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World Fuel Services Corp (NYSE:INT)
Q3 2020 Earnings Call
Oct 29, 2020, 6:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. 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] After the speaker's remarks, there will be a question and answer session. Instructions on how to ask a question will be given at the beginning of the Q&A session. [Operator Instructions]

I would now like to turn the conference over to Mr. Glenn Clevis, World Fuel Services, vice president, treasurer and Investor Relations. Mr. Clemens, you may begin your conference.

Glenn Klevitz -- Vice President, Treasurer and Investor Relations

Thank you, Eric. Good evening, everyone, and welcome to the World Fuel Service's third quarter Twenty twenty earnings conference call. I'm Glen Clevis and I'll be doing the introductions on this evening's call alongside our live slide presentation. This call is also available via webcast to access this webcast or feature webcasts, please visit the World Puel Services website and click on the webcast icon. With us on the call today are Michael Castlebar, chairman and chief executive officer, and IRA Burns, executive vice president and chief financial officer. By now, you should have all received a copy of our earnings release, if not, you can access the release on our website. Before we get started, I would like to review World Fuel Safe Harbor Statement. Certain statements made today, including comments about world fuels, expectations regarding future plans and performance, are forward looking statements that are subject to a range of uncertainties and risks that could cause world fuels. 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, its most recent form 10K and other reports filed with the Securities and Exchange Commission. World fuel assumes no obligation to revise or publicly released the results of any revisions to these forward looking statements in light of new information or future events. This presentation also includes certain financial measures as defined in regulation, a reconciliation of these non gap financial measures to their most directly comparable gap financial measures is included in world feels press release and can be found on its website. We'll 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 Castlebar.

Michael J. Kasbar -- Chairman and Chief Executive Officer

Thank you, Glenn. And good evening, everyone. Once again, our global team has continued to perform extremely well where 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 continue 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 multiservice, further enhancing our strong liquidity position. We reshape their 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 with 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 zero 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 low and zero 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 I've mentioned previously, we decided on Friday, March 13th of this year to have our more than 5000 employees from eighty five 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 15000 zoo meetings per month in January will be for everyone work from home. We digitize 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 virtualize their video and voice systems, bypassing hardware requirements which better enable their employees to work remotely from day one. The technology investments we've made in recent years have improved our performance and. Resilience, allowing us to quickly close their 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 and 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 -- Executive Vice President and Chief Financial Officer

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 Twenty twenty 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 onto the third quarter results, as usual. Please note that the following figures exclude the impact of non-operational items in the third quarter, as highlighted in our earnings release. So not operational income and expenses in the third quarter, principally related to the gain on the sale of our multiservice business, which was completed on September 30th, 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 increase sequentially in all three of our business segments with the most significant rebound 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 sixty four million dollars or one dollar per share in the third quarter adjusted third quarter net income and earnings per share with twenty point seven dollars million and thirty three cents per share, respectively.

Adjusted even in the third quarter, it was sixty four million dollars. That's an increase of 13 percent sequentially. And lastly, we generated two hundred and forty six million dollars of cash flow from operations during the quarter, which, combined with the proceeds from the multiservice sale, enabled us to reduce our gross debt balance by approximately five hundred and seventy million dollars, 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 four point five dollars 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 forty two percent, driven by increased volume across all segments and higher average fuel prices. Our aviation volume was one point eighty two billion gallons, 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 a healthy rebound 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 US is slowly improving, down 95 percent in April compared to sixty three percent in recent weeks relative to the same prior year periods. Volume in our Marine segment for the third quarter was four point four million metric tons, down approximately twenty one percent year over year, but an increase of nine percent sequentially is activity levels modestly rebounded during the third quarter.

Our land segment volume was one point two billion gallons or gallon equivalents during the third quarter. That's a decrease of eight percent year over year, but an increase of six percent sequentially. The year of your covid related volume declines were prevalent across our retail, commercial and industrial and wholesale operations, partially offset by increases in our growing world 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 two hundred and fourteen dollars million. That's a decrease of 30 percent compared to the third quarter of twenty nineteen, but flat sequentially. Our aviation segment contributed ninety eight million dollars of gross profit in the third quarter, down thirty eight percent year over year, but up six percent 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, third quarter gross profit of thirty two million dollars, that's a decline of 40 percent year over year and 14 percent sequentially. Year over year, comparison is negatively impacted by the benefits we experienced during the third quarter of last year leading up to the January 1st, very low sulfur climate regulations, compounded with a 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 last segment delivered a gross profit of eighty four million dollars in the third quarter, that's down 12 percent year over year, but effectively flat sequentially gross profit in the last segment was slightly better than expected during the quarter, with volumes returning to over 90 percent of prior year levels. The year of the year, gross profit declined, principally related to the further reduction of government activity in Afghanistan and a reduction in retail and commercial and industrial activity. Third quarter Landreaux profits still included 19 million dollars of gross profit from multiservice, 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 multiservice sale offset in part by an increase in activity in the U.K. as we expect seasonal strength in our eating or distribution activities driven in part by EU and higher usage as a result of the pandemic.

