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Executives

Jim Storey - Director of Investor Relations & Corporate Communications

Charles G. Raymond - President and Chief Executive Officer

John V. Keenan - President of Horizon Lines, LLC

Brian W. Taylor - President, Horizon Logistics, LLC

Michael T. Avara - Senior Vice President and Chief Financial Officer

Jacob M. Wegrzyn - Senior Vice President and General Manager, Puerto Rico Division

Analysts

Jonathan Chappell - JPMorgan Securities, Inc.

Kevin Sterling - Stephens, Inc.

Chaz Jones - Morgan Keegan & Co.

Horizon Lines, Inc. (HRZ) Q4 2008 Earnings Call January 30, 2009 11:00 AM ET

Operator

Good morning. My name is Regina, and I will be you conference operator today. At this time, I would like to welcome everyone to the Horizon Lines Fourth Quarter Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' presentation, there will be a question-and-answer period. (Operator Instructions). As a reminder ladies and gentlemen, this conference is being recorded today, January 30, 2009. Thank you.

I would now like to introduce Mr. Jim Storey, Director of Investor Relations for Horizon Lines. Mr. Storey, you may begin your conference.

Jim Storey

Thank you, Regina, and good morning, everyone. And welcome to Horizon Lines fourth quarter 2008 conference call.

Our speakers this morning are Chuck Raymond, our Chairman, President and CEO; John Keenan, President of our Liner Company; Brian Taylor, President of our Logistics Company; and Mike Avara, our Chief Financial Officer. Also on hand today are Jacob Wegrzyn, Vice President and Head of our Puerto Rico Trade Line, and Catherine Waltz, Vice President and Controller.

Our call today will be divided into two sections. Each speaker will first review the fourth quarter, and then come back again in the second section to discuss our outlook for 2009.

Before we get started, I want to remind everyone that copies of our press release and slide presentation accompanying this conference call, are available in the Investor Relations section of our website at horizonlines.com. We will be referring to these slides during our remarks.

Lastly, I would like to draw your attention to our Safe Harbor statement, and remind everyone that on today's call, management will make certain forward-looking statements that it believes to be a reasonable at this time. Actual results could differ materially from those projected today due to known and unknown risks and uncertainties.

A discussion of factors that might affect future results is provided in our filings with the SEC, and we encourage you to review them.

Now, let me turn the call over to Chuck Raymond.

Charles G. Raymond

Okay. Well, thank you Jim. My central message this morning is that our performance in fourth quarter, as well as for the year, demonstrates the resilience in the long-term viability of our company, the benefits our unique market position, and the soundness of our capital structure and business plans.

I am not trying to minimize the economic challenges that we tackled in the quarter, or those that Horizon Lines in every other operator in our industry continue to face. They are formidable. I do believe that Horizon is well-positioned to meet these future tests, and our fourth quarter performance supports this.

The lion shares of what we transport are considered to be necessities by the people we serve in Puerto Rico, Hawaii, Guam and Alaska. We also continue to build our Horizon Lines logistics business, which represents a compelling platform for future growth.

Now, looking at the quarter, we achieved $314 million in revenue, adjusted EBITDA of nearly $25 million and related earnings of $0.09 a share.

In our liner business, volumes declined due to the accelerated second half slowdown that we saw in the Hawaii market. Despite this environment, we were able to modestly increase our average revenue per container across all of our trade lanes. We also paid down more debt in the quarter, $37.5 million, just as we said that we would do. And in fact, we voluntarily paid back a total of $60 million on our bank revolver during the last three quarters of the year.

So we finished 2008 properly capitalized, operating with good liquidity, and performing well within our financial covenants.

Full year adjusted EBITDA of $130 million and earnings per share of $1.02 was actually at the high-end of our last guidance. Compared to 2007, our year-over-year fall-off in EBITDA was 19%, with a business volume fall-off of 3.4%.

Now, two points I'd like to make on that. First, the fall-off in volume in '08 was actually far less than what many other businesses have experienced. And the EBITDA deterioration, while disappointing, is actually indicative of the positive operating leverage this company will enjoy in the future, as these markets especially in Hawaii and Puerto Rico we cover.

Regarding Horizon Logistics, as you saw we recorded an impairment charge, totaling $19.4 million in goodwill and customer contracts primarily at Aero Logistics. However, we remained convinced that the acquisition of the Aero was the right strategic move for us. It has provided a platform for diversified growth, serving the high touch, high value segments of the Logistics business.

As I've said before, Logistics will be successful, that will come in small building blocks. More than ever, we believe Horizon Logistics will be will a primary catalyst for long-term growth once today's economic storms subside.

I want to recognize all of our Horizon associates for their contributions during the very challenging fourth quarter and challenging year. Our team demonstrated true professionalism, as they focused on driving cost out of the business and delivering industry leading service excellence to our customers.

They remain focused in the midst of our restructuring, which by the end of this month will have reduced our total non-union workforce by more than 16%. So, thank you for cutting out this difficult work in a sensitive and professional way.

I'll now turn the call over to John Keenan, who will take you through our fourth quarter line of business. John?

John V. Keenan

Thank you, Chuck, and good morning everyone. As Chuck said, the fourth quarter was a very challenging one, but our liner operations performed relatively well in the face of these challenges. Let's start with the review of our fourth quarter volume.

As you can see on slide seven, total volume decreased by some 4,159 containers or 5.8% for the quarter, compared with a year ago. This was a result of ongoing economic weakness in Puerto Rico and a further weakening in Hawaii. We believe that our market shares held fairly steady with Alaska at 41%, Puerto Rico at 33% and Hawaii, Guam at 36% and 51% respectively.

