time items, consolidated income from operations for the fourth quarter was $69 million, down $4 million, or 6% year-over-year and for the full year, income from operations was $257 million, down $21 million, or 8% year-over-year. Non-operating expenses, principally interest expense for the fourth quarter, were $7 million, that's an increase of $1.2 million, compared to the fourth quarter of last year when excluding the profit from the sale of our crude oil joint ventures, which were included in this line item in 2014. I would assume non-operating expenses will be approximately $6 million to $8 million in the first quarter. When adjusting for one-time items, the company's effective tax rate in the fourth quarter was 15.8%, compared to 14.8% in the fourth quarter of last year. We estimate that our effective tax rate in the first quarter will be between 17% and 20%. Adjusted net income, which excludes the one-time acquisition related expenses, was $52.7 million this quarter, down $5 million, or 9% year-over-year. For the full year, adjusted net income was $193.3 million, down $23.4 million, or 11% year-over-year. Non-GAAP net income, which also excludes intangible amortization and stock-based comp, in addition to the one-time expenses, was $62.1 million in the fourth quarter, a decrease of 5.9 million or 9% year-over-year. For the full year, non-GAAP net income was $225.1 million, down $23.9 million or 10% year-over-year. Adjusted diluted earnings per share was $0.75 in the fourth quarter. That’s a decrease of 7% year-over-year and for the full year, adjusted diluted earnings per share was $2.73, down 10% year-over-year. Non-GAAP diluted earnings per share was $0.88 in the fourth quarter. That’s a decrease of 8% year-over-year and for the full year it was $3.18 down 9% over last year. Our total accounts receivable balance dropped to $1.8 billion at year end. That's down approximately $500 million compared to the end of 2014. This principally raises the decline in average fuel prices offset by increased volume across all of our business segments. Net working capital was $822 million, down $72 million for the year and return on working capital was 33% in the fourth quarter, up from 29% in the fourth quarter of last year. We generated $122 million of cash flow from operations in the fourth quarter marking the 14th consecutive quarter of positive operating cash flow. For the full year, we generated $448 million of operating cash flow compared to $141 million in 2014. We have now generated more than $1 billion in operating cash flow over the past three and a half years. Our strong cash flow has enabled us to reduce our net debt to $190 million which further increases our capacity to fund organic growth, future strategic investment opportunities, such as the Exxon Mobil transaction announced this morning, dividends and share repurchase activity while continuing to maintain a strong and unleveraged balance sheet. So, in closing, 2015 volume growth was extremely strong despite difficult market conditions. Our annual volumes grew nearly 20% in 2015 which now represents nearly 20 billion gallons of volume. Our balance sheet remains strong and liquid supported by more than $1 billion of operating cash flow over the past three and a half years and today we announced the signing of a definitive agreement to complete what will be the largest acquisition in company history. We remain focused on numerous additional investment opportunities across all of our business segments in what remains a very robust M&A market. In order to ensure we continue to improve operating efficiencies and drive the maximum operating leverage from future acquisitions, we are embarking on a multi-year project to create a more efficient operating infrastructure. And lastly, we remain focused on our long-term growth strategy, developing organic growth initiatives, investing in accretive strategic investments and continuing to drive shareholder value. I would now like to turn the call over to Christy our operator to begin the Q&A session.

Thank you. [Operator Instructions] Our first question comes from the line of Jon Chappell with Evercore ISI. Please proceed with your question.

Thank you. Good morning, guys.

Good morning.

Hey, Jonathan.

Looks like a very good transaction. Just a question about how that fits into your current aviation structure and some of the acquisitions you've done in the past seem to be – had a lot of volume and maybe have maybe little bit lower margins in the portfolio and some have had pretty low volume with pretty high margin. So is there any way you can give us type of a run rate of volumes so we can back into kind of the margin and how it fits into your portfolio?

Sure, Jon. This is the lower volume variety as you so put it. Total volume from this transaction should be a little over 300 million gallons.

Okay.

Remember, this mostly - business in general aviation activities, so it does carry margins generally higher than our average margins in the overall aviation business.

Okay. Is there any seasonality to that business at all?

No significant seasonality.

Okay.

It’s primarily niche regional.

