Horizon Lines Inc. (HRZ) Q4 2009 Earnings Call January 29, 2010 11:00 AM ET
Chuck Raymond - Chairman, President & Chief Executive Officer
John Keenan - President, Liner Company
Brian Taylor - President, Logistics Company
Mike Avara - Chief Financial Officer
Jim Storey - Director of Investor Relations
George Pickral - Stephens
Chaz Jones - Morgan Keegan
Good morning. My name is Regina, and I will be your 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 speaker’s presentation, there will be a question-and-answer period. (Operator Instructions)
I would now like to introduce Mr. Jim Storey, Director of Investor Relations for Horizon Lines. Mr. Storey, you may begin your conference.
Thank you Regina and good morning everyone, and welcome to Horizon Lines fourth quarter 2009 conference call. Our speakers this morning are Chuck Raymond, Chairman, President and Chief Executive Officer; John Keenan, President of our Liner Company; Brian Taylor, President of our Logistics Company; and Mike Avara, Chief Financial Officer.
Our call today will be divided into two parts. Each speaker will first review the fourth quarter and then come back again to discuss the 2010 outlook. 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 www.horizonlines.com.
We will be referring to these slides during our remarks. I also want to remind everyone that management’s remarks this morning contains certain forward-looking statements, and that actual results could differ materially from those projected today. These forward-looking statements speak as of today and we undertake no obligation to update them.
Factors that might affect future results are discussed in our filings with the Securities and Exchange Commission and we encourage to you review these detailed Safe Harbor and risk factor disclosure. Please also note that where useful, we will continue to refer to non-GAAP financial measures such as EBITDA to evaluate our business. Reconciliations of non-GAAP financial measures to GAAP financial measures are included in the appendix of this presentation and in our earnings release and accompanying material.
With that, let me turn the call over to Mr. Raymond.
Okay, well thank you Jim and welcome everyone to our call. This morning we earlier reported fourth quarter financial results, which once again demonstrate Horizon Lines resilience in these very challenging times. Operating in a beaten down economic environment that continues to pressure volume and revenue, Horizon Lines achieved improved EBITDA from a year ago, during it’s strong cash flow, and voluntarily reduced our debt. In fact, our funded debt at the end year was about 5% below its year end 2008 level.
We aggressively managed our cost, and at the same time focused on customer service excellence. Our market share has held steady as did our rate net of fuel, and despite the drop in fourth quarter volume from a year ago, the pace of decline improved for the second consecutive quarter, so we’re cautiously hopeful that the worst maybe over and that we’re seeing signs of both economic and volume stability returning to our market. Our Logistics business also gained traction in the quarter and they produced better than expected revenue and reduced their loss rate.
Overall, we finished a very challenging year operationally strong and financially stable. We also reported in our press release this morning that our Board of Directors voted to continue our policy of paying a dividend to shareholders and at a revised rate of $0.05 per share. We believe this provides our investors with an attractive and appropriate payout while giving management additional flexibility to augment our ongoing determination to reduce debt.
Now, before I turn the presentation over to John, I want to take this opportunity, because many of our folks listen in, to personally thank them for their dedicated efforts in the fourth quarter and throughout the year. Their intense focus on managing costs, generating extra revenue and managing our cash collections, while at the same time maintaining an excellent service record for our customers, has positioned us very well for the challenges of the New Year. I am confident we’ll make progress in this environment and capitalize quickly on new opportunities when they arise.
With that, let me turn the call over to John Keenan.
Thank you Chuck and good morning everyone. Our line of business performed well during the fourth quarter, despite the ongoing economic challenges in our markets. Let’s start with a review of our volumes on slide seven.
Our trade lane economies remain weak in the fourth quarter and volumes were down in each market. Overall volume was down 4.2% from a year ago, which marks the slowest rate of year-over-year quarterly volume decline since the third quarter of 2008 when volume fell 4%, and despite the short volume environment, we believe our market share held steady in each trade-line. We finished the year with an estimated 37% share of the Jones act markets that we serve.
Turning to slide eight, revenue per container fell 2.5% due to lower fuel prices from the previous year. Our fuel prices average $443 per ton in the fourth quarter 2009, compared with $470 per ton in the fourth quarter of 2008. The impact of fuel prices is excluded, and revenue per container rose slightly from a year ago. Our ongoing focus on higher value cargo mix, partially offsetting continuing rate pressures, resulting from this extended soft volume environment.
