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Edited Transcript of INT.N earnings conference call or presentation 29-Oct-20 9:00pm GMT

·34 min read

Q3 2020 World Fuel Services Corp Earnings Call MIAMI Oct 31, 2020 (Thomson StreetEvents) -- Edited Transcript of World Fuel Services Corp earnings conference call or presentation Thursday, October 29, 2020 at 9:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Glenn Klevitz World Fuel Services Corporation - VP, Treasurer & IR * Ira M. Birns World Fuel Services Corporation - Executive VP & CFO * Michael J. Kasbar World Fuel Services Corporation - Chairman & CEO ================================================================================ Conference Call Participants ================================================================================ * Benjamin Joel Nolan Stifel, Nicolaus & Company, Incorporated, Research Division - MD * Kenneth Scott Hoexter BofA Merrill Lynch, Research Division - MD and Co-Head of the Industrials ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Ladies and gentlemen, thank you for standing by, and welcome to the World Fuel Services 2020 Third Quarter Earnings Conference Call. My name is Eric, and I will be coordinating the call this evening. (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 Services Vice President, Treasurer and Investor Relations. Mr. Klevitz, you may begin your conference. -------------------------------------------------------------------------------- Glenn Klevitz, World Fuel Services Corporation - VP, Treasurer & IR [2] -------------------------------------------------------------------------------- Thank you, Eric. Good evening, everyone, and welcome to the World Fuel Services Third Quarter 2020 Earnings Conference Call. I'm Glenn Klevitz, and I will be doing the introductions on this evening's call alongside our live slide presentation. This call is also available via webcast. To access this webcast or future webcasts, please visit the World Fuel Services website 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 lease. If not, you can access the release on our website. Before we get started, I would like to review World Fuel's safe harbor statement. Certain statements made today, including comments about World Fuel's expectations regarding future plans and performance are forward-looking statements that are subject to a range of uncertainties and risks that could cause World Fuel's actual results to materially differ from the forward-looking information. A description of these factors that could cause results to materially differ from these projections can be found in World Fuel's most recent Form 10-K and other reports filed with the Securities and Exchange Commission. World Fuel assumes no obligation to revise or publicly release the results of any revisions to these forward-looking statements in light of new information or future events. This presentation also includes certain non-GAAP financial measures as defined in Regulation G. A reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures is included in World Fuel's press release and can be found on its website. We will begin with several minutes of prepared remarks, which will then be followed by a question-and-answer period. As with prior conference calls, we ask that members of the media and individual private investors on the line participate in listen-only mode. At this time, I would like to introduce our Chairman and Chief Executive Officer, Michael Kasbar. -------------------------------------------------------------------------------- Michael J. Kasbar, World Fuel Services Corporation - Chairman & CEO [3] -------------------------------------------------------------------------------- Thank you, Glenn, and good evening, everyone. Once again, our global team has continued to perform extremely well. World Fuel is truly blessed with the talented and committed group of professionals. Our employees around the world have continued to follow our safety procedures and protocols, and we have been fortunate to have very few cases of COVID-19. Our global team continued to do a great job of managing cash, risk and operating expenses with expenses down sequentially and driving strong operating cash flow supporting our healthy liquidity position. Since we last spoke, we closed on the sale of Multi Service, further enhancing our strong liquidity position, we reshaped our workplace model and we continue to manage and grow business activity in our aviation, marine and land business during this extended global health and economic crisis. Despite the enduring nature of the pandemic related complexities in the world around us, we delivered a very respectable result in the third quarter. Our marine and aviation business will continue to add value through their differentiated offerings and remain a strategic operating partner for airlines, corporate aircraft operators and global shipping companies. I'm happy to report that our land fuels, natural gas, power and sustainability businesses are breaking into stride operationally and moving from local businesses to national and global operations following the evolution of our marine and aviation segments, which both started the same way. We are very encouraged by the interest we have received in our unique solution offering and global reach. Combined with an accelerated digital rollout, we are confident that what we have