Puerto Rico remains mild in a recession and a fall-off in Hawaii's storage driven economy accelerated in the fourth quarter. Hawaii's troubles reflect the deepening recession in the U.S. mainland and Japan, which are the primary sources of Hawaii's storage business.

Commercial construction in Hawaii also weakened for the same reasons offset somewhat by continued military spending on productized housing. Guam's volumes were off slightly.

Alaska continued to show strength as volumes remained up modestly over last year, driven in part by consumer spending and ongoing big-box retail expansion. In September and October, every Alaska resident received a permanent fund dividend payout of $3,269 from the state government, which stimulated purchases during the fourth quarter of the year.

Looking at unit revenue on slide eight, overall revenue per container rose 7.4%. When the impact of fuel prices is excluded, revenue per container was up 2.3%, which helped partially offset the volume decline. Our continued focus on high value cargos such as food stuffs, pharmaceuticals and other items that both refrigerated and dry goods containers helped drive the gains.

Slide nine shows our vessel performance metrics. Our vessel availability continued at near perfect levels and on-time arrivals improved four percentage points from last year despite adverse weather conditions in the Alaska and Puerto Rico trade lanes.

Capacity utilization of 66% compared with 74% a year ago, reflected both increased capacity in the Puerto Rico trade lane and slowing volume related to the economic downturns in Hawaii and Puerto Rico.

I think it's important to note however that while fourth quarter utilization was down from previous year, our capacity will provide us with strong operating leverage when the economy improves.

Our vessels continued to achieve improved on-time arrivals of 87% in the fourth quarter while still maintaining strict fuel conservation discipline. In fact, as noted on slide 10, we were able to reduce fuel consumption through innovation and daily monitoring of key performance indicators, part of our EDGE initiative.

Our average cost for fuel in 2008 was $532 per ton. So, this translates to a cost savings of approximately 5.3 million. We launched EDGE in 2006 to force our culture of continuous improvement in profits and system efficiencies, and it is working.

As another example, in our terminal operations, we've been able to improve upon cost per lift, angles for Aero by reducing or eliminating courses of downtime in Stevedoring operations.

In Puerto Rico alone, we improved our cost per lift by 6%, representing an annual savings of approximately $466,000.

Turning to slide 11, we continued to make important investments in our infrastructure in 2008 to help increase efficiencies and position us for future growth. These include cranes for Guam, which you see in the photo on the slide... on page 11, cranes for Alaska excuse me, Hawaii and Alaska, upgraded terminal operations in San Juan and Honolulu, and new trackers for our logistics business that are fully compliant with Southern California's Clean Trucks Program.

With that let me turn the call over to Brain Taylor.

Brian W. Taylor

Thanks John. Good morning, everyone. I'm going to briefly review our fourth quarter accomplishments and challenges, as we continued to develop our logistics framework. And then, I'll hand the call back over to Mike, who will review the quarter four financials.

As noted on slide 13, we continued to execute our organic growth strategy in the fourth quarter, really focusing our efforts on the growth and diversification of our account base. While the current economic environment really did slow our progress somewhat, I continued to be very encouraged by the number of new accounts that are moving cargo in our network, as well as the diversity of the industry segments in which we are winning this business.

Let me take a moment to give you a couple of examples. Last quarter, I spoke to you about our large port drainage contract we landed on the West Coast. We've now been able to expand our relationship with this premium tire manufacturer, and are now handling several new East Coast lanes moving into 2009.

The business relationship if we have grown with our largest apparel customer, continued to expand during the last quarter. We moved our 800 intermodal shipment from our facility in Lexington, North Carolina. And just a few weeks ago, we were given the opportunity to handle an increased volume of traffic to match up with cargo we are now moving back in to the Carolinas.

During this past quarter, we also took possession of 76 new ProStar tractors for the Sea-Logix trucking operations. Our West Coast facilities, combined with a green truck fleet now position us to handle larger and more complicated distribution programs, as the economy begins to rebound.

This past quarter also marked the official launch of our NVO business, and we are seeing both export and import business growth. Clearly, the downturn in global trade, and in particular, the Asia market will create some head winds for this segment. But it remains a key component of our growth strategy, and one that we will pursue aggressively in the months ahead.

No company likes to lose a major account, but when you do, it really only serves to reemphasize the importance of account diversification. We did post a setback this quarter, with the loss of a large Aero Logistics customer. And I guess I take some comfort in knowing that the decision to discontinue working with Horizon was not based on our service, but rather on a global agreement that this customer's new parent company already had in place with another logistics provider.

And while we've had really so much success expanding our volumes with several new key customers, this one account represented a significant portion of the Aero business, and replacing this revenue and margin so quickly, following the acquisition in '07, is going to take a little time.

The write-down of goodwill that we took for the loss in the quarter is substantial. But as Chuck said, we believe that the Aero acquisition has created a base platform for our logistics offering, and given us the opportunity to develop the expertise and strategies necessary to drive the premium logistics service offering forward.

And with that, I'll turn the call over to Mike.

Michael T. Avara

Okay. Good morning everyone, and thank you Brian. I want to start-off by first saying that we're pleased to achieve solid fourth quarter results despite the extremely challenging economic and volatile fuel price environment.

So kicking off with our financial highlights on page 15, adjusted EBIT of $24.7 million was at the very top-end of our quarterly range, which would have been in interested in our full year guidance of 120 to $130 million.

Our free cash flow was a great story. Adjusted free cash flow of nearly $60 million for 2008, far exceeded our 2000 guidance range of $29 million to $36 million. Fourth quarter unadjusted free cash flow came in at nearly $48 million.

