World Fuel Services' CEO Discusses Q3 2013 Results - Earnings Call Transcript

| About: World Fuel (INT)

World Fuel Services Corporation (NYSE:INT)

Q3 2013 Earnings Conference Call

October 30, 2013 5:00 PM ET

Executives

Michael J. Kasbar – President and Chief Executive Officer

Ira M. Birns – Executive Vice President and Chief Financial Officer

Analysts

Jonathan B. Chappell – Evercore Partners

Jack Atkins – Stephens, Inc.

Gregory Lewis – Credit Suisse Securities LLC

William W. Horner – BB&T Capital Markets

Operator

Good evening everyone and welcome to the World Fuel Services 2013 Third Quarter Earnings Call. My name is Mandy and I will be your event specialist today. This call is also available via webcast. To access this webcast or future webcasts, please visit www.wfscorp.com and click on the webcast icon. With us on the call today are Michael Kasbar, President and Chief Executive Officer; and Ira Birns, Executive Vice President and Chief Financial Officer.

At this time, 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, performance and potential acquisitions, as well as pending litigation and proceedings are forward-looking statements that are subject to a range of uncertainties and risks that could cause World Fuel’s actual results to materially differ from the forward-looking information.

A description of the risk factors that could cause results to materially differ from these projections can be found in World Fuel’s Form 10-K for the year ended December 31, 2012, 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 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 the 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. Instructions on how to ask a question will be given at the beginning of the Q&A session.

At this time, I’d like to introduce Mr. Michael Kasbar, President and Chief Executive Officer of World Fuel.

Michael J. Kasbar

Thank you, Mandy, and good afternoon everyone. Today, we announced third quarter earnings of $51.5 million or $0.72 per diluted share or $0.81 per diluted share on a non-GAAP basis. We continue the positive momentum we saw in the second quarter in many of our business lines and we ended the quarter with a solid capital position. Our Aviation group performed very well this quarter generating record volume. The third quarter is typically our strongest quarter due to seasonality and both our commercial and business aviation activities were positively impacted by this trend.

In particular, our commercial aviation activities were exceptionally strong in Europe, Latin America and Asia where each region posted double digit sequential and year-over-year growth. Our aviation team has done an excellent job in building this segment, growing volumes 13% year-over-year significantly outperforming the broader industry.

Our core marine activities were generally stable, following an impressive second quarter we once again experienced near record low volatility in bunker fuel prices, as we did in the first quarter. This lack of volatility negatively impacted our derivative marketing profitability.

Quarter-to-date volatility levels have increased modestly, which could help drive improvement in our marine results in the fourth quarter. While the global market is still over supplied with ships and freights, rates were generally still at historic lows, there are pockets of positive news in some sectors and our global team will be relentless in pursuing these new opportunities while executing on our long-term strategy.

As projected on last quarters call, our third quarter results in land declined sequentially driven principally by reduced profitability and improved marketing activities. We have seen signs of improvement in this business and as the spread between Brent and WTI has widened significantly over the past several weeks.

Our core land business is well [indiscernible] performed well. We continue to see a myriad of opportunities in the land segment and recently we made two small acquisitions which we expect will drive new opportunities for us. We will continue to pursue additional opportunities in this segment. Even though overall market conditions remain challenging, we see numerous growth opportunities in the market place.

In aviation, we just returned from the National Business Aviation Associations annual conference in Las Vegas. This year more than 25,000 people attended this event and the energy level was stronger than it has been in sometime. We showcased our growing network of services in premier brands, we opted to the general aviation community, including FBOs, MROs, and pilots and guarded a very strong response.

Our acquisitions in this space have taken root, and business aviation has become a larger part of our global aviation business. In marine, our team is prepared to capitalize on the ever changing landscape of supply and demand by deploying our diversified business model across our global platform.

For Land, the global distribution business remains fragmented, providing significant opportunities for continued growth in this segment. We gained significant expertise in this area over the last few years and believe we can replicate our success to capture additional market share in the U.S, U.K., Brazil and other parts of the world.

In our AVCARD Multi Service billing and payment solutions business we have only begun to scratch the surface. Our investments in this space provide us with the solid opportunity to grow this activity in each of our segments both domestically and internationally. The recent announcement regarding the expansion of our banking facility demonstrates the continued confidence and support from our bankers and provides us with an even stronger liquidity profile, enabling us to further pursue strategic growth opportunities. In the third quarter we also executed on our share repurchase program and we will continue to consider doing so from time to time.

Overall, considering the current economic environment I am pleased with our results and our performance this quarter. I am proud to see the engagement of our global team as we continue to grow our customer base and remain the counterparty of choice with our suppliers. While market conditions had constrained organic growth in the short-term, we believe we have significant opportunities for growth with an increasing portfolio of products and services and expansion opportunities into new geographies.

