Alexander & Baldwin, Inc. (NYSE:ALEX)
2012 Matson Sell-Side Analyst Day Call
April 11, 2012 08:00 am ET
Matt Cox - President, Matson Navigation
Joel Wine - SVP, CFO & Treasurer, ALEX
Dave Hoppes - SVP, Ocean Services
Ronald Forest - SVP, Operations
Rusty Rolfe - EVP, Matson Logistics
Good morning and welcome to the webcast of the Matson Navigation webcast this morning which is April 11, 2012. We filed an 8-K this morning, so in that 8-K there is a statement that this presentation that set forth expectations or predictions are based on facts and situations that are known to us as of the date of this filing. Actual results may differ materially due to risks and uncertainties such as those described on pages 19 through 29 of the Form 10-K in the Alexander & Baldwin 2011 Annual Report and other subsequent filings with the SEC. Statements in this presentation are not guarantees of future performance. We do not undertake any obligation to update our forward-looking statements and with that I would like to move us to the agenda for the day.
With Matson's management, it will begin with Matt Cox who is our President and Joe Winny will give us an update on the separation. We have the good fortune to have three operations folks with us today to talk about their business and that's David Hoppes who is Senior Vice President responsible for Ocean Services; Ron Forest who heads up operations; Rusty Rolfe, who heads up Matson Logistics. Joe Winny will then give a financial overview and Matt then will wrap it up. By the way my name is Celica Proffer and I do welcome you to this webcast and it's with a great deal of pleasure now that I introduce Matt to just kick this off.
Thanks Celica and good morning and thanks to everyone for coming. We hope that you find this session to be useful in getting some additional information in context about Matson. So on slide 5, one of the slides we are most proud of is the long history of Matson. Matson will celebrate its 130th anniversary this year. It all started with Captain Matson in 1882 sailing his vessel, the Emma Claudina from San Francisco to Hilo Hawaii and in many ways the history of Matson is really the history of the territory and then eventually the state of Hawaii. We’ve had a great year, we help to developed tourism in the state, when through the warriors were a pioneer in the containerization phase and currently as we’ll talk about more are the largest oceans carrier to the State of Hawaii.
Just to look at our geographic coverage on slide six, upon separation Matson's corporate headquarters will be in Honolulu Hawaii. We have offices throughout the US Mainland, in the Pacific and China. And as Rusty will talk about the logistics network is spread throughout the Continental United States.
Celica touched on this, but it has been announced that Walter Dods who is currently the Chairman of Alexander & Baldwin upon separation will become the Chairman of Matson. I am today the President and will pick up the CEO title, Joel Winny who you will hear from in a moment, for those of you that don’t know Joel, Joel came aboard last fall to Alexander & Baldwin as the CFO, who had then associated with Alexander & Baldwin and Matson for over a decade in a role at Goldman Sachs as an advisor to the company, came aboard as the CFO we are fortunate that he will be joining us as the CFO of Matson upon separation. And the rest of the team who Celica introduced, a couple of folks who aren’t here today have been at this business a long time, Joe brings a fresh insight, into the financial community insight and lot of external facing skills that will be really helpful to us and a terrific advisory background.
The rest of us have been at Ocean Transportation, logistics providers for combined 175 years, the six of us. So we have been at it a long time and we think we know what we are doing and provide a lot of continuity in this business.
Just to look at Matson at a glance, in 2011 we had revenues of just under $1.5 billion, $1.1 billion at the Ocean Transportation level and about $400 million at the logistics level. You could see the bulk of last year’s profit came from the Ocean Transportation segment and just under $80 million in operating profit. We have about 1100 employees. We have 17 vessels and we will go into much more detail in the following slides.
With that I am going transition and spend few minutes on corporate strategy, how we see the world, what are our goals, what are our aspirations, how we organize ourselves, what are we trying to do.
And then on slide 10 we start with our vision, basically we have been as I mentioned in my introductory comments in the Pacific a very long time, it’s our home, it’s our back yard. What we want to do as an overall strategy is to leverage the Matson brand and our capabilities into compatible new geographies and services. That’s how we serve important markets in the specific, we are always looking to where we can expand, as an operating business we are always focusing and operating a 24-hour data network business. It’s important for us to look for ways in which we can continue to improve our network and internally it’s very important in Matson culture to always do the right thing and do those by our customers, our employees and the communities we serve.
So what are our key strategies for Matson? On the Ocean Transportation side many of these topics by the way we will be covering in more detail with the other presenters. So I just want to touch on them here and not delve too deep, but we have plenty of time to talk about these strategies in more detail on the following slides.
On the Ocean Transportation side, we have built over the last six years an absolutely fantastic, unmatchable China service from three ports in Central China in the Long beach. We also having been through the current market cycle in Hawaii are poised to grow faster than the overall economy in Hawaii as it recovers primarily by leveraging the construction segment when it returns. We also from are a significant player into Guam. Guam is an important location for the US military, given the US government, the US military's realignment of its forces into the Pacific and we think we are well placed and want to leverage that move when it occurs.
And then lastly I mentioned this a moment ago, we are always looking for ways in which we can add new or expand our service offerings in compatible geographic locations. On the Logistics side and Rusty will go into more detail about this. At this point we are looking for organic expansion of our truck brokerage and warehousing business. We are looking at piloting this year, but hope to expand our own 53 foot Big Box program on the US Rail Network. We are in the process of building a China freight forwarding and China origin consolidation business which Dave will speak to and on the logistics side, we are looking at a disciplined M&A. What do we mean by that, we are looking for ways in which we can grow this business and we are not actually now looking to pay top dollar for overpriced logistics businesses that place themselves for sale as it is prevalent in some corporate strategies. We find those strategies to be very difficult to hang on to the realized value in the long run for maintaining acquisition awareness when we find a well-priced property we would consider acquiring it but we think organic growth is a key strategy for us at this point.
And then, I hope when you leave here today, one of the things you’ll hear is our customer service and operating discipline. We are very proud of that and we would have not conveyed our key message.
If you haven't gotten the sense that we are different, that we do significantly focus on customer intimacy, on customer, our customer service and the best ocean transportation logistics, freighter in the world. So if we haven't conveyed that at the end, we have missed something.
So what are Matson’s competitive advantages? On slide 12, Matson, in the Pacific, has a significant brand identity. What we say is if, you know, being half a world away, it’s hard to know that you get to Hawaii, you get to Guam, you get to Shanghai and you ask customers about who Matson is and they will tell you who we are and how we operate.
