Matson's (MATX) CEO Matt Cox on Q1 2014 Results - Earnings Call Transcript

| About: Matson, Inc. (MATX)

Matson, Inc. (NYSE:MATX)

Q1 2014 Results Earnings Conference Call

May 06, 2014, 04:30 PM ET


Jerome Holland - Director of Investor Relations

Matt Cox - President and CEO

Joel Wine - SVP and CFO


Jack Atkins - Stephens, Inc.

Kevin Sterling - BB&T Capital Markets

Ben Nolan - Stifel

Steve O'Hara - Sidoti & Company, LLC

Michael Webber - Wells Fargo Securities


Good afternoon, and welcome to Matson's First Quarter 2014 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, Investor Relations.

Jerome Holland

Thank you, Kate. Aloha and welcome to our first quarter 2014 earnings conference call. Matt Cox, President and Chief Executive Officer; and Joel Wine, Senior Vice President and Chief Financial Officer are joining the call today from Oakland. Slides from this presentation are available for download at our website 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 eight to 14 of our 2013 Form 10-K filed on February 28, 2014 and in our subsequent filings with the SEC.

Please also note that the date of this conference call is May 06, 2014, 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 thank you to those on the call. We had steady and largely uneventful first quarter. Our businesses performed as expected driven by sustained demand and freight rate strength in our core markets. We also had ongoing improvement in our warehouse operations as part of our Logistics Group.

However, as mentioned on our last earnings call, first quarter's financial results were negatively impacted by the timing of fuel surcharge collections. The impact was significant, but because it’s solely due to the timing of collections and not the level of collections, we expect to recover this offset over the balance of the year.

Looking forward, we continue to see encouraging prospects in Hawaii and in a strengthening broader economy that will drive volume growth in our Jones Act trades and in Logistics. We expect improvement at SSAT and continued high demand for our premium expedited service offering from China.

As such we are reaffirming our late February outlook and expect that full year Ocean Transportation operating income will be near or slightly above the 2013 level which was approximately $104 million net of a roughly $10 million litigation charge we booked in the fourth quarter of 2013. And more on that from Joel later in the call.

Tuning to slide four. You can see that our businesses generated EBITDA of over $27 million and EPS of $0.08 in the first quarter 2014. Both measured declined on a year-over-year basis due to the negative timing impact of our fuel surcharge collections in the quarter. I would also like to note that the first quarter is historically our lowest in terms of earnings and cash flow.

Volume in the Jones Act trades and in Logistics are typically stronger in the second and third quarters ahead of the fall holiday retailing season. As well our volume out of China is impacted in the first quarter by the traditional Lunar New Year slowdown, but essentially we ran at full utilization over the rest of the year.

With that all said, we still generated a significant amount of cash this past quarter, declared a $0.16 per share dividend and improved our liquidity and leverage ratios.

Tuning now to our Hawaii Service on slide five. As I mentioned before financial results were negatively impacted during the quarter by the timing of our fuel surcharge collections, Hawaii container volume decreased modestly due primarily to lower eastbound backhaul freight. However, rate increases in cargo mix improvements in the trade fully offset the impact of lower volume.

Despite the decline in container volume in this past quarter, we continue to expect our Hawaii container volume for the full year to be flat or slightly above 2013 level. This outlook also takes into the consideration the expected launch of Patia's second vessel which we now believe will be sometime in the fourth quarter.

And we remain confident in the Hawaii economy is in a multiyear recover in line with forecasted say GDP growth and increased construction activity which I will discuss further in a moment. With the modest uptick in the volume expected, we should remain in an optimal main ship fleet deployment throughout the year and achieve high utilization rates for our vessels.

The next few slides detail some of the key metrics of the Hawaii economy in particular the construction industry as forecast by the Hawaii Department of Business, Economic Development and Tourism, otherwise known as DBEDT, and the University of Hawaii Economic Research Corporation or UHERO. You can see here that real GDP is forecast to rise significantly in the next three years as we enter the middle stages of this Hawaii recovery.

A quick glance, back to 2011 shows how the economy has gained strength and while this has been driven by a very significant increase in vendor arrivals. And while vendor arrival activity is expected to remain at a high level going forward, the rapid growth in arrival is largely behind us. The next wave of growth is coming from construction activity. As construction continues on Hawaii's Honolulu rail project and as developer place their capital to work to meet the chronic shortage of primary residential housing.

A recent study by DBEDT concluded that 5,200 housing units will be required annually from 2013 to 2020 meet pent-up demand. Particularly, noteworthy is that forecasted double-digit growth expected in construction activity for 2014 and 2015. Our Hawaii trade thrives on construction and infrastructure spending, which have yet to hit its full cycle.

And right now the epicenter for construction activity is Honolulu's urban core. Within the core which extends from Waikiki in the east to the downtown Honolulu area, 17 condominium projects are in the midst of development, with five projects under construction, six obviously permits in 2013 and an additional six projects in the planning stages.

The first of the condo projects are schedule to be completed by year-end which is when we would expect to see some addition volume to materialize including a 214 in rental project and a 206 unit luxury condo talent. Another 341 unit condo project is also well underway and three projects totaling over 900 units are expected to break ground this year.