been building for some time is starting to gain momentum. Today, in some locations, we have 0 touch order processing for our clients and suppliers with invoices being produced in one day and digital content simultaneously appearing in customized portals. We are building this type of capability throughout our land business and throughout the company. As you will see in our sustainability report released yesterday, which I encourage you to read, it shows that we have been focused on sustainability and actively involved in the energy transition for years. You will see that we made our global operations carbon neutral for 2019. You will also gain a better appreciation for why we recently brought together our land fuels and connect energy management businesses to form World Connect Energy Services. This has enabled us to simplify energy management for our customers through our ability to provide sourcing and supply of conventional and renewable fuels, electricity, natural gas as well as the associated fulfillment, logistics and risk management to help our clients on their own to low and 0 carbon sustainability journey. A last word on our digitization journey. As we are in the middle of an energy and digital transition, I thought it would be useful for our investors to know where we are and what this can mean for our business. Just as the pandemic has made people reflect more on their impact on the environment, so has it underscored the importance of technology to modern living. As I have mentioned previously, we decided on Friday, March 13 of this year to have our more than 5,000 employees from 85 offices in 50 countries to work from home starting the following Monday. We were able to do that for a variety of reasons. Prior to the pandemic, we had rolled out best-of-breed collaboration tools in the cloud to keep our team productive and make sure they were better connected than ever, holding close to 15,000 Zoom meetings per month in January, well before everyone worked from home. We digitized the majority of our internal processes, and we are now printing millions of fewer pages each year. We became a cloud-first company after migrating hundreds of applications to the public cloud. We even digitized and virtualized their video and voice systems bypassing hardware requirements, which better enable their employees to work remotely from day 1. The technology investments we've made in recent years have improved our performance and resilience, allowing us to quickly close our offices and seamlessly move to a remote workforce without issue. As we have said before, our diversified global business platform helps stabilize earnings as different sectors and geographies often offset each other, while the commonalities allow us to capture internal synergies. In closing, we believe we are well positioned to weather this pandemic and advance our strategy for long term, profitable, sustainable growth. I'd like to take a moment to once again thank my colleagues all around the world at World Fuel for their dedication and commitment to our customers, suppliers, stakeholders, each and every day. I also want to thank our shareholders for supporting us on our journey. I'll now turn over the call to Ira for a review of our financial details, followed by Q&A. -------------------------------------------------------------------------------- Ira M. Birns, World Fuel Services Corporation - Executive VP & CFO [4] -------------------------------------------------------------------------------- Thank you, Mike, and good evening, ladies and gentlemen. Before getting into the company's results for the third quarter, I would like to thank our employees who have responded to the challenges of 2020, remaining focused on deepening relationships with our customers while supporting one another as well. We remain grateful for our employees' resilience, perseverance and dedication to our business. And of course, we hope you and your families are healthy and well. On to the third quarter results. As usual, please note that the following figures exclude the impact of nonoperational items in the third quarter, as highlighted in our earnings release. The nonoperational income and expenses in the third quarter principally related to the gain on the sale of our MultiService business, which was completed on September 30, but also included other acquisition and divestiture and restructuring related expenses. To assist you in reconciling results published in our earnings release, the breakdown of these non-operational items can be found on our website and on the last slide of today's webcast presentation. Now let me begin with some of the third quarter highlights. Volume increased sequentially in all 3 of our business segments with the most significant rebound of being in aviation. As we announced at the end of September, we completed the sale of our Multi Service Payment Solutions business, resulting in an after-tax gain of $64 million or $1 per share in the third quarter. Adjusted third quarter net income and earnings per share were $20.7 million and $0.33 per share, respectively. Adjusted EBITDA for the third quarter was $64 million, that's an increase of 13% sequentially. And lastly, we generated $246 million of cash flow from operations during the quarter, which combined with the proceeds from the Multi Service sale, enabled us to reduce our gross debt balance by approximately $570 million, further increasing our available liquidity and putting us in a net cash position for the first time in nearly 10 years. Consolidated revenue for the third quarter was $4.5 billion, negatively impacted by the continued impact of COVID-19 on our segment volumes as well as the overall decline in average fuel prices when compared to last year. Sequentially, revenues increased 42%, driven by increased volume across all segments and higher average fuel prices. Our aviation volume was 1.02 billion gallons in the third quarter, a significant rebound sequentially, but still well below pre-COVID activity levels. Cargo activity remains strong with commercial passenger and business aviation activity experiencing healthy rebounds from the low point in the second quarter. With the pandemic still looming or in some areas surging, we do not assume meaningful incremental growth in the fourth quarter. While statistics indicate that commercial passenger activity in the U.S. is slowly improving, down 95% in April compared to 63% in recent weeks relative to the same prior year periods. Volume in our marine segment for the third quarter was 4.4 million metric tons, down approximately 21% year-over-year, but an increase of 9% sequentially as activity levels modestly rebounded during the third quarter. Our land segment volume was 1.2 billion gallons or gallon equivalents during the third quarter. That's a decrease of 8% year-over-year, but an increase of 6% sequentially. The year-over-year COVID related volume declines were prevalent across our retail, commercial and industrial and wholesale operations, partially offset by increases in our growing World Connect Power and natural gas platform. Regardless, the land team has done a solid job delivering volumes very close to the prior year despite the impacts of the pandemic. Consolidated gross profit for the third quarter was $214 million. That's a decrease of 30% compared to the third quarter of 2019, but flat sequentially. Our aviation segment contributed $98 million of gross profit in the third quarter, down 38% year-over-year, but up 6% sequentially. While commercial passenger aviation activity increased sequentially, related gross profit remains significantly below the prior year. Continued troop withdrawals in Afghanistan also contributed to the year-over-year decline in aviation gross profit. Although near-term activity remains very difficult to forecast, as we look to the fourth quarter, we do expect gross profit to decline sequentially related to a further reduction in government-related activity in Afghanistan, seasonal declines in our core business and the impact of renewed COVID related travel restrictions, particularly in parts of Europe. The Marine segment generated third quarter gross profit of $32 million, that's a decline of 40% year-over-year and 14% sequentially. The year-over-year comparison is negatively impacted by the benefits we experienced during the third quarter of last year, leading us to the January 1, very low sulfur IMO regulations, compounded with the pandemic related decline in core resale activity, including the cruise sector. As we look ahead to the fourth quarter, we anticipate that marine gross profit will be similar to the amount generated in the third quarter. Our land segment delivered gross profit of $84 million in the third quarter, that's down 12% year-over-year, but effectively flat sequentially. Gross profit in the land segment was slightly better-than-expected during the quarter with volumes returning to over 90% of prior year levels. The year-over-year gross profit decline principally related to the further reduction of government activity in Afghanistan and a reduction in retail and commercial and industrial activity. Third quarter land gross profit still included $19 million gross profit for Multi Service, which again, was sold on the last day of the third quarter. Looking ahead to the fourth quarter, we expect land gross profit to decline principally related to the Multi Service sale, offset in part by an increase in activity in the U.K. as we expect seasonal strength in our heating oil distribution activities, driven in part by assumed higher usage as a result of the pandemic. Core operating expenses, which exclude bad debt expense, were $148 million in the third quarter, which was below the range that we provided on last quarter's call, as we remain focused on driving cost efficiencies. While our operating margins have clearly been negatively impacted by the pandemic, our expense reductions to date and our continued focus on our cost structure should help accelerate the return to pre-COVID operating margins as business activity slowly returns to normal. We expect core operating expenses to be in the range of $147 million to $152 million in the fourth quarter. Please note our people have always been and always will be our greatest asset. While COVID has certainly created challenges for our business, our global team has put forth a Herculean effort year-to-date under unprecedented circumstances, remotely managing the business with excellence day-to-day and exceptional working capital management, along with significant cost and CapEx reductions, which resulted in a record level of liquidity. We are also proud of the flawless execution on the divestiture of Multi Service amidst the pandemic, which resulted in an $80 million pretax gain. Our employees