We have a very strong, Dave will talk about this leading to the market share in the Hawaii market. We have the most sailing frequency into Hawaii. Dave will touch on the fact that because we sail our integrated string from the U.S. West Coast to China, at least full with cargo from the US West Coast, sales on to Hawaii, then Guam and is able to pick up and fill up with cargo from China. On the way back, we have a dual head haul which puts us in a very, very strong position.
We control and operate our own West Coast terminals through a joint venture which Ron will describe. We have two fantastic, middle-of-the Pacific terminals that we operate and hope to leverage. We own and control our own Neighbor Island network which allows us to match the cargo, which arrives in Honolulu, which needs to be connected to the Hawaiian Neighbor Islands and give us an advantage there. We have the most modern new Jones Act tonnage in terms of our fleet and we have, as Joel mentioned, a very strong balance sheet and credit metrics.
Core competencies, I won’t spend much time on this other than to say, I repeat which I said a minute ago. We have a very strong operating disciplined. We care deeply about when vessels depart, when they arrive, what the productivity at our terminals are makes a huge difference to our customers and that is a significant strength that we have.
On slide 14, we do have our challenges. The Jones Act markets and especially given our predominant market position in those market, it’s difficult for us over the long-term to grow much more than the GDP of the islands we serve given, again, our large market presence. Although, we do think that in the next few years, the building and construction segment, as it recovers will provide us, we mentioned the faster than overall growth in Hawaiian economy. Alaska, we’ve had a long interest in the Jones Act business in Alaska. There are two operators that are today and of one of those two businesses were to become available for sale, we would be very interested in that. Another challenges we have, roll-on/roll-off capacity for cars. Much of that capacity is on some older platforms. We do, we are looking at some new ships and in the next few years and we may use that as an opportunity to remedy the older Ro-Ro space that we have.
We rely on Matson as a Jones Act carrier. We believe and I’ll touch on the Jones Act in a minute, but we do rely on the support of the Hawaii delegation and other delegations for the support of the Jones Act. But we think it’s very strong but we never take that for granted and continue to invest time in making sure those that can make a difference, understand the importance of the Jones Act and the continued relevance of it.
We are highly, we operate in a highly unionized environment. So there is always a potential for labor disruptions. Although at the time we never take it for granted but we do feel like labor relations are good both from the shore side and off-shore for the time being.
And one of our competitors in Hawaii roll-on/roll-off carrier, there are three of us principally that operate in Hawaii. Matson has about a two-thirds market share but of the other two, one of the two other participants has announced that they are building a second vessel. They have one vessel now and they have announced a second one and then if it is completed, which is in to certainty, it has the chance of changing the competitive landscape somewhat.
I mentioned I touched on the Jones Act. Those that don’t know the Jones Act is a federal law which in its current form has been in place since 1920, but essentially a version of the Jones Act has been in place since the founding of our country, which reserves shipping between U.S. locations to U.S. companies, which are in the case of the current law, 75% owned by U.S. citizens who operate vessels which are built in U.S. shipyards and crewed by U.S. citizens flying the U.S. flag.
But to put this into a little bit larger context, more than 50 countries have similar laws which reserve shipping between their locations for flags of their nation and we do think it’s very relevant even today for national defense, environmental protection safety and jobs and employment.
And with that speedy introduction, I am going to turn it over to sort of the real work that’s going to be done by the rest of the crew here.
So I will turn it over to Joel Wine, Matson’s pending CFO at separation So, Joel.
Okay thank you, Matt. Let me spend a moment, give an update on separation but first on slide 17. Just to remind everyone, from an overall corporate perspective, if you look at Alexander & Baldwin, about half the company from an operating profit perspective, is Matson and about half is the A&B Properties businesses, currently, where our stock is trading, we’ve got a combined equity market capital around $2 billion.
On slide 18, I want to remind folks that on the A&B side, A&B will also be hosting a webcast this morning at 9.30. So I would encourage our listeners to dial in to that in which the A&B management team will be spending time going through detailed review of it’s businesses and strategies as well, very similar to what we are doing this morning in Matson.
On slide 19, in terms of the separation itself, it’s been well received by shareholders. I think the strategic rationale points listed on this page had been well understood. So let me just spend a moment updating folks on timing and the critical step items.
We filed our IRS letter ruling request, which is seeking a private letter ruling on the tax-free nature of the spend that was filed at the end of February. We don’t expect that to be a gating item. We expect to hear back in May or June from the IRS on that. The S4 merger proxy was declared effective and our annual shareholders meeting date has been scheduled for the second week of May. So that is tracking on schedule, on time.
And also last week on April 2nd, we filed the Form 10. The Form 10 is the registration statement of the new shares for SpinCo and which in our case, SpinCo is actually Alexander & Baldwin.
So if you look at all the various SEC and other timing items, it’s probably the Form 10 that ultimately will be the pacing item. So going to the regular SEC review process amending, etcetera, to get that registration statement took effective is probably going to be the pacing item as best we can see today.
We are working towards transaction and internally planning for a transaction happen as early as the end of June, the last day of June or the first day of July. So we say we are targeting third quarter transaction, it could be as early as the first day of the third quarter. And that's what we are working for.
Importantly, I just want to note also the bottom of the page, yes we are a merger proxy and merger vote is not conditioned, the separation is not conditioned in anyway on that merger vote; that merger vote is merely being put together as the best way for us to formulate our businesses and prepare them for spinoff, but the spinoff and separation itself is not conditioned on that vote.
Last thing, update on the Board, Matt mentioned Walter Dods has previously been announced our Chairman. In addition, Matt will be one of the Directors of the Board consistent with his role of CEO and the balance of our Directors we have not named specifically, but the Directors are expected to be a subset of the current A&B Board which we think provides important continuity with our previous governance.
So with that backdrop, let me turn it over to Dave to talk about Ocean Services.
Thanks Joel. I am going to begin on slide 22. We’ve got 130 years of very staid history of 130 years to develop our brand. We take this pretty seriously because we want our brand to evoke a certain number of things.
First of all, we want it to reflect our position as a premier ocean transportation and logistics provider. We also have a history of delivering innovation whether it would be the first container, A-frame gantry crane in 1960 or one of the most modern container terminals in the United States and Honolulu today. Reliability beyond the norm, I am going to ask you to be a little bit boastful about that. It’s actually significantly beyond the norm.