Slide nine shows the vessel performance metrics that illustrate our focus on schedule integrity. Vessel on-time arrival in the fourth quarter was 83%, compared with 87% last year. Weather related delays were the primary factor behind the decreases in our on-time arrival. Despite these delays, vessel availability remained excellent at well above 99%.
Vessel utilization was at 61% for the quarter, down from 66% a year ago, but unchanged from the third quarter. Our decline in capacity utilization reflects continued weak economic conditions in our trade lane. I want to emphasize that our existing vessel network gives us significant EBITDA leverage, with even a modest up-tick in volume. We have assets in place that allow to us carry substantially more cargo, without requiring additional major operating investment or expense investment.
With that, I’ll hand the call over to Brian.
Thanks John. Good morning everyone. As noted on slide 11, we’ve continued our focus on organic expansion in the fourth quarter, and we’ve seen some solid growth and diversification within our customer base. I get excited about the number of new accounts moving cargo in our network, and the growth that we’re now seeing in certain segments within our Logistics offering.
We made good progress in all of our lines of business throughout the quarter. The NVO volume grew steadily throughout this year and really accelerated in this past quarter. Margin compression in the trans-Pacific trade did hamper our revenue growth, but we partially offset this by handling a growing volume of export shipments, fueled primarily by the weak US dollar. I think the good news here is that we’re seeing affirming of the trans-Pacific rates, and that will help our international business growth in 2010 and beyond.
The expansion of our LTL platform has been absolutely tremendous, and we continue to add new providers and new clients to the network each month. The line hall trucking industry as you know remains in a bit of an over capacity situation that’s been slowing our revenue growth in the full truckload division, but the empty mile reduction initiative that’s managed by this team has helped to offset some of that weakness.
As we look at the end of quarter four, we actually finished the year with over a 320,000 empty miles filled with freight and with revenue, creating tremendous value for Horizon Lines as well as Logistics. We continue to find new ways to effectively integrate multiple offerings for our major customers and as we look at closing out the year, 35% of our top 20 accounts were using four or more of the services that we offer within Logistics, and this trend is going to continue to grow with each quarter.
Turning to slide 12, let me give you a couple of specific examples that highlight our progress. Our NVO volume during the week, our volume per week in the month of December was actually double the volume that we moved in quarter two, and we added 30 new accounts in the fourth quarter alone. Customers have turned to the flexibility and the multiple services Horizon can now offer, including our ability to manage tightening capacity in certain Asia ports.
During the quarter, the active LTL customer base grew to 330 customers, and we moved 3200 shipments in the month of December. We handled over 8,000 shipments in the fourth quarter, versus 526 in quarter two, demonstrating, I think the growing acceptance this offering has seen in the market. We’ve added an online rating engine, and that’s only going to enhance the flexibility and the attractiveness of the platform.
In previous calls, I’ve spoken to you about our portrait contract landed on the West Coast. Those relationships are continuing to grow. It’s expanding the volume of cargo that we’re moving to our LA warehouse, and it’s also bringing new drayage and distribution revenues to our overall mix.
During the capacity crunch that we’ve recently seen in Shanghai, our expedited division offered air freight solutions that also included West Coast trans loading and inland distribution. Through that offering, customers were able to utilize a very economical solution to move cargo that couldn’t easily find its way aboard an ocean vessel.
In summary, I guess really 38% of our 2009 third part revenue was generated in quarter four and we saw solid improvement in the contribution of the business relative to previous quarters. I think this quarter and the growth that we saw, demonstrate the foundation that we’ve created for Logistics, and has us well positioned going into 2010.
With that, I’ll turn the call over to you Mike.
Brian, thank you and good morning everyone. I’m pleased to report that we delivered solid fourth quarter results in the face of this still challenging economic environment that continue to pressure both volume and rates. We achieved this performance by focusing intensely on three key areas. We aggressively managed costs. We took advantage of revenue enhancement opportunities, and we diligently pursued cash collection.
As a result of this, we delivered adjusted EBITDA that was up 14.2% from a year ago. EBITDA margins of 9% that were improved from 8% in 2008 and strong adjusted pre-cash flow of $47.3 million for the quarter, resulting in 2009 adjusted free cash flow of over $70 million. We also made voluntary debt repayment of $36.5 million in the fourth quarter, and this allowed us to end a very challenging year with $28 million less in funded debt, than we had a year ago; and our dividend reduction will allow us to make further debt payments during the course of the year.