In addition, we did make voluntary revolver payments of $37.5 million during the quarter, bringing the total since the second quarter to $60 million. We did borrow $30 billion after our fiscal year-end to fund our January 2, 2009; that's the least payment of about $23 million on our three ships in Alaska, and also to provide for a seasonal working capital needs.

We remained in compliance with our two credit facility financial covenants, and we completed actions to prepare for what we think will be a fairly difficult 2009. We executed a reduction in force, we conducted impairment charged analysis, resulting the write-down of intangible assets, goodwill in one vessel, as well as some surplus equipment. And I'll quickly review both the restructuring charge and impairment charge on the following two pages.

Page 16 reflects the summary of our restructuring charge. We conducted analysis of our business to realign and right size the organization to better reflect our economic challenges in 2009, our business needs and our strategic direction. Reduction in positions, severance costs, and cost savings are reflected here on this page. So I won't read them to you.

Turning to page 17, an impairment is deemed to occur if book value exceeds the fair value of assets tangible and intangible assets. So in light of changing and really still deteriorating economic conditions, we conducted our normal, fourth quarter assessment of tangible assets, intangible assets and goodwill to determine if any evidence of impairment exists. A summary of the $25.4 million impairment charge reported in the fourth quarter is presented here, and reflects those specific items where we found evidence of impairment.

Looking at operating revenue on page 18, revenue for the fourth quarter slipped slightly, down $1.3 million or 0.4% over 2007. However for the full year, revenue increased nearly $98 million or 8.1% versus last year.

Page 19 provides more information on the factors that drove the change in revenue. I'll just touch one a few of them here because john, who's already previously mentioned some. But you can see in the fourth quarter, revenue for container grew by about 7.4%, and this improvement is reflected both in higher fuel surcharges as well as the rate and mix improvement totaling $15.5 million, rate net of fuel was up 2.3% also as John mentioned.

Conversely, lower volumes resulted in about $15.4 million deduction in revenue due to decline of loads in Hawaii, Guam as well as Puerto Rico.

For the year, rate per box increased by $333 or about 6.8% as then reflected in both improved fuel surcharges as well as higher rates totaling $93.6 million. Rate net of fuel improved for the year slightly more, up 2.45%. We did have revenue from our acquisitions that we did last year, contributing nearly $26 million of the $98 million revenue increase. The volume decline of 9,600 loads or 3.4% caused a reduction in volume, versus last year of $35.1 million.

Operating income results on page 20 are adjusted to exclude the impairment charge, the restructuring charge, antitrust related legal expenses and union severance expense. And just normal, we have a reconciliation in our appendix of all the various measures.

So for the fourth quarter, adjusted operating income declined by $11.2 million or nearly 55%. And this really was due primarily to the volume decline that we discussed having approximately of $10.6 million impact on our fourth quarter operating income.

Turning to year, adjusted operating income fell by $28.1 million or 29.5%. And again the lion's share of this is attributable to our volume decline debt $24.1 million. We did have our vessel lease expense for the five new ships for the full year in 2008 and this caused about $8.4 million impact. And the rate net of fuel improvement that I've mentioned previously helped when the operating income line delivering margin of about $13 million.

Adjusted EBITDA reflected on page 21 declined $11.2 million for the quarter and $30.5 million for the year. And of course the same factors I just discussed regarding adjusted operating income also affected adjusted EBITDA.

Turning to page 22, in order to present the results on a comparable basis for net income, we've made a couple of additional adjustments. 2007 loss, when extinguished from the debt of $38.6 million, this of course was in conjunction with their refinancing last year. And also deferred tax free evaluation benefit of $7.4 million for the year have also been excluded really to put the results on an apples-to-apples basis.

So on this basis, adjusted net income in the fourth quarter of $2.8 million was down nearly $8 million from 2007. We had interest expense savings of about $1.1 million, but this really only partially offset the decline in adjusted operating income that I discussed of $11.2 million.

However, our refinancing last August continues to pay benefits. Our blending cost of debt has been reduced from 5.2% to 4.25% over the last year. And those rates continued to fall as we take advantage of falling LIBOR rates on the floating portion of our debt.

For the year, adjusted net income was $30.8 million, 15.1 million behind net of last year. And the adjusted operating income shortfall that I mentioned of $28.1 million more than offset lower interest expense of $9.2 million in 2008.

Adjusted diluted EPS on page 23 declined $0.23 or nearly 72% on a reduced net income, but benefited partially from our lower share account.

You might recall that we acquired 3.8 million shares between August 2007 and January 2008. And this brought our average diluted shares outstanding down to 30 million shares versus 33.1 million shares in the fourth quarter of 2007.

So for the year, adjusted diluted EPS fell by $0.34 or 25% as the lower net income more than offset these reduction shares outstanding.

Page 24 provides a segment breakdown of our 2008 results. Liner EBITDA of 25.5 million for the quarter and 132.5 million for the year, you will see reflected here and logistics EBITDA of a negative 0.8 million for the fourth quarter and a negative 2.5 million for the year.

Recall that the elimination you see reflected here reflects services the logistics business. This providing to the liner company and that's currently at a cost basis through 2008.

Turning to free cash flow on page 25, we are especially pleased with these results. Adjusted free cash flow, again nearly $60 million, was $33 million better than 2007. And that improvement was driven largely by improved working capital an area of constant focus in our organization, providing additional $26.4 million of cash flow versus 2007.

We had lower vessel lease payments of $21.1 million. You might recall we have had a mid-term balloon payment in 2007 that we did not have this year. And there was not a bonus payment in 2008 that occurred in January of 2007. And that, of course, would have been for our bonus for 2006, paid in January of 2007.

In offsetting all these positive factors, of course, is the EBITDA shortfall of about $30.5 million. Net cash flow was down $0.7 million, but that was $87 million better than 2007 and you can see the factors list here on page.