In addition, there are commercial developments underway totaling over $1.6 billion. And as these projects come on line, we are poised to meet the incremental containerized freight shipping demand whether it comes from large appliances, cabinetry, household goods or commercial grade products.

Slide eight offer some additional color on the Honolulu Rail Transit Project which I know many of you have been following. The graphic depicts of expected route of the project which will -- is expected to cost $5.2 billion. The initial section of the rail transit system from Kapolei to the Aloha stadium is schedule to open in 2017 and the entire system from Kapolei to Ala Moana Center is expected to be fully operational in 2019.

According to the Honolulu Authority for Rapid Transit or HART, the project is progressing well with nearly 90% of the construction still ahead. And while much of the construction is comprise of concrete, aggregate steel which we don’t carry, we do expect some container volumes related to this project.

More importantly, over the course of the next decade, we expect to see volume gains associated with higher employment level, greater consumer spending and the development of retail and residential centers around the rail hubs.

For a greater historical perspective, we want to show on slide nine Matson container volumes on TEU equivalent to last 35 years. You will note that there have been several multiyear freight cycles at work and we are currently near the trough of the most recent cycle. As we have mentioned before we believe the Hawaii economy is in a multiyear recovery led currently by construction and this chart certainly demonstrate that past recoveries have been sustained over extended period of time which bodes well for our prospects in the coming years.

Turning to our Guam Service on slide 10, container volume increased by 3.4% in the quarter on a year-over-year basis. The modest increase was related to the solar installation project. For 2014, we expect continued steady economy activity and anticipate modestly improved volume compared to 2013, assuming no new competitors entered the market.

Moving to the next slide, our China Expedited Service continues to perform well in the oversupply Transpacific trade lane. During the first quarter, our container volume decreased by 3.5% due to an additional sailing falling in the quarter of this year. The chart on the upper-right depicts the continued year-over-year decline in quarterly average Shanghai containerized freight index spot rates industry in line with our expectation.

However, Matson's rates demonstrate continued stability, interim and sizable premium supported by ongoing customer demand for our niche premium expedited service.

As a reminder about one-half of our China business is based on annual contracts with the other half based on spot market. And I am pleased to report that we recently concluded our annual contracted cycle retaining all of our customers and achieving a small increase in our contracted rates.

In contrast, the international carriers not only failed to achieve any increase in their contracted freight rates for the third consecutive year, but also experienced some rig erosion this year. That said, looking at the reminder of 2014 we expect to see flat container volume on a year-over-year basis as our ships run essentially at full capacity from China and we expect our average rates to approximate 2013 levels.

Tuning now to slide 12, SSAT, our terminal operational joint venture contributed $200,000 in the first quarter, flat with last year's first quarter performance. The dedicated terminal SSAT operates for Matson a distinct competitive advantage for Matson in receiving and delivering cargo and enable our industry leading vessel turn times.

At the end of January, we moved our open terminal to operations to SSAT mega terminal and the results reflect the continuing optimization of operations as well as some incremental gains in lift volume. We are also beginning to realize terminal efficiencies and are pleased to extend our value proposition to some new customers. For 2014, we are expecting modest profit at SSAT.

Slide 13 highlights results of Logistics. In the first quarter of 2014, operating income improved by $300,000 over the prior year, as severe weather impacted domestic intermodal volumes partially offsetting warehouse operating improvements, increased highway volume and lower G&A expense.

For the balance of 2014, we expect operating income to modestly exceed 2013 levels driven by continued volume growth, ongoing expense control and improvements in our warehousing operations.

I will now turn the call over to Joel for a review of our financial performance and consolidated outlook for 2014.

Joel Wine

Thank you, Matt. As shown on slide 14, Matson’s consolidated operating income for the quarter was $9.9 million as compared to $18.7 million for the first quarter of 2013. Ocean Transportation operating income decreased $9.1 million during the first quarter of 2014 compared with the first quarter of 2013.

This decrease can be attributed primarily to the timing of fuel surcharge collection. Other factors included lower Hawaii volume and lower channel freight rates.

Also for the quarter, the company incurred $1 million in legal expenses related to the molasses released into Honolulu Harbor in September 2013. Partially offsetting these decreases to operating income where fright rate increases and cargo mix improvements in Hawaii and lower outside transportation costs.

On slide 15, looking at our condensed income statement, total revenue was essentially flat, declining by less than 1% while our operating expenses increased by 1.5%. In the last 12 months, we generated $160.6 million of EBITDA. Lastly, our net income and EPS included a slightly higher a normal effective tax rate for the quarter of 41.4%. We still expect our annual effective tax rate for 2014 to approximate 38.5%, although we know that quarterly fluctuations above or below this percentage presently occur.

Turning to slide 16, you see a summary of our balance sheet. As mentioned on our previous earnings call, we issued $100 million of senior unsecured 30-year notes at a 4.35% fixed rate on January, 28. With the new issuance, our total debt at the end of the first quarter increased to $383.6 million.

However, our net debt to LTM EBITDA ratio remains very strong at less one time. In addition to our low leverage, we have excellent liquidity with $229.7 million of cash and cash equivalence as of March 31.

As we have said previously, if we did not make any strategic investments between now and when our new vessels are delivered in the third and fourth quarters of 2018, we would use this balance sheet cash plus free cash flow generated over the next four years to pay for our new vessels, with any shortfall in cash being funded from our $375 million bank revolving credit facility, which has no outstanding borrowings at the moment. Under this scenario, we do not expect the need for any additional capital raising transactions to fund our new vessel capital expenditures.

