Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Matson, Inc. (NYSE:MATX)

Q3 2013 Earnings Conference Call

November 6 2013 16:30 ET

Executives

Jerome Holland - Director of Investor Relations

Matt Cox - President, and Chief Executive Officer;

Joel Wine - Senior Vice President, Chief Financial Officer

Ron Forest - Senior Vice President, Operations

Analysts

Jack Atkins – Stephens

Steve O'Hara - Sidoti & Company

Ben Nolan - Stifel

John Mims – FBR Capital Markets

Operator

Good afternoon, and welcome to Matson's Third Quarter 2013 Earnings Call. For your information all participants will be in a listen only mode during the company’s presentation. There will be an opportunity to for you to ask questions at the end of today’s presentation. (Operator Instructions) The conference is being recorded.

I would now like to turn the call over to Jerome Holland, Director of Investor Relations.

Jerome Holland

Thanks Kate. Aloha and welcome to our third quarter 2013 earnings conference call. Matt Cox, President and Chief Executive Officer; Joel Wine, Senior Vice President and Chief Financial Officer and Ron Forest, Senior Vice President Operations are joining the call from Oakland. Slides from this presentation are available for download at our website, www.matson.com, under the Investor Relations tab.

Before we begin, I would like to remind you that during the course of this call, we will make forward-looking statements within the meaning of the Federal Securities Laws regarding expectations, predictions, projections or future events. We believe that our expectations and assumptions are reasonable. We caution you to consider the risk factors that could cause actual results to differ materially from those in the forward-looking statements, in the press release and this conference call. These risk factors are described in our press release and are more fully detailed under the caption Risk Factors on pages 9 to 15 of our 2012 Form 10-K filed on March 1, 2013 and in our subsequent filings with the SEC.

Please also note that the date of this conference call is November 6, 2013, and any forward-looking statements that we make today are based on assumptions as of this date. We undertake no obligation to update these forward-looking statements, also, references made to certain non-GAAP numbers in this presentation. A reconciliation to GAAP numbers and description of calculation methodologies is provided in the addendum.

With that, I will turn the call over to Matt.

Matt Cox

Thanks Jerome. And thanks to those on the call today.

We have an expansive call today with exciting news about our ship build program and attractive private placement financing and of course the review of the most recent quarter results and updated outlook for the fourth quarter.

Third quarter results were mixed. Our core transportation services performed well despite a lull in container volume in the Hawaii market following strong volume growth in the first half of the year.

Several unfavorable items impacted earnings in the quarter as well including higher than expected transition cost at SSAT’s Oakland terminal and adverse arbitration decision in Guam and response costs and third party claims related to the molasses incident in Honolulu Harbor.

On the positive side, we continue to see strong demand for our premium service out of China, performance in Guam remain steady and logistics continues to rebound with stronger volume levels and improving warehouse operations.

Today we also separately announced a contract with Aker Philadelphia Shipyard to construct two dual fuel containerships with delivery expected in 2018. The decision to build these TVR vessels was based on our continued confidence in a long-term prospects for Hawaii. We got a lot more on this later in the call but needless to say we are excited about bringing state-of-the-art green technologies to our home trade.

And finally, we also announced an agreement for $100 million senior unsecured private placement of 30-year debt. We expect to take down the notes in early 2014 at an attractive low coupon rate of just 4.35%. Joel will speak more to this later.

Now, I would like to discuss the results for the quarter.

Turning to slide 4, you can see the financial results were off modestly from the prior year. EBITDA decreased $8.4 million in the quarter as compared to last year attributable to lower earnings. Earnings per share decreased from $0.45 last year to $040 in this quarter. Net income was half less than $2 million during the quarter, despite the numerous non-operational charges we incurred. All in all, a solid quarter.

Year-to-date we continue ahead of our 2012 pace. The first nine months have been characterized by modestly stronger Hawaii volume, flat volume in our China and Guam trades, lower results in SSAT, improved performance in logistics and lower vessel operating expenses, recall that we have been in the [indiscernible] fleet for the entirety of this year and the benefits of running this optimal configuration that flowed into our financial results.

Year-to-date EBITDA is nearly $134 million, while earnings per share has shown significantly higher levels. Some of the year-over-year improvement in EPS was driven by separation expenses we incurred in 2012.

Turning now to our individual service lines on slide 6, our Hawaii service hit a lot in container volume in the third quarter, which is off over 3% from the prior year. The down draft was seen across the board – cross section of cargo types. And we don’t believe there was any loss of market share. Based on discussions with our customers there were a couple of construction projects in the third quarter of 2012 and its in repeat in 2013.

Also we saw some inventory rebalancing in our beverage segment that resulted in lower volumes. Another driver was our household good shipper volume drops based on and shipped in the military household goods cycle.

As we mentioned on the last call we still think its too early to say that the Hawaii recovery is complete and this well is an example of the uneven nature of the market rebound. Offsetting volume decline via favorable cargo mix as compared to the prior year which resulted in higher yields for the trade and we benefited from operating a nine ship fleet throughout the quarter. Last year we were in a 10-ship fleet deployment for a significant portion of the third quarter due to vessel dry dockings.

Looking to the fourth quarter, we expect volume to be at or perhaps modestly lower than prior year in the Hawaii trade. We also expect to continue to operate a nine-ship fleet.

[indiscernible] some of the key metrics of the Hawaii economy based on recent forecast by the Hawaii department of business and the University of Hawaii Economic Research Corporation, UHERO.