Core operating expenses, which exclude bad debt expense, were one hundred and forty eight million dollars in the third quarter, which was below the raise 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 of the three percent operating margins as business activity slowly returns to normal. We expect core operating expenses to be in the range of one hundred and forty seven to one hundred and fifty two dollars million in the fourth quarter. Please note, our people have always been and always will be our greatest asset, while covid is certainly created challenges for our business, our global team is put forth a Herculean effort, year-to-date, under unprecedented circumstances, remotely managing the business with excellence day to day, an exceptional working capital management along with significant costs and capex reductions which resulted in a record level of liquidity. We are also proud of the flawless execution of his investiture of multiservice amid the pandemic, which resulted in an 80 million dollar pre-tax gain. Our employees have performed admirably and 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 is this compensation expense is included in the one hundred and forty seven to one hundred and fifty two million for operating expense estimate provided for the fourth quarter. With the world's remaining challenge 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 twenty three point three dollars million in the third quarter. Despite our diligence and focus in the fact of our accounts receivable, balance is just over 40 percent of 2010 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 in the third quarter was forty two million dollars, down significantly from the prior year, of course, but an increase of twenty one percent sequentially. Third quarter interest expense was nine dollars million, which is down more than 50 percent 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 percent in the third quarter, up from 30 percent 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 one point twenty five billion dollars at the end of the third quarter, down more than 50 percent, or approximately one point six billion dollars from the 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 two hundred and forty six million dollars of operating cash flow with four hundred ninety one dollars million of operating cash flow generated during the first nine months of Twenty twenty. 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 multiservice sale, combined with a strong operating cash flow, enabled us to further reduce our debt balance by approximately five hundred and seventy million dollars 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 multiservice, 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 a 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 2013 Sustainability Report earlier this week, which, among other important elements, discusses our participation in these fast growing markets. While you'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 two to three years with a 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 like to turn the call back over to Eric or operator to the Q&A session.

Questions and Answers:

Operator

[Operator Instructions] And our first question comes from the line of Ben Nolan with Stifel. Please go ahead.

Ben Nolan -- Stifel -- Analyst

Hey, good afternoon, guys. Hey, I wanted to begin a little bit on on the liquidity, obviously. Good to see net debt free and benefit from the multiservice sale and also just the direction of the working capital. But where you are here, you know, obviously awash, effectively awash in cash. And I know, IRA, you mentioned looking to find ways to invest, but I'm curious how you think about investing in your own stock via perhaps the buyback program. You know, I mean, you're trading at something like a thirty five percent discount to book. And it doesn't seem like there should be any that like your book value should be pretty transparent or if the multiservice sale is a good proxy, maybe even understated. So it seems like it seems like that's a pretty compelling investment opportunity. I don't know. Maybe. Could you talk through how you see that maybe potential for buyback program?

Michael J. Kasbar -- Chairman and Chief Executive Officer

Yeah, thanks. Thanks, Ben. Look, you know, for starters, you know, we started repurchasing our shares early in the year when we you know, we thought they were undervalued and then the pandemic hit. So we wisely, as many other companies did that activity with the immediate goal being, you know, preservation of capital and liquidity. You know, 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 you know, is there is today. But, you know, our liquidity position was arguably in very different spots. And all of a sudden, it is three months later, while we were pretty confident about getting multiservice done, it wasn't completed yet. 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, but as you say, with in a very different position. So I would say our you know, our disposition is is clearly become more favorable to that idea. You're right. You know, as of today, we're trading at sixty four percent of book value, which, you know, will not complain about it or try to do something about it instead. But obviously that's hard to hard to understand. And we therefore think investing on our stock, you know, could be prudent. So that's something that we will strongly consider alongside, you know, keeping capital allocated for some of the strategic investments that we also think are important over the next couple of years. So certainly something that that we will we will consider taking some action on quickly.