Whether it’s the growing global business aviation platform or specialty products such as lubricants and deicing fluid or transaction management services, we remain focused on driving profitable growth across our businesses. We have the capital and internal talent to make this happen. From an M&A standpoint, our acquisition pipeline is stronger than ever, driving even further opportunities for growth as we look towards 2014.

Our entire team remains focused on growing our value proposition in fuel, services and billing and payment sectors across all three of our business segments, driving greater value for our customers, suppliers and shareholders. We want to thank all of you for your continuous support.

With that, I’ll now turn the call over to Ira for a financial review of our results of this quarter.

Ira M. Birns

Thank you, Mike and good evening everybody. Starting with revenue, consolidated revenue for the third quarter was $10.5 billion, up slightly on a sequential basis and 6% compared to the third quarter of last year. The year-over-year change in revenue was entirely attributable to the increase in volume across all three of our business segments.

Our aviation segment generated revenue of $4.2 billion, up $434 million or 12% sequentially and $356 million or 9% year-over-year. The year-over-year increase was entirely due to increased volume.

Our marine segment revenues were $3.6 billion, down $391 million or 10% sequentially and $54 million or 1% year-over-year. The entire year-over-year decrease was a result of lower volume. And finally, the land segment generated revenues of $2.7 billion, down $29 million or 1% compared to the second quarter, but up $281 million or 11% year-over-year. The year-over-year increase principally relates to the Carter acquisition completed in September of 2012.

Our aviation segment sold a record 1.3 billion gallons of fuel during the third quarter, up 96 million gallons or 8% sequentially and 145 million gallons or 13% year-over-year. Volume in our marine segment for the third quarter was 6.2 million metric tons. That’s down 1 million metric tons or 15% compared to last quarter and 240,000 metric tons or 4% year-over-year.

During the third quarter decreased volatility was the principal contributing factor to the drop off in volume.

Our land segment sold 885 million gallons during the third quarter, down 18 million gallons or 2% sequentially, but up 100 million gallons or 13% from last year’s third quarter. The decline principally relates to decline in crude oil volumes as previously forecasted. Excluding crude, land volumes actually increased by 4% from the second quarter. Consolidated gross profit for the third quarter was $186 million, down $2 million or 1% sequentially, but up $6 million or 3% compared to the third quarter of last year.

Our aviation segment delivered a strong quarter, generating $90 million in gross profit, up $14 million or 18% sequentially and $6 million or 7% year-over-year. In the third quarter, we experienced strong seasonal growth in both commercial and business aviation as projected on last quarter’s call with government activity effectively flat.

Net revenue was principally impacted by an 8% increase in volume, higher average margins on spot business activity as well as an improvement in derivatives activity. As we look to the fourth quarter, global passenger jet fuel consumption typically experienced a 79% sequential decline in volume.

While do expect the seasonal decline in volume in the fourth quarter, we hope to outperform the broader market as we have regularly done in the past. And while government activity was stable in the third quarter, we will likely experience further decline in Kyrgyzstan and Afghanistan volumes in the fourth quarter and through 2014.

Our jet fuel inventory position from our self-supply model was approximately 121 million gallons or $347 million at the end of the third quarter, up from 98 million gallons or $270 million at the end of the second quarter. The increase principally relates to increased volumes and timing of certain cargo deliveries around quarter end. While the spread between jet fuel and heating oil prices experienced modest volatility during the quarter, this dynamic had no meaningful impact on third quarter results.

Our marine segment generated $40 million in gross profit. That’s down $12 million or 23% sequentially and $14 million or 25% year-over-year. While volatility levels picked up somewhat in the second quarter, they were reverted back to new historical lows in the third quarter. This lack of volatility negatively impacted our derivative marketing activities, which principally drove the sequential decline in gross profit.

While the macro environment remains challenging, our marine team generally navigated the markets well in the third quarter with core traded activity remaining stable and we’ll continue to seek new opportunities while balancing the risk profiles of new and existing customer accounts.

Our land segment contributed gross profit of $56 million in the third quarter, down $4 million or 6% sequentially, but up $40 million or 32% year-over-year. Fuel related land business activities generated gross profit of $46 million. Once again this represents our total business activity in land with the exception of Multi Service.

Our core land fuel distribution business delivered sequentially higher profits in the third quarter. However, as projected on our last call, the profitability in our crude business declined sequentially resulting in a net decline in gross profit this quarter.

With Brent and WTI spread widening once again, the actual spread as of this morning was more than $12. It provides an opportunity to some improving crude related profitability in the fourth quarter. And Multi Service once again performed well and we continue to work with the Multi Service team to grow our fuel card program in Multi Service’s billing and payment solutions.