Turning to page 26, as reflected here, we're in the fortunate position of having ample liquidity. We are in compliance with our credit facility and financial covenants, have a low weighted average interest rate on our debt and no recapitalization needs until 2012.

So to wrap up, we delivered good results in the face of financial crisis and global recession. We are intentionally managing our costs, searching for opportunities to selectively grow revenue, conserving cash and paying down debt. Although the severity and duration of financial crisis and economic turmoil cannot be predicted, we feel Horizon Lines is very well positioned to weather the storm.

Although we are of course solid disappointed with our adjusted EBITDA of $130 million for the year relative to our initial expectations, I would point out that these 2008 results are only 20% off are all-time record of adjusted EBITDA of $163 million achieved in 2006.

So with that, I'll now turn the call back to Chuck to provide insights into 2009.

Charles G. Raymond

Thank you very much Mike. Okay, well for the year ahead, we planed our business based on expectations of a rather deep ongoing recession. Most of markets will continue to be impacted by high unemployment, reduced consumer spending, and shrinking consumer cost, as I guess. And although somewhat insulated, we're certainly not immune from these factors. That being said, it feels to me that financially our year 2009 should be not too far from our 2008 results.

Respectable earnings will come from fewer container loads at a lower costs. This could even yield somewhat stronger cash flow than last year. Notwithstanding our guarded confidence here, we're kind of approaching financial guidance with the same caution that made transportation companies, Old Dominion Freight Lines being the latest are exercising so far this year.

Given today's extremely volatile business environment, at least for the time being we're going to hold off providing annual guidance until we have a little bit more clarity. The government's first snapshot of the U.S. economy in the fourth quarter is expected to show at its weakest point in 26 years. So, we want to be careful about the guidance issue.

Who today can predict how this broad economic stimulus plan is actually going to turn out, and also how fast we'll be able to recognize new trends. So, we will revisit the guidance issued at the end of the first quarter. And at that time I hope to have a better view of the year. We may then be able to give you a full year guidance as we have in the past. Overall, I think this a prudent approach.

Now, today, I am able to give you a little sense of how the business is performing so far this year. We're now about half way into the first quarter. And at this point, we believe our core business assumptions for this year and for this quarter are valid. Our volumes so far are very close and our costs are inline with our 2009 plan.

Now let's think about Horizon Lines ability to ride out today's economic storm, something that's obviously a concern. So let's consider these characteristics of our business.

First, we need to differentiate between domestic and international shipping. International shipping of all types is immersed at its biggest crisis in decades. Remember, we primarily served the U.S. domestic markets, which aren't exposed to the extreme supply and demand turmoil that is causing havoc today in most of the foreign trades.

Secondly, we carry the basic needs of our trade lanes. Most of our cargos are vital to the populations in our markets, so we have a fairly stable base of demand for our container shipping business. Actually the same applies to many of our logistics services.

And third, we have a strong long-lasting customer relationships. Many are a diverse, large, consumer and industrial product companies, including the likes of Costco, Wal-Mart, Johnson & Johnson, Safeway Stores and Lowes Home Centers. We also serve several agencies of U.S. Government, including the Department of Defense, the U.S. Postal Service and the U.S. Mint. And finally, we remain financially stable. As Mike pointed out, we enter 2009 with appropriate liquidity and with no recapitalization needs until 2012.

As you know, Horizon Lines faces another challenge, that in the form of the ongoing Department of Justice anti-trust investigation. As you can appreciate, I can't comment specifically on the situation, except to reiterate to our company and to our followers that Horizon Lines continues to fully co-operate as the investigation moves forward.

I will say that we are fully cognizant of the cloud of the uncertainty this matter presents to you. And to obligate constituents and we're as anxious as you are to remove this uncertainty very soon.

Lastly, we announced last evening our Board of Directors continues to support our regular $0.11 quarterly dividend. Our dividend policy is to provide cash back to investors in appropriate proportion through our earnings and free cash flows. We believe that current rate is correct given the future prospects of our company.

Now with that, let me turn the call back over to John Keenan, and talk about the liner of business for 2009. John?

John V. Keenan

Thanks again, Chuck. Turning to slide 30, Alaska was our strongest economy and best performing trade lane in 2008. The fact that Alaska is in oil driven economy, however, it's a cause for some concern with oil prices down sharply from 2008 highs. Some forecasts are predicting recession this year, and unemployment is expected to decline modestly. But any decline would mock the first contraction in 22 years.

The Gross State Product, which is heavily impacted by oil, is predicted to be down 26% this year, after showing about a 5% gain in 2008.

Unlike most other states however, Alaska is sitting on a pretty big cushion in the form of a $6 billion state budget surplus and about a 29 billion permanent fund. The state uses the permanent fund to pay out annual dividend checks to residents, and the size of the payout is based on a rolling five year average, although the fund has contracted due to losses on investments, sizeable checks are still expected to be distributed.

Meanwhile, major retailers are continuing with their expansions and remodeling plans, as Alaska has by far the highest per capita sales per square foot of any state, about $429. Alaska's other big export, fish, will be somewhat impacted by another reduction in the Bering Sea pollock quota for 2009. The reduction of 18.5% is less than last year's, and we more than offset the related volume decline with strong business from the retail sector. So, we expect this impact on our business to be minimal.

So for Alaska, we believe we can grow our volumes from last year in this environment by continuing our liner sales with strong growth oriented customers and focusing on high value cargo.

Turning to slide 31, we believe Hawaii will continue to be a challenge in 2009. This state has slipped quickly into a recession amid a rapid drop-off in tourism, and weakening commercial and residential real estate.