Ben Nolan -- Stifel -- Analyst

All right. I appreciate that. And 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 and less meaningful. And I was hoping maybe if you could if it's possible to say, OK, of your just 14 million dollars of gross profit, how much of that is attributable to the government services Afghanistan part? Or, you know, how much as there is a wind down? How much should we think about that, that potentially playing into the gross profit going for.

Michael J. Kasbar -- Chairman and Chief Executive Officer

Yeah, you know, great question, you know, again, the last number we know publicly reported in 2000 and 19, we were at about 18 percent of total gross profit for that activity in the third quarter. That number is just under 15 percent, 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 know we expect, you know, additional declines next quarter. And I would say that will continue into Obviously, next year. You know, it's likely that that 15 percent will very soon drop into the single digits. Aside from that, you know, 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, you know, what Obviously, what will be, you know, transpiring in Afghanistan with the NATO forces over a longer period of time. But, you know, clearly many troops have already departed.

Some of the bases are shrinking in size and, you know, at activity levels are declining. So, you know, that number will come down. We don't have a crystal ball as to, you know, you know where we're wind up. We expect that, you know, some level of activity will continue. And we know 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, you know, to rebuild or build new ratable growth in some of the areas that have had a lot of potential, like our franchise.

Ben Nolan -- Stifel -- Analyst

Ok, and then lastly for me and I'll turn it over and actually as it relates to that Kinect franchise, it's growing in importance. And I'm I apologize if this is not a great question, but I 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 Kinect program? And you know, how is it that, you know, where do you get value to people?

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

Mike is the king of elevator fishing, so I'm going to let him walk then.

Michael J. Kasbar -- Chairman and Chief Executive Officer

So, you know, this sustainability report is certainly going to be, I think, you know, a great guide to a number of different things that we're doing. But, you know, natural gas is a growth area. It's a transitional fuel. You know, power is going to double over the next 30 years. So as you're looking at energy efficiency, you know, our team is a is an energy management company. So they're helping companies be better able to put their arms around it, use less, you know, consume less. So it's energy efficiency. It's build reconciliation is 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 doing 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 land, but it's complimentary. So, you know, it's a common customer base in many cases. And we're now offering, you know, carbon offsets and carbon reduction strategies, looking at wind and power, dealing with onsite solar, looking at, you know, 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 of is 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 know, you'll see some of the things that we're doing, 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, you know, our core business, our conventional fuels. So, you know, we're using our installed user base, if you will, you know, to help our, you know, loyal, you know, legacy customers figure out how to navigate through a fairly complicated, you know, set of choices. And we've got a lot of very smart people. Our energy management folks are 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, you know, 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 were looking for LNG and CNG solutions. We like the business. We ended up putting about eight of them together, but we love it and we're going to continue to grow in that space.

Ben Nolan -- Stifel -- Analyst

All right, Mike, I appreciate it. And our next guest.

Operator

Our next question comes from the line of Ken Dexter with Bank of America. Please go ahead.

Ken Hoexter -- Bank of America -- Analyst

Good afternoon, Michael and IRA and Glenn. Maybe we could just kind of follow up on Ben's last question there. So if your caller point, eight billion of revenues, you know, most right now is reselling some sort of carbon based fuel. Right. Oil to diesel to carbon-based marine air 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 carbon-based goal is to give power to customers, understand? I just want to understand what kind of investments you're talking about making with your carbon-based liquidity. Thanks.

Michael J. Kasbar -- Chairman and Chief Executive Officer

So these are you know, listen, I wouldn't we could potentially participate in production, but it is not it is not the first thing, I mean, that we would do, you know, that we do have some physical activity, but we're really doing three things. So you've got six 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 six, you know, sort of areas that we participate in terms of providing, you know, alternative energy and gas and power. We provide those services as an advisor for fees. So we're providing advisory and consulting and going in and helping companies understand some of their complex, you know, areas in terms of energy. We will act as a broker and then we'll act as a merchant. So we're participating, you know, in the same three 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 six areas. We've got three ways of engaging with the client in the marketplace. You know, for different reasons. We may participate in a different way. But, you know, it's an important part of the business.

And, you know, we you know, 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, you know, when we started our marine and aviation businesses, they were local businesses. You know, 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, you know, within our energy business. Putting the two of them together makes a hell of a lot of sense. And we're actually, you know, blending our Marine and aviation business within our energy management and carbon business. So it's, you know, 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. It's starting to happen. And we'll be looking to, you know, acquire in that space as soon as we could find the right, you know, the right the right companies to bring into the fold. But we're actively doing that's actually what that's what I would that's not the organic things of the six different parts that you're providing and So, doing.