Operating expenses in the third quarter, excluding our provision for bad debt, were $120 million. That’s up $3 million sequentially but down $1 million after excluding Multi Service and CarterEnergy when compared to the third quarter of 2012. The expenses this quarter were on the higher range than what we projected last quarter principally due to approximately $2 million of operating expenses related to a small acquisition completed during the quarter.

We remain focused on improving our overall operating efficiencies over the next several quarters. And looking forward, I would assume total operating expenses excluding bad debt expense of approximately $118 million to $123 million in the fourth quarter.

Turing to the balance sheet, our total accounts receivable balance was $2.5 billion at the end of the third quarter, that’s down $73 million compared to the second quarter and up approximately $134 million compared to the third quarter of last year. Bad debt expenses in the third quarter was approximately $1.9 million, down $800,000 sequentially and $1.8 million compared to the third quarter of 2012. The sequential decrease in bad debt expense was principally related to the decrease level of accounts receivable.

Consolidated income from operations for the third quarter was $64 million, down $5 million or 7% sequentially and $7 million or 10% year-over-year. For the quarter, income from operations on Aviation segment was $41 million it’s up $7 million sequentially and $1 million compared to the third quarter of 2012.

Our Marine segments income for operations was $17 million for the third quarter, representing a decrease of $7 million sequentially and $10 million compared to last year’s third quarter.

And finally, our Land segment had income from operations of $15 million down $6 million sequentially and $3 million year-over-year. EBITDA for the third quarter on a consolidated basis was $76 million, a decrease of $3 million or 4% sequentially and $4 million or 5% year-over-year.

Non-operating expenses, which primarily consist of interest expense were $5.7 million in the third quarter that’s up $900,000 compared to the second quarter and $2 million from the third quarter of last year, both the sequential and year-over-year increases were principally driven by higher average borrowings during the third quarter.

Excluding any foreign exchange impact, I would again expect non-operating expenses to be approximately $5 million to $6 million for the fourth quarter. Our tax rate – our effective tax rate for the third quarter was 14% compared to 21.7% in the third quarter of last year.

While there is a significant variance in our year-over-year quarterly tax rates, our year-to-date tax rate to the third quarter is now 17.3% versus 17.5% in 2012 effectively flat. The sequential decrease this quarter is principally due to a lower contribution of U.S. based earnings to our forecasted annual results. We expect our tax rates to be in the range of 16% to 19% in the fourth quarter. Our net income for the third quarter was $51.5 million that’s a 1% increase sequentially and it’s effectively flat year-over-year.

Non-GAAP net income which excludes amortization of acquisition related identified intangible assets and stock-based compensation was $57.9 million in the third quarter, a 1% increase sequentially and also flat year-over-year. Diluted and non-GAAP earnings per share for the third quarter was $0.72 and $0.81 respectively both increasing $0.01 sequentially and both flat year-over-year.

Our overall net trade cycle was flat sequentially at 8 days and down from 8.2 days in the third quarter of last year. As Mike, mentioned earlier during the third quarter we repurchased $20 million of our common stock in the open market. Although we have not done so for sometime, we will now consider buying back our shares from time to time when we feel our shares are undervalued, principally to offset any diluted impact of employee stock awards. We still have $30 million available under our existing authorization to repurchase additional shares. Regardless, we ended the quarter with $333 million of cash, compared to $232 million at the end of the last quarter and a $139 million in the third quarter of last year.

While our cash position increased by $101 million, our total debt increased by $107 million. Therefore our net debt position was effectively flat and our cash position this quarter was positively impacted by this very strong cash flow at the end of the quarter, which didn’t come in time to repay some of the outstanding debt on our revolver. We expect our cash position to return to its historical range in the fourth quarter.

We generated $61 million of operating cash flow during the quarter bringing total year-to-date operating cash flow to $214 million compared to operating cash flow of $48 million during the first nine months of last year. This now marks the fifth consecutive quarter of positive operating cash flow, which continues to strengthen our liquidity profile. Our liquidity profile was further strengthened earlier this month as we now have extended the maturity of our revolving credit facility to October 2018 and increased the size of the facility by $300 million to $1.1 billion.

We also extended the maturity date of our existing $243 million term loan to October of 2018. The overwhelming support we received from our bankers is a true testament to their belief in the success of our business model and we are very appreciative of their support. Between the additional $300 million and positive changes to terms and conditions of the amended facility, our total liquidity has now increased by approximately $500 million, further increasing our financial flexibility and providing even greater support for organic growth and strategic investment opportunities going forward.