Slide 17 is a recap of how our cash flow have been deployed in the last year. Over the last year, we generated $190.8 million in cash from operations, $33.8 million was used for CapEx of which $25.4 million was maintenance CapEx and $8.4 million was paid on our two new vessel contract signings.

We also paid $27.2 million in dividends and we paid existing debt by $17.6 million. The net result was the total cash increase of $118.7 million from new sources and uses over the last year. This increase in cash amount excludes the additional $100 million of cash raised from the new debt issuance in January of this year.

With that, let me now turn to slide 18 where we affirm our full year operating income outlook for 2014 previously provided in late February. Our outlook excludes any molasses release impact, because such future potential impacts are presently unknown. Our 2014 outlook is also being provided relative to 2013 operating income excluding the litigation charge taken in the fourth quarter of that year.

For the full year, we still expect the Ocean Transportation operating income to be near or slightly above the 2013 level of $104.3 million. Given that our first quarter operating income was $9.1 million lower than last year, we do expect year-over-year improvement for the balance of the year, with the majority of this improvement to come in the second half of the year.

These improvements will be driven by flat to slightly higher Hawaii volume, modestly improving volume in Guam, flat volume in freight rates in China and modest profit at SSAT. Also we expect a core nine-ship fleet throughout the year, and to benefit from improvement in our South Pacific trade lane.

For Logistics, we expect full year 2014 operating income to modestly exceed the 2013 level of $6 million driven by continued volume growth, expense control and improvements in warehouse operations.

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

Matt Cox

Thanks, Joel. We continued to be optimistic about our current operations and prospects. As the construction cycle in Hawaii gears up and the broader economy improves, we expect to see new volume materialize. In Guam, stable level economy activity provides us incremental opportunity for modest growth. Our China service continues to be high demand with customers recognizing the unique value of our expedited solution, and we expect our vessels to run essentially full throughout the balance of the year in this trade lane.

Our Logistics performance continues to improve through very diligent cost cutting and a mindful eye on our warehousing operations, while at SSAT, the open facility expansion starting to produce the better results that we expected.

Our businesses are performing well. Our balance sheet is in great shape and we continue to generate significant cash. Without a doubt, we are prime for the opportunities that are ahead.

And with that, I will turn the call back to the operator to ask your questions.

Question-and-Answer Session


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

Jack Atkins – Stephens, Inc.

Great. Thank you and good afternoon, Matt and Joel and Jerome, how're you all?

Matt Cox

Good Jack. How're you?

Jack Atkins – Stephens, Inc.

Good, good. Thank you. So I guess, just to start off with firstly going to your outlook on the ocean transportation side of the business. I think the guidance is for flat to slightly up in terms of volumes there in the quarter [by lane] (ph). Could you maybe talk Matt and granted you don't give quarterly guidance I understand that, but kind of how would you expect conceptually volumes to sort of trend as we move through on year-over-year basis?

Would you expect to see sort of up little bit single digits in the 2Q and 3Q and maybe flattish in 4Q, is that generally the right way to think about it?

Matt Cox

The way I would answer that Jack is to say that of course we have our seasonal factors of second and third quarters will be the strongest quarters at history to repeat itself which we expect.

And then I think what we're also expecting is for the construction activity to be picking up as the year progresses. So I think the trend is relative. We need it now as time will continue. So we'll see a little bit more strength as we get a little later into the year and into 2015.

Those are the two, kind of factors that impact our thinking, but I don't know that I can put a specific percentage to the trend.

Jack Atkins – Stephens, Inc.

Okay. No, that will make sense. And on the logistic side of the business, you granted -- the first quarter saw some difficulties because of the weather, but could you maybe just sort of highlight a couple of thing, that you guys are doing, just couple of the specific items because I do think you're seeing some nice underlying improvement in terms of profitability; just curious if you could highlight that for a moment?

Matt Cox

I think as we mentioned that we didn't see some loss of intermodal business because of severe weather, we expect that, that based on some estimates to be about 1500 or 1600 loads because of the weather in the quarter. Those intermodal volumes were down. That's probably about $250,000 of margin and some of that will get through the balance of the year. These were delayed shipments, but that was kind of the impact to the quarter.

I probably saw terrific year-over-year increases in our truck brokerage segment. We're pleased by that. We saw a terrific [set] (ph) and turn time utilizations on our private 53-foot program that we piloted a couple of years ago. We are look at continue to build that line of business.

And then we saw some good international volumes. So beyond the intermodal volume, each of our businesses, we spot improvement in and then like the direction we are headed in.

Jack Atkins – Stephens, Inc.

Okay fantastic. And then the last question just for clarification sake. I know you guys highlighted the timing of the fuel surcharge collections and you referenced that on the fourth quarter call as well with regard to the first quarter, but could you just maybe sort of walk us through from a high level, why there is -- seems to be a timing delay as far as recouping those costs this year where it doesn't seem like that’s really been an issue in the past, just so we can understand how -- the mechanics of how that works?

Matt Cox

Okay. And let me answer another part of the question, which is Matson's goal is to seek to recover 100% of the fuel in our Jones Act Trades in Hawaii and Guam. And over time that is year-over-year, we have been very consistent in our ability to do that.