The tourism decline is expected to continue in 2009, with the most recent projection from the University of Hawaii Research Organization, calling for further decrease of nearly 6% on top of about a 10% drop in 2008. Partially offsetting this is the continuation of privatized military housing construction. We expect our volumes in Hawaii to contract about 5.7% from 2008, as Hawaii works its way through this economic slump. Again, we will focus on high-value cargo and service excellence.

We expect our Guam trade lanes to be flat as declines in consumer discretionary purchases are offset by sustained volume of private and military construction projects.

Puerto Rico on slide 32 is entering its third year of recession, with forecast calling for a continuation of double-digit unemployment, high inflation, growing bankruptcies and the government budget running on a $3.2 billion deficit. Nevertheless, sentiment seems to have improved somewhat. Lower fuel prices have helped spur some consumer spending. And as we predicted the election of Pro-business Governor, Louis Fortuño that lays that out has injected some much needed optimism into this business climate.

The new government has declared a fiscal state of emergency, and is proposing measures to increase revenue, and reduce government spending through a series of corporate and private tax increases, and government hiring increase.

The jury is still out on what specifically will result from this, but the business climate is hopeful. We are projecting volumes to be down in this trade lane, but at a lesser rate than the 4.8% decline in 2008. In this environment, we are keenly focused on customer relationships, service delivery, and cost efficiencies.

Briefly on slide 33, you can see our capital spending plan, which has been significantly reduced from 2008. Our spending in 2008 has positioned us well for this environment, and we do not believe 2009 will require spending beyond our planned $13.5 million level. We are also planning on seven dry dockings in 2009 as outlined on slide 34.

The cash course is projected approximately 18 million, and two of these services on our new D8 vessels will require only underwater inspection in lieu of actual dry dockings.

Finally, a few brief updates on page 35. We have put our plans for launching a coast wide service on hold until the economy improves. We believe that operating coast wide service remains a viable source of future revenue. But we also believe that current economic conditions make it very difficult to launch a profitable service at this time.

In terms of legislative updates, we are hopeful that clarification of the harbor maintenance tax will be resolved by Congress this year. We feel a revision of the tax is a necessary condition to ensure the future viability of a coast wide service.

Regarding Title XI funding, we also continued to work with the maritime trade unions, and our new Congress to increase funding and rationalize utilization criteria for financing the future of U.S. shipbuilding.

For fiscal year '09 $48 million, for new Title XI loan guarantees has been appropriated. Liberalizations fund is relatively quiet. We have no bargaining agreements expiring until June 2010.

And with that, I would like to hand this over to Brian.

Brian W. Taylor

Thanks, John. I am now on slide 37. The Logistics team is continuing to work aggressively on a number of items that will be key growth drivers for us in 2009. Our plan calls for the continued execution of our organic growth strategy, building and strengthening relationships with an increasingly diverse number of customers in our four key lines of business.

Our revenue in Mexico grew over 20% in 2008, making this one of the key bright spots. And we certainly continued to se many new opportunities on the Horizon in this area. Global events and volatile fuel prices during this past year have many companies looking at migrating a portion of their manufacturing capacity back to places that are much closer to the North American shores.

Our well-positioned cross border infrastructure in Laredo and our experience handling in country trucking in Mexico have us deeply involved in a number of major bids that could turn out to be a very significant wins for us in '09.

Through the lease of the new tractors for Sea-Logix, we're already leveraging our green truck initiatives to build a much larger book of drainage business on the West Coast. This position us to offer customers really a cost effective drainage solution that can be integrated with warehousing, distribution and a very broad inland transportation network.

We continued to see good business wins in our alternative energy segment. We expect this to ramp up even faster as the new administration places a heavy focus on alternative energy development and implementation.

The freight brokerage business is building new momentum and we'll provide solid revenue growth in 2009 as well as a contribution toward the reduction of empty miles for Horizon Lines. Each time we capture a new opportunity to fill one of these empty lanes, we generate new revenue for Horizon Logistics and a margin and efficiency gain for the Horizon Lines inland transportation network.

Finally, our new NVOCC initiative is often running and we're well on our way towards building a non-asset based global transportation network that will provide solid growth and profitability in the coming year.

I'm now on slide 38. There is no doubt that the growth of our logistics business will have some challenges this year. Like many other companies we expect the ongoing economics slump to have an impact on the pace of volume and profitability growth in the near term. And we certainly recognized that organic growth in a down market is going to take some time.

We remained solidly committed to the logistics sector, and the current economic challenges are not going to cause us to alter our course to change the strategy. This is a large fragmented market with excellent long-term growth attributes. And we now have all the assets in place, with little requirement for additional investment. And the successful execution of this non-asset logistic strategy will solidly position Horizon for accelerated growth as the economy begins to recover.

Now, let me turn this back over to Mike for our 2009 financial review.

Michael T. Avara

Okay. Brian, thanks again. Our 2009 as you heard project to be a very difficult year, and we've budgeted accordingly. On a relative basis that I think Horizon Lines is pretty well positioned.

Our volumes and rates should hold up much better given the lifeline nature of the products we carry, our limited competition and transportation alternatives, and extensive and then sometime decade long relationship with our customers.

So, I'm reviewing our financial outlook for 2009. I really want to focus on three things: our volume rate and fuel assumption is to give you some insights into how we're thinking about these for 2009; our assumptions regarding the economic factors impacting our trade lanes as we continue to try to give you more of the key metrics that we think drive our business results; and our cash and cost savings initiatives both already underway and plan for the future and events that are needed.

And finally, I'd like to wrap up with just a reminder on the convertible note accounting effective in 2009, which does change.

