Horizon Lines Q4 2007 Earnings Call Transcript

| About: Horizon Lines, (HRZL)

Horizon Lines Inc. (HRZ) Q4 2007 Earnings Call February 1, 2008 11:00 AM ET


Mike Avara - VP of IR

Chuck Raymond - Chairman, President and CEO

John Keenan – President

Brian Taylor - , President, Horizon Logistics

Mark Urbania - EVP, CFO

John Handy - EVP


John Chappell - J.P. Morgan

Kevin Sterling - Stephens Inc

Chaz Jones - Morgan Keegan

Peter Wahlstrom - Goldman Sachs


Good morning ladies and gentlemen. Thank you for standing by. Welcome to the Horizon Lines' fourth quarter fiscal year 2007 earnings results conference call. (Operator Instructions)

I would now like to turn the conference over to Mike Avara, VP, Investor Relations and Treasurer. Please go ahead, sir.

Mike Avara

Terry, thank you. Good morning everyone and welcome to Horizon Lines fourth quarter 2007 earnings release call. Thanks for joining us today. Coming from New York this morning Chuck Raymond, our Chairman, President and CEO and John Keenan. John was honored with reward last night, (inaudible). Congratulations John on that award. Here in Charlotte are Brian Taylor our President with Horizon Logistics, Mark Urbania, Executive Vice President and CFO and John Handy, Executive Vice President.

The call will be broken down into a couple of sections today. We’ll first take you through our 2007 fourth quarter and full year financial results. Chuck, John and Mark will do that for us. We’ll then turn our attention to 2008. Brian will join this conversion, we'll look at our market outlooks, our major initiatives and our financial forecast for 2008.

But before we begin I got to take just a minute and refer to your our Safe Harbor statement on page 3. During this call, we will be making certain forward-looking statements, and although we certainly believe them to be true at this point in time, we obviously can provide no guarantee that they'll actually come to pay us. There is important risk factors that are spelled out in our filings with the SEC and I would call your attention to those risk factors.

So, with that, I would like to now introduce Horizon Lines, Chairman, President and CEO Chuck Raymond and thanks all. Chuck?

Chuck Raymond

Mike, thanks very much and good morning folks. Thanks for joining us. Today we are going to go ahead and cover the fourth quarter and full year of 2007. And also give you a little more guidance for the 2008 plan. Therefore, the content of today's call and in elect of the presentation may a little bit different from prior earnings releases.

In order, to make our business strategies and our assumptions for 2008 very clear, we'll provide may a little more detail of our key assumptions for the year coming up. For the year, we delivered a $35 per share, $0.32 of that was earned in the fourth quarter. These results, as well as EBITDA in cash, are within the range of guidance and expectations.

We think that, in spite of market fears of recessions, the company experienced nearly 10% operating revenue growth in the fourth quarter. In fact, we now understand that fourth quarter GDP grew by a very paltry six tens of 1%. Obviously, very well below what Wall Street have been looking for, and than quite start contrast from the previous quarters growth, which was around 4.9%.

Economist have been, estimating an increase of 1.2% in fourth quarter. For the full year, the US economy obviously grew at a little over 2% probably the worst performance, in five years. And I guess that background, we built our 2008 plan and we also know that the Puerto Rico economy which has been in recession for most of the past two years is stabilizing and we're going to share that information with you. In spite of all this Horizon Lines did not retreat from its 2006 business results. We had a good year in 2007 compared to 2006 despite the economic headwinds that we had to fight all year long in Puerto Rican economy.

However, I think we used our very talented associates coupled with our new EDGE processes and tools to manage the cost out of our business effectively, while still giving award winning services to our customers. We're able to use our cash intelligently, and we brought back some stock over the last ten weeks, which Mark Urbania will update you on, at what we think are pretty attractive prices.

Turning to 2008, as we look over our Horizon for the full year, we see superior operations and business expansion driving exceptional shareholder value. We've invested smartly in our key marine terminals. We've put more efficient ships in all of our markets, and in doing so provided extremely reliable capacity that will meet our customer's needs for many years to come.