Now there are times when we get ahead and behind in the quarter. Generally we don’t highlight it, because we don’t think it adds meaningfully to our story, that is there maybe some quarterly fluctuation, but because it doesn’t impact our annual valuation and our value premise, we generally don’t talk about them. Of course this is a big one.

So, to your specific question about the timing, we're making assumptions about where fuel prices are going and where volumes are coming in, and there is a number of other factors which allow -- we don’t have a set timing or data in which we reset our fuel surcharge.

We do it when we think it's appropriate and in this case, we were -- our expectation about where fuel pricing is going turned out to not be correct and we got a little bit behind. But again, we're still confident that we're going to be able to collect it and it really isn’t a big needle mover from an investor standpoint.

Jack Atkins – Stephens, Inc.

Okay. That’s helpful. Thanks again for the time.

Matt Cox

You bet.


Our next question comes from the line of Kevin Sterling with BB&T Capital Markets. Your line is open.

Kevin Sterling - BB&T Capital Markets

Thank you. Aloha gentlemen.

Matt Cox

Hi Kevin, how are you?

Kevin Sterling - BB&T Capital Markets

Yes, Matt, when I look at what you laid out for ocean transportation, you're operating income expectations for 2014, you did a great job on giving us your expectations.

What's the biggest lever there for may be potential upside? Is it Hawaii volumes, which ultimately has started a Hawaiian instruction cycle, is that how we should think about the biggest needle mover there?

Matt Cox

Yeah, I think that's the biggest needle mover over time. I think -- the question for us is we still is that last few quarters, Kevin it's been, when we do we get the traction on a lot of these projects in the pipeline.

And, so, we continue to be relatively upbeat over the next 24, 36, 48 months that we're going to see a growth in the market and we're well poised to capture our share of that growth.

So, I would say, that is probably the single biggest factor over time. As it relates to the balance of the year, just within the last three quarters, that maybe a less of a factor, because we do see that thing really kicking in the second half, late 2014 and beyond.

I would say, that's probably the biggest needle mover, but I think we like what we're seeing in the economy more broadly and absent some kind of an external shock, we're feeling pretty good about the volumes.

Kevin Sterling - BB&T Capital Markets

Okay. Great, thanks. And kind of following up on that and just looking a little bit further out, but you've talked about patient introducing in the capacity and Hawaii construction cycle, picking up, how should we think about maybe 2015 potential with that additional capacity coming on? Little bit construction demand in your opinion think be strong enough to absorb that additional capacity.

Matt Cox

It's a good question, I think in part, it depends on when the vessel is deployed, how successful it is in getting full. Part of that vessel will be dedicated to roll-on and roll-off and automobiles and part of it will be used for general construction equipment and also containerized cargo.

So, certainly we think the growth in construction volumes and where we are with the economy more broadly will be helpful in terms of absorbing that additional capacity, whether it absorbs the full capacity, is unclear.

And if that, we are probably expecting somewhat of disruptions at least to the extent that we see larger growth that certainly would moderate the impact.

Kevin Sterling - BB&T Capital Markets

Got you. Okay. And switching to your China service, obviously that's running full year large, you got a great service there, but rates are volatile. What can you do as an operator to maybe push pricing and grow the top and bottom line, is it really improved efficiencies?

Matt Cox

Well, from our perspective, we have seen as I mentioned, the overall trade we seen market rates going down. We see our rates staying stable, so our premium continues to expand, that's the entrance from our data points.

The thing we can do most importantly is to maintain our service levels. The International Ocean Carriers, businesses have continued to become commoditized and are being even more so with the formation of these mega alliances, the services or their service levels, reliability continues to slip.

We continue to stick to our netting. On the margin world, it's looking to find, putting the last two or three containers on a ship and trying to be as full as we can. That's a process that every week, we're looking for ways to try to fill that ship because candidly we have every week more demand than we have the ability to fill for space.

Kevin Sterling - BB&T Capital Markets

Okay. Great, that's good problem to have. And switching to logistics, how should we think about logistics long term margins maybe in the 2% to 4% range and if that's the case, how do we get there?

Matt Cox

Yeah, I think 2% to 4% is good. I think what we -- the goal for ourselves is first to get ourselves back into double-digit levels of operating profits over the next years, which I think is realistic. I think our view is that, each of the lines of business improving over the next few years.

We've got, I think strategies for organic growth in each of our lines of business, we think it's not a stretch to think over the next two or three years will be at $10 million range.

Of course our goal long term will be to get that back to where it was before the economic cycle hit, understanding some parts of that business are not going to come back, some of the rail incentives and other things, which are no longer in place that were present before. But, we're quite bullish over the long term on our logistics business.

Kevin Sterling - BB&T Capital Markets

All right. Great. And last question here keeping with logistics, do you think you just need additional scale there to kind of help improve profitability and if so, are you seeing acquisitions in the pipeline that could maybe help you get there?

Matt Cox

Yes, I think certainly we want to keep an acquisition awareness. I think Kevin, from our perspective we got a terrific organic growth strategy. We're seeing some of the multiples that people are willing to pay for some of these brokerage and other assets and for us it's awfully hard to see how you make those things work over the long run.