Starting on slide 14, I want to walk you through the financial in a little bit more detail. As Jim has mentioned, we made adjustments to put 2009 and 2008 results on a consistent basis. Starting with operating revenue, fourth quarter operating revenue declined $15 million or 4.8% from the fourth quarter of 2008. As you can see on slide 15, the largest component of the $15 million revenue decline was a $9.3 million shortfall in volume. John mentioned that revenue loads fell 4.2% in 2008 in the quarter. This was followed by a $7.8 million decline in fuel surcharges due to lower fuel prices from the prior year.
Declines from non-transportation revenue of $1.7 million, really rounded up the major factors that impacted the overall revenue short fall. There was some help on the revenue margins, and the growth in our Logistics business, contributing $3.6 million in terms of Logistics growth.
Turning to adjusted operating income and EBITDA on slide 16, as you can see we made good progress from a year ago. Adjusted fourth quarter operating income rose 50.5% to $14 million, while adjusted EBITDA increased 14.2% to $28.2 million. Let me take just a minute and go through some of the major components.
The $4.7 million increase in adjusted operating income was delivered through the following factors: savings from our non-union workforce reductions and other cost management efforts totaling $6.8 million, reduced rolling stock expense of $1.8 million, lower dry dock amortization on our vessel dry docks of $1.2 million, and these favorable factors were partially offset by the margin decline of 4.2% with resulting negative $5.6 million impact on EBITDA. Looking at adjusted EBITDA, really the same factors I just described impacted those results.
Turning to slide 17, our fourth quarter adjusted net income totaled $3.7 million. Again, a good increase in the quarter; an increase from the $2.5 million a year ago. The net income growth was largely a result of the $4.7 million improvement and adjusted operating income that I just discussed. Interest expense rose a bit; a little bit over $500,000. You might recall that in June we amended our credit agreement, resulting in higher interest expense on our bank debt of 1.5%. I would also remind you, we are presently not recording any federal income tax as a result of the tax valuation allowance we also took back in June.
Looking at adjusted diluted EPS, it totaled $0.12, and that was up again $0.04 from the 2008 fourth quarter. This was due primarily to the $2.5 million improvement in net income. I do want to give you the full year financial highlights on slide 18. I won’t spend a lot of time on these. We’ve been through the quarterly details, but I would like to say it was a challenging year. We performed well financially in the face of this difficult environment, and we finished the year particularly strong.
Slide 19 provides a segment breakdown of our 2009 fourth quarter results, reflecting liner EBITDA of $24.9 million and logistics adjusted EBITDA of a negative $1.2 million. As Brian already noted, our Logistics business generated strong revenue in the quarter, and significantly narrowed its rate of loss.
Cash flow is presented on slide 20 and continues to be a very good story. Adjusted free cash flow for the year totaled $70.5 million, compared to roughly $60 million a year ago. The $10.7 million improvement in adjusted free cash flow, compares quite favorably with the corresponding $17.3 million decline in adjusted EBITDA. So, how did we do this? This is primarily through the planned lower capital spending for 2009, and our continued strong focus on working capital.
Capital spending was $26 million lower than in 2008. As our combined capital investments of $70.5 million in 2007 and 2008, primarily on terminal infrastructure, trains and some vessel work, it allowed to us reduce capital spending in 2009 to $13.1 million. Now we plan to return to a more normalized CapEx run rate of $20 million in 2010, which we’ll discuss in just a minute.
Working capital provided a source of cash of $11.4 million per year, compared with $13.5 million in 2008. Again, excellent performance on working capital management. This was driven primarily by our strong focus on accounts receivable and despite the difficult economy, our cash collections were very strong, and more importantly we’ve seen no deterioration in our accounts receivable aging.
Turning to slide 21, you can see at the end of the fiscal year, we continued to operate with adequate liquidity totaling nearly $105 million. We remained in compliance with our two credit facility financial covenants. Nearly 82% of our funded debt remains fixed through its maturity in 2012, and we enjoyed a very low releveraged interest rate on our debt of 4.57%; and finally we have no recapitalization needs until 2012.
In addition, we made voluntary payments of $36.5 million on our debt for the quarter, so we ended the quarter with $38.1 million less in funded debt. Then at the end of third quarter, as Chuck mentioned, $28 million lower than a year ago. Our decision to reduce our quarterly dividend from $0.11 per share to $0.05 per share will provide additional funds to further our debt pay down initiative, as well as still provide a very attractive dividend yield to our equity investors.