Now before closing, I would like to provide a brief update on matters relating to the July train derailment in Quebec. As a reminder, our connection to this incident stems from our being the owner of the crude oil and the lessee of the tank cars that were being transported by the railroad at the time of its derailment. We are entitled to the crude oil on behalf of our crude oil marketing joint venture and it’s subleased the tank cars to the joint venture for use in its operations. As we mentioned on last earnings – on our last earnings call at the time of the accident our crude oil and the leased tank cars were under the care custody and control of Canadian Pacific Railway, the railroad with which we contracted in Montreal, Marine and Atlantic, our railroad definitely subcontracted by Canadian Pacific.

Concerning regulatory actions, we continue to contest the order issued by –issued against MMA, CP and World Fuel by the Quebec environment ministry. The principle basis upon which we are challenging the order is that is the miss application of Quebec law. Since our last call we have formally contest the order and expected a hearing before the TACT, administrative body responsible for hearing such confiscation will take place in the first half of next year.

While we believe we have strong arguments against the order with the TACT rule against us, we would seek administrative review of the decision and if unsuccessful we then challenge the decision in civil court. We intend to aggressively pursue all available rights to contest and appeal the order. It’s our understanding that it could take several years before all appeals are exercised by the parties and a final decision is reached.

While we continue to contest the legality and validity of the order, we continue to take actions that we believe are appropriate to meet our obligations under Quebec law and after that ends, submitted technical plans to the ministry proposing to undertake a role of certain activities at the site that we believe is consistent with our responsibilities under the law. We expected any cost which may be incurred by us in connection with this limited role will be covered by insurance. We have been in contact with various other Canadian and U.S. regulators since the first days of the accident and continue to cooperate with these authorities.

With respect to the lawsuits pending in Illinois and the Class Action pending in Quebec, we are among various defendants and substitutes which in addition to Canadian Pacific and MMA include affiliates and insurers of MMA, various railcar manufacturers and lessors and the party which contracted the purchase the crude oil.

All these lawsuits are at a very early phase making it impossible to estimate any potential liability. We continue to believe the claims against us are without merit and intend to vigorously defend ourselves against these actions. Apart from these law suits, we have received demands for indemnification from certain tank car lessors pursuant to the relative lease agreements.

We are still accepting these demands, but we don’t anticipate any significant exposure associated with these indemnification obligations. At the same time, we are assessing claims we may have against certain third parties. With respect to insurance, notice has been provided to our various carriers who have been very cooperative.

We understand that the investment community is interested in understanding the limits of our policies, however we do not believe it is in the interest of the company or shareholders to disclose such information at this time.

As we have stated previously we and our joint venture affiliates maintain insurance covering the actives in which they are engaged, which include coverage for environmental damage and clean up costs as well as third-party liability and defense costs.

We expect that substantially all defense costs incurred in defending the orders, the Canadian Class Action lawsuit, and the U.S. lawsuits will be covered by insurance. In the third quarter, we expensed just under $800,000 related to this matter, which includes deductibles under our insurance policies and certain limited legal fees not covered by insurance.

Lastly with respected questions that has been raised publicly concerning the makeup of the crude oil and the packing group classification of the oil. While we’re not able to comment specifically on these topics due to the pending legal proceedings, we can’t say there is nothing we are aware of currently with respect to those topics that we believe contributed to the cause of the derailment or its consequences.

We remain deeply saddened by this tragic accident and our thoughts and prayers remain with the citizens of Lac-Mégantic, as they seek to recover from this terrible accident. While you may have remaining questions regarding this incident unfortunately at this time we cannot provide any additional comments beyond what I just shared and the information which we’ve included in our 10-Q disclosures.

So in closing, despite the obvious distractions associated with Quebec, our team remains focused on driving our business and we are pleased with the overall results we delivered this quarter.

Capitalizing on our core competencies, we remain strategically focused on delivering profitable growth, driving solid returns and creating additional shareholder value. And our strong cash flow performance coupled with our extended banking facility put us in an even stronger position to execute on accretive, organic, and strategic investment opportunities as we head into 2014.

With that I would now like to turn the call back over to Mandy, our operator to begin the Q&A session.

Question-and-Answer Session

Operator

(Operator Instructions) As a reminder, we would appreciate if the participants limit themselves to one question and one follow up. We will pause for just a moment to compile the Q&A roster. Thank you. Our first question today comes from John Chappell with EverCore. Please post your question.

Jonathan B. Chappell – Evercore Partners

Thanks Mandy. Good afternoon guys.

Michael J. Kasbar

Hi John.

Ira M. Birns

Hi john.

Jonathan B. Chappell – Evercore Partners

Mike, first question the marine business, you guys talked about it, lack of volatility et cetera. However it was still a pretty large sequential decline in gross profit and just looking at historical, it’s been about 2.5 years since you’ve had the quarter so low. So I am just trying to figure out, how much of this kind of marine weakness is strictly just volatility and prices and there are lot of spot market business there versus how much if it is your kind of proactive manner in treating the difficulties in that market and based on that when do we start to see kind of a ramp in risks on your side, where you can start to see an improvement in volumes again in markets?