We tend to be disciplined in our underwriting and are not going to overpay for revenue or volume growth that's not part of our story. And candidly, I think we got a pretty credible organic growth strategy with a lot less risk.

Kevin Sterling - BB&T Capital Markets

Well great. I really do appreciate all your time this afternoon. Thank you.

Matt Cox

Okay, Kevin. Thank you.


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

Ben Nolan - Stifel

Hi guys, I have a few questions. First relates to maybe how you would expect things to play out over the next few months as it relates to potential -- the possibility of a labor strike in the west coast and how you guys might, well first of all, if you could handicap the likelihood of that if you have any comment there at all.

And then secondly how something like that would impact you guys?

Matt Cox

Yeah I can try to answer the question. So as you know or as many of the wholesalers know, the six year contract is ending on June 30 of 2014. The contract negotiations are set to begin on May 12. The PMA, who is the important group that is negotiating with the ILW will begin on May 12.

Their own internal expectations are that they don't expect an agreement will be reached prior to the termination of the contract signing, but more likely, they expect at this point an agreement will be reached a week or two after the July deadline.

The PMA believes that if they will be able to do it without an employer look out or work stoppage and that’s their take on it, but of course some of this is unpredictable and of course there is a number of issues on the table, but the PMA’s expectation is that they will be able to renew a contract without an employer lockout or work stoppage.

Ben Nolan - Stifel

Okay. And I assume that you would have a similar re-unit that disruption is probably unlikely and then -- but worse comes to worse how big of a deal could it be for you guys?

Matt Cox

Well I think we would in past disruptions and events would take place, I think the ability of the State of Hawaii to tolerate a work stoppage is very small given the very limited amount of warehouse space in Hawaii and my expectation is if there were a work stoppage, which we don't expect, that it will very short in the duration before Congress would invoke their back to work strategy.

So, now that's not to say, wouldn't be disruptive financially or it wouldn't take quite a bit of time to get the networks right, but I think the actual stoppage would be relatively short.

Ben Nolan - Stifel

Okay. So, it's certainly not keeping you up at night, I guess is the answer.

Matt Cox

No, no, it isn't

Ben Nolan - Stifel

Okay. So my next question has to do with -- it's following up on what Kevin was asking with respect to potential for acquisitions on the logistic side, but, I thought I might broaden it out a bit and with respect to sort of -- your deployment of capital and looking for opportunities to put money to work away from your new building program are there any areas that you could say, appear to be cut on low hanging, in terms of outside acquisitions or obvious tangential opportunities and clearly not going to say specifically but, or do you think that the market is pretty fully priced at the moment, the best opportunities, probably, exclusively organic across your platforms.

Joel Wine

Ben its Joel. I'll take a crack at that. So, we obviously think about those opportunities ocean transportation on one hand, logistics on the other. Ocean transportation is a much bigger business for us. So there, we look at different Jones Act opportunities and we also look for niche opportunities as we talked about.

We think our history of servicing remote islands and being a very high quality service operator, in markets where service and reliability are at a premium and of importance, we think we can do well in those kind of markets whether they Jones Act or not.

And so, those are the kind of opportunities I would call them niche opportunities that we'll continue to look for, and there are some, that we are tracking and it's just hard to predict when they hit and when they're available and how big they might be? But I think leveraging off those skills and capabilities on the ocean transportation side is our focus.

On logistics side, when you talked about capital deployment and investment, we do believe we got a very good organic story as Matt talked about. There are pretty heady multiples paid for businesses these days in the M&A market in that space.

But one thing we are not sure about doing is investing in talent acquisition. So we have, we're in the marketplace every day, every month, looking for talent to join our company that brings expertise in their own brokerage businesses and we haven't been bashful about trying to go out and compete for that kind of talent. We think that's very sensible and add to our platform and our growth opportunities.

So, just because you may not be doing big M&A, that's weaning to press releases and those sorts of things doesn't mean, we are not looking every day for investment opportunities in assets or people to grow our core franchises.

Ben Nolan - Stifel

Okay. That's, helpful. Or I guess along with that, I think that there was certainly the possibility of potentially expanding the new building program beyond the initial two vessels.

Has there been any movements in that regard or is that further down the line, something that doesn't need to be addressed any time in the near future.

Matt Cox

Yeah, this is Matt, I think our view at this point is that the two vessel program is going to meet our needs for the intermediate term. We will after few years down the line, potentially be looking to place some additional -- potentially a two vessel order, but that could not, there may be for three to five years down the road.

We think that the two vessels we ordered is all that we need for the time being and are not expecting to exercise our option for additional vessels at this time.

Ben Nolan - Stifel

Okay. Great and I just had one more, if it's okay. And this is something that is coming up, I'm hearing among some of the International carriers, a lot more noise it relates to MARPOL Annex VI and the cell formations regulations and the potential impact on fuel costs specifically in some of those emission control zones, is that something that you guys have done much work on or feel is going to have much of an impact on your operation.

Obviously the West Coast would be impacted by those, by that regulation, but coming the first of the year, but I was curious if you've done anything in that regard or would you simply as a pastor at the end of the day?

Matt Cox

It's a combination of both. I think we've done a lot of work within our fleet on preparing ourselves, the actual fuel itself has a different viscosity and we've been doing a lot of testing to make sure that operationally that we can continue to maintain our fleet in terms of service speeds and in terms of maintenance on this different fuel.