Our shareholders will see strong growth in earnings per share, supported by our vibrant and growing business, a strong balance sheet, and the value of there being fewer outstanding shares of Horizon Lines out there.

So with that, let me turn this over to John Keenan, our President and Chief Operating Officer of Horizon Lines LLC. John?

John Keenan

Thank you, Chuck. Well good morning .hank you for joining us today. I'm on slide -- number eight. Like to just talk a little bit about our revenue and volume updates for the fourth quarter. And if you look at the unit revenue per container, also referred to as our revenue per box You see there its has been up 6.8% quarter-over-quarter from '06 to '07 and that’s predominately driven by our general rate increase, as well as our cargo mix enhancements across the various trade lines.

If you look at the container volume, the container volume is down 1.3%. The Alaska volume growth was strong based on extended construction and our South bound seafood who experienced solid growth in Alaska. Hawaii, we also had some favorable volume growth due to the military and retail mix and in the Puerto Rico trade lane the volume declined there reflects the existing soft markets. And on Guam, the Guam outbound or as we refer to it as our backhaul the Saipan garments we saw some reduction in our movement out of Saipan.

On page nine, a little bit about our vessel deployments. We successfully completed our deployments in two younger and larger vessels the Navigator and Trader are now positioned in a Puerto Rico trade lane. This allows us some additional and more flexible capacity within that trade lane, as well as additional refrigerated cargo carrying capability on those ships.

The larger vessels in the California, Hawaii express and the Pasha on the West Coast, as well as consisting capacity that we discussed in the past which allows to on a weekly basis have a consistent volumes in each of the markets.

On the fourth quarter on page 10, on the vessel performance for the fourth quarter we’re very proud about vessel availability. We look at that number of 99.9% that’s with a 10% increase in operating days year-over-year so we’re extremely proud of our vessel ability, as well as our vessel on time arrival. And if you look the on time arrival, as we recall we measured this to the minute, this is very important key performance indicator metrics as an organization. We’re up 3% there, was improvement in Puerto Rico from 86% to 92%, in Alaska from 86% to 90% and from Hawaii, Guam 67% to 71%. So, we have seen consistent improvement in all three trade lanes.

And if you look at the vessel utilization number, you will see that the vessel utilization is down approximately 1%. That's the up size TP1 service with all five new Hunter-class vessels deployed, coupled with the addition of the new [PEC] service utilizing our new [CA] that provided about 19.3% more capacity than in 2006 based on 2006 capacity, Q4 '07 utilization contained about 88%.

On page 11, you see some of our fourth quarter awards and recognition. We are very proud to announce that once again, we have earned 2007 Platinum Carrier Award by Home Improvement Retailer Lowe's. We are 99.9% on time service. This recognition is the second consecutive year that Horizon Lines, have received this award. We are very proud of that and again it's a reflection of our service to our customers.

Below that, you see a picture of this is Horizon Falcon. The one of our new Hunter-Class vessels participated in the search and rescue operation in North of Guam, in mid July. And rescued two Chinese national crew members and they were recognized for their bravery and valor at the Admiral of the Ocean Seas award dinner in New York City. Again, we are very pleased with our crew, as well as the performance of that vessel and the entire Hunter-Class vessels.

On slide 12, the Equipment Modernization little bit investment in our container fleet, which continues into 2007. You see our new refrigerated containers over a 1,000 boxes they are in service now.

Our new dry containers, we put 1,800 dry containers in out network in 2007. 1,200 of those are the 45 foot international standard boxes and we added to our fleet, which is in reflection to our commitment to increase demand for bigger boxes in our services.

Below that we show a little bit of slide on our maintenance cost per load, which has improved significantly in our refrigerator containers and our dry containers. The key takeaway there as we continue to bring new equipment into our fleet, we're seeing reduction in our maintenance cost and at the same time we're seeing better utilization. And with our dry containers for instance, we're seeing three more additional loads annually based on the fact that boxes are not sitting around in our network.