Got it. Second question, you did a great job this year on the marine side given a ton of headwinds there. But if we look at the fourth quarter, there seem to be a pretty meaningful almost a 10% sequential drop from the volumes in 2Q and 3Q. Obviously marine can be incredibly seasonal, but also in the last three months I guess the last five months there has been a huge step down in a couple of major section and so much of that sequential decline, was just a seasonal issue and how much of it is you kind of ceiling back risk is you know bankruptcy is kind of accelerated in dry bulk and the container markets?

It's tough to tell Jonathan, I mean you know better than anyone but there is a lot of folks on the sidelines of the derivative side you know people really are taking a wait-and-see approach not only on the marine side but also on the aviation side. So, it's little tough to tell you know we've got to be pretty careful in the current market conditions because the economic scenario so poor. So it’s little bit hard to tell and it's really a quarter by quarter thing for us, the way that our model works is that we’ve got the ability to dial up and dial down. I think while we are feeling pretty good about our mousetrap and our global platform definitely being a little bit careful. So you are going to see some movement in that volume on a quarter by quarter basis.

Yeah understood. And then just a quick one from my follow-up obviously ended the year with a lot of cash $260 million of it paying for this transaction and a lot of tax credit facility. So as we think about your liquidity going forward, the best way to ask this is, couple of years ago you stated you needed about $150 million or - comfortable with maybe a $100 million to $150 million of cash on the balance sheet to run the business and everything else was kind of up for opportunities. As the business has grown significantly and as you add this new business as well what's the kind of comfort level of cash in the balance sheet so you kind of once again back into what liquidity is available to pursue other opportunities like the one you announced today?

I would say that that number hasn’t changed materially Jonathan. We've obviously had more significant cash on our balance sheet than the amount that we feel we need because we’ve generated so much cash and haven’t spent this fast enough. So I would say we’re still comfortable over the long run you know should our balance of cash drop down to that range of $150 million or so we'd still be very comfortable with that position.

Thank you. Our next question comes from the line of Gregory Lewis with Credit Suisse. Please proceed with your question.

Thanks and good morning gentlemen. You touched on the cash in overseas, and you come back [ph] into cash domestic, as we think about opportunities and you think about where your cash position is, should we be thinking more about more international expansion, the domestic or are there going to be opportunities domestically or at least how are you thinking about that?

We have a lot of opportunity fortunately and I would say there are plenty of opportunities domestically and there are a growing number of opportunities internationally as well. Clearly if we find something internationally like we did with the Exxon Mobil transaction that's a nice win for us because we have cash sitting offshore that is not really generating much of a return and we can use that cash to fund the transaction. And if we find additional opportunities offshore we still have incremental cash that we could tap that's sitting offshore as well. But that doesn't preclude us from going after acquisitions domestically and there are plenty of those as well and we got ample availability on our credit facilities to fund those transactions. So I would say there is opportunities on every continent today, we just have to prioritize and find the one to make the most sense for us strategically.

Just following up on that, has the significant slowdown and the availability of capital in the MLP market significantly increased your opportunities to buy things domestically?

I'm not sure that that's necessarily the case, I think there is still a lot of competition for certain transactions but I think we got a great reputation in the market and when deals come to market people tend to – I’m not sure they always come to us first but we’re probably one of the first people they used to come to talk to because we've got the track record of all the deals we've done successfully in the past, so I don't think we've seen a significant [Technical Difficulty]

Okay. That's fine. And then, just you mean, you clearly feel it's the adjacent businesses that really drive margin, I mean, there is recession fears, there is panic, oil prices are jumping around every day, has that driven, have you noticed a pickup in demand for those derivative services of hedging over the last, call it, six weeks, I mean, as we think about the quarter or even -- we can even go back and look in December, as there's been more concern about just the uncertainty out there, you're seeing banks potentially pull back on capital, are things starting to line up where beyond the traditional fuel selling, there is going to be outsized opportunities in those adjacent services, have we started to see any signs of that yet?