With the latest releases, UHERO and DBEDT have extended their forecast through 2016. The Hawaii real gross domestic product has been a solid indicator of general container volume growth and you can that is forecasted up 4.2% for 2014 and 2015.

And predictably note for us it’s a double-digit growth expected in construction activity for 2014 and 2015. That’s in line with what we are seeing and hearing on the ground in Hawaii as several high risers are underway during the planning stages in the Honolulu urban core. There is always some lag between build and permitting and construction materials are actually shipped. So we look at the forecast uptick in permitting and hiring as positive signs moving forward.

Visitor arrivals are expected to continue to grow although its slightly slower paced than in the past three years and that’s when you expected given the high visitor counts in Hawaii today.

Before moving to other service lanes, I would like to give an update on the unfortunate molasses release that occurred in Honolulu Harbor in early September. As most of you know, we have suspended our molasses operation. The response pace was completed on September 20th and Keehi lagoon was reopened to the public the next day after the Hawaii Department of Health reported that dissolved oxygen and pH levels in the harbor and nearby Keehi lagoon have returned to normal target levels.

In early October, as we reported in an 8-K filing, we received a federal grand jury subpoena for documents related to the release of molasses. We are cooperating fully.

In the third quarter, we incurred $1.3 million in response costs legal expenses and third party claims. To be clear there was no impact to our container operations. At this early stage in the proceedings, the company is not able to estimate the future costs, penalties, damages or expenses that it may incur related to the incident.

As a result, at this time no assurance can be given at the impact of the incident on the company’s financial position, with loads of operation or cash flows will not be material.

Slide 9, shows the results for SSAT, our terminal operations joint venture. SSAT’s performance in the quarter was negatively impacted by higher than expected transition costs at the new mega terminal in Oakland largely due to a delay in getting access to one of the two new facilities resulting in significant congestion.

As a result, we booked a $2.4 million loss. We expect some of these additional transition costs to spill into the fourth quarter. So we expect a modest loss at the joint venture. Volume at the other terminals that SSAT operates were essential flat during the quarter, however, we did have some customer gains in select markets.

The investment that SSAT has made in Oakland position the joint venture well for 2014 and beyond. As many of you know SSAT is an essential component of our service capabilities and value proposition to our customers. The dedicated terminal SSAT operates provide a distinct competitive advantage for us in on-loading and off-loading our vessels as well as receiving and delivering cargo.

Turning to our Guam service, on Slide 10, container volume decreased by 3.2% in the quarter on a year-over-year basis relating primarily to the timing of select shipments. The decrease was minimal only 200 containers and it is reflective of the needed level of economic activity in Guam.

For the year, for example Guam volume is essentially flat compared to 2012. Financial results were negatively impacted by $3.8 million due to an adverse terminal operation arbitration decision related to the sale of jointly owned cranes that was triggered by Horizon’s decision to leave the trade in 2011. We expect fourth quarter 2013 volume to be about the same as last year and performance on this trade to remain steady.

Our China expedite service continues to perform well in a challenging trend specific market. We see strong demand for our expedited service and are running at essential 100% utilization for our east bound carriage. As well we continue to command a week premium in this trade as a result of a unique service offerings. Industry leading transit time, efficient cargo uploading at our dedicated terminal in Long Beach and our superior on-time performance.

Markets spot rates did drop significantly on a year-over-year basis in this trade as we expected. However, our rates did not fall by nearly the same amount in part because of the premium we command and in part because only half of our business is based on the spot rate.

During the quarter volume was down 5.3% related to an additional sale we recorded in the third quarter of 2012.

Looking to the fourth quarter, we expect to see similar volume and rate dynamics. We expect flat container volume on a year-over-year basis. And expect the spot rates will continue to contract somewhat.

Slide 12, describes the result logistics, which showed improvement over the prior year driven by higher intermodal and highway volume lower G&A expenses and continuing progress at our Northern California warehouse operations. Like many in the industry we saw margins contract a bit during the quarter of earlier year levels. But we are pleased by the 1.6% operating income margin recorded.

Due to the same factors that led to a positive quarter, we expect that our operating income margin for the fourth quarter will be 1% to 2% of revenues this will significantly surpass the performance from the same period of the prior year. Recalling the fourth quarter of 2012, the logistics incurred a $3.9 million one-time loss associated with its Northern California warehousing operations.

I will now turn the call over to Joel, who will review our financial performance and consolidated outlook for the second half of the year. Joel?

Joel Wine

Thank you, Matt.

As shown on slide 13, Matson’s consolidated operating income for the quarter was $27.2 million as compared to $34.2 million for the third quarter of 2012.

Ocean transportation’s operating income this quarter was $25.5 million, a decrease of $7.4 million from the prior year. The drop in operating income for ocean transportation was related to the low and Hawaii volume, lower China freight rates and $7.3 million in unfavorable non-operational items in three components.

First, the adverse arbitration that Matt mentioned of $3.8 million, second, a $2.2 million tax allocation item related to our separation. This $2.2 million tax allocation hurt operating income that was offset by an equal reduction to our income tax expense for the quarter and therefore did not affect our net income or EPS. And thirdly, $1.3 million in cost directly related to the molasses release.

Both the $3.8 million arbitration decision and the $1.5 million molasses release cost figures are pre-tax and did impact EPS on a after tax basis.