We've done a lot of work and we've also -- of course the new vessels that run on LNG, that we'll have delivered will obviously be able to as a clean burning fuel, allow us to continue to leverage, but at this point, we don’t see any operational constraints with the new standards and to the extent that those fuel consumption, it relates to areas which are surveying the Hawaiians and Guam market prices.

We would likely seek to recover that through a fuel surcharge mechanism for the more expensive fuels.

Ben Nolan - Stifel

Okay, perfect. All right. Well that does it for me. I appreciate the time guys.

Matt Cox

Okay. Ben, thanks.


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

Steve O'Hara – Sidoti & Company, LLC

Good afternoon.

Matt Cox

Hi, Steve.

Steve O'Hara – Sidoti & Company, LLC

I was just wondering if you could talk a little bit more about the, expected improvement in construction. I think a lot of the improvement now is like you said, I think comes from Honolulu and more multifamily high rise in that respect.

Talking to people in the Hawaiian economy, it sound like you expect more of the single family home, construction kind of follow-on after that, does it have the same kind of -- is that a similar impact in terms of, is it single family home, like a multiplier effect on a multi dwelling unit in terms of the need for transportation, it should have the same impact on jobs and I guess that would have a better impact on the economy and need for ocean transport but can you talk about that dynamic a little bit.

Matt Cox

Sure, I can, and what we wanted to do is to take -- to take a little bit of time to produce -- to show as an example of the kinds of projects that are going on, to give a little bit more color on what we see in the pipeline.

We also use these single family home construction on Wahoo, in West Wahoo and capital there are a number of projects that are in the pipeline for approval. We also see resort residential on the neighbour islands, starting to show some life again, although I didn't call them out because they're in small numbers.

But both are -- in fact to your question about, single family home versus high rise or higher density units, we certainly, the single family home construction does move the needle in percentage term, in terms of number of units relative to high rise for two reasons.

One, because the multi storage structures are steel and concrete in aggregate, those generally both in bulk and generally those houses are condominium type of apartment projects, are smaller in size than typically a single family home.

So definitely when the single family home market returns that certainly will be a catalyst for growth beyond -- like as we have -- the multi storey units do provide a good bump for us as well.

Steve O'Hara – Sidoti & Company, LLC

Okay. And then maybe just as a follow up in terms of the pacer ship, I think originally you were expecting the CV impact I think late 2013 or mid-2013 and at times keeps getting pushed out and pushed out, there certainly doesn't seem like a bad thing, but I guess, I'm just kind of wondering what the -- is it just kind of a little bit of visibility on your part or is there sort of are they kind of slowing it down, I am just kind of wondering about maybe any insight you have there? Thank you.

Matt Cox

Sure Steve. I would say we have primarily been using the schedule as we understand they have been providing it to their customers. And so our market intelligence isn't observing shipyard but rather by statements that sales folks are making to the end customers in Hawaii. So our movement there is just in line with what they are telling the customers.

Secondly it's not unusual for projects in the U.S. build side to slip a bit. It's not our understand that they are purposely slowing it down or there is any problems with the delivery as far as we know, and it's just, these are sort of normal delays as far as we understand.


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

Michael Webber - Wells Fargo Securities

Hey, good afternoon guys, how're you?

Matt Cox

Good Mike, how're you?

Michael Webber - Wells Fargo Securities

Hey good. most of my question has been asked I did want to touch on a couple of things one of the economies under construction data, but first on me assets liability. I know it hasn’t come up yet in Q&A or in the deck and it's been a while that there has been obviously some press out there reasonably having bear in fact the potential liability associated with the spill somewhere between $80 million and $400 million.

Obviously that’s speculative right, but in the absence of any factual update or any guidance is really other is to go on. Can you guys provide any degree of an update in terms of either what policy this may have, following from an insurance perspective an update in terms of timing and when you could provide some guidance and total impact in just -- some updates from here it's been in the couple of quarters now and it's really not how it's going?

Matt Cox

Sure. Basically Mike where we are in this phase that the project is, a number of state and federal agencies have initiated investigations. We have been cooperating with the various state and federal agencies. A grand jury has been formed also to look into the matters and again our primary focus is on providing those regulatory bodies with the information they need in order to conduct their findings.

And so, the timing of those investigation work is not up to us. It's up to the various agencies involved to provide the timing. So we're at a point where other than continuing to drive information, there is not a lot of new information. You pointed out that we did note that we submitted this claim to two of our insurance carriers.

At this point it's not clear whether our policies cover this and that will be determined at some future point in time and again all I can say is that you mentioned the Barron's article, we just see that as highly speculative. Beyond that, since we don't know, it's very difficult for us to be guessing about what the outcome here is.

Michael Webber - Wells Fargo Securities

Sure. Can you give us like which policies you filed and what sort of coverage you have on either of these policies?

Joel Wine

We can't give you the coverage details Mike, but the two policies are protection and indemnity P&I coverage as well as our marine general liability.

Michael Webber - Wells Fargo Securities

Okay. And you guys won't get into the coverage levels. When do you think you could be able to put some more color on that so we can either put potential liability behind the story or bring it front in center?