Well, as it relates to hedging, for the most part, it's the complete opposite. Lot of people are on the sidelines, the airlines have certainly taken off, Delta I think has taken off all of their hedges. So a lot of folks got burned, they took a position and this was some part of the drop-off in Q2. Everyone thought that it hit the bottom, they've put on some hedges, it dropped further, they took losses, everyone pretty much decided to take a wait and see the prices there are quite low. So it's not really very oriented towards hedging. You can certainly make an argument, that at these low numbers, it's not a bad idea, but there is still a lot of discussion of the bottom pulling out further, you're hearing a number of different pundits in our call for $20 barrel oil. So it's pretty soft on the demand. Now, as it relates to other services, and as it relates to financial counter parties and all of that, I think that the diversification approach that we're taking is intelligent and omni-channel approach, where we're looking to have ubiquitous coverage and dealing with a lot of services and really helping folks navigate reduced cost of procurement and energy management is really the name of the game. So that's really what our strategy has been for a long time. It's expensive to do that, but we believe it's in the interest of shareholders to be building a rock-solid bulletproof business that is very service oriented, is very comprehensive and is not depending simply on a markup on fuel, but becoming a professional global energy management company that's cutting across transportation, commercial, industrial and governmental market segments. So that's not easy to do. We've been at this our entire lives and that's really why you're seeing our expenses be a little bit different than what perhaps we both like to see. But we're taking a medium to long-term orientation and it's not easy, I mean it's not mysterious what we're doing, it's just difficult to execute.

Thank you for the time, gentlemen.

Thanks.

Thank you. Our next question comes from the line of Jack Atkins with Stephens. Please proceed with your question.

Good morning, guys. Thanks for the time and congratulations on a strong quarter and the acquisition. So, Ira, I think if we can go back to something you were talking about in your prepared comments, the $4 million reduction in OpEx, excluding acquired expenses, is that part of sort of the larger, sort of cost cutting program that you guys have undertaken and can you maybe give some details around what's driving that?

I would say that we're just very cautious on every dollar that we spend and the overall scheme of things, it's nice to brag about a $4 million reduction, it's not a really big number. So I can't point to anything specific, it's just a couple of hundred thousand dollars in several different categories I would say that helped to reduce those expenses overall. So, we're spending money where we think it's prudent and we're looking to save money where we think it's equally prudent and over the past year, we've obviously done a reasonably good job in doing so, by keeping non-acquisition related expenses pretty much flat and we’re going to always be able to do that. As I mentioned on the call, we’re going to be spending a few million dollars this year on our long-term infrastructure project, but we may find some offsetting savings in other areas. So I can’t really point to anything specific just to say that we’re very focused on cost and we always will be trying to make sure we are spending $1 more than we need to.

Okay, make sense. And then thinking about the acquisition, you mentioned on the press release that as part of the transaction, you’re going to become a distributor for Imperial Oil in Canada. Is that assumed in the accretion expectations for full year basis, in terms of the transaction and can you maybe walk through the mechanics of how this will work, we have a specific territory in Canada or we need compete with existing Imperial distributors for business?

Well, for starters, it is included in the accretion estimate. Everything that we made reference to is included in the estimate next year. And the second part of your question in terms of we will have long-term distribution rights with Imperial Oil and there is competition in Canada with other parties, but that’s a valuable piece of the public force as part of this transaction.

Okay, I got you. And then lastly, on the military side of the business, you commented that you expect that to be a little bit softer in ’16 versus ’15, could you maybe put some brackets around how we should be thinking about that from a financial impact perspective to ’16?

It’s always a tough one, because I think if I estimate this question last year, I would have given you a more doom and gloom forecast and we have won that outperforming our expectations in a pretty big way, because military activity continued and additional troops was sent over. As we look to ’16, we again at the start of the year, are expecting a drop-off, but it’s really tough to measure how much that might be. That activity still is in double-digit percentages of aviation BP [ph] as I have referred to that metric in that past. And that number will quite likely drop in and probably just merely be in double-digits in 2016. We really just don’t know, things can be changing month to month, decisions are made by the military on certain basis on a moment’s notice, which could be a positive or negative. So we’re optimistic that we will generate a reasonable amount of profitability in ’16, which is probably way beyond what we would have expected a year ago, but it’s really tough to measure how much that is. But it almost certainly will be a lower number, just again tough to quantify.

Okay. Well, thank you again for the time this morning.

Thanks, Jack.

Thank you. Our next question comes from the line of Ken Hoexter with Merrill Lynch. Please proceed with your question.

Hey, good morning Ira and Michael. Michael, you talked a bit about the strategic acquisition, maybe just delve into that for a little bit. What’s changing or just are you acquiring businesses that you are not in in terms of the aviation with ExxonMobil, I just want to understand when you say, or is it just that it’s because it’s the largest changes structurally in how you’re going to be running the business?