And we also have a long-term demonstrated financial stability, which is really something that we hope people see in our brand.
And finally, and I want to say this is almost an obsessive focus; we focus on delivering a solid value proposition to our customers.
We’re not the only one who feels this way. We won quite a few awards. This is focused on two this morning. We have received Logistic Management Magazine’s Quest for Quality Award for nine consecutive years. Also we’ve been awarded Toyota Logistics’ Highest Logistics Award for the last three consecutive years. And you can see from the table there are a few others things as well.
The next slide, slide 24 is pretty much a nice graphic depiction of our network. The blue line represents our five vessel integrated Hawaii-Guam-China weekly services. The purple line represents our PNW Oakland weekly triangulating service to Hawaii. The orange line is our weekly Oakland to Long Beach service to Hawaii. And finally, the green line and I’ll talk a bit more about this later, is our service that connects across Guam to Micronesia and the Mid-Pacific. I’ll go into our route deployment a little bit more as I talk about each service.
The Hawaii service is comprised of Hub and Spoke Service. Our long-haul vessels sale three times from the West Coast as I have described in the previous slide, this makes up our nine ship base deployment with five ships going on to Guam and China and four turning in Hawaii and coming back to the US Mainland.
The Neighbor Islands of Hawaii are spokes; serve Oahu own integrated Neighbor Island barge service. We actually talk about own for very good reason. Own means that unlike our competition we own the assets we control the service. Our competition uses a PUC regulated service that must sail at specified times in the days and the week.
As a result of that, if there are late sailings or there are something that causes a ship to arrive a little bit late, okay, we can hold our barges and still make the Neighbor Islands connections where our competition cannot; we consider that to be a competitive advantage. And as Mat pointed out, the Westbound market of Hawaii we have about two-thirds of that, approximately two-thirds of that market.
Here is a historical look at the combined Westbound and Eastbound volumes from 1974 to 2011. I want to note that while we report our freight carried today in containers for public purposes, we have used TEUs for this slide.
Going forward, we will continue to use containers, but we wanted you to take a look at the dramatic change in freight associated with the switch from smaller containers in the 70s and 80s to larger containers in the 90s and then the 2000s. So what this reflects quite honestly is that it shows that the container growth would be a little bit less, I mean more muted while TEUs which demonstrate the amount of cargo, it gets a little bit better slope.
Note that these vertical bands are United States’ recessions and as you will see Hawaii is clearly affected by United States Mainland recession just like any of the other states.
I am on slide 27; we have a very diverse customer base. Freights forwarders although representing 30% to 32% of our freight lift, okay, there is about 20 plus customers inside that segment. So it really continues to diversify our freight.
Now building materials have actually historically been a larger percentage of Matson’s volumes. Their current 8% to 10% is smaller than it has been historically and I think that reflects what Matt said about how important that residential investment is and construction is to our freight carriage. It’s been as high as 15% before, so you can see that during the downturn, the construction downturn that’s had an impact on our freight lift as well.
I also want to point out that government cargos; well, they are a very large customer. They still only represent 5% to 7% of our volume.
Here is some of the key economic indicators in Hawaii for the year as estimated by the University of Hawaii. I think that you will notice the biggest turnaround based on this estimate is the construction income which was negatively in 2007 down 5.6% and the forecast is that it will up 5.2% from that period. I should point out that while unemployment falls from 6.3% to 6.2% it is historically about 4.5% to 4.8%, so it still remains relatively high.
This is probably something we haven’t talked about before, but I wanted to give you some of the details and differences on the pricing. The Hawaii service unlike other domestic and international trades, we have public tariff rates that are filed with the Surface Transportation Board. Our rates are largely commodity based recognizing the value of the commodity.
Our freight rate is comprised of four basic components, ocean freight rate, terminal handling charge, wharfage and fuel surcharges. Our pricing increases are designed to cover cost escalations and they are typically only increased once per year in January and then I’ll talk about this a little bit later, but our fuel surcharge mechanism is very efficient. How do we maximize yield? Quite honestly, the single most important tool we use to maximize yield is to maintain high vessel utilization. Matson's ability to expand and contract our actively deployed fleet really assist us in this effort. Today our deployment is nine long haul vessels. We can go to 10 and we can even go to 11 if freight demands weren't doing so. And the reverse is also possible where we went from 11 fleet, 11 ship fleet to a 9 ship fleet during this downturn. Ron will talk a little bit more about that actual utilization later.
Targeting freight based on [euro] per container is also very important and we had a good laugh when we put this together because this is one of those slides, it's like hello of course. But I think you need to look a little bit, not around that target zone, but around that area in the target zone that has some of that bright green and shaded a little bit in the lower right-hand quadrant and that's it. To keep your vessel utilization high you might take a commodity such as beer which may not have the highest yield per container, but still has significant volumes. Because it brings total yield to the ship and that's really what this is saying and you want to stay away from that cream color areas as much as you can.
I am on slide 31 and this is a little bit about our fuel surcharge methodology. Matson's fuel methodology is designed to recover up to 100% of our fuel-related costs from our Hawaii and Guam customers. There is no fuel recovery in our base rate. The FSC is the sole methodology to recover our fuel-related costs. Matson recovers fuel by assessing the fuel surcharge to account for price, consumption and another very important component, volume.
Now while this fuel mechanism is very efficient over the course of the year, there can be quarterly lags and the reason for that is as a matter of policy, we give 30 days notice to our customers when we increase the fuel surcharge. And when you do that, in a period of very volatile fuel, it can have a short-term impact on your collections. This is a pretty good slide since 1999 and yes in 1999 we had zero fuel surcharge. The red line is the average west coast bunker fuel cost and the blue line is the Matson's fuel surcharge. So you can see they track really closely. That's kind of the statement to the efficiency of our collection and we get a little bit of a gap, that's likely to be one of those lags that are generated by some extra volatility in the fuel prices.
Let's switch to our Guam service. As I mentioned before, Matson sails to Guam once per week as a part of the Hawaii-Guam-China integrated vessel deployment. I want to talk about that graphic on, I guess it would be on the left-hand side. It shows how we have extended our reach in the Micronesia and the mid-Pacific using a feeder vessel, a charter feeder vessel. So we actually use Guam as a hub and extend our reach into the mid-Pacific, the Marshall Islands and the FSM.