Matt Cox

It's difficult to know Mike. The timing is not in our hands. It's up to the various agencies to conclude their work and then obviously they like to get the matter behind as quickly as is practical and beyond that it's really not known at this time when that might be.

Michael Webber - Wells Fargo Securities

So we need to get their work done before you guys can provide us with how much coverage you have on the policies?

Matt Cox

It's more of a sequencing of process and review. Mike. So we know what kind of coverage we have. We haven’t disclosed that. It's not part of our normal converge whether it applies or not, is not clear.

So what needs to happen is the different regulatory bodies need to work through their investigative findings. We need to review that, review that with the insurance companies then and we'll have information that’s worthy of -- that's been reviewed and decided and can be disclosed. So we're not near that at this point in time. So it's really more of a process point.

Michael Webber - Wells Fargo Securities

Okay. All right. I appreciate that but, one more around the broader Hawaiian economy and it certainly seems like, I guess it seems like some data things are getting a bit better and it's obviously been kind of a gradual recovery but then there is – some conflicting data I guess around same store sales, which certainly seem weaker in the space and then in the area.

And then if you kind of look at permitting data from a construction perspective, I know your volumes have historically been tied to it's construction at which is high correlation, but if you could break that down, the correlation with new permitting data -- new permits from housing perspective has been our point seven and total permits have been much lower and I guess new permits and our construction they are off about 30% in a less six months while total permits were actually up.

So the data is a bit misleading with new permits actually being a lot lower. Matt, you've seen a number of cycles now I guess within this specific economy. When you're looking at all the construction data that I guess you guys put in deck on all these different projects and it certainly seems like normally there is a quiet of bit going on.

Does that seem more speculative this cycle? Does it seems like it’s a bit different I am just trying to drive up the total amount of construction projects that are out there and that we've certainly read about as well versus some of this data, which implies new permitting is off and things might be a bit softer, I'm just trying kind of drive the two.

Matt Cox

With regard to your question, from my perspective we mentioned the 17 projects. We understand there may be more projects, we didn’t talk about, so there are some hotels that have also the Outrigger hotel is announcing edition of new tower in Waikiki and so there is lots of very positive indications that things are moving, for there is a number of construction cranes that work in Honolulu, its more than I have seen in a very long time.

So we're encouraged by all that. There is every single project that gets announced ultimately get build, it's unclear, but we do feel a lot of momentum and it does feel very real to us.

And we wanted to take a little bit of an extreme time because we continue to say that we are encouraged by the prospect and we wanted to provide just a little bit more data point to give some additional credibility to our view that the economy should get better over the next few years.

Michael Webber - Wells Fargo Securities

Got you. But doesn't it feel that much different, I guess than in past cycles that you have that cycle in your deck, it doesn't feel any different than the last to last couple of cycles you've seen?

Matt Cox

I'm not ready to go there yet. I would just like to see a normal which we expect again I'll take that.

Michael Webber - Wells Fargo Securities

Fair enough. All right, guys. I appreciate the time. Thanks.

Matt Cox

Okay, Mike.


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

Unidentified Analyst

Hey guys, this is Chris Carry (ph) actually on for John.

Matt Cox

Hi Chris.

Unidentified Analyst

A lot of my question have actually already been answered, but I was just hoping to ask a couple of quick ones here. Digging down a little bit deeper on the logistics business, I know you saw additional year-over-year improvement in your operating margin in the quarter there.

But seeing the acceleration of the fundamentals in that market in the quarter largely due to weather, I'm just kind of curious how your pricing trend is given, the increase in carrier cost. Or if that margin improvement on the operational side from the pricing standpoint, or was that much more on the efficiency improvement associated with warehousing and other improvements you made within your organization.

Matt Cox

Yeah. I would say we have seen improvements in volume. We have seen improvements in our warehousing operation, margins have been pretty flat. But in some of our lines of business, we have seen improved margins.

What we haven't seen is any degradation in markets, over to speak up. And so, what we're seeing is flat to improving margin and volume improvements that are driving the quarter results and this really is a result of a lot of work that's going on the G&A side and on warehousing improvement and blocking and tackling and other kinds of things.

So, I hate to put my -- I can't put my finger on any one thing. It's been a lot of heavy lifting that our logistics team has done just a terrific job in getting this point in the right direction.

Unidentified Analyst

Yeah. That's great. That really is great and then, but going forward, do you see the improvement in logistics margin, you said you want to hit double digit operating profit and we know hopefully just keep on grinding that operating margin up.

Do you see additional leverage to be squeezed out of that business on the cost improvement side from the warehousing perspective or do you start to see some margin improvements just by virtue of running additional volumes through the system as we go forward.

Just trying to think about, just try and get some additional color on how you think about the margin progression in that business and the leverage that you can pull there.

Matt Cox

Yes, I think it's fair to say that the margin improvements going through improvements in operating costs reductions, the G&A reductions are limited. We've worked really hard to squeeze as much as those as we can without hurting the quarter underlying business.

I think our expectations are that we'll continue to see volume growth. I'm not ready to call margin expansion because of box shortages and clearly this has been a buyer's market. All the brokerage and logistics companies have seen margins under pressure.

But we hope with a little traction in the economy and our customers understanding that we can get into equipment shortages and you really need to work with reliable brokers and logistics providers, the customers have really benefited from a surplus of capacity and I think we don't need to get very much further into this cycle when that dynamic changes.