So in summary, on slide 22, we turned in very respectful financial performance for the fourth quarter, against continuing stiff economic headwinds. Despite the revenue and volume shortfalls, we achieved steady rates that are fueled from a year ago, increased EBITDA, and generated strong cash flow, which we used to pay down debt.
Now, this completes my financial review of the fourth quarter. So, I’m going to turn the call back over to Chuck to talk about 2010.
Thanks Mike. As we did last year, on this call we’d like to give you a sense for where we see the year ahead. First of all, we face some key challenges. These are fragile and uncertain economic climate. Higher, and let’s say volatile fuel prices and the ongoing department of justice investigation. We’ve got little control over these challenges.
What we do have, and what I believe so clearly demonstrated in the fourth quarter is the ability to manage our cost, and deliver excellent services to our customers that face with these challengers. Add the demonstrated capabilities to early signs, in our trade lines of a possible economic recovery, and we have reason for continuous optimism looking at the New Year. In short, we are well positioned to write out these continuing uncertainties and to capitalize aggressively on any mild firming firms as they develop.
With the New Year, we are also executing a measure to return to a more normalized capital spending profile. This balances our investment in the future with our debt reduction initiatives as our market economy slowly regains their footing. Lastly, we enjoy strong, long standing collaborative relationships with organized labor. The cost challenges we all face resulting from the recent unprecedented global recession really is significant.
We’ve got to be realistic about our ability, more importantly our shipping public’s ability possibility to absorb ever increasing contractual labor costs and benefits assessments. Some of these are just inappropriate for times. Our objective is to work with organize labor to address this now, so that we are better positioned in the future to mutually share in our successes and I think we’ll be successful.
Horizon Lines, is also a good start in 2010. Our volumes have held up well in the first month or so, and we are progressing pretty much on plan, but as I’ve just discussed, challenges remain and vigilant cost management is going to continue to be very important to us this year.
So with that, let’s have John Keenan to share his views.
I would start the 2010 outlook with a brief review of our trade lanes. On slide 26, we show the Alaska economic outlook. Alaska is expecting a generally flat business environment in 2010 after working its way to a comparatively mild down turn last year relative to the lower 48. We would describe the business climate as cautious.
Looking at the key indicators, gross state product is expected to rebound this year after a sharp decline in 2009. As you recall, Alaska is an energy based economy with state revenues impacted by oil prices. The permanent fund dividend which is paid out annually in the fall to every Alaskan citizen is expected to be in the same range as the $1,305 per person that was distributed in 2009. Private construction spending is projected to be flat after falling sharply in 2009, and retail expansion has slowed significantly.
On the positive side we expect our southbound seafood shipments to improve this year. Also government spending remains strong for military and infrastructure projects. Horizon Lines is well positioned in Alaska with its solid core of healthy big box retailers. We also continue to maintain strong relationships with our overall customer base as well as with the military. We remain focused on high value cargo and disciplined cost manager.
Turning to Hawaii and Guam on slide 27; there are some early signs of recovery. Tourism is a major economic driver in Hawaii and a key indicator for tourism, visitor arrival is expected to rise in 2010 for the first time in four years. The University of Hawaii economic research organization currently sees visitor arrival increasing 3.7% in 2010. Because of ongoing discounting to attract visitors, however the level of visitor spending is expected to be flat this year, but that’s still an improvement from the 12.6% spending decline in 2009. Unemployment is likely to remain historically high, somewhere just above 7% for the remainder of 2010 while personal income is seen flat to slightly down.
The military sector, another key driver for Hawaii’s economy remains stable while construction, the third main driver isn’t expected to bottom out until later this year. All in all, there is some mild optimism in the marketplace. We are aligned with financially strong customers in Hawaii and we continue to win our fair share of the military business. In Guam, all eyes remain focused on the massive infrastructure construction that is expected to begin later this year. This is in preparation for the multi year redeployment of US Marines from Okinawa to Guam, which is slated to begin in 2014. The move will significantly expand the island’s population and its supply needs. We expect our cargoes to begin feeling the impact related to the infrastructure buildup late this year or early in 2011.
Turning to slide 28, Puerto Rico is in its fourth year of an economic recession, but the government is moving aggressively to jump start the economy and shift employment and economic growth to the private sector. The Fortuno administration laid off some 25,000 government workers last year; a move that economists take to drive the unemployment rate close to 19% early this year, but the move is also designed to reduce government spending and preserve the Commonwealth’s investment grade credit rating, so they continue to get funding necessary to drive its economic stimulus plan forward.