have performed admirably in successfully managing our business by focusing and executing on the things within our control to navigate through the negative impacts of the pandemic. Therefore, we plan to book an additional accrual for incentive compensation for our global team in the fourth quarter, which will allow us to provide them with at least a somewhat reasonable level of incentive compensation under present circumstances. This additional compensation expense is included in the $147 million to $152 million core operating expense estimate provided for the fourth quarter. With the world remaining challenged due to the significant impacts of COVID-19 on the commercial passenger aviation market and parts of the marine market, particularly the cruise sector, bad debt expense, unfortunately, remain elevated at $23.3 million in the third quarter. Despite our diligence and focus and the fact that our accounts receivable balance is just over 40% of 2019 levels with the risk profile of our overall portfolio, clearly improving, risk remains elevated when compared to historical norms. Underwriting has always been a significant core competency in our business, and this year is no different. We remain focused and diligent on managing our credit risk, including reducing credit lines wherever appropriate. Adjusted income from operations for the third quarter was $42 million, down significantly from the prior year, of course, but an increase of 21% sequentially. Third quarter interest expense was $9 million, which is down more than 50% year-over-year. Our total interest expense continues to benefit from lower average borrowings and significantly lower interest rates. As a matter of fact, at the end of the third quarter, we had no borrowings outstanding under our revolving credit facility. Our adjusted effective tax rate was 32% in the third quarter, up from 30% in the third quarter of 2019. At this time, we expect our fourth quarter tax rate to be similar to the third quarter. Our accounts receivable balance declined to approximately $1.25 billion at the end of the third quarter, down more than 50% or approximately $1.6 billion from year-end, driven principally by volume declines and lower fuel prices. Our team continues to do a great job managing working capital, as mentioned earlier, resulting in $246 million of operating cash flow, with $491 million of operating cash flow generated during the first 9 months of 2020. We continue to benefit from relatively low fuel prices and lower working capital needs, which have enabled us to generate significant amounts of cash flow. The proceeds received from the Multi Service sale, combined with our strong operating cash flow, enabled us to further reduce our debt balance by approximately $570 million. At the end of the third quarter, again, we were actually in a net cash position for the first time in nearly a decade. In closing, we experienced a modest improvement in the third quarter, generated a significant amount of operating cash flow and successfully completed the sale of Multi Service, leaving us with a record level of liquidity at the end of the quarter. We continue to manage costs carefully. But with significant available capital, we have begun focusing more of our energies on organic growth and strategic investments, in particular. To provide some more color on specific investment opportunities, I would like to highlight our World Connect business. This is a growing business in which we principally participate in the power and natural gas markets, but also solar, wind, carbon and renewables, supporting commercial, industrial and government customers globally. As Mike mentioned earlier, we formally issued our 2019 sustainability report earlier this week, which amongst other important elements, discusses our participation in these fast-growing markets. While we've been building our capabilities in this area over the past few years, this business activity still represents only a modest portion of our overall revenue and profitability. With available liquidity at record levels, we intend to make significant strategic investments in this business over the next 2 to 3 years, with the goal of turning this into a substantially larger business over this time period. We will also continue to build out our commercial and industrial diesel and gasoline activities, driving synergies and greater scale in both of these two important platforms, all without losing sight of any additional niche opportunities in the aviation and marine markets. And of course, we remain focused on other ways to drive additional value for our shareholders. Thank you very much for your time. Please be safe. I would now like to turn the call back over to Eric, our operator, for the Q&A session. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) And our first question comes from the line of Ben Nolan with Stifel. -------------------------------------------------------------------------------- Benjamin Joel Nolan, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [2] -------------------------------------------------------------------------------- I wanted to dig in a little bit on the liquidity. Obviously, good to see net debt-free and benefit from the Multi Service sale and also just the direction of working capital. But where you are here, obviously, a wash, effectively, a wash in cash. And I know you -- Ira, you had mentioned looking to find ways to invest. But I am curious how you think about investing in your own stock via perhaps a buyback program. I mean, you're trading at something like a 35% discount to book. And it doesn't seem like there should be any -- like your book value should be pretty transparent or if the Multi Service sale is a good proxy, maybe even understated. So it seems like that's a pretty compelling investment opportunity. I don't know, just maybe could you talk through how you see that and maybe the potential for buyback program? -------------------------------------------------------------------------------- Ira M. Birns, World Fuel Services Corporation - Executive VP & CFO [3] -------------------------------------------------------------------------------- Yes. Thanks, Ben. Look, for starters, we had started repurchasing our shares early in the year when we felt they were undervalued and then the pandemic hit. So we wisely, as many other companies did, ceased that activity with the immediate goal being preservation of capital and liquidity. I think on last quarter's call, someone asked about buybacks. And I said at the time that they still weren't a priority because there was still a lot of uncertainty as there is today. But our liquidity position was arguably in a very different spot than all of a sudden, it is 3 months later. While we were pretty confident about getting Multi Service done, it wasn't completed yet. And then our team did an excellent job this quarter managing working capital in many very smart ways to generate a lot of cash. So all of a sudden, we now find ourselves, as you say, with -- in a very different position. So I would say our disposition has clearly become more favorable to that idea. You're right. As of today, we're trading at 64% of book value, which we'll not complain about it. We'll try to do something about it instead, but obviously, that's hard to understand. And we, therefore, think investing in our stock could be prudent. So that's something that we will strongly consider alongside keeping capital allocated for some of the strategic investments that we also I think are important over the next couple of years. So certainly something that we will consider taking some action on quickly. -------------------------------------------------------------------------------- Benjamin Joel Nolan, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [4] -------------------------------------------------------------------------------- All right. I appreciate that. And I like the answer. Now switching over a little bit to just thinking about -- and this time of the year, it seems like it always comes up that your annual government services contract is out for renewal. I was wondering maybe if you could just maybe talk through that, obviously, activity in Afghanistan is winding down or is becoming less meaningful. And I was hoping maybe if you could -- if it's possible to say, okay, of your $214 million of gross profit, how much of that is attributable to the government services Afghanistan part? Or how much -- as there is a wind down, how much should we think about that potentially playing into the gross profit going forward? -------------------------------------------------------------------------------- Ira M. Birns, World Fuel Services Corporation - Executive VP & CFO [5] -------------------------------------------------------------------------------- Yes. Great question. Again, the last number we publicly reported in 2019, we were at about 18% of total gross profit for that activity. In the third quarter, that number is just under 15%. Arguably a little higher than otherwise would be if it wasn't for the pandemic because our overall level of gross profit is down so significantly. Our contract has been renewed for another year. But that doesn't necessarily mean the level of activity remains the same. And as I mentioned in my prepared remarks, we expect additional declines next quarter, and I would say that will continue into next year. It's likely that, that 15% will very soon drop into the single digits. Aside from that, we don't know a lot more than you guys do. There's a lot going on in the world. Next Tuesday, in particular, that may or may not have any impact on what will be transpiring in Afghanistan with the NATO forces over a longer period of time. But clearly, many troops have already departed, some of the bases are shrinking in size and activity levels are declining. So that number will come down. We don't have a crystal ball as to where it will wind up. We expect that some level of activity will continue, and we monitor that very closely. But again, one of the reasons why we're also focused on some of these investments I talked about is to rebuild or build new ratable growth in some of the areas that have a lot of potential like our Connect franchise. -------------------------------------------------------------------------------- Benjamin Joel Nolan, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [6] -------------------------------------------------------------------------------- Okay. And then lastly for me, and I'll turn it over. And actually, as it relates to that Connect franchise, it's growing in importance. And I apologize if this is not a great question, but honestly, I don't know -- could you maybe walk me through, if I'm an energy consumer, what is the value add? What's the elevator