We also have easy connections to Guam from the [PNW] in Oakland by trans-shipment across our terminal in Honolulu. Until the end of 2011 our historical market share fluctuated between 52% and 56%. Matson's current share approximates a 100% as a result of our principal competitor exiting the trade. This is another historical graph, again is expressed in TEUs, although we will continue to express our public information in containers.
What's most importantly interesting about this one, is the big drop in freight from 2003 and 2006 was primarily related to eastbound garments from the island of Saipan. Saipan was a build American garment operation and when they eliminated the quotas for China that product began to fall until it ultimately died. There are no garment factories left in Saipan at all. As you'd expect volumes increased after the typhoon because of restocking and rebuilding requirements, but after a period that volume moves back to a normalized level. Guam is also affected by the same economic factors as Hawaii as can be seen by 9/11 and when tourism increases and declines.
We don't segment our volumes in Guam quite the same as we do in Hawaii, but you can see that our largest piece of our business is Guam Commercial Dry. I think what's important to talk about here is the fact that the government cargoes play a much more significant role in the freight lift in Guam. And this makes it understandable as why we are focused on this proposed military realignment. It's very important that we have the capacity and the capability to handle any increase in freight that's associated with this realignment.
I am on slide 36 now. Like Hawaii, the Guam rates are tariff fixed. We also have a very efficient fuel surcharge mechanism in place and we have no plans to our raise our ocean freight rates during 2012 beyond any pass-throughs of any port charges. This brings me to our China service. Again that's served through our five ship weekly integrated in the Honolulu-Guam-China service. We serve the ports of Xiamen, Ningbo and Shanghai and we serve these into the ports of Los Angeles and Long Beach. So when I talk about our markets for the rest of this presentation, I want you to understand that, that Xiamen, Ningbo and Shanghai into the Southern California market of Los Angeles and Long Beach.
Our market share today is between 5% and 6%, relatively small. Now in this service Matson has the fastest transit time of 10 days providing a 2 to 4 day transit advantage over the current trade practices. Additionally, next day cargo availability extends this advantage to between 3 to 6 days. I'll come back to that point a little bit later.
The China service characteristics are much different than that in our domestic trades. The trade has many international carriers with activity in many trades. In fact there we have in excess of 20 competitors in some fashion in our trade link. The trade has a distinct seasonality around a peak season and a low season. The peak season runs from the middle of May to the end of October or sometimes the beginning of October and of course the low season is generally associated with the Lunar New Year.
And this China service by its nature is much more variable and volatile. Pricing in the CLX China service is far different than Hawaii and Guam. The China trade is almost entirely confidential contracts. Pricing components are ocean freight and a fuel adjustment factor. These are highly volatile pricing driven by the demand capacity relationship in the trade. That makes Matson and this is very important, we are a price taker instead of a price maker. However this premium service that I talked about a little bit earlier has allowed us to get as little as a $200 premium in a weak market, but one that can be much higher in a robust market.
The fuel adjustment factor is also market based. We use, already we have a large percentage of our fuel factors are floating to move with the price of fuel and we expect that we will even rely on that more heavily during the upcoming contract cycle.
Here's a good depiction of the rate volatilities expressed by the Shanghai Containerized Freight Index. This volatility occurred in a three-year span, and during that three years, the consulting firm [Technical Difficulty] carriers in 2009, lost a combined $13.9 billion.
They made a combined $12.1 billion in 2010, and then again in 2011, they lost a combined $6 billion. This chart kind of tells you why that can happen, and I would also like to remind you that during those three years, Matson’s Transpacific China Service continued to make money because of the dual head-haul economics that Matt talked about earlier.
What this chart really says is that you know, our market remains robust, and remember we have very high vessel utilization with only a 5% to 6% market share in this marketplace.
Here's a little bit of look at the Chinese-bound segments by volume. Freight, All Kinds, is a maritime term or a tariff term for just the commodities of very different types. And environment, and then garments, and all those smaller than, in smaller segment, garments are really in our sweet spot.
I am on slide 43. Matson’s garment penetration is something that's quite remarkable because garments value our service. Garments have a seasonality. Manufacturers can be subject to subject to significant penalties and even cancellation for delayed product. One of our customers even resets their store 14 times a year. This makes Matson a very attractive carrier.
Matson has the highest market share of garments from the markets we serve. Our market share of garments is very close to 23%. And remember, our market share out of there is only 5% to 6%.
Finally, our next target. Our service speed and reliability provides with another target value that customers will value. Air freight can be as much as 10 times as expensive as ocean freight. This is an opportunity. If customers have the ability to slightly lengthen their supply chain and take advantage of lower costs provided by ocean transportation. And even a combination of ocean and air depending upon the destination.
The major container carriers are reducing their speed, reducing their differentiation to vessel sharing agreements and alliances. Coupled with these facts and Matson’s steadfast focus on service and reliability, there will continue to be opportunities upon which Matson can capitalize in this trades.
Thank you and I turn the presentation over to Ron.
Thank you, Dave and good morning everyone. I am on slide 46. As Matt said earlier, our strict operating disciplined is one of our core competencies. The key components of our operating discipline are keeping our fleet on schedule and making freight available quickly, moving containers and trucks through our facilities efficiently, ensuring that container equipment is available when and where our customers needed, and aggressively managing cost in all areas and maintaining a leadership role in environmental matters.
Starting with the fleet, I’ll talk about how we deploy our vessels. We owned 13 ships, 8 diesel-powered and 5 steam-powered. We currently run 9 of the 13 vessels. Our five newest vessels, shown in blue on this map, run from Long Beach to Honolulu to Guam. Then onto three ports in China and then back to Long Beach, each on a 35-day voyage. Two of our vessels, including one with the garage, shown in orange, run from Oakland to Long Beach to Honolulu and then back to Oakland, each on a 14-day voyage.
And two vessels shown in purple, run from Seattle to Oakland to Honolulu and back to Seattle also on 14-day voyages. This provides our customers with three Honolulu arrivals per week, one sailing per week to Guam, and one sailing per week from China to Long Beach.
We target capacity utilization the low 90% range, which we believe is a good balance between customer satisfaction and cost.