In addition to these three unfavorable items year-over-year comparisons were also negatively impacted by $3.1 million from SSAT’s loss of $2.4 million this quarter compared to a positive $700,000 contribution in the third quarter of 2012.

The loss attributable to higher than expected transition cost related to the expansion of SSAT’s new terminal at Oakland which Matt mentioned. These negative items in our ocean transportation segment were partially offset by freight rate and cargo mix improvement in select rates and lower vessel operating expenses.

Turning to our logistic segment operating income was $1.7 million for the third quarter 2013 an increase of $0.4 million over the prior year primarily driven by lower G&A expenses.

The next slide shows our year-to-date results. For the first nine months of 2013, consolidated operating income was $82.4 million an increase of $9.6 million or over 13% from 2012. Ocean transportation operating income was $78.3 million, an increase of $8.4 million over the prior year driven by lower vessel operating expenses, higher volume in the Hawaii trade and to the absence of separation costs partially offset by higher terminal handling expense associated with higher volume and higher general and administrative expenses and previously described non-operational unfavorable items in the third quarter.

Logistics posted improved operating income is $4.1 million for the first nine months of the year driven by lower G&A expenses and higher intermodal volume.

Looking in our condense income statement on Slide 15, total revenue increased by 3.4% on a year-over-year basis driven mostly by higher logistics volume. Total operating cost and expenses increased 5.6%, selling, general and administrative expenses increased $1.2 million mostly related to our acquisition of assets in the South Pacific.

Our effective tax rate during the quarter was 27.1% which were significantly lower than the 37.1% rate we had in the third quarter of 2012. The difference in income tax expense was attributable to the previously mentioned $2.2 million tax allocation related to the company’s separation in the prior year. We expect the fourth quarter effective tax rate this year to return to our normal rate of approximately 38.5%.

Turning to Slide 16, we continue to generate significant levels of cash from operations which is attributable to the strength of our core market positions and generally improving economic conditions.

The waterfall graphic on this Slide, show sources and uses of our cash year-to-date. We have generated $137.8 million in cash from operations for the year, $19.7 million reduced for maintenance CapEx, $19.9 million with paid in dividends, debt was reduced by $32.7 million and we acquired assets in the South Pacific for $9.3 million. The remainder of $61.9 million has increased our balance sheet cash position. We expect cash from operations to continue to be strong in the future which will bolster our balance sheet cash position.

Turning to the balance sheet on Slide 17, the company made a deposit of $111.8 million to a capital construction fund as we neared the finalization of our vessel replacement plan during the quarter. The deposit consisted of an assignment of our trade, accounts receivable to the capital construction fund. The receivables are encumbered meaning they are ours, so the assigned receivables remain embedded in other current assets on the balance sheet.

Also while the deposit has the effect of differing a portion of the company’s current cash back liabilities which led to an increase in our long-term deferred income tax account on the balance sheet the CCF deposit does not affect our current period income tax expense rate on the income statement.

Regarding debt and leverage, we ended the quarter with total debt of $289.9 million of which $12.5 million is current. Our net debt to LTM EBITDA ratio is down to a very strong level of 1.19 which continues to position as well for future investments. Overall, we remained focused on maintaining a strong investment grade credit metrics for the long haul.

Turning to Slide 18, we’re pleased to also announce today $100 million cash transaction; we believe this 30-year final maturity debt is attracted capital for the company at a fix rate of 4.35% on a senior unsecured basis, the closing in funding are expected to occur in January. The transaction demonstrates Matson’s strong access to external capital at rates consistent with an investment grade balance sheet.

As we turn into our updated outlook on Slide 19, I want to note that our outlook excludes any impact from the molasses release because such future impacts are presently unknown.

With that said, we expect Ocean Transportation’s fourth quarter operating income to be near to slightly below prior year levels driven by modestly lower volume in Hawaii, modest erosion of freight rates in China and losses of SSAT associated with Oakland terminal transition.

These items are expected to be offset somewhat by the benefit of operating our core non-ship fleet for the fourth quarter this year. We continue to expect logistics operating income to be 1% to 2% of revenues for the balance of the year base on modest volume increase, ongoing expense control and improvements in the warehouse operations. This is achieved logistics operating income performance will be a significant improvement year-over-year to the warehouse consolidation charges of $3.9 million that Matt mentioned before.

We expect our maintenance CapEx to be approximately $25 million for the year, exclusive of any progress payment or deposits associated with our new vessels. And with that, I’ll now turn the call back to Matt.

Matt Cox

Thanks, Joel.

We continue to be optimistic about our operations and prospects. While Hawaii volume hit a low during the third quarter, we remain confident in the long-term prospects for our home trade. Our China service continues to perform at a high level as we have established a strong niche in our expedited service that is reflected in the premium we command in our rates.

We are also encouraged by better ongoing results and logistics, the results have a lot of hard work we put into the business in terms of expense control and improving operations. While there was a short-term impact from the transition at Oakland. We’re excited about the expansion of terminal operations at SSAT which will better service Matson, will also meet the needs of a growing customer base.

All of these contribute to solid earnings in cash flow generation that gives us the confidence to invest in Hawaii future. With two new ships that will reinforce our market leadership position by adding a needed capacity for future growth while ensuring superior reliability the hallmark of Matson’s service.