Puerto Rico also is relying heavily on funds from the federal stimulus package to help create projects that both strengthen the infrastructure, and absorb the laid off public workers. Despite these uncertain economic conditions, Horizon Lines’ market share in Puerto Rico remains fairly consistent. We are focusing on high value cargo, schedule integrity and cost management.
Looking at the American recovery and reinvestment act on slide 29, it continues to have a mixed impact in our markets. Puerto Rico said that it’s receiving some $6.1 billion for the program and has already put about $2.8 billion of that to work, funding construction projects and providing direct payments to an estimated 85% of the island’s workforce. We have not experienced any direct impact yet from the federal stimulus program in our Alaska and Hawaii markets, although we do expect that the program could generate some indirect benefit as these moneys are put to work.
Turning to slide 30 and 31, I’d like to spend a minute reviewing our 2010 capital and dry dock spending projections. On slide 30, you can see that we are projecting approximately $20 million in capital spending this year. This represents an increase from $13.1 million last year, and is more in line with the normalized capital spending rate. The increase reflects both our expectations of a stabilizing economic climate and our desire to make some important, but prudent investments in our future. For instance, the budget includes $5.2 million for vessel modifications and life extensions. This is being used to modify the cargo carrying capability on our D7 vessel servicing Alaska. These modifications will allow to us better serve our customers, while at the same time also extending the useful life of these ships. In addition, some of the CapEx is designed for a new refrigerated container, again, to better support our customer’s needs.
On slide 31, our dry dock schedule shows that we have 10 dry docks slated for this year and a cash outlay of $24.9 million. As you can see on the slide, while dry dock spending this year is higher than the previous two years, it’s in-line with our $21.4 million on nine drying dry dockings in 2007. Our dry dock schedule each year is driven by the regulatory requirements in place for each individual vessel, based on its inspection cycle. The result is that we have more dry docks in some years than in others.
Our lines of operations are well positioned for 2010, and we are cautiously optimistic that our markets have stabilized. We are making prudent investments in our future, while at the same time tightly managing our costs. Our Edge process improvement initiative has become part of our cross-management culture. We have a team of professionals focused exclusively on Edge, and this team is continually assessing every facet of our business. We are making consistent progress and our accomplishments include reduced fuel consumption, more efficient terminal services, and reduction in vessel crew overtime. In 2009 for instance, our vessels reduced our annual total fuel consumption by approximately 6,000 metric tons, representing a $2.1 million decrease in fuel expense for the year. This is just one area of continued cost management and focus from our Edge team.
With that, let me turn the call over to Brian.
Thanks John. I’m on slide 33, folks. Continued expansion of the Logistics platform has been and is continuing to be a critical strategic initiative for Horizon, and it’s one that supports the long-term growth of the company. As we continue to grow organically, one of the essential elements of the strategy is the integration of our offerings, really allowing customers to rely upon us to provide multiple supply chain solutions. The recent expansion of our international offering really creates new opportunities for us to link the domestic and foreign supply chain, driving new revenue into multiple lines of our business.
To give you an example, during the fourth quarter, we helped one of our customers move critical domestic components to our west coast facility where they can be cross docked and we prepared them for shipment to international factories. The finished product which was produced in Shanghai was then flown by Horizon via multiple locations in North America, and we delivered these shipments to their ultimate customers using our LTL platforms. In addition to all of that, we handled their documentation, their customs clearance, their ten plus to customs filings. We were their one stop provider. I mean, we delivered what we call our 3V service, which is: visibility, velocity and value added, and I guess I should mention that this one project alone produced over $3 million in revenue for our business in the fourth quarter.
The NVOCC momentum that we’ve seen in the second half of 2009 really does indicate we’re well on our way to building an asset-like global transportation network. Our knowledge of the Pacific market, together with our network of relationships overseas, has given our customers access to the supply chain assistance when they need it the most. To give you another example, we had a customer who desperately needed to move 25 loads from Asia before Thanksgiving. Turned to Horizon for an east and west coast trans load, tag and ticket expedited solution, with final delivery to 400 book stores in the United States. Cargo got delivered on time, was within budget, and added significant revenue growth into four of our lines of business.
In both cases, those customers needed Horizon to be the critical link between their international and domestic supply chain. Our ability really to utilize our NVO service in conjunction with the integrated domestic network that we operate, will really continue to drive significant growth and efficiency in our business model as we look ahead to 2010. The Logistics offering that we now have in place is giving us new ways to connect with our core liner customers. Customers who have been in long-term relationships with our company are now able to leverage the flexibility and the breadth of service our company can now offer within the global supply chain.