pitch that you guys do through that Connect program? And how is it that you're -- where do you add value to people? -------------------------------------------------------------------------------- Ira M. Birns, World Fuel Services Corporation - Executive VP & CFO [7] -------------------------------------------------------------------------------- Mike is a king of elevator pitches. So I'm going to let him walk you through that. -------------------------------------------------------------------------------- Michael J. Kasbar, World Fuel Services Corporation - Chairman & CEO [8] -------------------------------------------------------------------------------- So Ben, the sustainability report is certainly going to be, I think, a great guide to a number of different things that we're doing. But natural gas is a growth area. It's a transitional fuel. Power is going to double over the next 30 years. So as you're looking at energy efficiency, our team is an energy management company. So they're helping companies buy better, able to put their arms around it, use less, consume less. So it's energy efficiency. It's bill reconciliation. It's pretty complicated. I mean, most people don't understand their electric bill. So we go in and we help companies with their efficiency audits, look at all of their billing, look at their rate intervention. And we're actually dealing with the logistics, some of their risk management, some of their derivative activity. So it's complementary. It does have some differences from our liquid fuel and marine, aviation and land, but it's complementary. So it's a common customer base, in many cases, and we're now offering carbon offsets and carbon reduction strategies. Looking at wind and power, dealing with on-site solar, looking at renewable strategies where individuals could take the other side of different sustainability projects. So it's a variety of different strategies, where companies need to procure gas and power and also look at creative ways to reduce their carbon footprint. So I don't know if that was such a great elevator speech, but it's a number of those different activities that I probably should have been prepared to give you that 25 words or less, but you'll see it all on our website. You'll see some of the things that we're doing. I'm not going to say that we're doing anything that a lot of other companies aren't doing, but we are doing it globally. We are blending it within our core business, our conventional fuel. So we're using our installed user base, if you will, to help our loyal legacy customers figure out how to navigate through a fairly complicated set of choices and we've got a lot of very smart people. Our energy management folks, our knowledge workers, a lot of intellectual capital so it's a great business. It has fantastic financial profiles on it. It is growing. So we're grabbing the future. It's the way to go. And we started this back in 2012. And really, I could claim some brilliant strategy on it, but we were really just looking to satisfy our marine and land customers who are looking for LNG and CNG solutions. We like the business. We ended up putting about 8 of them together. But we love it, and we're going to continue to grow in that space. -------------------------------------------------------------------------------- Operator [9] -------------------------------------------------------------------------------- Our next question comes from the line of Ken Hoexter with Bank of America. -------------------------------------------------------------------------------- Kenneth Scott Hoexter, BofA Merrill Lynch, Research Division - MD and Co-Head of the Industrials [10] -------------------------------------------------------------------------------- Michael and Ira and Glenn. Maybe we could just kind of follow-up on Ben's last question there. So if you call it, $4.5 billion of revenues, most right now is reselling some sort of carbon-based fuel, right oil to or diesel to marine, air and ocean. You mentioned your future investments you could make. Are you talking about buying power generation like wind and solar plants to be able to give that power to customers, if your goal is to give power to customers. I understand -- I just want to understand what kind of investments you're talking about making with your liquidity? -------------------------------------------------------------------------------- Michael J. Kasbar, World Fuel Services Corporation - Chairman & CEO [11] -------------------------------------------------------------------------------- So these are -- listen, I wouldn't -- we could potentially participate in production, but it is not the first thing. I mean, that we would do, that we do have some physical activity. But we're really doing 3 things. So you've got 6 different parts of the business, which is gas and power, it's wind, it's solar, it is carbon and then it's renewable fuel. So those are the 6 sort of areas that we participate in terms of providing alternative energy and gas and power. We provide those services as an adviser for fees. So we're providing advisory and consulting and going in and helping companies understand some of their complex areas in terms of energy. We will act as a broker and they will act as a merchant. So we're participating in the same 3 ways that we participate in our conventional fuels, if you will. We're just involved in