No, listen, I think it’s important to understand that all we are doing is satisfying customer demand. There are probably three different ways that we can fulfill a customer’s requirements and again, it’s not mysterious. Amazon is opening stores, Wal-Mart is converging their technology, and ecommerce, you’ve got people setting up third-party networks using technology. So there is nothing new about this. It’s certainly the cloud and some of your invitation towards omni-channel approach to satisfying customer demand is nothing new where it’s just a bit more robust. We have been oriented on that for a long time from when we made a Y2K decision to go with an Oracle solution to that where we could have taken a simple patch. We’ve always had the vision of creating a ubiquitous energy management company and I don’t think anyone really has that in the marketplace today, which makes it difficult for you guys to model and compare us to and I appreciate that, but this is nothing other than continuing to build out our network. So it's an opportunity that we feel it fit perfectly in our wheelhouse within the aviation side. We started this back in 2000 with our fuel management, moved on to taking inventory to create value. We penetrated the supply chain here in the US. We started to do that in terms of opening up markets in Europe. This now gives us interesting access in those locations. So it fits perfectly. On our global energy management side, that's very exciting from a perspective of opening up now to natural gas and power. And commercial and industrial was 70% of energy demand is natural gas and power for those industrial and commercial users. So we're pretty excited about that. And it’s a perfect overlay on our global platform. So diversification is our strategy. It has a little bit of complexity to it, but it's really the similar discipline of risk management, logistics, making it easy for companies whose core competency is not energy procurement, it is doing something else, whether it's moving passengers or goods or manufacturing. Whatever it may be, energy management is incredibly important whether it’s sustainability, reporting, risk management, you name it. That’s really the strategy is to provide that to the energy, basically commerce, global commerce to be their partner in doing that. So whether it's a ship, a plane, a truck, a moving target, a stationary target, it's about providing that comprehensive solution to the marketplace. So, bringing it back to your question, this is really not a whole lot different than what we do every day. We're applying MCS’ physical capabilities to this activity. So while they are also looking for other projects to replicate what we've done in-theater in Afghanistan and different parts of the market, whether it’s humanitarian or any type of somewhat complicated logistics. So I think sorry for the long answer, but it is very much consistent with what we’ve been doing all along. It's just more of it all at once.

So, I am sorry, Michael, maybe you could just dumb it down for me in terms, because you a through a lot of stuff in that with Amazon, Walmart and Y2K, what – maybe just a profile, what are you acquiring in terms of - because you mentioned some niche airports in the multiple different markets. What exactly are you gaining here? Are you just gaining Exxon Mobil’s distribution to specific air fleets and in niche airports I just want to understand kind of what –

So it’s basically airport assets and operations, fueling operations at 83 airports. So it’s access in Canada, United Kingdom, Germany, Italy, Australia, New Zealand and most likely France. So we now have access to physical supply and inter-plane fueling operations and storage in those locations. So that's something that is different and it is an expansion. We're penetrating the supply chain within jet fuel supply at those locations, so it’s pretty exciting actually. I mean, we've done this. You’ve got an open market in the United States, so anybody can basically walk in to the United States, so you can’t exactly do that in some of these other location. So there is a barrier to entry and that’s been consistent with what we did in Northern Europe. We’ve made those announcements with other acquisitions in Scandinavia. So we’ve doing this now for quote sometime. This is now just a significant acceleration of that. So that’s - access to those locations where we are basically operating the store. So that’s Walmart part. The Amazon part is one we are third-party. So most of what we've done traditionally is as a third-party fuel logistics company where we are leveraging the marketplace and acting as a marketing company. In this case, we're actually operating those facilities and delivering the fuel with our own assets. So, still asset light but that’s really the specific difference there but we’ve been doing this for a long time it’s just a lot more of it all at once.

That’s a lot clearer I appreciate that. And so it’s kind of what you're already doing in different places, you’re expanding it very rapidly globally. Is there anything with the acquisition is just kind of normal course of business activity for those customers, do you have to renegotiate anything in process or is it kind of you just pick up as they stand or it a constant negotiation quarterly or it annually can you maybe just describe that?