Volume is a key determining factor, as when to add a 10th ship. When volumes climb much higher than 90%, we must manage our customer’s freight which often means moving it on ships other than the port vessels. This is not an ideal situation from a service standpoint. We dry docking our own plant out of service but then closed two smaller ships to replace some larger ship and thus resulting temporary retention fleet. The impacts of adding a 10th ship for approximately $8 million to $12 million annually net of fuel comprised largely of crew wages.
And bi-weekly increase of 650 to 850 slots depending upon the vessel added which would increase capacity by approximately 8% to 12%. Utilization would initially decrease because we’d likely be adding more capacity than actually needed.
On slide 49, this Westbound utilization graph shows the percent of Westbound capacity utilized from 2007 through 2011 which is the red line against the number of ships deployed which are the blue bars. You can see we have gone from 11 to 10 to nine ships. The general trend is that when Westbound freight has declined through the recent economic cycle, we’ve removed ships and kept our utilization up around 90%.
The vessels in our nine ship active fleet average 18 years old, which is the lowest in the Westbound trades that we serve. We achieved 75% to 85% on-time arrivals even with the very strict 59 minute window we allow ourselves; most of the industry base is on-time arrivals particularly in the Trans-Pacific Eastbound trades on a 24 hour window.
Weather accounts for 50% of our late arrivals; without occurrences, we’re approximately 85% to 90% on-time. We are often rated best-in-class by various industry analysts.
Our comprehensive vessel maintenance program is directly correlated with out excellent on-time arrival performance. We strive for reliability, longevity and cost control; longevity is important due to the high cost of US build replacement vessels. We maintain our vessels while in service and have regulatory dry-dockings.
Both programs focused on maintaining our vessels’ steel, coatings, main engines, propulsion systems and other systems and machinery often well beyond the expected life that the ship builder or original equipment manufacturer had intended.
We participate in the US Coast Guard’s UWILD program and thus avoid expensive mid-cycle dry-dockings and related costs. In order to qualify, we must maintain our vessels in excellent condition and within the confines of the rules of classification. We use the mix of foreign and US shipyards to manage costs. Foreign yards are less expensive but require more vessel repositioning and US customs duty than US yards. In 2011, only 3% of our arrivals were late due to vessel mechanical failure.
Switching to terminals on slide 52, this map of the Pacific Basin shows our major ports of call. On the US West Coast we call it dedicated Matson facilities. These facilities are managed by our joint venture SSA Terminals that I’ll speak about a little later.
In Honolulu, we call it our own facility which is managed by Matson Terminals, a subsidiary of Matson.
The Guam facility is run by the Port Authority of Guam and is a public facility where we have berth and crane guarantees.
The China facilities at Xiamen, Ningbo and Shanghai are state owned enterprises which are public where we also have berth and crane guarantees.
The use of dedicated facilities on the West Coast and in Hawaii is very advantageous. Some examples of the benefits are guaranteed berth and cranes which means always making our ships, always working our ships on arrival. This helps turn our vessels quicker and maintain schedule. We have fast turn times because we control the manning at our gates. Each of our three West Coast facilities has been rated best in their areas.
Wheeled Operations enable us to make freight available quicker, turn trucks faster and receive freight up to the sailing time of the vessel. The top picture shows our 108 acre Honolulu facility at which all our vessels haul are open terminals in the lower picture.
This is a graph of our truck turn times compared to the industry range. Truck turn times is measured from when a truck arrives at a marine terminal including Q time until the time the truck clears the out gate and normally includes both delivery and pick-up transactions. Truck turn times are important to our customers in terms of efficiency and cost, but also to truckers in terms of compensation.
As you can see Matson consistently averages less than 30 minutes while the industry range is between 45 and 90 minutes. This is a competitive advantage for us and as I have already mentioned Matson’s facilities have continually been rated the best terminals on the West Coast for truck processing.
Moving to container equipment on slide 55, we have 58,000 containers and chassis managed from two main prospective. First is asset management which have several key dimensions. We must ensure that we have the right amount of equipment in our network including sizes such as 20s, 40s and 45s and types such as dry, refrigerated, flat-racks and other specialty equipment.
Then we must balance whether to own, which economics normally favor versus whether to lease which provides flexibility during market downturn or change in customer demand. For location management, very simply we try to have the right equipment when and where our customers need it.
As I mentioned previously, we have 58,000 units in our system, our own-lease ratio is at 80-20. As you can see here 41,000 or 70% are containers and of those containers approximately 80% are dry and 11% refrigerated. The majority of our containers are 40 feet in length. We also have 16,000 chassis and 1,400 generator sets; gen-sets attached to chassis and are used to power reefers when they are off.
Turning to environmental matters on slide 57, Matson serves some of the most pristine areas of the world including Hawaii, Guam, California and the Puget Sound. We have always been not only a good steward of the environment but out ahead of federal, state and local legislative requirements.
We established more stringent requirements on ourselves such as plugging our ships into short power in Long Beach far ahead of the 2014 state requirement not discharging from our oil water separator systems within 50 miles of any coast line and adhering to our Zero Discharge Policy where we throw nothing but food scraps over the side of our ships. We are the only ocean carrier in the world with this policy.
We are always looking to improve and minimize the risk to the environment. We have done extensive research and testing on new technology such as Ballast Water Systems and Clean Air Technologies.
We are proud of our environmental achievements such as receiving the US Coast Guard’s Benkert Award for Environmental Excellence which is the US Coast Guard’s Premier Environmental Recognition Award. We signed the first Port of Long Beach ‘green lease’ in 2006 and agreed to plug our ships into short power which came to fruition last year.
In fact on the left side of the lower picture, you can see the cable reel on-board one of our newly outfitted ships and the two cables that will be hung over the side to connect the short power. We are also very proud of all the other awards and achievements both on the stage and not on the stage.
Moving to cost management on slide 59, this pie chart shows our four main components of cost. The largest is cargo handling which represents approximately 40% to 50% of total costs and covers costs such as moving containers on and off vessels and moving full containers through other modes of transport such as by truck, rail or connecting ocean carrier.
Next is vessel expense which is approximately 30% to 40% of total cost and its largest component is the fuels we use to run our vessels and also included here are crew wages and benefits. And there are smaller vessel and operations overhead cost segments as you can see and you can see the larger components listed on the chart.
We’re totally focused and aggressive on cost management. We have a stringing budget process that we track against weekly, monthly, quarterly and year-to-date. Variances are explained by responsible managers. We have extensive metrics covering all operating unit cost and service parameters.