Turning now to Slide 21, we contracted with Aker Philadelphia Shipyard to construct two new 3,600 TEU containerships which we call the Aloha-class. These vessels have been designed specifically for Hawaii and will provide us with some key operating advantages. This considerable investment totaling $418 million is financially compelling and continues our tradition of introducing the most advanced ship to our trades. We expect to take delivery of both vessels in 2018, many of you may recall that Aker builds are for newer ships that are deployed today in our CLX service. So we have a longstanding relationship with the Aker team.

The first of the two Aloha-class ships will be named in honor of the late Senator Inouye. This decision was a natural one for us. Senator Inouye left an unparalleled legacy in Hawaii history. He was a true champion of the U.S. Merchant Marine. Having a modern U.S flag containership dedicated to serving Hawaii bear his name, is an appropriate tribute to this great man. And on a personal note, while I know many in Hawaii who know the senator far better than I did, although triggered my one-on-one time with him and I consider him a true American hero.

So why now and why new ships? As I mentioned at the top of the call, we have continued confidence in a long-term prospect for multiyear growth in Hawaii. In order do best serve that market and continue to deploy in optimal main ship fleet, we need to expand our capacity over time to meet growing demand. The ongoing renewal of our Hawaii fleet will ensure that we continue to maintain our superior schedule and cargo reliability to Hawaii. We are Hawaii’s lifeline and we take that responsibility very seriously. The new builds will realize fuel efficiencies through improvement in haul and engine design and a potential to use LNG has an alternative marine fuel. The vessels will also have state-of-the-art safety and environmental systems and Ron will speak to that in a few moments.

Lastly, and as importantly, the investment is financially compelling and based on our current forecast will be accretive to earnings upon entering the trade. Our businesses generate significant cash, so we expect the strength of our balance sheet to remain in tact and to have the capacity to invest in other areas throughout this fleet renewal cycle.

And with that, I will turn the call over to Ron Forest, to discuss the specifications and capabilities of the new Aloha-class. Ron?

Ron Forest

Thank you, Matt.

We’re very excited about the Aloha-class because these vessels will meet Hawaii’s future freight demand and will be environmentally friendly. We’re building these larger 3600 TEU ships with engine design to run at a high speed would ensures timely delivery of goods. The additional 45-foot capacity and additional repair outlets will optimize our future cargo mix and allows us to better transport perishable goods to the islands. We also have designed the vessels [indiscernible] spacing to carry construction materials more effectively. These vessels will have a wider beam providing enhanced stability and loadbility while reducing ballast water requirements.

And as importantly, we will be able to navigate safely into some of Hawaii’s smaller ports. Finally, these new vessels will have state-of-the-art green technologies including a fuel efficient haul design, dual fuel engines, environmentally safe double haul fuel tanks and fresh water ballast systems. These advancements are important to Hawaii as a means to reduce fuel consumption and will result in significant emissions reductions over time.

As shown on Slide 24, we have designed the vessels and the engines to use liquefied natural gas or LNG as a fuel source. For us to utilize the LNG, there are four requirements. First, commercially available LNG and bunkering capabilities on the West Coast; second, ships big enough to accommodate the LNG tanks without sacrificing the cargo package, third, dual fuel engines and fourth, piping and tanks.

Today’s announced investment gives us two of these four components, vessel size and dual fuel engines. We have to finalize the piping and tanks components of the LNG package at a later date after we have to determine LNG is commercially available on the West Coast. If we do proceed, the additional work would cost approximately $20 million per ship and would include installation of the LNG tanks associated cryogenic piping and other related equipment. The prospect of LNG as a lower cost cleaner fuel for these vessels is exciting. Now, we certainly hope the industry matures in time for our vessel deliveries.

With that, I will turn the call over to Joel.

Joel Wine

Thank you, Ron. The vessels are a significant investment for us and when complete these new Aloha-class ships are expected to have among the lowest operating cost per TEU of any ship in the Jones Act [ph] trade. The cost efficiencies are driven by our ability to maintain enough for non-ship fleet deployment as much higher volumes in the past and also like significantly lowering our operating cost on a per TEU basis.

In addition, lower fuel consumption, lower crude costs and reduced maintenance repair expenses will be important drivers to produce meaningful savings.

In terms of CapEx timing for the investment, as the table at the bottom of Slide 25, it’s showing the new expected progress damage for the new build program. You can see that approximately 75% of the total investment comes in 2017 and 2018. As previously mentioned, we already made $111.8 million deposit into our CCF during this quarter which demonstrates that the timing of our CCF deposit will likely be different than the timing of the vessel construction progress payments for the shipyard shown on this page.

Going forward, we anticipate making additional deposits in our CCF in order to maximize the benefits of that program and no CCF deposits are likely to occur before the scheduled progress payments listed here.

Let me finish by saying that in summary, these vessels are expected to generate strong returns and have an attractive ROIC profile for the company. Overall therefore, we are excited about the shoulder value creation potential from this investment.

With that I’ll now turn the call over to the operator for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from the line of Jack Atkins of Stephens. Your line is open.

Jack Atkins – Stephens

Good afternoon, guys, thanks for taking my questions. First off, congratulations on the announcement of the new vessels and I guess my first question relates to that. Could you talk about, I know it’s early, but could you talk about where those vessels will likely be deployed, will they be in the Hawaii turnaround service or will they be in the Hawaii Guam China service?

Matt Cox

Hey Jack, this is Matt, good question. We envision the two vessels that would come online in 2018 to be deployed in our Hawaii turnaround service to the West Coast. So we have four vessels that are in that position that sail from the West Coast to Hawaii and turnaround back to the West Coast. And as you mentioned five that go to on from West Coast to Hawaii then Guam and China. So it will be in one of the two West Coast turnaround positions.