On page 13, you look at the Horizon EDGE, a little bit on the update from 2007 and some of the key benefits that we've seen. Improved vessel network efficiencies, I just gave you the improvements in each of our trade lanes based on the on-time, our schedule integrity, a key focus of our EDGE team, our port productivity is variable and reduction on variable costs, these are terminal expenses in each of our trade lanes, you can walk in a terminals and see, key performance indicate is now that on bulk Edge and whether each of the organization is on focus on improvements in those areas. Without going into each of the benefits, I think a key takeaway on this slide is that, we've exceeded our 2007 EDGE target of $13 million and in a few slides later I'll talk a little bit when we speak about 2008, some of the continuation of 2008 EDGE benefits and our opportunities that we intend to focus on.

And with that, I'll like to turn it over to Mark Urbania, to talk about the financial review. Thank you.

Mark Urbania

Thank you, John. I am on page 17, looking at operating revenue, both in the fourth quarter and full year. In the fourth quarter we were up 9.9% comparatively and for the year 4.3%.

Let's turn to the next page for analysis of that. On page 18, on the revenue growth side you can see in the fourth we continue to enjoy good cargo mix and rate improvements through the fourth quarter and full year. The revenue from the acquisitions the two acquisitions we made Aero Logistics and Hawaii Stevedores and contributed nicely to the revenue growth during the year competitively

A few recovery, if you remember back in November we came out with some revised guidance, because fuel spikes you can see for us $5.7 million more than the fourth quarter of last year, which represents most of the year. So we lost money on fuel in the fourth quarter and more about that in a few moment, but all of that more than offsets the volume short fall particularly in Puerto Rico.

On page19, looking at adjusted operating income, slightly down for the fourth quarter and full year and although revenue was higher than last year with not enough to offset a higher fuel cost and the additional vessel operating expenses for our new program.

On page 20, adjusted EBITDA slightly down compared to over the fourth quarter and pretty much on par with last year down slightly the same explanation slide for operating income to adjusted income here.

On the adjusted net income line, on the fourth quarter we’re down but up for the year, the same explanation applies here adjusted net income. In addition, interest expense was lower due to the refinancing that we accomplished in August 2007 partially offset by a slightly higher tax rate in 2007 versus in 2006. So we’re very pleased with the net income.

Looking at EPS, we finished the fourth quarter of 2007 $0.02 up of 2006 same period, but went up to a $1.36 from a $1.33. It's really, just the difference in net income divided by the shares. From a free cash flow perspective, we exceeded the guidance that we gave you prior. The guidance we gave you prior was 19 to 22. We actually came in 26.7. Almost all of the increase was a result of, really managing our working capital very well in the fourth quarter, particularly, on the cash collection side that really drove this improvement.

Just a quick update on the share repurchase program. As we recall the Board authorized, us to purchase up to $50 million of common stock. We have completed that program, over the last 10 weeks what we feel are very, very attractive valuation and please to report that.

Just to wrap up 2007 before we move on to 2008. We have got the list of accomplishments here. You heard some of these from Chuck. I think we are most proud of the fact that we overcame a difficult market conditions in Puerto Rico. We keep our earnings pretty much in line with 2006. We have really aligned things up well, as we move forward with our TP1 fleet enhancements, the restructuring, the creation of a Horizon Logistics, business that's growing, EDGE is on track and delivering benefits ahead of plans, integrated two acquisitions in a share repurchase program.

We had a very busy year and now we look forward to telling you more about 2008 where it turns back over to John Keenan for the economic outlook in our markets.

John Keenan

Hey Mark, thank you. What I like to do is, take this time to walk you through each of our trade lanes and the economic outlook that we see. As you know, we have the benefit of operating in three distinct trade lanes in our service and one of the powerful components of our brand being the Jones Act carrier three services.

