World Kinect Corporation (WKC) Q3 2016 Earnings Report, Transcript and Summary

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. During the presentation, all participants will be in a listen-only mode. After the speakers' remarks, there will be a question-and-answer session. 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 Thursday, October 27, 2016. I would now like to turn the conference over to Mr. Glenn Klevitz, World Fuel's Vice President and Assistant Treasurer. Mr. Klevitz, you may begin your conference.

Thank you, George. Good evening everyone, and welcome to the World Fuel Services' third quarter 2016 earnings conference call. I'm Glenn Klevitz, World Fuel's Assistant Treasurer and I'll be doing the introductions on this evening call, alongside our live slide presentation. This call is also available via webcast. To access this webcast or future webcast, please visit our Web site 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 Web site. Before we get started, I'd like to review World Fuel's Safe Harbor statement. Certain statements made today, including comments about World Fuel's expectations regarding future plans and performance are forward-looking statements that are subject to a range of uncertainties and risks that could cause World Fuel's actual results to materially differ from the forward-looking information. A description of these factors that could cause the 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 Web site. 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. The segments 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 logistic capabilities to solve complex problems for our customers. In the fourth quarter we began the phase acquisition of the previously announced transaction through which we will purchase from ExxonMobil fueling operations at more than eight airports. As noted in prior communications this transaction represents a significant expansion of our global aviation platform further establishing us and the supply chain in numerous international markets. The Marine segment continued to experience more of the same macroeconomic environment that has plagued the sector for some time. Poor market dynamics in the container drive dry bulk and tanker sectors have weakened the financial position of owners and operators which is 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, identifying opportunities and enhance the value we bring to the shipping industry as a financially stable partner at a time of economic uncertainties. Reliable transparent counterparties that can offer competitive global supplying 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 of 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 mid-west wholesale distribution business. Our team remains focused on further market penetration and expansion of our services 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, consolation and dynamic energy management services. Multi service continues to bring customized scalable solutions and operating efficacies to global and national companies for their sales, procurement, payment and transaction management needs. Our overall strategy 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 position for profitable growth in market penetration. Our diversified business model allows us to more effectively response 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 market 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 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 will 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 to 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 as 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 or 9% year-over-year. The decline in volume relates to the continued weakness in the overall Marine market. The Marine segments brokered business activity for the quarter was approximately 11% of total marine volumes, 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 predominately 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 extraordinary well over the past year, going volumes organically by leveraging their 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 of another other strong record third quarter. Similar to the sequential decline which we witnessed last year. As you look to the fourth quarter we continue to plan for the acquisition and integration of ExxonMobil 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 our 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 benefited from some expected seasonal business this quarter as previously forecast, we lost some business related to customer 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 [indiscernible] 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 we experienced this past quarter. As we mentioned last quarter we are taking actions to reduce expenses in order 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 from 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 UK principally driven by historically warm weather conditions in a lot part of the quarter. Looking to the fourth quarter we should realize the benefit from seasonality principally from our Watson business in the UK. The extended such benefit will depend upon winter temperatures throughout the UK. Non-fuel 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 non-returning 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 cost. To assist all of you on reconciling operating income results published in our earnings release in 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 segment 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 acquire businesses. In the fourth quarter total operating expenses excluding bad debt and onetime 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 profitability. This is offset by weakness in UK. These results were partially offset by the increase in aviation profitability. Non-operating expenses, principally interest expense for the third quarter was $9.8 million an increase of $3.9 million compared to the third quarter of 2015 principally related the 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 U.S., 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 third quarter last year. Our total accounts receivable balance was approximately $2 billion at quarter end, effectively flat with the third quarter of last year, principally related to the increased volume in our Aviation and Land businesses segments. Networking 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 months 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 terms loans to October 2021. And increased the size of the overall facility by approximately $500 million to $2.1 billion. And also renegotiated returns, which further increases available capacity under the facility today. The transaction was significantly over subscribed 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 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 service well as we go segment share to organic growth initiatives and strategic M&A. While the fourth quarter should benefit from seasonality in land, we will also experiencing a seasonal decline in Aviation with Marine not likely to see much of a change, either positive or negative. However as we look forward to 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 will now like to turn the call back over to our Operator to begin the Q&A session. Thank you.

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

Mike my first two questions are going to be about Marine as you may have expected and my follow up will be for [indiscernible], but risk and opportunities, so first on the risk side. Probably very difficult to quantify, but obviously a pretty unprecedented issue this quarter was [indiscernible], how much of an impact is that having on just the global shipping market from a supplier’s standpoint? I’m not asking for your direct exposure to [indiscernible] or how is certain the rest are going, but is it just really kind of hurting trade flows, elevating counterparty risk and how long does this potentially last into next year?