Ken Hoexter -- Bank of America -- Analyst

It was I mentioned some acquisitions or you mentioned acquisitions you could make in that sector and 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 -- Chairman and Chief Executive Officer

It is that sourcing is the sourcing is a 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, you know, a lot going on in the market today. So that's where we plan to invest as well as our, you know, 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, you know, the ability to provide to provide a complete solution to those clients and to invest it. So it's very much in line with our overall operating strategy where it is a, you know, a blended, bundled, tailored solution. And combined with the digitization strategy that we have in the company, we feel like we are really seeing, you know, some road to scalability. You know, we've got a lot of automation and robotics. So it's you know, it's kind of exciting. And, you know, certainly the pandemic is it is what it is. But we feel like this is a, you know, a great pivot for us to accelerate it. And that's what we're intent on doing. All right.

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

Let me give you a quick one like that. You know, that can that remains a very fragmented market and obviously a growing market. So, you know, there are many opportunities in the areas that might describe.

Ken Hoexter -- Bank of America -- Analyst

Ok, so, IRA, you talked about incentive comp included in your in your target, is there a level included in that that you can provide?

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

I would say there's about ten million dollars, you know, incremental in the fourth quarter forecast as the way to look at it obviously are our expense run rate would have otherwise come down a bit because the multiservice sale, so there's somewhere around ten dollars million more in that. One hundred and forty seven to one hundred and fifty two million number that you could refer to as kind of one time.

Ken Hoexter -- Bank of America -- Analyst

And then I read 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 your thought on on the go forward, on the bad debt side?

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

I guess 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 we've been living in. So, you know, it's tough to predict, as I said last quarter. And I would have been, to be honest, a little bit wrong, you know, with lower levels of volume, which are which would continue even though we saw some increases in aviation this quarter, the level of, you know, larger credit lines, if you will, that would be outstanding today compared to where we would be a year ago, are dramatically smaller. So, you know, we've had you know, we've dealt with some bankruptcies. You know, one of the one of the steps that was thinking of providing on the call is there have been, you know, 19 restructurings in the aviation space. And fortunately, we only had significant exposure to of those, one of which we probably were probably going to get out of it without losing any money whatsoever.

But, you know, I'm saying that there's still lots of small and 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, you know, drags on and, you know, and airlines, how long it's going to take an airline to really get back on its feet and 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 zero. You know, in some cases, they're their prepayment arrangements. Now we have a few you know, existing situations are still ongoing, which we hope will result in a positive conclusion. But, you know, there you know, that's not certain yet. So, you know, I would hope that the level of bad debt expense will begin normalizing.

But, you know, I can tell you that with absolute certainty today, but we're certainly striving for that and watching the overall something we still look at every single day with the management team, you know, you know, any meaningful credit, especially a scenario where, you know, 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, you know, the second wave and the third way. Have you seen the news out of, you know, out of Germany, you know, overnight and a couple of other countries with shutdowns, again, which doesn't help. So, you know, again, our goal is to see that number normalize. You know, we're not completely out of the woods yet, but we're a lot closer than we were two quarters ago, that's for sure.

Ken Hoexter -- Bank of America -- Analyst

Ok, a great job in getting the that pay down so well and into the Metcash like they can.

Michael J. Kasbar -- Chairman and Chief Executive Officer

Before you go, I want to add a little bit of color to the M&A side. Clearly, you know, the land space is kicking into gear. Aviation's 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, you know, we really are blessed with, you know, 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 run run way and it's 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 you know, the profile in terms of recurring revenue, there is also, you know, very attractive. So, you know, over the last several years, we looking to eliminate, you know, 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, you know, in fact, expanded that. But that is an area that we like for the reasons stated. And we've got a core competency there. So in any case, that's also something. 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 where you are leveraging, you know, common capabilities and it's very complementary to our Marine and aviation business. So it all fits.

Ken Hoexter -- Bank of America -- Analyst

Thanks.

Michael J. Kasbar -- Chairman and Chief Executive Officer

Thank you, Ken.

Operator

And Mr. Kasbah, there are no further questions at this time. I'll turn the call back to you for closing remarks.

Michael J. Kasbar -- Chairman and Chief Executive Officer

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

[Operator Closing Remarks]

Duration: 46 minutes

Call participants:

Glenn Klevitz -- Vice President, Treasurer and Investor Relations

Michael J. Kasbar -- Chairman and Chief Executive Officer

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

Ben Nolan -- Stifel -- Analyst

Ken Hoexter -- Bank of America -- Analyst

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