We use cross-functional teams that meet regularly to plan vessel schedules, freight and automobile management, terminal operations, equipment availability amongst others. Every line items of cost in this company is managed closely. We continually seek and encourage cost savings initiatives and process improvements and we have incentive programs throughout the organization around cost management.
Now I would like to talk about our joint venture SSA Terminals on slide 61. This JV was formed in 1999 with SSA Marine. The current ownership is 65% SSA Marine and 35% Matson. SSAT provides Stevedoring and terminal management services on the West Coast to Matson and other ocean carriers as well as container and chassis maintenance, daily chassis leasing and on dock rail services.
As you can see on the chart, SSAT has two terminals in each of the major West Coast gateways and those six terminals represent 24% of the container terminals in those gateways and 20% to 25% of the containers lifts.
The strategic value of this JV has several dimensions. First, SSA Marine is a successful domestic and international stevedoring company with a good reputation and a brand complementary to ours. This reputation and brand continues at SSAT. This business has long-term lease commitments and ongoing capital requirements for cranes, yard equipment and technology. SSAT is able to finance these needs through its own self funding mechanisms.
Matson continues to benefit from economies of scale, faster vessel dispatch and have better cost predictability while sharing in the financial success of the business and participating in Pacific-RIM growth.
For those of who that followed the trade press, you may have seen the announcement that the grand alliance will move from SSAT’s terminal in Seattle to Tacoma in the second half of this year which will negatively impact earnings, but we continue to be optimistic over the long-term with the prospects for this business.
Now I would like to turn the presentation over to Rusty Rolfe.
Thanks. I am going to begin on page 64. The Matson Logistics Group was formed about 25 years ago. Today, we are top 10 asset-light brokerage company with a strong Matson brand and we are known for excellent customer service that we provide to our customers.
The core business, the domestic rail, international rail and highway segments are similar in revenue size and on a combined basis make up 90% of the revenues. The warehousing line of business represents less than 10%.
This slide illustrates our different product offerings. Our goal in the Logistics Group is to establish our relationships with our customers on one of the product lines and then develop an understanding of the customer needs to potentially create an opportunity to move them into the other segments that we cover.
On page 66, our key priorities are to continue to position us as a national provider of the integrated logistics services by expanding our core segments and developing our freight forwarding and consolidation offerings in China.
We intend like Matt said to grow organically, but in the event we do find an acquisitions that fits we’ll look for an acquisition that will help us enable us to grow.
Our growth opportunities are to develop synergies across all the Matson segments or lines of business and leverage those customer relationships. We have done this on a limited basis with very positive results. We believe there are additional opportunities and we have developed a more formalized sales strategy moving forward. We also plan to on-board 253-foot Matson control container this year. These will be used to expand our customer base and differentiate us in the marketplace.
In our Asian model segment, our sales recruiting efforts will be focused on larger agents which create less risk and have greater stability with customers. We have hired additional sales resources in the warehousing segment to help us open new locations and will continue to expand our inside sales teams. We plan to add freight forwarding and NVOCC service to our growing China consolidation segment.
Here is a look at how we've positioned ourselves in the US. We have seven customer service centers, 30 outside company sales people and 15 inside sales people centralized in Chicago. We have three warehouse locations and additionally we have 100 plus agents that are not on this map in our agent model group. Looking at our core business sections we start with the domestic rail. The current environment is very positive around the service that rail carriers provide. It really has never been better. With a shortage of over the road drivers and many new regulations around trucking, we believe this trend will be positive going forward.
But it's clearly evident is that the asset based providers are outperforming the non-asset based brokers. Our growth plans includes acquiring our own 53-foot boxes to help eliminate the barriers that we encounter with customers that require asset based brokers only as a lot of times we go into the customers and the first thing a lot of customers will say is, hey we only work with asset based players. So one of the goals for us here is to make sure that we can combat that and get through some of that. So and also in tough times where equipment is tight, this allows us to control some of the destination, our own destination with the customers we chose to work with. And this will also complement our current rail provided boxes and other service capacity options that we have available to us.
One of our specific sales strategy for us is the focus on the eastern rail network working with the Northern Southern and CSX railroad where truck conversion is growing considerably. Here is a snapshot of those companies that currently participate in the privately owned assets. We will follow this group in 2012 with a planned multiyear growth strategy. We will run our boxes on the BNSF and the CSX railroads in controlled origin and destination parings to help the utilization of the equipment and the turn times.
The International Rail segment is consistently profitable and resource light. The customers we win or lose come with large volumes. The lack of new carriers in the International segment have cost us to shrink in recent years. Mergers and consolidation along with these carriers doing direct deals with the railroads hamper our growth.
Our growth opportunities will include defending our current book of business and being aware of potential new carrier business when current competitive contracts expire. We work closely also with our rail partners to identify new non-traditional type business as well.
In the highway segment, the proposed transportation fraud legislation is expected to create improved profits, regulation and quality of brokerage between shippers, carriers and highway brokers. Should this bill pass, we expect it will strengthen our long-term position to help clean up the marketplace fraud and improve perceptions that may exist with some customers around the brokerage. Large to mid-sized public and private truckload carriers are creating and/or expanding in the highway brokerage. Inside sales is largely the sales strategy with the ability to recruit, hire and train large blocks of candidates at one time.
New technology tools of services and software providers are helping create efficiency within a very manual industry. Matson Logistics highway business is operated through company store and agent operations. Historically we have had above market yield for highway. Volume growth in our company store and operations have been at or above market, while our acquired highway agent business has historically lagged. For our strategic growth initiatives we expect to continue our above market yield performance and achieve volume growth. Our growth strategy has been centered on stabilizing our agent business and positioning it for growth, leverage our base technology platform and implement future enhancements to create efficiencies to develop new business and manage carrier capacity. We will expand inside sales to accelerate growth by recruiting the large blocks and finally continue to provide excellent service to our customers and ensure we are the preferred broker of choice with the motor carriers.
Warehousing is on page 73. Warehousing is our newest product inside our core offerings. As you can see we have a facility in Hayward, two in Oakland that make up a 100,000 ft.² We have one in Los Angeles and three in Savannah. Currently we have the best-in-class operation going on in Savannah. We have extended our footprint into our third building now. Northern California has been hit with some customer departures and idle space challenges, where in Los Angeles is pretty new and so we're starting to build the pipeline there.