So turning to page 40, let's take a minute and review our volume, rate and fuel assumptions for 2009. Overall, we expect volumes to decline by about 2.5%, but at a lesser rate than last year's decline of 3.4%. John walked you through these on a trade lane basis. So I won't do that again here.

Rates net of fuel modest increase 2.3%. We're really are not too bad, given what we think will be a tough 2009. Fuels would be much, much better in 2009 than it was in 2008, and you see our projections here about 250 to $275 per ton, which represents debt of 50% of more decrease from the average price last year of $532 per ton.

Page 41 provides a recap of the major economic forecasts reach for our trade lanes. John's already walked you through these, so I won't go through them again. I would note though in light of the financial crisis and global recession and the result of visibility for everyone into 2009, we did engage some consultants to help us validate our volume and rate assumptions. We had these folks run a series of regression analysis against 2000 through 2008 actual results. It's really fine the best predictors of both our volumes and rates. Some of these folks are pretty highly regarded from MIT and transportation consulting firm. And our final budget assumptions reflect these findings of course.

So turning to page 42, the overriding exposure to our budget is severity and duration of financial crisis and the global recession. In addition, there are some trade lanes specific risk that John mentioned. Cost and cash savings initiatives completed, and underway are expected to generate expense savings of $13.2 million, and net cash savings of $35.7 million as you see on the chart on the bottom right.

In addition, in the event 2009 would have to turn out worse than expected, like all good companies we've already enacted initiatives and brought the series of additional contingency plans to protect our 2009 budget.

Turning to page 43, I wanted to remind you one more time as the year begins there would be new accounting or convertible notes, basically the coupon rate is not reflected in our case on a quarter, but rather the higher rate that would be in place for a non-convertible instruments. And you see the impacts, although its those interests and EPS reflected on this page.

So with that, I'd like to now turn the call back over to Regina for Q&A. Regina?

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Jonathan Chappell of JPMorgan.

Jonathan Chappell - JPMorgan Securities, Inc.

Thank you. Good morning, everybody.

Unidentified Analyst

Good morning.

Jonathan Chappell - JPMorgan Securities, Inc.

Chuck, my question has to do with potential opportunities, and how you're going to balance capital allocation this year. Now obviously, on one hand it's good to be liquid, and I'm sure paying down debt is probably a primary usage of cash right now. But I'd also think on the other hand, primarily in logistic side, both you and Brian painted a very optimistic picture longer term for that business. There is got to be smaller logistics companies that owners will capitalize as Horizon Lines is in 2009, may present an opportunity to attack on some eventual accretive acquisitions. How are you thinking about taking opportunities that time rate still good to kind of play it safe?

Charles Raymond

Well, Jonathan everything you say is right. However, with the economic uncertainty that we are in right now, just the real question about whether this is going to be a kind of a W type of recession or is it kind of the peak V and how long it's going to last, those are really kind of scary things. And I think that what we're going to do is sit on a side lines in terms of acquisitions until we really see these things play out.

That being said, we're always studying the sector and look towards the opportunities may be. So if things improve quickly, that could be an option for us. But we'd have to be very sure of the accretive nature of those acquisitions. And we'll keep them on our radar screens. But I won't expect that we'll make it.

Unidentified Analyst

Jon, just interest to add to that, we clearly have built our strategy for '09, and even going into 2010, surely based on organic growth. And as Chuck mentions, really acquisitions are not playing a role in that at the moment.

Jonathan Chappell - JPMorgan Securities, Inc.

Got it. My other question has to do with two of the initiatives that have been spoken a lot over the years, both TP1 and EDGE, and just a little update on the developments of those and the expected savings, Mike did give us on page 42 the EDGE savings and it looks like that's going to fall short of the '09 guidance. Just want to make sure the original '09 guidance. I'm making sure of that. And then obviously, with the way that the international containership market has been developing, what are the thoughts on TP1, it was originally supposed to breakeven in 2009, is that pushed out to 2010 based on the economy?

John Keenan

Jonathan, good morning, this is John Keenan. I'll take the question on the TP1, and the TP1 strategy, which as you know we feel we successfully implemented, and that as you'll recall was putting the five new non-Jones Act vessels into our Transpacific service. And that allowed us to cascade vessels throughout our fleet, to put the largest C8 in Puerto Rico and give us that capacity as you saw in the capacity utilization, and at the same time free up shifts for the coast wide service.

So, in terms of that we are complete, and we've met our goals and objectives on TP1. And it has also allowed us to have the incremental capacity in each of the trade lanes, not just in Puerto Rico, but also for the Hawaii, Guam trade lane if that continues to improve. And with the... on the EDGE, I'll let Mike, I'll turn the EDGE question back over to Mike.

Michael Avara

Jonathan, let me just be clear on EDGE. As we look at incremental benefits, we have built into out internal budget $3 million, and we're targeting at least an additional 2.8. John and I, and at the EDGE teams have $5.8 million of ships already underway. And we hope we can do much better than that.

That's probably a bit down from some of the numbers we've talked out previously on a year-over-year improvement. But remember, some of that came from the revenue and margin side. So although we're getting some real benefits in terms of the fantastic business intelligence system with the contraction volume you don't really see those incremental year-over-year.

Jonathan Chappell - JPMorgan Securities, Inc.

Okay. That's great, and very helpful. Thanks to everybody.

Charles Raymond

You're welcome.

Operator

Your next question comes from the line of Kevin Sterling with Stephens, Inc.

Kevin Sterling - Stephens, Inc.

Good morning, gentleman.

Charles Raymond

Good morning, Kevin.

John Keenan

Hi, Kevin.

Brian Taylor

Hey Kevin.

Michael Avara

Hi Kevin.

Kevin Sterling - Stephens, Inc.