There is a natural flow of business I mean it's not indentured servitude, but we are picking up sort of a flow of business and relationships. And there are going to be a number of contracts that will be assigned. So, we know many of these customers we have relationships with these customers, so now this is really just an expansion of our capabilities and we've been a partner to both the manufacturing side of jet fuel were different companies are manufacturing the fuel but they don’t necessarily want to deliver it, they don't want to sell it. So, we continued those partnerships with those suppliers and we also continue the relationship with our aviation customers both commercial and business clients around the world, we now just get more embedded within the supply chain. It also gives us an interesting foothold in those countries to diversify into our land business and basically just get into the supply chain and increasing we’re seeing that more and more where our businesses are different, they have different names, they have different labels but the reality is what we’re doing across a diversified energy side is very much the same. So we're getting significant synergies internally, we’re in the early innings of that. We’ve reorganized our company, our marine and aviation businesses and now very closely aligned, our land business is really starting to come into its own. Global energy management is identified a completely new set of customers where we’re providing natural gas and power and also providing liquid fuel and diesel and gasoline and lubricants. So any case, I know I'm giving you too long of an answer Ken but I don't have too many opportunities like this to explain what we do. So I wanted to take advantage of it.

I think it's really helpful and vital. Ira, maybe I just want to kind of highlight some of the stuff and it’s still small but your bad debt expense is creeping up. Your days receivable is up to two days at the highest level since second quarter of ’08 if my math is right. How do you think about the market, I know you were kind of getting this in one of the questions before but versus maybe the days sales outstanding you saw in downturn, where do you think this market is trending in terms of the this environment and your exposure on that bad debt side.

I think we continue to be grow relatively conservative company in the way we manage our receivables portfolio. We manage billion of dollars of receivables on a day-to-day basis and I still believe despite the $2 million remember that’s a provision in the fourth quarter which is a bit of analytics as supposed to actual write-offs. So I think our position and our comfort level with what we have on our books are not changed materially, days sales outstanding will move around a bit from time to time partially driven by mix of business where we’ve mixed in some business that has a slightly higher trade cycle on the AR side. Aside from that nothing really meaningful has changed. As a mentioned on the call, we look at it as a metric is what we actually write off in a given year and that number has been remarkably consistent and is extremely low number as a percentage of whatever you want to divide it by, net revenue, gross revenue, receivables et cetera. It's been somewhere between $7 million and $8 million consistently now over the past three years. So I don't think we feel anything material has changed. Obviously in some segments that we serve there has been a bit of weakening of the customer base and we are very careful in terms of who we are engaging with on a daily, weekly and monthly basis.

Great that’s helpful. And lastly just you mentioned the multi-year project to create a more efficient network, I guess is that because of the acquisition and I guess, can the system handle the new business, is this just blending in to what you've already, Michael, you've mentioned some of the investments you've made, is that all prepared and ready for enabling to handle this strong growth?

This is a journey, Ken and this is -- we have started a long time ago. So, we're pretty excited about it. Ira has done many good things, we got involved in our crude oil business. Years ago, we exited that and he gets a good chunk of the credit for that piece and as well, on the cost management side of it, we've been talking about this transformation within our systems for many years. So this is a combination of things. We've got a phenomenal technology group in our company. I've been with very pro technology, because it's so critical for what we do, both internally, the amount of data that we have, the amount of information that we have, the flow of business that we have, it's just extraordinary. We're very much an information company big time and we utilize that, the service organization, we've got all of our offices connected, we've got one instance of Oracle, we're an enormous user of Oracle cloud, we're pretty excited about some of our enterprise wide initiatives to bring together our 743 sales people around the world. That or essentially, all doing the same thing. So there are tremendous synergies, so I know the organic growth has been less than what we want, the expense side has been higher, because we haven't been able to integrate systems and as we bring on more and more companies, it becomes a little bit more complicated. So now, getting to a plug and play, Mike Crosby’s number one job, our EVP of Land is with Jay Smith, building our global land platform that is really exciting. So we’ve got a lot of good things going on, it's going to take a while, it's going to cost money, but it's certainly in the shareholders' long term interest to be making these. So we're kind of taking it on the chin in terms of a quarter-by-quarter basis, but we think that this is really the right thing to do. So we're pretty excited about it and we've got a lot of engagement with the entire organization.

Just one thing to add to Mike's comments Ken, in terms of the ExxonMobil acquisition, it has nothing to do with the long-term project. We're comfortable that we had integrated that acquisition over the next 12 months as the project -- ongoing project will be on that. So the infrastructure we have today can very well handle the integration of that particular acquisition. [Technical Difficulty] I thought I actually answered the question.

Thanks, Michael. Thanks, Ira.

All right. Take care. Operator?

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

Okay. Well, thanks everyone. We appreciate you waking up early and appreciate the support and look forward to talking to you next quarter.