You are giving me a hell of a compliment Jonathan. So it's hard to say, we know what the impact is on us with a 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 is still significant risk and certainly you’ve got significant concern with intermediaries. We think that we stand out amongst all of the participants or at least most of 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 have been in the business for a long time, but I’ve never seen them this bad. So we think that we are in this mode of operating for quite some time and again that I think speaks volumes to the fact that we got a diversified business model. We’re certainly commitment to the Marine space and we are taking slightly different tact in terms of how we are participating in the marketplace as it relates to the types of activities that we’ll get involve with. So the derivative activity is fairly lack luster, 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 the cycles have been quicker so it's going to be lower to longer. And we are hunkering down, but we will continue to participate. The industry needs good counterparties, you do have significant amount of changes coming into the market place in terms of barging with mass flow meters, that’s created some change in various different markets. IMO just announced with the environmental protection committee confirm 0.5% sulphur. 2020 that certainly is going to change the fuel guide, 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 be a change, it’s going to come down to road. L&G certainly is going to be part of the equation. We understand that by virtual or natural gas, our participation and certainly the interaction within our land business in terms of distillates. So it’s not exactly answering your macroeconomic shipping question which we don’t pretend to know the answer 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.

Well you actually somewhat anticipated my second question on Marine side, which was the IMO announcement today. And it seems like there is going to be a massive amount of disruption which should be right in your wheelhouse in a very short period of time. Let me just rephrase the question and combine the two of them. How do you think about the cost cutting and right sizing your business for 2017 during this incredibly difficult market, while also maintain the capacity then to take advantage of the potential opportunity with the IMO phase in 2020?

Okay, so listen, every Company has a lot of things going on with it. So we’re really taking a close look at just doing more with less, looking at a fixed cost or a variable cost and reviewing our participation in the market place. Leveraging technology, technology is incredibly important. We’ve been in the energy management business now for about 3 years, we really like that space. It applies to anyone on planet earth that use this 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, even 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 configure 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. 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 plant and it’s a win for sustainability, we’re all about sustainability in our company. All of that basically is fundamentally existing for us because of our deployment and the diversity of us being able to bring together different solutions. So LNG would know a hell of a lot about that. We are moving a lot of natural gas. We have invested into liquefaction construction, so that sort 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 had been before. So we got our work cut out for us.

And then the follow up for Ira, I think there was probably like a timing event around the accounts payable or receivables or derivative 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 [indiscernible] to have, but really the question is how much cash is too much cash. You probably have that 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 are not comfortable making, but start to think about other ways to deploy capital?

Great question Jon. I’m not sure I’ve ever argued 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 U.S. We’ll be using a chunk of that cash, some of it as early as next week to fund the various closing of the ExxonMobil transaction. 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 U.S. I don’t think we would ever decide to make 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 overtime find efficient ways to bring some of that cash back to the U.S. where we have significant amount of debt that we would be able to pay off with some of that cash. A lot of smart things we could with that cash overtime and it’s probably one of the problems 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 where 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 of changed, and also extend the life of that deal out to 2021, which provides us a significant comfort level or for quite some time in terms of having liquidity there to grow the business both domestically and internationally overtime 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 are very appreciative to all the banks that have supported us in that deal. And they’ve been with us for a long time and we expect to be with them for long time to come.

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

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

Good and obvious question that we expected to be asked. So little complicated but I’ll try to keep it simple. First of all from a pure currency translation stand point, in the weaker quarters in the UK, which are Q2 and Q3, we don’t see the strong seasonal uptick from whether related activities that we’re 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 the 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 gross profit for Watson and the balance of the UK business to grow, that’s were our dollar denominated profits 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 our annual basis is not significant, but it’s bumpy. We will see a negative impact in the next six months and the six months after that it will balance back out again. The bigger question is, how that’s effecting the macroeconomic environment in the UK, and that’s a bit tougher to measure, but I’m sure we had some impact to our businesses just because of the conditions in the UK, construction industry cutting back. We served that industry over the course of the year. So there is some economic factors beyond the pure currency translation that are certainly impacting us, they’re tougher to quantify.