Now clearly, the growth of our Logistics business is going to have some challenges again this year. The ongoing economic environment is clearly going to have an impact on the pace of volume and profitability growth, but I look back and say our fourth quarter performance indicates we’re making substantial progress. We’re committed to the Logistics sector and to the successful integration of that international and domestic supply chain, and we believe that the execution of this strategy really will solidly position us for accelerated growth as the economy recovers later this year.
With that, I’m going to turn it back over to you Mike, and you can take the 2010 financial overview.
Brian thanks. I’m now on slide 35. I want to provide some insights into our financial outlook for 2010. We believe the economy remains at this point, too uncertain to resume formal financial guidance. However, we might reconsider this position as the year progresses, but for now we’ll share the key assumptions that we’re using in our financial planning for 2010. You can see these assumptions on slide 36. Let me start with volume, rate and fuel. We are projecting volumes and rates net of fuel to be basically flat. It’s up slightly for the year as our trailing economy slowly stabilizes. Fuel prices are projected to be in the $475 to $500 per ton range for the year. Now, this compares to an average price of $343 in 2009.
Looking at our cash flow and its drivers, we anticipate solid cash flow performance for the year. I really do not expect it to match the levels achieved in 2009. This is partly due to the increased capital spending and dry dock expenditures that John discussed earlier. As economic stabilization slowly returns to our markets, we are planning to increase capital spending in a measured and prudent fashion, balancing continued investments in our business, with our need to reduce debt. I would hasten to add that if the economy fails to recover as expected, we have contingency plans to defer or reduce spending on both capital and dry docks. In addition, we expect to pay the remaining $15 million this year, of the $20 million cash component of our pending Puerto Rico class action settlement.
Turning to slide 37, similar to last year, we expect our 2010 first and second quarters to show weak comparables versus 2009. Let me take a minute and explain why. This is primarily due to expectations that rate net of fuel will be flat to slightly lower than last year in the first quarter. You might recall that we enjoyed pretty good rate increases in the first quarter of 3.3% and 2.4% in the second quarter 2009; and fuel prices will be higher than in 2009, which will negatively impact fuel recovery, even if we maintain which we intend to do, the same good recovery percentage that we have with higher fuel prices.
So in conclusion on slide 38, we expect another challenging year, but feel we are well positioned. Our business is somewhat recession resistant, serving the basic needs of our trade lanes, and our operating leverage is considerable. So with even just a little bit of help from the volume side in this difficult economy, we can generate good EBITDA growth very quickly. We do have the benefit of operating on a stable financial platform with adequate liquidity, relatively low interest rates, and again no big recapitalization needs until 2012. In 2009, we’ve demonstrated our ability to tightening manage costs and capitalize on select government growth opportunities. We plan to continue to navigate this steady course in 2010, and hope to see additional benefits as recovery takes hold in our markets.
With that, I’ll now hand the call back to the operator for our Q-and-A session.
(Operator Instructions) Your first question comes from George Pickerl - Stephens.
George Pickerl - Stephens
Mike, just a little color on the comments you just made on the first half outlook. When you said the comparables will be more challenging, were you just talking volume and price or can we infer that all the way down to the operating income line?
I think the latter George. We will face some tougher volume and particularly rates in the first half of the year that will translate down to the operating income line. As we did this year though, we expect to have a better second half, and see a pretty similar pattern to what we experienced in 2009.
George Pickerl - Stephens
But if you take the adjusted op income and first half of 2009, you think it’s going to be lower than the first half of 2010?
Yes it will, George.
George Pickerl - Stephens
Okay. Brian, on the Logistics side, quickly, was it profitable in December?
We actually had a good month in December, very, very close to break-even for us in December. So again, as I mentioned, during my remarks we really saw solid progress in the quarter. It’s continued here into January as well.
George Pickerl - Stephens
So do you think Logistics could be break-even for the full year, I guess I should say.
I think given the way that we allocate costs, I don’t suspect that it would be profitable here in 2010.
George Pickerl - Stephens
So can we maybe talk about that for a second? I guess the simple question is why? Is it something where you’ve built up the infrastructure and your costs are ahead of your revenue, or is it something where it’s just a very competitive rate environment where the customers are going after and you just aren’t seeing the top line profitability.