gas, power, wind, solar, carbon and renewable fuels. So it's those 6 areas, we've got 3 ways of engaging with the client and the marketplace. For different reasons, we may participate in a different way. But it's an important part of the business, and we -- we're -- this is accelerating very quickly. We've got a global business. And as I said in my prepared remarks, the thing that is really exciting is when we started our marine and aviation businesses, they were local businesses. We acquired a couple of companies and they were still local. And it took a long time for them to be what they are today. So we've seen that journey. And it's accelerating within our liquid land business and it is accelerating within our energy business. Putting the two of them together, makes a hell of a lot of sense. And we're actually blending our marine and aviation business within our energy management and carbon business. So it's something that we're excited about. We want to do a lot more of it. There's a good amount of organic opportunity that's starting to happen, and we'll be looking to acquire in that space as soon as we could find the right companies to bring into the fold, but we're actively doing that. -------------------------------------------------------------------------------- Kenneth Scott Hoexter, BofA Merrill Lynch, Research Division - MD and Co-Head of the Industrials [12] -------------------------------------------------------------------------------- That's what I was asking, not the organic things of the 6 different parts that you're providing and doing. It was -- Ira mentioned some acquisitions or you mentioned acquisitions you could make in that sector. I just wanted to understand what kinds of companies you would be buying? Is it the sourcing of that power? Or is it more the consulting? -------------------------------------------------------------------------------- Michael J. Kasbar, World Fuel Services Corporation - Chairman & CEO [13] -------------------------------------------------------------------------------- It is the sourcing of sustainability of renewable businesses of advisory businesses. So it runs the full gamut. There's a good amount of technology offerings there. So it's any business that is actively involved in managing the procurement of natural gas and power; is providing advisory on wind and solar; is playing a role within carbon and renewable certificates and renewable fuel. So any and all of those areas, we are interested in, and there's a lot going on in the market today, so that's where we plan to invest. As well as our liquid land business, we're going to be burning liquid fuel for quite some time. So the combination of the two is a powerful cocktail. Because all of those folks that are burning conventional fuels need to have a pathway to reduce their carbon impact. So the two go hand in glove, and it gives us the ability to provide a complete solution to those clients and to embed it. So it's very much in line with our overall operating strategy, where it is a blended, bundled, tailored solution and combined with the digitization strategy that we have in the company, we feel like we are really seeing some road to scalability. We've got a lot of automation and robotics. So it's kind of exciting. And certainly, the pandemic is -- it is what it is, but we feel like this is a great pivot for us to accelerate it, and that's what we're intending on doing. -------------------------------------------------------------------------------- Ira M. Birns, World Fuel Services Corporation - Executive VP & CFO [14] -------------------------------------------------------------------------------- The only thing I would add to that, Mike, is that, Ken, that remains a very fragmented market and obviously a growing market. So there are many opportunities in the areas that Mike described. -------------------------------------------------------------------------------- Kenneth Scott Hoexter, BofA Merrill Lynch, Research Division - MD and Co-Head of the Industrials [15] -------------------------------------------------------------------------------- Okay. So Ira, you talked about incentive comp included in your target. Is there a level included in that, that you can provide? -------------------------------------------------------------------------------- Ira M. Birns, World Fuel Services Corporation - Executive VP & CFO [16] -------------------------------------------------------------------------------- I would say there's about $10 million incremental in the fourth quarter forecast is the way to look at it. Obviously, our expense run rate would have otherwise come down a bit because of the multi-service sale. So there's somewhere around $10 million more in that $147 million to $152 million number that you could refer to is kind of one time. -------------------------------------------------------------------------------- Kenneth Scott Hoexter, BofA Merrill Lynch, Research Division - MD and Co-Head of the Industrials [17] -------------------------------------------------------------------------------- Okay. And then Ira, your thoughts on bad debt expense going forward. I mean is this increasing bankruptcies because of COVID? Is it taking more reserves? What's your thought on the go-forward on the bad debt side? -------------------------------------------------------------------------------- Ira M. Birns, World Fuel Services Corporation - Executive VP & CFO [18] -------------------------------------------------------------------------------- I guess I have to be careful what I say because I may have been a little too optimistic last quarter because, obviously, we're in uncharted territories in the world. We've been living in. So it's tough to predict. As I said last quarter and I want to be honest a little bit wrong with lower levels of volume which are continuing, even though we saw some increases in aviation this quarter, the level of larger credit lines, if you will, that would be outstanding today compared to where we would have been a year ago are dramatically smaller. So we've had -- we've dealt with some bankruptcies. One of the stats I was thinking of providing on the call is there have been 19 restructurings in the aviation space. And fortunately, we only had significant exposure to two of those, one of which we were probably going to get out of without losing any money whatsoever. But in saying that, there's still lots of small or medium-sized customers that are struggling. It really depends -- I guess the answer to your question depends a lot on how long the world we live in drags on and airlines -- how long it's going to take airlines to really get back on its feet. None of them will have unlimited staying power. So we're watching that very carefully. Our credit lines are clearly well below where they were a year ago, in some cases, 0. In some cases, they're prepayment arrangements now. We have a few existing situations that are still ongoing, which we hope will result in a positive conclusion, but that's not certain yet. So I would hope that the level of bad debt expense will begin normalizing. But I can't tell you that with absolute certainty today, but we're certainly striving for that and watching the overall -- it's something we still look at every single day with the management team. Any meaningful credit, especially a scenario where we're looking to ramp up again because business activity started picking up and that's where we have to be very careful as well if there's the second wave and the third wave. You've seen the news out of Germany overnight and a couple of other countries with shutdowns again, which doesn't help, right? So again, our goal is to see that number normalize. We're not completely out of the woods yet, but we're a lot closer than we were 2 quarters ago, that's for sure. -------------------------------------------------------------------------------- Kenneth Scott Hoexter, BofA Merrill Lynch, Research Division - MD and Co-Head of the Industrials [19] -------------------------------------------------------------------------------- Okay. Great job in getting the debt kind of paid down so well and into net cash. -------------------------------------------------------------------------------- Michael J. Kasbar, World Fuel Services Corporation - Chairman & CEO [20] -------------------------------------------------------------------------------- Ken, before you go, I want to add a little bit of color to the M&A side. Clearly, the land space is kicking into gear. Aviation has done a phenomenal job. I mean, really just off the chart in terms of how well of a job they've done and our marine team -- we really are blessed with a very talented organization. A lot of people have a lot of passion. So certainly, our connect -- our World Connect Energy Services, we think we've got a good runway and has got great financial profile. But I would be remiss in not also talking about our government and military business activity. We've got a tremendous amount of capability there. And the profile in terms of recurring revenue there is also very attractive. So over the last several years, we're looking to eliminate sort of erratic business activities and go for more predictable, ratable recurring revenue. So the combination of the tremendous amount of capability that we have in serving government and military is something that we have, in fact, expanded that, but that is an area that we like for the reasons I stated, and we've got a core competency there. So in any case, that's also something -- and it does dovetail. The government is very interested in sustainability as well. So all of these basically come to a confluence and a convergence. We are leveraging common capabilities, and it's very complementary to our marine and aviation business. So it all fits. -------------------------------------------------------------------------------- Operator [21] -------------------------------------------------------------------------------- And Mr. Kasbar, there are no further questions at this time. I'll turn the call back to you for closing remarks. -------------------------------------------------------------------------------- Michael J. Kasbar, World Fuel Services Corporation - Chairman & CEO [22] -------------------------------------------------------------------------------- Well, thank you very much. Thanks to our shareholders for the support that you've given us and to our various vendors around the world and employees and colleagues stay safe. And I look forward to -- we all look forward to talking to you next quarter. Take care. -------------------------------------------------------------------------------- Operator [23] -------------------------------------------------------------------------------- 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.