Our growth strategy or initiatives include growing Savannah market. We believe we are well positioned to expand into additional buildings there, targeting and opening up new locations in new markets and improving the profitability in Oakland and [Hayward] with our new sales resources to create a more substantial pipeline.
Let me summarize our key strengths. With a strong Matson brand, our financial strength and our committed customer service teams, we are well positioned in the market place to grow. We have a proven customer relationship solidified by continued support we receive from them. Many of our top customers have been with us for several years. We have a solid sales approach that helps us touch every size of a customer in all segments without watering down our resources. Our vendors love to work with Matson because we work with them as partners, that strategy will not change.
We have our new operating system rolled out throughout the company with enhancements that create better, decision making to drive bottomline results and we believe our management team is the strongest as any in the industry. Thank you. With that I will turn it back over to Joel.
Okay, thank you Rusty. Let me turn to slide 77 to begin the financial information section of the presentation. This is a condensed version of the pro forma 8-K we filed last week and let me start with revenue. On the revenue side, importantly, it does include the full amount of our fuel surcharge mechanism, but as David noted earlier, we recovered the vast majority of our fuel cost but that does show up in our revenue item.
On the operating cost side, this is where all the cost that Ron reviewed on the pie chart on slide 59. All of those cost categories show up in operating costs and as we file our future financials, all of that will be just in single line items, treatment under operating costs.
The SSAT business and it is accounted for in the equity of Matson since we are a 35% owner. That shows up as a contract expense. So break that out, and so you can see that on the single line item treatment and here you can see it as a negative number because it’s a counter expense.
The SG&A line includes most of all of our office space employees around the world, all of our office space and rent and all other corporate functions. Just to comment on income tax, we noted in the pro forma 8-K, that we filed that we expect our effective income tax going forward with 38.8%. That's different than the amount you will see if you do the math on 2011, just due to the pro forma accounting, particularly for the SpinCo side of the equation on A&B but we expect that to be 38.8% going forward.
On a share count basis, the spinoff transaction itself will be a straight one-for-one share distribution. So we expect no change to our shares outstanding on a basic or diluted basis. And then lastly, importantly in the 8-K that we filed and I reiterated here, we do expect $8 million to $10 million of incremental corporate overhead expenses to a public company. And those numbers are not included in the cost numbers you see here in our pro forma financial.
CLX2, slide 78, the Pro Forma accounting roles are such that you do not include discontinuing operations. So that’s why that was not included, but going forward in a regular in 10-Q filings and 10-K filings, you will continue to see, CLX2 discontinued operations in addition, because Alexander & Baldwin and SpinCo for legal and accounting reasons, Alexander & Baldwin will also show up as a discontinued op in our future filings.
Turning to the balance sheet on slide 79, I wanted to comment on to the debt number. We announced publicly, when we announced the separation itself on December 1, that we are going to allocate debt 60% to Matson and 40% A&B. So if you look at our year-end debt, corporate debt number and take 60% of that, you would have arrived at number of 335 million. This pro forma number of 357.6, which is in our 8-K filing is higher because we’ve added on a one-time cost, separation cost, and other cash flow items that we expect to occur between the date of the balance sheet, which was 12/31 and the date of the separation.
Second point I make on this page is on invested capital. So if you add up to 357.6 from a debt perspective and a shareholder’s equity amount of 238 million, you get a total of invested capital of 596. And if you look at our income from continuing operations in the previous slide I showed you of 2011 of 42 million, 42 million of income, 596 of invested capital, it gives you an ROIC number of 2011 for Matson of about 7%.
2011, there was a number of headwinds in our business but we still produced a 7% ROIC number.
Turning to slide 80 and 81, we wanted to give a ten-year history. We previously put these slides in our investor materials. This includes all of the Matson businesses and this information has been derived from the segment reporting that currently exists in the Alexander & Baldwin 10-Ks over time.
Slide 81 showed EBITDA and CapEx and in particular on CapEx, we wanted to call out, we did have substantial spending for four new vessels which I will comment on little bit later, but if you extract those out, the average spend for last ten years has been around 40 million and what we’ve said publicly in terms of maintenance capital going forward, we expect that number to be higher going forward because of this general cost increases and environmental regulatory compliance etcetera and somewhere between 40 and 50 as where we would expect our normal annual maintenance capital expenditures to be year-in, year-out.
Going forward, Matson will continue to report two segments. Ocean Transportation and Logistics Services. Slide 82 just shows these two segments over the last three years. Diving into each one, we wanted to show the quarterly trend of each businesses. Slide 83 and 84 show the quarterly revenue and then operating profit for Ocean Transportation and in particular on slide 84, I comment, it’s not unusual for the first quarter to be light to lowest utilization quarter for us, Q2 and Q3 tend to be the most profitable quarters as utilization rates goes up.
Q4 tends to be profitable but not as much as the business tapers off a little bit in the fourth quarter from the volume and capacity utilization perspective. But you will see there is seasonality to our ocean transportation and operating profit.
Looking at the same data for logistics, slide 85 shows the revenue profile on a quarterly basis and slide 86 shows the operating profit on a quarterly basis and similarly, although more muted, there is some seasonality.
The first quarter tends to be a little bit light. The business builds in volume in Q2, typically we have a peak, experience peak profitability in Q3 than taper off in Q4.
We also wanted to show long-term segment basis on slide 87, shows ocean transportation, revenue and operating profit margin. The average operating profit over the 10-year period, 96 million and you can see, I think, importantly on this slide, that in all, over the last ten years, except for three, the operating profit was north of 10 million and we said publicly we do expect the ocean transportation segment to produce 10% to 12% operating profit margins, generally through the cycle.
Currently, we are facing headwinds. The Hawaii volumes are still below where they were before the recession, noticeably below and obviously the Transpacific freight rates are still quite depressed, which is depressing our margins currently.
Slide 88 is the same data for logistics business. And I think if you look at the slide, you would conclude, what we conclude which is there generally a 2% to 4% margin business. So our focus is to get the business back in to the higher end of that range, going forward, just on the initiatives Rusty mentioned.
Slide 89 gives you the history on the SSAT contribution, your income statement. The average over this 10-year period has been 8 million. This business will continue to be subject to the ebb and flow of international container volumes coming in to the six key ports that are part of SSAT on the West Coast and as Ron mentioned, we’re experiencing some weakness in the lifts in those ports in the SSAT business.