I think it is absolutely a combination of both. We have obviously put in place structure that allows us to provide the kinds of service that our customers are looking for, and what we obviously need to do is drive a significant volume of revenue through that network in order to generate profitability. So we need to generate incremental revenue here in 2010. Simultaneously, we face some rate compression pressure in 2009 in the pacific theater, as well as in the trucking sector here in the domestic US. That’s improving, but it’s going to continue to be a pressure point for us in 2010.
George Pickerl - Stephens
Maybe Mike, if I could go back to you for one more, then I’ll get back in line; the press release mentioned an increase in labor expenses. You may have mentioned it earlier on the call too. If you take out the legal expenses, you’re on about $20 million per quarter SG&A run rate. Can you maybe give a little guidance or a little color of what you think that will be in 2010?
George, let me make sure I understood your question. Did you ask about labor or legal expenses?
George Pickerl - Stephens
I’m asking about SG&A.
SG&A. Okay, in the fourth quarter of 2009, we did a great job throughout the cost structure, but especially on the SG&A line. We have really incorporated that improvement we made in the fourth quarter into our 2010 plans, so you should see continued improvement in 2010 on the SG&A line.
George Pickerl - Stephens
Okay, but still then on the labor line?
In the labor line, you’re seeing an increase, is that your question, George?
George Pickerl - Stephens
Mike, let me handle that. I think there’s two pieces. If you any increases in labor George, one of them are assessments related to the west coast, maintenance, and benefits which we are seeing and all other participants in IOWU plan or parts, members of the PMA are seeing, so we do have an impact on those assessments. There are man hour assessment and a tonnage assessment over the west coast facility. So that is one area where you’ll see an increase, and there are some increases in assessments, also in the port of New York and New Jersey which are independent of the typical 1%, 2%, or 3% labor wage increases that you see in the various unions that we have here caught and bargaining agreements with.
John, thanks for the clarification. Again for 2010, we’re expecting flattish and improvements really versus 2009 on revolved hedges.
Your next question comes from Chaz Jones - Morgan Keegan.
Chaz Jones - Morgan Keegan
I actually have Mike on with me as well. He might ask a question, but I guess one of my questions was related to operating expense in the quarter. Generally speaking, seasonally revenues come in in the fourth quarter, but we’d expect OpEx to come in in the fourth quarter as well. That didn’t happen this quarter. Can you give us a better understanding for what actually happened there? Was it fuel, was it something else?
I’ll take that one Chaz. It’s Mike, good morning. Primarily fuel, we did a very good job on all the other cost components. As you know, fuel prices increased quite a bit in the fourth quarter, reaching a height of about $500 a ton for bunker fuel just about two or three weeks ago. That’s come in a little bit now, but primarily the increase in fuel prices.
Chaz Jones - Morgan Keegan
In terms of the dividend, how much did the fact that it seems like from what you are saying on the call today, that maybe you’re not really expecting much of a recovery in earnings in 2010. Maybe the recovery is pushed out some in terms of your businesses. How much of that played into cutting the dividend?
Chaz, when we look at the dividend, we have a robust discussion amongst ourselves and obviously with our board of directors every quarter. It really is a quarter-to-quarter decision. As we look at our debt, that becomes due in 2012. We decided to talk a portion of that dividend and use it to augment our existing debt reduction efforts. I would hasten to add that at $0.05 per share, it still provides a very good return to our equity investors at the current stock price level. So I think it strikes a good balance between chipping away more at our debt structure, and also still providing a very good return I think for our people in terms of yield.
Chaz Jones - Morgan Keegan
And then I guess shifting back over to the cost discussion, do you have any bonus accruals that are going to be out there in 2010?
Well, the way our plans work, it could always be dependent on our adjusted EBITDA performance. So we’ll have to see how the year goes, and that’ll determine if there is a bonus accrual and if so in what amount.
Chaz Jones - Morgan Keegan
Mike, did you have something?
Mike - Morgan Keegan
Yes, actually I have a few here guys. On the Maersk contract, I think it’s coming due in December this year. You guys are still having ongoing discussions with them; is there anything to report on that front?
Yes, good morning. This is John Keenan. As you know, there’s a couple options that we can pursue; one is the status quo work working with a combination of another company that would support us in the TP-1, and we’re also looking as you know, evaluating our terminal options, which all come due in December of 2010. So the question really is whether we continue with the relationship and wholesaling space to Maersk or we choose to do that by ourselves; and at this time, we haven’t made that decision yet, but we expect to be in a position between 30 to 60 days to really give you a thorough update on where we’re at with our entire TP1 and Maersk strategy.