Michael J. Kasbar

Thanks John. John, you know as well with anyone, you know the state of the market, I guess that’s been sort of talking about this for quite sometime. Slow standing is not insignificant. We estimate there was probably about 30% drop-off in demand. You’ve got a lot of dislocations going on, larger shifts are taking, bunkers of peer locations, freight rates are pretty precarious for a number of different sector. So still fairly risky environment out there, so we’re being reasonably careful.

On the volatility side, the market is remarkably stable and when the price doesn’t move so much, it’s little bit more difficult to be able to provide that value in the marketplace.

So I think we’ve got one of the better mouse traps in the marketplace and it’s the benefit of our diversified business model in terms of being involved in a lot of different end markets and being able to work the different business cycles.

So I don’t suspect that the market is going to stay as stable as it has been and our group is pretty innovative, we’ve been working variety of different geographies and for new markets. You’ve got a lot of dislocation going on in terms of the musical chairs that the oil industry, the departure in various different markets, and new supplier is coming in and new supply sources coming in.

So with that some of the economy picking up and with some volatility coming back into the market, optimistic that we will start to see some better results, but I still think we have little ways to go. So maybe that’s not a very specific answer, but that’s the best one I can give you.

Jonathan B. Chappell – Evercore Partners

Enough, I understand. For my follow up, you also mentioned at the end of your comments about pretty much I think you said the most robust M&A pipeline that you have seen in some time and obviously Ira gave us a little bit of an update with your financial flexibility right now. As you look at non-organic growth, are you looking at things that are kind of similar to what you have done with multi-service and add card as far as and a higher margin, less fuel related or less direct fuel related type businesses or you still kind of thinking about bolt-ons to kind of your core fuel business?

Michael J. Kasbar

We are very open minded. Once again, I think I have said it before, being able to diversify and provide solutions, big part of the name of the game for us is to take the pain away from our clients, so transaction processing, billing solutions, underwriting, being able to deal with some of that back office side of the equation, it’s something that’s very appealing to us. We had experienced with that part revenue part in 2007, Multi Service has been great experience so far.

So we like that, we’ll also continue to look at within the land business, enormous marketplace, the aviation, that we acquired seven or eight companies, I think maybe even nine that we put together, and in our business aviation space, and that’s really starting to come together we really are getting the platform there so, anything that is related to that distribution into the end-markets, expanding our customer base getting involved in the natural gas’ aside, the energy side. It’s really quite extraordinary what happened in this market here with shale oil and shale gas tremendous amount of dislocation, you’ve got compressed natural gas coming into the picture, we’re participating and that so, it’s really quite growing?

Jonathan B. Chappell – Evercore Partners

Okay. I appreciate it. Thanks a lot, Mike.

Operator

Thank you. Our next question is coming from Jack Atkins at Stephens. Please post your question.

Jack Atkins – Stephens, Inc.

Good afternoon, guys. Thanks – thanks for taking my questions.

Michael J. Kasbar

Hey, Jack.

Jack Atkins – Stephens Inc.

Mike, I guess that just to start out with depending on how the fourth quarter shapes out. Looking back over the last couple of years, 2013 earnings per share is going to be fairly similar to 2012 – 2011 on an absolute basis. And I know for a company that has such a great track record of organic growth. It’s got to be frustrating another market there is a lot to do with, but I was just curios if you could may be lay out for investors and the analyst on the call. Sort of what you all are doing organically, if you lay out may be a couple of strategic initiative that you guys are pursuing it internally to return the Company to the historical levels of organic growth that you guys have achieved over the years.

Michael J. Kasbar

That’s a good one Jack. As we look at the platform that we've got, which we feel pretty good about the growth that we driven and certainly the volume started the equation the commercial aviation side has grown almost exclusively organically. A big chunk of that I think is repositioning the Company in a number of different ways, you got a lot transition going on within the spaces, within the global market places that you’ve got different regulations coming in within the bunker side, where you're going to see 0.1% sulfur being supplied in 2015 that’s going to cause tremendous amount of disruption in the marketplace, it’s going to make what is already a complicated marine sourcing business – significantly more complicated.

I think our development within our diesel and gasoline business puts us in a great position to be able to service that marine business. We’re certainly expanding new geographies that we got a fairly robust governing business, we knew that that was the sunset activity within, Afghanistan and Kyrgyzstan we’re actively looking to take that competency and apply it to our government clients in different geographies. We've setup shop in different locations.