Jack Atkins – Stephens

Okay, got you. And the reason I asked that is, if you put it in the Hawaii Guam-China service that would help to increase your capacity in that lane which is fully utilized and also I would think would just enhance the fuel savings there. So could you maybe talk about the specific region why you need to have it, just in the turnaround service to Hawaii or --

Matt Cox

You’re right in pointing out that the benefits could potentially accrue to our CLX service in the form of additional capacity. First in that LA position, Long Beach position to Hawaii and then potentially out of China. It’s a main part of the economic that Joel touched on at least initially was in allowing us to stay in a nine-ship fleet as the cargo volume returns to pre-recession levels.

Jack Atkins – Stephens

Okay.

Matt Cox

In order for us to do that we would need to keep those vessels on the West Coast turnaround position in order to allow us to stay into a nine-ship fleet rather than having to go to a 11-ship fleet if we hadn’t made the investment. So while, both sets of deployments potentially rather than take is, the larger advantage comes in the West Coast turnaround service.

Jack Atkins – Stephens

Okay. That makes a lot of sense. And then Joel, as far as the $100 million borrowing, I guess the [indiscernible] replacement, could you talk about the rationale for that, is that going to used to fund the ships or the new vessels, the progress payments on those or other corporate purposes because just on the surface, it looks like you don't really have any significant capital needs that are imminent?

Joel Wine

Sure, sure Jack. Thanks for the question. The use of proceeds to general corporate purposes, let me just say from a corporate finance perspective, we knew the transaction is very attractive for couple of different reasons. First, the debt structure itself blocking in 4.35% is attractive. We do that to attract the lock-in. And secondly, getting longer duration in our capital structure is a really advantageous thing to do given the long life nature of a lot of our assets.

And then also thirdly, as pointed out structurally, we have about $100 million of scheduled amortization over the next four years and so this set of structures do not begin to amortize still, well, beyond that. So it has a very nice stead amortization schedule for us that fits well. So that’s kind of the corporate finance capital structure point of view.

But I’ll also say strategically we view it as attractive as well. It allows us the first part of our funding sources we currently have some private placed debt; we’ve got bank capacity; and we’ve got Title XI debts. So we will look to diversify that. But also from a more strategic perspective, this will enhance our liquidity profile and allow us to really maintain strong financial flexibility to continue to pursue growth investments even as we enter this significant new CapEx space. So for all those really strategic reasons and financial corporate finance reasons, we felt like this is a very good deal for us and a good transaction.

Jack Atkins – Stephens

Okay. Last question and I’ll jump back in queue. Joel, just to the point about redeploying that capital, could you talk about the internal hurdle rates but you guys target as far as deploying capital, what sort of return would you be looking for on that capital as you invest in the business?

Joel Wine

Well, as market change, cap cost of capital changes. We think right now our weighted average cost of capital for this business is in the 8% to 9% range. So we have total thresholds as we look at all of our CapEx in excess of that. And so for these new vessels, we went back to be in excess as well. And we think this one is going to be in low double-digit. So I will say in the 10% to 12% to 13% range that’s what we think where we project out and forecast out this investment return to be.

Jack Atkins – Stephens

Okay, great. Thanks so much for the time.

Joel Wine

Thanks Jack.

Operator

Our next question comes from the line of Steve O'Hara with Sidoti & Company. Your line is open.

Steve O'Hara - Sidoti & Company

Hi, good afternoon.

Matt Cox

Hi, Steve.

Steve O'Hara - Sidoti & Company

Could you just talk about the -- with SSAT and how long you expect this transition cost to continue? And then I don't know if you can kind of break this up, but I mean in terms of, what they were in the quarter and would you have been possible without that maybe it’s not as simple as that. And then in terms of the -- how should we think about cash taxes going forward with the deposit into the capital construction fund?

Matt Cox

Okay, Steve. This is Matt. I’ll answer the first two questions and I’ll leave the question about taxes to Joel to comment on.

The questions around SSAT were in part, we do see some, we observed one of the drivers and lower performance in the quarter was our underperformance at SSAT. I would say almost all of those costs that we recorded in the quarter related to the transition expenses as we open for created the single terminal from the multiple terminal turnover our operating beforehand.

We do see again some trailing costs into the fourth quarter. We expect that those would be the largely behind us as we get to the end of the year and we could – we are going to be starting 2014 without all those transition costs. And so the results would have been far better earlier in the previous quarter, we were looking at about breakeven performance for SSAT without those expenses, we would have been about at that level.

And then I’ll leave to Joel to comment on the tax question.

Joel Wine

Sure. On cash taxes and the way to think about the CCF, we’ll get a tax shield basically for the – at approximate effective tax rate of 38.5% for the amount that we deposit into the CCF fund, Steven, with one caveat, if that triggers it down into, [ph] alternative minimum tax status level, then we wouldn’t necessarily get the full 38.5% tax benefit but it would a significant tax benefits which we’ll see this year as you look at our cash flow, up in the cash flow from operation, you’ll see a significant benefit of tax add back in defer taxes.

And then on the balance sheet, what you see is an increase in our long-term defer tax liability and so effectively what’s happening, we’re getting the shield today and your trading future tax shields out in future for tax shield today. That make sense?