Mike - Morgan Keegan
And John remind me, I think you guys announced earlier this month that you changed terminals in the port of Oakland, moving from Maersk to somebody else. Was that at all related to the agreement that governs the TP1 with Maersk?
No, it was not. It was related to an agreement that the terminal service provider, which is APMC, a subsidiary of Maersk had with the port of Oakland. The lease expired and Ports of America has since acquired that lease and we’ve signed an agreement with Ports of America. We made that transition at the beginning of the year, and things are going well at this point.
Mike - Morgan Keegan
I just have one more for Brian on the Logistics front. It sounded like the expedited air portion of your business had a good quarter, which is fairly consistent with what some of our other companies are saying. If I recall, I think that the plan was to kind of de-emphasize expedited, in favor of focusing on LTL and global forwarding. Is that still the case? Did anything change on that front?
Mike, its Brian. Nothing has changed on that front. We did earlier this year reallocate some of the resources and focused to the growth of the NVO, and the LTL or freight brokerage business, but that doesn’t mean that we are eliminating or dropping our expedited business. It’s a part of the offering. It’s a piece that we want to be able to provide to customers at opportune times when they need it, and that’s exactly what happened in the fourth quarter, and quite frankly it’s even continuing a little bit here in the first quarter as capacity continues to be an issue in the TransPacific theater. So again, just to say, we’re still going to be in the expedited business, but there will be, and continue to be a stronger focus on NVO and LTL.
Chaz Jones - Morgan Keegan
Yes, I had two other quick follow-ups, maybe the first one for Mike. Should we kind of still be anticipating roughly about $2 million of legal expense as we move into 2010 per quarter?
No Chaz, I’m hopeful that rate starts to come down. As we look at our potential conclusion to these antitrust matters, we’re hopeful that our attorneys think it’s possible that they come to a conclusion by the end of the year. Obviously that was our hope last year too, so no sure bets on that, but we have done a whole lot of work. We’ve made some good progress on certain of the cases. So we see a reduction in that rate of spending. Internally, we’re looking at probably $8 million to $9 million; hope to do better than that, and really just proportionally to the second half of the year, but that will really depend on when we have a lot of activity around specific resolution efforts.
Chaz Jones - Morgan Keegan
Then any update on the Puerto Rico class action? I know that was awaiting court approval, and I was under the impression that perhaps that would be resolved by the end of 2009, but I haven’t seen anything out there. Is there any update there?
This is Chuck. We’ve become aware that probably one of the other charters of the Puerto Rico trade has proposed a settlement to the court, which we believe is roughly in-line with where we were. I think that’s probably going to be a positive sign, and we suspect that would start to moving things along, probably as one of the carriers that had been commenting on our settlement. I think it’s positive for us.
There are currently no further questions in queue at this time. I’ll turn the conference back over to Chuck for any closing remarks.
Okay Regina. Well thank you very much everyone for joining us. A couple of points; first of all, let me just reiterate again. We continue to see challenging times ahead. We and the rest of our industry are operating in a new reality here, born out of the downturn that we’ve been through and the uncertain recovery which hopefully we’re going to start to see trending up, and there’s early signs of that, but success is going to belong to those who see the future from this new perspective and adapt a new way of handling their business. I think we’re well positioned to do that.
At Horizon Lines we are moving forward, building on our demonstrated ability to manage our costs in an aggressive way, to maintain our liquidity and generate good cash flows, continue to pay down our debt, and to invest appropriately in the future of our customers, for our customers and our business. Let me just reemphasize one thing on the Cap Ex; we are going to spend a little bit more money this year, but that’s really in the core business. That’s as John pointed out, preserving our vessels, improving our cargo-carrying ability for our core trades; we’re not going to be making acquisitions in 2010. That doesn’t mean we won’t in some future years, but we think that the focus on serving our customers today, managing our debt, all of the things I just talked about are probably more important right now.
That being said, you heard Brian speak of visibility and velocity and value added. Clearly, we’re making good progress in integrating our traditional service offerings with new customers who are benefiting from the linkage of our growing NVOCC business and our proven Logistics capabilities, and I’d say especially in the pacific theater; that’s important for us.
So again, thank you, and we’re looking forward to talking with you again in April, and we’ll review our first quarter performance with you at that time.
Ladies and gentlemen, this does conclude today’s conference. Thank you for participating. You may now disconnect.
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: email@example.com. Thank you!