Congratulations on a good quarter in such a difficult environment. Chuck, let me start while it's clear Puerto Rico is in a recession and it has been in a recession, would you say things have maybe stabilized?

Charles Raymond

You know we are fortunate that we have Jacob Wegrzyn here. Jacob, as you know, is our VP and GM for the Puerto Rico Trade. He has been a business leader in Puerto Rico for his whole life. And I'll let him give you a chart position, what you see is happening right now in the marketplace?

Jacob Wegrzyn

Good morning. No, we've seen that there is some competition with the barge company servicing Puerto Rico, and some softening in that. There could be some impact on that to us. But the cargo, the type of cargo that we tend to carry doesn't lend itself easily to move migrate to that barge service. So, I think that we're well positioned to maintain ourselves, we've got a strategy in place for our market share. I think we're going to continue that for 2009.

Kevin Sterling - Stephens, Inc.

Okay. Thank you.

Michael Avara

Kevin, getting to the root of your question of how is that economy looks down there? What's the consumer attitude? We talk about this quite a lot in the last couple of days while Jacob's been up here. And I'd say that we were characterized that Puerto Rico for the last three years as John Keenan mentioned is been in a recession, and it had terrible inflation down there. It was as high as I think 16% one year.

So in way the Puerto Ricon citizen is kind of learn to adjust their spending patterns. And they had to do that faster obviously than the rest of the U.S. or Hawaii or even Alaska had to. And with fuel coming down during the second half of last year, we actually saw our business to pick up in the fourth quarter, even a little bit ahead of brilliant plan.

So I think you are on to something good. There is probably a little stronger consumer confidence right now that we had and certainly the elections in Puerto Rico have improved the thinking locally that the government finally is now aligned, the government finally gets it. And it was, we'll start to make some tough decisions to bring that economy back inline.

Kevin Sterling - Stephens, Inc.

Okay. Thank you. Chuck, along those lines launch too, you've got, you mentioned you've got six weeks under your belt now for the first quarter. And I realized I understand that you don't want to give 2009 guidance and I think that's prudent. But maybe you can talk a little bit about the trends you are seeing for these six... that you've seen so far in these six weeks. And I am particular in the rest of your commentary, which are seeing in your two major trade lanes, Hawaii and Puerto Rico.

Charles Raymond

Well, I'll tell you what, that's John Keenan's business. And he knows it even better than I do. So I'm going to let John answer that question for you Kevin.

John Keenan

Kevin, we've... as I mentioned we've taken a very conservative approach in both Hawaii and Puerto Rico. When you look at the volumes that Mike has outlined on the slides. We're seeing the business for the first six weeks of the year similar to what we expected. We're seeing Hawaii continuing to be soft. We're pleased with what we see in Puerto Rico. And in Alaska there is some softening, but we have a lot of weather in the Pacific North-West that had our volumes off from what we had forecasted. But generally businesses so far in '09 is trending the way we anticipated.

Michael Avara

Kevin, it's Mike. If I could just add to that. I'd remind you that our first quarter is our seasonal weakest quarter. And as we look at this procession playing out, I think the year-over-year comps will be most difficult in the first quarter and then to a sort of lesser extent in the second quarter. If we do get some recovery late in 2009, our comps should be better in the second half of year. So, I would ask you to take both business into consideration.

Kevin Sterling - Stephens, Inc.

Okay, absolutely, thank you. Mike, I've got a question for you. Can you walk us through, you talked about it being in compliance since your financial covenants and can you just remind us what your covenants are?

Michael Avara

Yeah, let me just turn you back to that page Kevin in the presentation. So back one to page 26, we have two financial covenants, our interest coverage ratio and our senior secured leverage ratio. So, if you look at the end of our fiscal year end 2008, our interest coverage ratio was 4.41 times at the end of fourth quarter, higher than required 3.50 times minimum and our senior secured leverage ratio at 1.80 time is under 3.50 times maximum. So we're completely in compliance with those two calculations.

And remember, of course, these are on a LTM basis. So we have going into the first quarter, of course, nine months in the bag so to speak through the actual results from the five or nine months.

Kevin Sterling - Stephens, Inc.

Okay. And as you look forward, as you guys have done your plan, you are in compliance with your covenants?

Michael Avara

Absolutely, yes we are in compliance.

Kevin Sterling - Stephens, Inc.

Alright, great. John, got another question for you. At what level of vessel utilization would you consider parking of ship?

John Keenan

Well, Kevin, that's a great question. Certainly, the only trade that would really apply to is Porto Rico. We have evaluated that several times. Most recently, just last week we changed the scheduling on our gas vessel. So we can slow that down and see some savings from a fuel and operational expense. It have to be significantly below where levels are today, Kevin. So we're comfortable that we've got the right assets and the right services right now.

Kevin Sterling - Stephens, Inc.

Okay. Thank you. And John, just kind of a follow-up. You mentioned you have seven vessels scheduled for dry dock in 2009 versus two in 2008. Well, I think your expenses is projected to be less. Can you walk through why that is?

John Keenan

Well, Kevin, when you look at first of all two of the vessels are doing an underwater survey in lieu of dry docking, so they actually don't go in the yard and take a typical length of time that you would take say 25 to 30 days, and the expense is significantly less than those two vessels that are going in, right. So and the others run around the typical expense that we've seen in the... from our dry docking. So it's on track of what we spend historically, Kevin.

Michael Avara

So Kevin, if I could just build on John's response. You might recall for expense purposes, we amortized the spending over the 2.5 year period between each dry dock supplier by the Coast Guard. So you had carryover from other periods. The cash flow is obviously reflect the actually cash payment.

Kevin Sterling - Stephens, Inc.

Okay, great. With all concerns about credit, are there any issues regarding your customers and bad debt expense?