The market is a bit more broadly based today than it used to be. It used to be a little bit more straight forward where you have your standard bunkering locations, you had a certain amount of fragmentation, that’s changing through certain extend, we now have simultaneously a lot of concentration with larger ships and larger suppliers in some of the main ports, but some of that volume has been taken up by bunker supply, showing up in a number of different locations.

So we are participating in every part of the marketplace and looking to drive efficiencies, work the cost side of it, but I think you have to have some appreciation that the demand is somewhat tested. So some part of what we are doing is trying to add more of those solutions to the equation, really looking to differentiate in the marketplace. I think that we are widely perceived a superior platform that has the right financial positioning and one of the best teams in the marketplace.

So our land business will continue to grow, our aviation business will continue to grow, the marine space is certainly been challenged and we have been careful on that, just because there is, a significant amount of risk and you have to be a little bit careful about how you proceed in that marketplace.

Our expansion into other products on lubricants, the icing fluid natural gas, I think it’s going to service well, to be able to get access to a broader base of clients, so we are moving from a fuel company to an energy company looking to provide solutions, expanded the definition of our marketplace form airlines and shipping companies to that broad based ground fuels business, and then looking at commercial and industrial users and really managing industrial risk with their energy products and providing it in a complete solution.

We’ve got a sophisticated offering on the derivative side, which gives us risk management. We understand underwriting, so I think we continue to provide a great distribution platform for the supply community and we are redefining our customer base.

We continue to penetrate different geography, so the beat goes on, granted the growth has not been as strong as it has been, but I guess we are investing into a slow dime rather than a fast nickel and I think that you will start to see some of those things come through in 2014.

Jack Atkins – Stephens, Inc.

Okay, that’s very helpful Mike, thank you so much for that color. And I guess for my follow up question, on the military side of the business, our checks on various government website have indicated that I guess you guys have some major fuel contracts with the military related to Afghanistan and your activity there which are either expiring, I think, some of them are expiring today or early next year with one large one. I guess first off is that, is that the case. And then secondly, I know you guys have talked about military activity winding down in your business in the fourth quarter and then in 2014, how much of a set balance sheet we should expect in terms of profitability, I guess gross profit sequentially just to help us sort of understand how that flows?

Michael J. Kasbar

It’s a moving target on a day-to-day basis in terms of the additional demand it’s still forthcoming from the military. So it’s tough to forecast – it certainly looks today like the number will be lower than the third quarter by at least a few million dollars except to give you an exact number, and then we will likely drop further in the first half of next year. There probably would be something that continue on indefinitely even after most of the troops [ph] go out, but obviously that’s going to be a much lower level of activity than what we’re seeing today.

Jack Atkins – Stephens, Inc.

Okay. Okay, that’s helpful. And then as far as the contracts, are those going to renew the ones that are expiring in the near-term or are those just ending at the end of this month?

Michael J. Kasbar

There is a lot of chance. Some of them are rolling off, some of them are getting extended, some of them maybe going away. At the end of the day that’s secondary. I think the best way to look at it is the way I described earlier in terms of the reduction in volume because we may loose some one contract and then pick up some one on extension to our new piece of business in the short-term.

Jack Atkins – Stephens, Inc.

Okay, great. Thanks. Thank you for the time.

Operator

Thank you. Our next question is from Gregory Lewis at Credit Suisse. Please post your question.

Gregory Lewis – Credit Suisse Securities LLC

Yes. Thank you and good afternoon.

Michael J. Kasbar

Hi, Greg.

Ira M. Birns

Hi, Greg.

Gregory Lewis – Credit Suisse Securities LLC

Mike, you mentioned the two smaller acquisitions in land that you’re able to execute during the third quarter. Should we be thinking about those in terms of bolt-ons or are those – you mentioned that you see some adjacent opportunities with those acquisitions. Can you provide a little bit of color and what you’re thinking in terms of those?

Michael J. Kasbar

Sure. One company just called U.S. Energy and doing the natural gas, electricity and water side there and energy management services business and they’re focused on those markets for commercial, industrial and government clients. They provide procurement advisory risk management services and in select cases they’ll act as a merchant to their clients. So we like that.

Some of our diesel clients such as our distilleries in Scotland or trucking companies in the U.S. have been switching to compress natural gas and we didn’t have worst in a way so this was a leading group of professionals with a solid portfolio of customers and they provided services in natural gas and electricity for many years.

So in addition to leveraging their natural gas competencies their client list gives us a great opportunity to service their liquid fuel requirements across the United States. So I expect that in 2014 they’ll make a meaningful contribution. So we are excited about that diversification. It’s very much consistent with what we do in terms of providing solutions.

And then, another company was in the third quarter, but another company that we picked up was lubricant distribution company in Scotland. And again, that is sort of consistent with proving solutions. They provide the lubricants for commercial and industrial customers, passenger and commercial vehicles and the marine and aviation industry. So it straddles all of our business. It gives us the opportunity to leverage our supply chain with the supply community and broadens our customer base.