Okay, so we should be thinking about Watson a little bit more cautiously as we had in the winter, okay. And then just as I think about that PAPCO and APP, I guess there is acquisition closed in the third quarter. Just sort if you can talk and Mike may be provide a little bit of update on that, 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 been thinking about this more in terms of volume or could we see there -- the bolt on of these business actually increased 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 is a margin opportunity because of the mix in business in these two businesses. Their margins on average are higher than our overall land margins going into these two deals. So it should certainly positively impact margins overtime. Mike may want to talk a little bit about what these two businesses do for our domestic, commercial and industrial platform, 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 Mid-West on whole selling gas stations and today we have about 1.6 billion of branded gasoline and diesel distribution under long term contract to gas stations, even in the Mid-West. We like that business a lot. We want to complement it with CNI that is commercial of industrial users, it’s a nice fit with our energy management business on natural gas and power so the two of them share some cliental. It’s very comparable with our Aviation and our Marine business, where we are selling directly to end users, if not whole selling, but its servicing those end users. So these were two significant moves into that space. We ultimately want to cover over the 48 states and be able to handle national accounts. So we are pretty excited about that, when you look at that and then you look at our global energy management business on 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 there 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. Then 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 onto those bandwagons so to speak. There is a commonality across the entire energy complex and we’re leveraging our competencies into those different spaces. So it's very compatible with our retail basis, we are buying from obviously the same supply community. We’ve got good amount off synergies in terms of transportation, so that was really the whole CNI story was to bring it together. Some mount of inventory, good amount of logistics and obviously hopefully having delighted customers. And we’ve got fuel cards in there, so there is a lot of synergies and we’re really in the early innings of bringing that together, a lot of moving parts, a lot of integration, a lot of technology. We’re still digesting a heck of a lot of integration and technology. These things don’t happen quickly. We have been building our oracle platform and we are 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 -- [indiscernible] because we are expecting good amount of scalability and the ability to manage our costs. But it’s a little bit of a road.

Our next question comes from the line of Ken Hoexter with Merrill Lynch. Please go ahead.

Michael just to wrap on a little bit, were you just talking about integration and what is still left to do? When you think about the six acquisitions over last three years, just more recently and you talked about bringing people in, but what's do you have to do on -- just not the Watson and [indiscernible] going all the way back to Western Petroleum [indiscernible] are they all on the same systems, is that where you are getting these cost savings from or is that already done and there is different things you are working on?

No, they are on bits and pieces, they’ve got commonality, but in terms of building out the whole systems, no. I mentioned some of the new folks that have come into the company and I mention Michael Crosby as the EVT of our Global Land business and fortunately he’s got a good technology background and that’s his number one priority. So there is lot of things that as you could imagine we have to do. But nothing is getting in his way or at least he is 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 not a casual affair. And simultaneous as we’ve previously announced, we’ve got our Enterprise transformation project. So it’s the last riot here in terms of building out global technology. It is a really heck of a lot of work and requires a lot of patience, it costs money, but we’re convinced with Masood Siddiqui [ph] building our cloud -- 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’re continuing to stay the course in terms of moving our systems. And the big picture is ubiquitous global energy management fulfilment in terms of third party, handling it physical ourselves, we have inventory, we have physical assets, as well as using technology with multiservice, with payment and cards. So that’s the big picture, what they’ve said previously. I wish I was 35, but we’re 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 [ph] 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 big, big part of that both for our internal efficacy, 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, we’ve 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 of each of the individual --.

Every day, every single day. I mean we’ve got -- I mean the potential is significant, but sadly we have a ways to go. We are significantly more confident in this area than ever before. And it’s not so much about technology or IT, it’s a lot of combination things and it requires a lot of business engagement and you’ve got to do it, while you’re running you’re business. And we’re acquiring companies at the same time, so sometimes companies come up with a sale and if you don’t buy them, 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.

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

Ken you know that if there is anything we know something about its Marine underwriting. So we’ve been [multiple speakers] for a long time. And so I think, you want to --.

Sure. As Mike said, I mean it’s certainly a core competency of ours, especially in Marine where we’re very adept at handling the matter of Maritime Law in terms of collecting receivables and [indiscernible] case will be disclosed in our Q which will be filed very, very shortly. My controller is sitting here right next to me and nodding his head. Our exposure is about $18 million as of a couple of weeks ago. And what we’ll be saying in the queue which I could tell you now is we believe we will recover all or substantially all the amount outstanding or otherwise mitigate any related losses through either Maritime leans, again using our competency in Maritime Law or using other avenues of recovery for loss mitigation including insurance. But as always there is never any assurance that we’ll be able to recover everything, but we are pretty comfortable, based on what we know today that we could out in a reasonable position. But it will be a time consuming process.

So maybe just a last, I mean with a big picture on the Marine side, as the customers integrate and Mike you talked about the alliances and the partnerships. Do they gain more leverage in negotiation with you and it puts more pressure on profit per metric ton?

Listen it's -- you are going to have a continuing mix, I mean the pendulum is going to swing. So being larger doesn’t always necessarily means 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, they are going to do it more cost effectively. 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 smarter customers as far as I am concerned. So it varies and just because they are bigger doesn’t mean that they’re not going to be your 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 are 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 things. So size does not necessarily mean intelligence or an improvement in operation, but it gets down to a company-by-company and sometimes down to procurement person by procurement person, it becomes -- unfortunately in some cases it becomes what aftershave you’re wearing.

Our next question comes from the line of Jack Atkins with Stephens. Please go ahead.