Steve O'Hara - Sidoti & Company

Yes, that helps. Thank you very much.

Joel Wine

Okay. Thank you.

Operator

Our next question comes from the line of Ben Nolan with Stifel. Your line is open.

Ben Nolan - Stifel

Okay, great. I had a few follow up questions. It relates to the new buildings and then also on $100 million. First of all, in the new buildings, I think you guys did a really nice job of sort of laying out with the vessel timetable is going to be like in the CapEx requirements and that’s why I think, one of the things that caught me off-guard a little bit was how little was required upfront? Is that typical of these type of transactions or could you maybe just walk me through how the negotiating process went in terms of capital outlay?

Matt Cox

Yes. Hi, Ben. This is Matt. I’ll comment and then if Ron wants to add something that I had missed will do then. Our process just to start with the last part of your question, we’ve had a -- we sent our bit package around, we’ve been, we engaged a number of ship building entities that were interested in working with us on our project and certainly the price of the vessels and the timing of those payments were part of our own internal decision-making.

But I would take part -- it’s not unusual to have a relatively nominal amount of contract signing and of course there is some mobilization by the yard but one of the factors that relates to the delay is the fact that the vessels themselves wouldn’t be delivered until 2018. Part of the reason for that is that, all of the yards are -- many of the yards we’re in discussion had fairly active backlogs of existing vessels owing to in part this resurgence of Jones Act shipbuilding associated with the energy boom and fracing. And so the yards themselves are busy on other projects and therefore won’t get started with the actual purchasing of the steel and bending and cutting until little further along in the project and another reason why the payments were delayed somewhat.

And Ron, I don't know what I missed.

Ron Forest

I think you covered.

Matt Cox

Okay.

Ron Forest

Nothing to add.

Ben Nolan - Stifel

Okay, great. And then as relates to the vessels and the design specifically, is this your own proprietary design or is it, would it done on half of the blue print of an existing Korean design or something else?

Ron Forest

Yes, Ben, this is Ron Forest. The design each shipyard that we negotiated with provided a design from the Korean partners. And it was based specifications that we required on what we wanted to ship to carry and speed. We gave a list of specifications and then they went to the Korean partners and came up with the design that was probably somewhat off the shelf and then tweaked to fit our requirements.

Benj Nolan - Stifel

Okay. That’s helpful. So, it’s not a starting from the ground up process really it’s already somewhat pretty well established in terms of the ship design aspect I suppose.

Ron Forest

Yes.

Ben Nolan - Stifel

So and then my last question it relays and it goes back to what Jack was asking a little bit. On the $100 million debt financing, that seemed to me to be really pretty favorable financing terms both in terms of duration of the money and the interest rate and any amortization. I suppose that you guys think the same but could you maybe walk me through why you maybe you didn’t do more of that and then pay down some existing debt currently or just increase the size of the deal a little bit given the pretty favorable terms that you got?

Joel Wine

Yes, Ben. It’s Joel. Thanks for the question. We basically pay down all the debt that we can that’s pre-payable without penalty. So what’s left on our balance sheet really can only be bought back and treasury has bought 50. So we are trying to replace that but similar to straight bond market debt, you got a buyback 50:50. So there is a real penalty to do that.

So you’re right. This is very attractive long duration. We’re pleased with it but this is why we manage your balance sheet -- we had a really strong investment credit metrics. So we can access discount capital but it is the downside that we can’t take out previous capital issue in the past just because of the expensive pre-payment penalties.

Ben Nolan - Stifel

Okay, that’s helpful. That does it for my question. Thanks.

Operator

Our next question comes from the line of John Mims with FBR Capital Markets. Your line is now open.

John Mims – FBR Capital Markets

Can you hear me?

Matt Cox

Yes, hi, John.

John Mims – FBR Capital Markets

All right. I have a little problem with the phone. So let me -- thanks for taking my question. Let me shift focus away from the ships for a minute and talk about operations. When you look at ocean volumes across the board for the quarter down about 6% of revenue up 1%, how much of that GAAP was mix versus peer price improvement?

Matt Cox

Yes, I don't think, it’s a combination of both. I think, let me just answer the question a little more indirectly by saying that in the Hawaii trade, we seek annual increases at the beginning of the year of modest amounts generally in line with our increases in underlying operating costs. And that’s what we did as in January of this year. And so that is certainly part of the increase. And again, the balance is really due to mix issues. We did not in the Guam trade for the last several years increase our freight rates due to the fact that Horizon had pulled out and for the time being, we felt, it was, we would wait on any future rate increases there.

So and then the China trade, we saw actually freight rate declines as we’ve been mentioning because of the competitive dynamics and so it was a bit of a mixed bag but again, the two factors I would say mix was probably a slightly bigger driver than rate increases if you look at our total revenue package.

John Mims – FBR Capital Markets

Good. That’s fair. Are you at a point now where you can start ratcheting at Guam or do you think that’s kind of stay relatively flat and is it enough to move the needle?

Matt Cox

Yes. I mean our thinking and for those that have been familiar with our story for sometime or the story of Guam, there was a significant level of interest and potential growth in Guam associated with the relocation of then 8,000 marines from Oakland to Guam and a significant amount of additional infrastructure required to accommodate those marines. That has been pushed off.

We now think that, that’s not going to happen probably before 2016 at the earliest or probably between 2016 and 2018. So we’ll certainly provide a more at the year-end call. We’ll certainly provide our views about 2014 but absent any large catalyst, we’re looking for relatively muted activity in Guam volumes at this point.