So, both of those businesses anything that’s on the distribution, downstream distribution be able to aggregate demand is very much consistent with our long-term strategy and then selectively figuring how to optimize the supply chain to be able to grab the margin and provide and enhance solution to our increasing customer base.

Gregory Lewis – Credit Suisse Securities LLC

Okay, great. And then, just as I’m looking at the balance sheet, it looks like over the last couple of quarters, PPA has been moving higher. This quarter was up, I guess $15 million-$16 million quarter-over-quarter. Is that related to these acquisitions or is there other assets that have been acquired as part of the overall strategy?

Ira M. Birns

Greg, I’ll get that. It’s Ira. A big chunk of the number you’re seeing in this quarter and you’ll see a similar number again in the fourth quarter relates to the expansion of our infrastructure in North Dakota that supports our crude operations. That was announced by our joint venture partner earlier in the year. So that’s somewhere between a $40 million and $50 million investment and we’re about – got halfway through it as of the end of the third quarter. I know Mike you want to elaborate on that.

Michael J. Kasbar

In terms of PPA?

Ira M. Birns

No, just in terms of project.

Michael J. Kasbar

That crude project is sort of an interesting one for us. It again puts us into the distribution logistic side and being able to supply our supplier with crude oil, I think puts us into another interesting dimension within the supply community, provide some interesting offsets. So once again getting deeper into the supply chain is good. It’s very interesting. In this country just tremendous amount of change with the Bakken, they’ve expected that to double. So we had a first mover advantage there. We’ve got a distribution network there and our suppliers are connected with our facility there. So we feel pretty good about that diversification within that crude oil side.

Gregory Lewis – Credit Suisse Securities LLC

Okay. Thank you for the time.

Operator

Thank you. Our next question is with Kevin Sterling at BB&T Capital Markets. Please post your question.

William W. Horner – BB&T Capital Markets

Hey, guys. It’s actually William Horner on for Kevin.

Michael J. Kasbar

Hi, William.

William W. Horner – BB&T Capital Markets

Hi. Thanks for taking my questions. Ira, going back to Jack’s question on the government activity and maybe asking this little bit differently, but I know on previous calls you have talked about the opportunities that this business has afforded to you in terms of leveraging your relationships and logistics. I was wondering if you could sort of touch on maybe what sort of traction you are getting with this and given the ramp in your volumes this past quarter in light of your kind of flat government activity, are you starting to see a pickup and maybe leveraging this with your government customers and maybe a little layover into your commercial business as well.

Ira M. Birns

So the government activity, I think as you know by now, these are requirement contracts and we’ve been involved in that government activity since the late ‘80s and we like it. It’s a bit of a challenge. You certainly have to have your eyes [indiscernible] so it’s kind of like Formula 1 racing where you are really testing your ability to perform and then being able to apply that back into your more civilian business activity if you will.

So we’ll continue to do that and as I think I’ve mentioned many times before, when we went into the acquisition of MCS, we knew that that was going to be a sunset opportunity, but it was a great crowd of people and it gave us advanced logistics to be involved in different theatre. So we’ve been actively pursuing those types of activities in our locations and we’ve had some small wins, nothing material, nothing really to replace what we’ve had either in Afghanistan or Kyrgyzstan. So there will be sort of phasing down as Ira commented on and we will continue to grow our commercial business and to expand into different areas, anything that fits into a distribution model that has that energy dimension to it. We are revealing the price risk, delivery risk, quality control, quantity control, timely delivery, operations, management information transaction processing, underwriting anyone of those businesses really is very much mapped to us. Obviously, we’ve got a deep focus on the commercial aviation, the business aviation, the full spectrum of marine, supply and now it’s around fuel distribution. So I am not sure if you are looking for something specific but that’s the general disposition.

William W. Horner – BB&T Capital Markets

No, no that very helpful, Mike, that’s kind of what I was looking for nothing too specific, just kind of the cross selling opportunities and then just leveraging the logistics across your entire platform. So from our follow up just on the share repurchase – I don’t know if you can answer this or not, but have you repurchased any shares quarter-to-date?

Michael J. Kasbar

No, we have not.

William W. Horner – BB&T Capital Markets

Okay. All right thanks, guys.

Ira M. Birns

Thank you.

Michael J. Kasbar

Thanks.

Operator

Thank you. Our next question is from Jack Atkins of Stephens. Please pose your question.

Jack Atkins – Stephens, Inc.

Hi, guys. Thanks for taking my follow up questions. Just two quick items here first on the joint venture with Dakota planes it looks like just looking at the minority interest line that was a loss making entity in the quarter. Would you expect that to return to profitability in the fourth quarter or do you think that is going to be sort of breakeven or might be at a loss in the 4Q?