To kind of start off, can we 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 under performance in your European operations there, but I’m not quite sure. Could you just dive into the sequential decline and I know if I remember correctly it was a difficult comp. But 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 has a meaningful factor year-over-year as well. Two things, one is, we still gas and oil either directly or through sale to distributors, who the sell into the agricultural space, we got to do it directly or through other distributors. And the gas and 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. You ever been to the UK in September, it’s not necessarily nice and warm. But this year it was the warmest September in a 100 years. So even though it’s not a gigantic number compared to what we may see in 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 non-exiting. So those few 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 announced earlier the sale of the [indiscernible] 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 U.S. was a little bit weaker, but nothing material. And you know there was other couple of bits and pieces, but now you’re down to hundreds of thousands of dollar of variants, as opposed to millions. So the UK by far was the biggest driver of the -- in terms of the sequentially and year-over-year comparisons.

Okay, that’s helpful, Ira. Thank you for that color and then, when I think about the impacts from the various initiatives whether it’s the cost saving initiative that you guys announced on the last conference call or the new IT platform that is in the process of being rolled out. Where there any cost associated with that in the quarter that were usually large, maybe we can think about in terms of -- just trying to normalize this quarter for just underlying operating performance?

Remember we call out what we deem to be non-recurring 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 two 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 the expenses associated with the two newly acquired businesses that added to our expenses, if you’re looking at the number sequentially in the third quarter. So that would be the single largest sequential and year-over-year driver of expense increase, but nothing else extremely large.

And then just following up on the cost savings announced on the last quarterly call. Can you give us an update in terms of how much you’ve been able to take out the business so far? And then is 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 a repletion factor at Stevens [ph]. So I think last quarter we [multiple speakers]. So $15 million to $20 million is the amount that we made reference to last quarter and very little of that has been achieved so far. A big chunk of that is in Marine and we expect to start seeing benefits of that in the first quarter of 2017 and the next largest chunk is in land and the same thing there. To Kens question earlier about integration, we’re making some progress Mike talked a lot about that 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. But 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 that’s great. If I could sneak one more in. That’s on multiservice. You guys talked last quarter about some exciting opportunities there in multiservice in terms of some business you going after. Can you give us an update on sort of how that’s looking and would you expect that GP line from multiservice to maybe ramp in the next year with those new business wins I think you guys were targeting.

Actually multiservice 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. There is little bit of expense that we will see before we start seeing much of the profit. But if we looked at 2017, I believe we said this last quarter, so we reiterated their GP should jump by somewhere around 20% driven by organic growth plus the impact of those projects kicking in as we saw the New Year. So 2017 should be the single largest step up year-over-year for multiservice since we acquired them.

[Operator Instructions] Our next question comes from the line of Ben Nolan with Stifel. Please go ahead.

I wanted to follow up if I could on one of Jon's questions earlier about the new IMO fuel regulation 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 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 -- can you maybe walk me through what you guys are thinking on the implications of this issue here?

I’ll tell you, it’s really kind of interesting. When we got into what we call the Land business it was really an eye opening -- an eye opener for me, because we really didn’t pay a lot of attention to our U.S. 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 is always obviously a lot of decision and push back 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 sizeable. So you’re going to have some increase in cost without question. A number of people depending on where they are and going to take different solutions. From scrubbers there is obviously a payback, you got infrastructure in terms of L&G, you’re going to have some blended fuel oil, so a lot of that is going to come into the market. So that will occur, you’re going to have a heck of a lot of that going on without question. Some folks will just go with the distillate. So it’s really going to be all over the place, it’s going to be all over the Board. You’ve had some point-to-point go to L&G in the Baltic, but it will get done and of course compliance and monitoring is a big part of it. So there is 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 we just had the Paris Accords, so I think it would have been received as extremely, politically, unfavorable and outside of 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, 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?

Totally, this turns the whole industry upside down with a question.

Yes and that was sort of what my take was, but it’s good to have somebody that knows a little bit more about it to verify that. The other thing I was going to ask actually for you Ira, you guys just a month ago or so updated your repurchase program. I was just curious has there been any moving parts on that front or now that you’ve sort of updated the platform a little bit, how you think about your activity on share repurchase moving forward?

Yes, that thing, we haven’t done anything since that announcement. We just wanted to take the opportunities to replenish what was available to us because we never know when the opportunity might make the most sense for us to go it and repurchase some shares again. We generally do that to simply offset the dilutive impacts of employee stock awards and that number is somewhere around may be $40 million a year. So we haven’t necessarily done that ratably, but we’ve averaged somewhere around that number in the last couple of years. So we just wanted to make sure we had -- we were running down just barely enough for one year’s worth of purchases based on those averages. So that’s all about that announcement, the wagon [ph] will continue to go down the same path, I don’t expect any major changes that philosophy anytime soon.

Perfect, I’ll stick with just two. So that will do it for me, but thanks a lot guys for taking the 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 tremendous committed an engaged organization and we 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.