Michael Avara

No, we fortunately have not had any major problems there. You saw how strong our cash flows are. And our past two receivables are exactly the same as they were last year.

Kevin Sterling - Stephens, Inc.

Okay, great. One last question. Looks like you guys are continuing to tighten your DSOs. And right now, when I look at your free cash flow yield, just kind of doing some back on envelope of math, it's north of 70%. So, very, very impressive and you continued to improve your working capital or your tightening your DSOs. How much more do you think you can continue to squeeze days off your DSOs?

Michael Avara

Well, working capital has been intense focus for us for a while and you saw the improvements that' we really halfway come through this statement of cash flows in the fourth quarter. We think there is another day or so, we can get out of there. And we're going to look at working capital on a broad basis. I have got gentlemen who's going to lead that team and look at positive concrete basis and various other non-AR, nor-AP working capital maths.

Kevin Sterling - Stephens, Inc.

Okay. Thanks Mike. And gentlemen, thanks so much for your time today. Once again, congratulations on a good quarter I think in a very difficult environment.

Michael Avara

Thank you, Kevin.

Charles Raymond

Thank you, Kevin.

Operator

Your next question comes from Chaz Jones with Morgan Keegan.

Chaz Jones - Morgan Keegan & Co.

First question here would be, I know this would be immediate, but will there be any potential impact looking out here maybe 2010 and beyond on business volumes related to any type of infrastructure stimulus that's trying to get through Congress?

Charles Raymond

Well, that's a good question and we are obviously alert to that. If you read through and I feel you probably have Chaz, the allocation of where that money is going to go. The answer is yes. I mean there is money specifically targeted to the island of Puerto Rico and there is a letter from President Obama to Governor Fortuño that lays that out as his desire. There is also money headed to Hawaii and Guam and Alaska.

So that's certainly will help. And, of course, as the general economy picks up those items that we move out of Puerto Rico, some of the pharmaceuticals and electronic products as an example would start to pick up.

Chaz Jones - Morgan Keegan & Co.

Probably doesn't hurt that the President has ties to Hawaii.

Charles Raymond

Well, that helps that. The other thing is that, a Senior Senator, Senator Inouye is also the head of the Senate Appropriations Committee. And so, typically he'll be very sensitive to Hawaii's needs.

Chaz Jones - Morgan Keegan & Co.

Looking at the volume assumptions for 2009, could you give us any sense as to whether you know that assumes any type of improvement in I guess either overall volumes or just the general economies of three individual trade lanes by the end of 2009.

John Keenan

Chaz, this is John Keenan. When we put together the budget and the assumptions that Mike shared with you, we took I think a very conservative view on what we thought the markets would do and it might touched on. And we engaged some consultants to help reduce some regression analysis and also look at very current. When I say current within what was going on November and December in each of the markets to make sure that we're planning as appropriately and forecasting as appropriately as we could. So I would say it's a conservative if anything that would probably I would look to see some upside in the numbers that we outlined.

Chaz Jones - Morgan Keegan & Co.

Okay. That's helpful.

Michael Avara

As on this point, I would add to that that we did especially in Hawaii as I mentioned build some additional downside in the first half of the year. So the first half volume assumptions for Hawaii was... is a bigger reduction than the second half to bring the blended 5.7.

Chaz Jones - Morgan Keegan & Co.

Okay. Just on tax rate, I know was I have in earnings guidance in 2009, but could you give us any just back of the envelope, direction on tax rate in 2009?

Michael Avara

Sure, Chaz. When we look at 2009, we expect the tax rate to probably be in the 12 to 15% range. I think if you use something like that for your assumptions, you should be safe.

Chaz Jones - Morgan Keegan & Co.

Okay. And then the last question I had here, just in terms of equipment, whether it be containers or the chassis that are on lease, in 2009 are you going to continue to let those leases expire as they come off and is that a cost savings that's already being capture in the EDGE program?

Charles Raymond

Chaz, yes. What we've done in 2008 is we've taken out approximately 3,000 pieces of equipment in our network. And you'll see some of those savings in our '09 plan. And in '09, we also have plan for further removal of equipment especially if equipment is coming up on lease expirations to take out of our network.

Chaz Jones - Morgan Keegan & Co.

Okay.

Michael Avara

Chaz, I would just remind you that as part of our impairment charge we already recognized what we think the cost will be to return equipment. So we won't have that expense that we would have going when you return equipment.

Chaz Jones - Morgan Keegan & Co.

Okay, understood. Well, I appreciate the time. As always, guys best of luck in 2009.

Charles Raymond

Thank you.

Unidentified Analyst

Thank you.

Unidentified Analyst

Thank you.

Operator

And there are no further questions at this time.

Charles Raymond

Okay. Well, let me just wrap up here, Regina and thank you. And thank you everyone once again for joining us today. After all this discussion, I'd just like to leave you with you a couple of fundamental investment considerations that remain constant. We've talked about some of these before. First of all, Horizon Lines remains a lean domestic shipping company. We're serving a group of trades where we are actually the economic lifeline connecting them to the Continental U.S.

Secondly, as we pointed out we continued to cultivate lasting partnerships with these leading brands of the nation. And that's supported by enviable levels of service and that's throughout of our company.

And then third, as Brian has talked our logistics platform offers a real solid launching path for organic expansion and long-term asset like growth. We are committed to long-term service of our trades. We started this business back in 1956 and we intend to sharply increase our focus on serving customers with exceptional shipping and logistics services as we've done in the past despite any short-term distractions.

So with that, thank you for your interest and attention. And we'll discuss our business with you again on our first quarter earnings call. I believe that call is currently scheduled for the morning of Friday, April 24th. And thank you again, Regina.

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.

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