John Mims – FBR Capital Markets

Okay. One more on pricing, in the China trade certainly when you look at index rates very volatile changing kind of week to week, some of your business is contract and then you’re getting a premium on all of it. But in the spot rate, even with that premium, are you seeing the volatility week to week or you able to is your pricing a little more stable?

Mat Cox

Yes. So by way of context, about half of our business moves under annual contract that are generally done around April 30 to May 1 or May 1 to April 30. So that portion is relatively known at that period of time. The spot market, we have seen relatively low changes in our own freight rates week to week. We certainly monitor the spot rates but for our spot rate business, it tends to be significantly more stable especially during the six months a year when we’re at peak. And so, we’ve seen not very much movement. But again, we’re expecting, we’re not immune from the rate cycle. We’re expecting to move into the traditional slack season and our expectation is that our rates will moderate in the fourth quarter as they did in the previous year’s fourth quarter.

John Mims – FBR Capital Markets

Okay. But still even in the spot business, it just, it’s relatively stable but still depressed year-over-year?

Matt Cox

Our business is lower year-over-year at a rate level that is significantly higher than the overall trade.

John Mims – FBR Capital Markets

Okay. Yes, perfect. Now switching, one question on logistics, can you segment out on the margin improvement, segment out, but that’s more net revenue side? What is more -- related to cost and obviously there is an industry headwinds across the board everybody seeing that. I’m trying to see if you’re able to buy better rate now or if you’re -- the 1.6% was more of a company specific cost issue?

Matt Cox

Yes. I would say that we have seen like everyone else has seen margins under pressure and those have tightened. I would just attribute and we’re not immune from those market margin pressures. I would say that the majority of our increase relates to increases in our G&A and cost structure which we’ve been very actively managing.

John Mims – FBR Capital Markets

Okay. That’s great. And then, actually Joel, let me ask you one question about ships and I’ll turn it back over. You said, the new ships will be the most efficient in the Jones Act which make sense, but can you give a range of how big that GAAP will be versus the ships you’re replacing like x percent of your -- per container operating expense savings not relative to the industry or relative to the ship you will be taking out in the market?

Joel Wine

Yes, John. Well, let me first just clarify that these new ships will be -- we’re confident will be among the lowest in the industry. We don't obviously have debt on everybody and so I can’t say that this is going to be the lowest. So just make that. What we can say is in our own fleet on per TEU basis, we expect to have the lowest cost. And so that will be meaningful. It will be important source to the return thesis that I mentioned before. But, we’re not going to break out how much is coming from each of the individual component parts that we talked about but we will say that it will be all of them blended together will lower in a significant way across our per TEU delivered basis for containers in these new ships.

Matt Cox

And this is Matt. I would just add those savings come in two forms as I said earlier. One is the fact as you point out that the vessels that are being, that will be put in, will be replaced are nearing the end of their economic lives and these new vessels will be much more efficient on a vessel per vessel basis. But the other and large benefit is that we’ll have to operate fewer of them because we built them large enough that would allow us to operate fewer of them to carry at the same cargo package compared to where we were previously. So both of those elements create the returns that make this investment work well.

John Mims – FBR Capital Markets

Okay. That make sense. Actually I have one more on the new debt, am I right that we should see about $0.25 a year in interest expense after tax or is there some other debt coming off, I guess starting in 2014?

Joel Wine

Yes. There won’t be debt come out because of this. So if you look at our -- if our share count stays the same at 43.3 million after tax, this will be about [ph] 16 in the year on an annual basis, just a $100 million at 4.35% after tax divided by 43 --

John Mims – FBR Capital Markets

Yes, yes. That’s right, sorry. [indiscernible]. Okay, cool. Perfect. Thank you so much.

Matt Cox

Okay, thanks.

Operator

Our next question comes from the line of Michael Webber with Wells Fargo. Your line is open.

Unidentified Analyst

Hi, guys, Don [indiscernible] for Michael.

Matt Cox

Hi, Don.

Unidentified Analyst

I actually had a just one quick question about you mentioned that double-digit construction growth is a positive indicator for the Hawaiian container trade, is there a specific inflection point that we can look to or maybe another indicator that will indicate stronger outside for the Hawaiian economy going forward?

Matt Cox

No. The data that we specifically look at are construction jobs done and building premise -- we’ve always cautioned on building premises can be a lot in ways especially quarter-to-quarter, year-to-year on building premise. So we continue to say construction jobs people actually working in Hawaii in the industry that’s going to be probably your best highest correlated variable to actual container volumes. Does that answer the question you asking?

Unidentified Analyst

Yes.

Matt Cox

Okay.

Unidentified Analyst

That’s actually my only question [indiscernible].

Matt Cox

Great. Thanks Don.

Operator

Our next question is a follow up from the line of Steve O'Hara with Sidoti & Company. Your line is open.

Steve O'Hara – Sidoti & Company

Hi, thanks for taking the follow up. I guess just in terms of the dual-fuel vessel, how does that work, I mean if you, I mean, can you, how often can you kind of switch back and forth beside on a fuel for a certain period of time or you can kind of switch back and forth?

Ron Forest

Yes. This is Ron. I mean our goal would be to use LNG, if it was available all the time. But, we will have capability to switch back and forth. The ship will have fuel tank dedicated for heavy fuel oil tanks as well as distillates and LNG tanks. So we could switch back and forth.