Slide 90 gives you long-term capital expenditure information and depreciation and amortization. And what I would like to point out on this slide is the ’03 to ’06 period when we purchased four new vessels. So you can see significant amounts of capital spent for those purchases and what you will continue to see for Matson is every 5 to 7 years or so, we will add some vessels as we continue to replace vessels in our core 9-ship deployment. But what we said is that we expect over the next three to five years to add two new vessels.
The exact amounts, dollar amounts of those vessels obviously will depend upon the design, specifications that we can track at the time but each vessel could be as much as $200 million in cost.
Wrapping up on slide 91, we wanted to show the key statistical drivers that we focus on day in and day out on the ocean transportation side. Ron and Dave both commented on our high service reliability and that’s best measured by vessel on-time performance. We focus on that. Operationally, capacity utilization like any heavy, fixed asset business is critical to us, and obviously freight rates and volumes we watch very, very closely.
On the logistic side, it is a throughput business, brokerage models, and volumes are critically important as well as the contribution of gross profit margin is a critical fact we watch very closely. And on the SSAT side, it’s really number of vessels coming into the key ports that we participate on the West Coast, terminal productivity and stevedoring productivity is important as well in terms of that business producing earnings and cash flow.
And on the financial side, I think the matrix are well understood. We do focus on ROIC. We think it’s a good measure of our business. We think about investing new dollars in the business along with some of the other traditional metrics we see here for our business.
So with that, let me turn it over to Matt to hit the key investment highlights.
Thanks Joel. I will take the next few minutes and kind of wrap up why we think Matson makes, I think, a significant and compelling investment value. Firstly, as was indicated, Matson has the leading market share in the core Hawaii shipping ring. We've talked about our two-thirds market share. We've talked about a 130-year-old carrier and we are integrated, we are part of Hawaii; Hawaii is part of us.
Similarly, in Guam, we are a long-standing player there. We are temporarily the only or the primary carrier from the US West Coast to Guam. We do expect eventually a second competitor to emerge. We are not sure when that will occur, perhaps it will occur closer to when the military volumes begin to build in earnest, but until then its important for us to be able to provide a reliable service to the customers and to the communities in which we serve.
We have very strong brand. We have very strong performance. We have very intimate customer support services. We have in many cases multi-generational relationships with many of our customers that go back many, many years. We have the largest fleet of Hawaii. We are able to operate it flexibly to respond to changes in market demand leading to high utilization as Ron mentioned which allow us to, we think, maintain relatively strong margins through the cycles.
We do control in the case of Hawaii as Dave mentioned our own integrated barge network which allows us to have the best connections for about a third of Matson’s cargo which we’ll required to be moved from the West Coast to Neighbor Islands, so we have a very strong benefit there.
I talked about that in my introductory comments and Dave did as well, we have first of all the benefit of the dual head-haul structure which allows us to remain profitable through what has been a fairly choppy economic cycle on the international trade. We also have the best-in-class service in the markets in which we operates. So we’ve got this premium niche service.
We’re not interested in carrying low rated, low value commodities that move on very slow ships and get there; whenever they do, we’re looking for cargo which needs to get there, which alternatively might be moving air freight and that very small segment of the market, that actually cares when the cargo gets there and are setting up our reputation and brand and put us in a very terrific position in one of the most competitive markets in the world.
On slide 95, just to continue a bit longer; we have the largest number of modern Jones Act vessels. The average age is 19 years. Our main competitor in Hawaii trade is a fairly aged platform; it has a significant reinvestment risk and I would say that over our long history and just to put this into context Matson had been operating to Hawaii for 80 years before it became a State of the United States, so just to put this our long relationship with Hawaii into context.
We’ve seen many competitors come and go, but we’ve been there and we will be there and that’s an important part of our franchise. We have a strong fleet of equipment that’s modern, that we invest in periodically; that is our customers’ expectation that the equipment will be in good order and we are easy to do business with; that’s our main goal that we make it easy for our customers to call to book to get equipment, to get in and out of our operating terminals and to get their cargo in Hawaii when it arrives.
I think we have strong diversified streams of revenue and as I mentioned we have long standing relationships. We also have, we think a highly strategic ownership position and a very strong marine operating joint venture with SSAT that will provide us both operating benefits in terms of control in the west coast in the financial return aspect that will benefit us into the future.
We think it was also important Matson has had a long history of a strong balance sheet, strong cash flow generation. Our goal in the separation was to allow both Matson as a newly independent company and Alexander & Baldwin both end up with investment grade credit metrics and in our case a low debt to EBITDA ratio; a strong level of income from operations of about $230 million over the last three years.
If you take income from continuing ops and plus depreciation and amortization minus CapEx of good free cash flow. We also do see that upside from growth opportunities in Matson Logistics. I would say, if you look at our businesses over the last few years, each of them has been cyclically, negatively impacted by the economic cycle that for those of you who follow transportation now has impacted a lot of different segments.
Each of them remains fundamentally healthy viable businesses that as and when the economy recovers we’ll be positioned to benefit from those recoveries as they occur. We do feel very, very well positioned here.
We’ve got a great management team, very experienced. We have been adding for a long time. We seed it ourselves with some fresh perspectives. I think it’s important that you have a combination of long experience and intimacy with our customer and operations, but also I think fresh thinking and join some of the new additions also bring that benefit to us. And I think we have been around, we have seen the cycles, we know how to manage through them, we know how to get to the other side and we know how to invest through the cycle and I think that’s one of the important takeaways here.
We have announced that Matson will be paying a dividend post separation. The final number hasn’t been announced or decided by the Board, but we have targeted a dividend between $0.50 and $0.70 a share.
And with that it leaves me to say thank you for your attention, a warm, a low heart to you. We look forward to seeing some of you who might be interested in coming out to learn about us coming out to Hawaii. And I would say that even though it sounds a little self serving you can’t really know Matson until you come and see us in our home market of Hawaii.
It’s easy to put all the stuff on paper but just to get a sense of how woven we are into that market, it’s really important element to come and see how important we are to Hawaii and how important Hawaii is to us.
So thank you for your attention. And thanks for your interest this morning. So thanks very much. I’ll turn it back over to Celica.
[No Q&A session for this event]
That does conclude our webcast for today, but Alexander & Baldwin webcast will be starting about 15 minutes at 9.30 this morning Eastern Time. So thank you.
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