Michael J. Kasbar

So, yes, good question. Just to be completely clear the operating results are right around breakeven this quarter. And that was driven by the dynamics that we explained during the call, the competitive pressures as well as the fact that the spread between WTI and Brent evaporated and that is left for good part of the third quarter. The recent number was negative, it relates to the $800,000 that I mentioned in insurance costs, deductibles and some uncovered legal fees that relate to the Quebec incident. And those flow through the joint venture. So that took that to a negative.

Based upon what we are seeing so far in the fourth quarter with the spreads widening once again the spread between WTI and Brent was over $12 this morning. There is certainly an opportunity for us to return to profitability. It’s quite likely that we will return to profitability how much I can’t tell you. But we should make a few million in that area in the fourth quarter.

Jack Atkins – Stephens, Inc.

Okay, okay. That’s helpful and then last question is a housekeeping item. Ira do you have the quarter end diluted share count?

Ira M. Birns

The actual quarter end number?

Jack Atkins – Stephens, Inc.

Yes, just so we know what the run rate is going forward because of the repurchases.

Ira M. Birns

It’s – I’ll give it to you in one second. It’s 72.261 million shares as of October 24. And I don’t think that is much different from the September 30 number.

Jack Atkins – Stephens, Inc.

Okay, thank you.

Operator

Thank you. Our next question is coming from Shawn Collins at Bank of America. Please pose your question.

Shawn Collins – Bank of America

Great. Thanks guys. Thanks for taking our question. I think at the beginning of the call you said that you were seeing strength in Europe and Asia. I don’t know if I have that right or wrong, but can you just kind of talk about what you’re seeing regionally and kind of compare the U.S. versus Europe versus Asia. And how you are – how the businesses are evolving there?

Michael J. Kasbar

Yes. The comment was relative to our commercial aviation business Latin America, Europe and Asia did quite well in the quarter and so one of them just obviously operating in all of these figures is that we do get good amounts of diversity in terms of those different regions.

And I think Europe is still not doing all that well, Asia is obviously doing better, Latin America didn’t get infected obviously with the downturn, so I think it’s very much a commentary of us being able to ride the markets in Asia and Latin America. And I think it’s quite a strong commentary in terms of our performance within Europe, so we’ve got a significant position within the U.S. market and we continue to get involved in the supply chain here, which we’re happy with the position that we have established here, but markets increasingly are more global and as new markets open up, we’ve got a lot more appetite to the indoors markets as the first mover.

Our team globally is pretty talented that’s being able to look at these markets and enter them. But the macroeconomic future of these markets is not necessarily my specialty. But we did well as it relates to the once that we have identified earlier in the call.

Unidentified Analyst

Okay, great. That’s helpful, thank you. And just a quick follow-up on M&A, I know you’ve touched upon that, but what are you seeing in terms of valuation out there, private valuation versus public valuation. I mean you mention we – they have a tepid economy in a challenging business environment, but at the same time we have pretty robust credit market as well as equity market that are reaching new highs. I’m just curious, what you guys are seeing from an M&A valuation standpoint based on the things you are seeing out there?

Michael J. Kasbar

It varies obviously depending on the situation of the Company, of the size I think it’s fair to say that valuations generally speaking are high amounts than they were in 2008. So the statement would be obvious, but I think that we are quite a good buyer, I think that people appreciate doing business with us because they know that we are a serious buyer.

And they know that their companies are in good hands, when they become part of our group. So I think we do enjoy some benefit compared to another acquirer, but values I don’t think they’ve gone down. So MLPs have raised the valuations on certain properties because of the tax treatment in the lower cost of capital. But it runs the full gamut and it really just depends on case by case basis.

Ira M. Birns

I would just add to on average I would say valuations is still reasonable and therefore there is still lot of opportunities out there that we are looking at, that aren’t valuing itself to some ridiculous levels where the deal would make no sense for us. So we still within that reasonable range, they do vary but they are not out of control at this point in time from our perspective.

Unidentified Analyst

Okay, great. Thanks a lot for the time guys.

Michael J. Kasbar

Thanks, Sean.

Operator

Thank you. That was our last question. I would now like to turn the floor back to management for closing comments.

Michael J. Kasbar

Well, thank you for listening to this call, we do appreciate the support that we get from the community, and we are hard at work and optimistic that we’ll be back on growing the Company in a way that you’ve been accustomed to. Thank you very much.

Operator

Ladies and gentlemen…

Michael J. Kasbar

Thank you, operator.

Operator

Thank you. Ladies and gentlemen, this does conclude today’s conference call. We thank you for your participation. You may now disconnect.

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