Steve O'Hara – Sidoti & Company

Wow. So, you can potentially -- whatever [indiscernible] reported at that time?

Ron Forest

Yes.

Steve O'Hara – Sidoti & Company

Okay. And then in terms of -- if I remember back to the pre-separation kind of the Investor Day or update you had in New York. There was a talk about Hawaiian infrastructure and you had a statement not spent on infrastructure for -- they kind to missed the cycle I guess and are we any closer to kind of getting that moving again, its not like the Hawaiian light rail or Honolulu light rail maybe moving again, I mean where are we in that cycle?

Matt Cox

Yes, this is Matt, Steve. I would say there are four or five brands. We think about the construction opportunities in Hawaii, they held into several categories. One, of course, the other ones you’re pointing out which are the infrastructure which is, whether it’s water and sewer, it’s road way, it’s light rail. And we do see that in each of those cases, there are and again especially as the state finances continues to improve, there will be more spending on those public works type projects.

And again as you point out rail is back on track and we’re encouraged by where light rail is now. The second is in military construction and there -- we continue to believe that while the overall DoD budgets are impacted by sequestration and other spending, we do over the longer term fuel encouraged by the importance of the pacific and we do think that both into Hawaii and Guam over time, there will be ongoing an important military construction that will take place for that part of the economy.

And then lastly, its really in the area of private investment and that takes the form of residential high rise construction or Wahoo and other forms of remodeling and hotel either brand new hotels are a significant refurbishments and in that segment of the economy we are very much encouraged by what we are hearing to be especially in Wahoo relatively strong and healthy cycle in which – while there continues to be some surplus in building based on the current need that we are going to see a relative robust period of private investment construction.

So its really all of those together as we think about the broader Hawaiian economy and what investments are going to be made over the next 5 to 10 years.

Steve O'Hara – Sidoti & Company

Okay. And then maybe just one last one, I know it is that the auto volumes was down pretty good anything – I mean it seem like you have been kind of suspect of volumes were kind of report or kind of maybe happily surprised in the past – recent past, is that just kind of returning to normalization there?

Matt Cox

Really are two the way we think about the auto market, there are two pieces, one are the retail sales of new cars and manufacture movement of those cars. There we have seen relatively good improvement in year-over-year auto purchases relatively consistent with what we are seeing in the mainland and other U.S. markets. The bigger mover of the needle for these auto shipments are really the timing of rental car replenishments and each year depending on how the holidays fall and the agreements reach between the manufactures and the rental car companies, they tend to move in different quarters but overall not by dramatic amounts. That is over time their relatively stable although we have noted that from year-to-year they tend to move in slightly different periods. But overall, we don’t – those were not significant profits especially the rental car refurbishments of new manufacture cars are rather significant contributor to our operating results in an any given quarter.

Steve O'Hara – Sidoti & Company

Thank you very much.

Operator

Our next question is a follow up from the line of Jack Atkins with Stephens. Your line is open.

Jack Atkins – Stephens

Yes, guys. Thanks for taking my follow up question. Just back to the ships for a moment, I’m sorry, if you have already answered this. But you intend to see Title XI financing for those vessels, and sort of how does that work, do they have to be delivered to you before you can finance them through that avenue can you just talk about that for a moment?

Joel Wine

Sure. We made no decision on Title XI financing at this point Jack. And you have any time to do Title XI financing, you got to get the application underway but we advancing tends to occur in close upon delivery. So we have to start the application process relatively soon. But it wouldn’t be something that we come to conclusion and we fund it until the delivery times, we have got a number of years. So but at this point in time, we have made a decision one way or the other.

Matt Cox

But the only thing I would say is that based on the way that we are seeing the world now, I think Joel is right at preserving our ability to do that. But the way we see it at this moment these vessels are largely going to be financed through this $100 million financing that Joel mentioned and operating cash flows over the next few years before the delivery of the vessels.

Jack Atkins – Stephens

Got you. But generally speaking Title XI financing would probably be more attractive in terms of a coupon rate then down you get to the public markets?

Joel Wine

Not Jack, not dramatically.

Jack Atkins – Stephens

Okay.

Joel Wine

Little bit, but remember its secured. And so what 21 security does in your capital structure is it shows off unsecured capital. So the rest of your balance and we talked to our lenders about this a lot, the rest of your balance between a little bit some security if its not much because otherwise you lose your investment grade type profile for your unsecured debt, which is a criticail piece for us.

Jack Atkins – Stephens

Okay.

Matt Cox

And the last point I would make. This is Matt. The last vessel that the Model A, which is the last of the Aker carrier vessels that we acquired in 2006. The private placement financing net-net all in was actually less expensive for us versus using Title XI on a NPV basis.

And in part because of our preference to stay investment grade credit metrics and if you are in that position then that there is not as dramatic an incentive to use Title XI relative to more marginal borrowers.

Jack Atkins – Stephens

Okay. That’s great. That’s very helpful. Thanks for the time.

Matt Cox

Thanks Jack.

Operator

(Operator Instructions) And I’m not showing any further questions at this time. I would like to turn the call back over to Matt Cox for closing remarks.

Matt Cox

Okay. Thanks for all of your interest today. We look forward to catching up with you at our year-end call and Aloha. Thank you.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone have a good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Matson's CEO Discusses Q32013 Results - Earnings Call Transcript
This Transcript
All Transcripts