And when it does, I think we're going to see both margins recover to where they were prerecession. I'm just not ready to call that yet, but I don't think we are far from that if we do see some increase, in momentum in our core markets.

Unidentified Analyst

Yeah. Okay. Fair enough. And then, I was just hoping to ask a question about kind of broader, broader shipping dynamics here. We think a larger portion of the order book going forward is going to be these larger vessels, plus 10,000, plus 13,000 TEU vessels.

How you guys think about terminal capacity on the West Coast and those larger vessels impacting operational efficiencies at the terminals and just in addition to that, thus having a dedicated terminal kind of provide you a little bit of shelter there if those larger sheds are doing these, kind of disrupt the narcotics.

Matt Cox

Yes, I think our view is that these big ships are coming and are here and will only get bigger. What happens to us is really couple of things. If you look at it from a SSAT or terminal joint venture perspective, our terminal joint venture partner (Carex) [ph] or SSA.

We believe the best operators of Marine terminals on the West Coast by far and the joint venture has been looking forward we've been over the years looking at improving our facilities and buying the very large cranes that are going to be required and operating terminals to be able to handle those very large ships and I think as a result, our joint venture is very well prepared to benefit from the invent of these new large ships.

As it relates to Matson's little premium expedited niche service. Unfortunately the bigger ships will come with more alliances with slower and slower cargo availability and turn times and this continues to reinforce the value of a small niche product.

We're going to continue to deliver what we're up, what we've promised. The other services will get worse further expanding our service differential.

So, those are just a couple of thoughts about how the market is going to play out over the next few years.

Unidentified Analyst

Right. No, thanks, it's really helpfully and then just now that you've mentioned that, so longer term are you expecting these dynamics to only improve the pricing potential of that China expedite service or perhaps maybe grow the premium over the market rates.

If we're looking on a longer term perspective and the pricing of that, particular service.

Unidentified Company Representative

I mean, that's what we have seen. We have seen an expansion of our premium over the last year or two. It's not unreasonable to expect that to continue. I also think that further pricing gains in the trend specific line of business are really not going to be available to us until the overhang of vessel capacity is absorbed.

And with these carriers continuing to order these large ships in an amounts that exceed the end growth market in market demand, that's hard to predict when that's going to occur. But when it does occur and it will, I'm not sure whether that's 2016, 2015, 2017, I mean, I really don't know there should be a further boosts in our earnings, why we don't just close the operating profits of our lines of business. This business together with the Guam service has been a really nice line of business for us over the last few years.

Unidentified Analyst

Yeah. That makes sense and then, last question here, then I'll turn it back over, these the May 1st your rise in stock and [trends] (ph) and now it's taken as although CRI is fading very quickly sheer rises, it's trading pretty quickly.

Did you guys see any benefit from those or so? Did you premium track, the CRI and then wasn't a bit stickier on the down side of the pricing adjustments or did you not really seem any benefit there.

Matt Cox

Yeah. Well we -- as I mentioned in my prepared remarks, we did see an increase in our freight rates, the modest year-over-year and part of it is a function of the significant demand for our services and we were able to achieve a nominal increase and year-over-year rates on the contract to part of our business, so we were encouraged by that.

Unidentified Analyst

Okay. Okay, thanks so much for the time.

Matt Cox

Alright, thank Chris.


Our next question comes from the line of (indiscernible) Snow with Oppenheimer. Your line is open.

Unidentified Analyst

Hi it's actually Tom for Ian, just real quick, on the timing of the collection reversal, is that something that happens I will call in one quarter potentially like you in this quarter. I know it's probably not that big of a deal, or is something that you just mentioned that will be in the balance of the year happens like all in one quarter potentially like you did in this quarter, I know its probably not, but told you something, mention that will be in the balance of the year? How do we think about that impacting a specific quarter? Would you guys kind of give us a heads up ahead of that?

Matt Cox

I think what you should assume is that we collected between sort the second, third and fourth quarter. Our goal is to recover it by the end of the year as of course we're going to be shipping more containers in the second and third quarters if we follow our historic patterns therefore we'll get more of it because it's expressed on a per container basis.

But we don't expect it to be a significant driver between now and the end of the year, but we do at this point expect to get it gradually over the balance of the year.

Unidentified Analyst

And then just understanding the Hawaii container guidance, as it relates to your comments on the overall multiyear recovery, is the kind of modest rate of growth of flat to slightly up, kind of based on historical experience that you guys have had, why not a more robust growth guidance for 2014. Or is that just consistent with how you're seen it happen in the past.

Unidentified Company Representative

Well I think it's more around looking at the market today, looking at the specific projects that are underway and understanding at what phase of the projects the container volume will be injected into the -- the demand will be required.

Of course we have relatively flattish volumes so far. So that’s coloring our view. Again we continue to be optimistic about the next 24, 36, 48 months. But our expectation is we may see just a little bit of it and is really one of the reasons why we're calling for a relatively flattish year-over-year volume growth.

Unidentified Analyst

All right. Thanks a lot.


I'm not showing any further questions in the queue at this time. I'd like to turn the call back over to management for closing remarks.

Matt Cox

Okay. Well thanks for your interest in the company. And Aloha I look forward to catching up with you in the next quarterly call.


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.

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