I want to start with telling you that we've done about six or seven iterations of our budget and what we feel is, we have a realistic actionable business plan. And I'm going to start with the Alaska volume, and in Alaska growth that we see about 3%. The Alaska DSP which is a growth state product is forecasted to increase form $243.8 billion approximately $1.9 billion year-over-year. As, you know, and have heard in a past the high oil prices and help to buoy the state economy in Alaska.

We expect to see job growth for the 20th consecutive year approximately a 1000 jobs, and most of those jobs will be in the anchorage area which as you know, that's the area well served by our vessels, mainly with strong growth in the military sector, as well as significant retail construction and expansion with new stores from Lowe's as well as Target. We see tourism and the population in the state continue to grow.

Moving over to the Hawaii economy outlook. As you look at Hawaii, we anticipate the GSP growth of approximately 1%. As you know Hawaii has traditionally had very low unemployment. It's the fourth lowest in the United States. The unemployment in Hawaii anticipated is to be 2.7% this year. And tourism, as you know, which is an important sector for Hawaii's economy and Horizon Lines demand forecasting a 1% digital growth in 2008.

The commercial construction that we've been seeing in Hawaii will certainly offset or the anticipation is that it offset some of the softening that you see in the residential construction. And high levels of federal spending in Hawaii are another important economic driver, much of this federal spending is on the military, and Hawaii continues to be a leading destination for federal expenditures, the 5th highest in United States.

Moving out to Guam, I think I was out in Guam in the first week of January and I could let you there is lot of excitement and enthusiasm around Guam. We feel we’re very well positioned with our new assets, specially the vessels that we put in the TP1 service, the flat-racks that we’ve continued to add the new equipment to our fleet and that's position us very well for the construction that we’re starting to see in Guam.

You see on the slide here, the 10 year military spending of $15 billion is underway. Its important to note that; that’s $1.5 billion annual spending that we anticipate seeing in Guam and its already started. The tourism continues to grow in Guam and if you look at the Saipan that's a very small percent of our business, but Saipan, the garment factories have closed and we factored that into our 2008 plan.

On to Puerto Rico, the Puerto Rico economy you are very familiar with, the GDP growth we see approximately 1% is what today has been forecasted. As you’ll all know for the Puerto Rico economy had has a rough couple of years due to government deficits and high energy prices. As you know 2008 it is an election year for the governor and the legislature. In the past the election years had brought higher levels of government spending, which tends to stimulate the islands economy.

The minimal wage increase of $2.10 from 2007 to 2009, they have a big impact certainly in Puerto Rico than on the mainland, because the median household income is about third of that than what it is on the mainland.

Investments continue not only in the pharmaceutical, but also in the bio-tech industry, approximately $4 billion in investments has been announced and in the pharmaceutical and bio-tech are important to Horizon Lines because they generate high values loads for us.

On the weak U.S dollar make Puerto Rico, an attractive destination for foreign tourist. So we anticipated a little bump in tourism. And the developing new industrial incentive laws as you know the industries unite in alarming government to maintain and enhance the tax abatements that have been provided for investment in Puerto Rico.

Little bit about 2008. I have covered the focus of EDGE and what we were able to accomplish, as an organization in 2007. And one thing I want to make sure, you understand this really has been a, aged cultural change within the organization. The entire company from sales to operations is focused on providing services excellence and only through our on time and schedule integrity. But in each area of our organization, and these are the key areas that we continue to focus on in 2008 with one important addition here that I would like to touch on and this is really the vessel fuel. As you know, that's a large expense item for us and we continue to find ways to improve our consumption on board our vessels, our vessel overtime, as well as our maintenance and repair.

But the area I just wanted to touch briefly on is sales and marketing. What we have done there as we provided our sales and marketing organization with the additional tools and techniques, to help improve and enhance our profitability focusing on our cargo mix and our upgrade.

On page 15, a little about our coastwise. I think the key takeaway here is that, there is good support from the government on as you with Title XI, there is some funds that have been added to the Title XI ship building program. Reforms to the capital construction fund, which will now allow our vessels to have to built with CCF to operate in coastwise trade. We are also working on some of the pending legislation on the Harbor Maintenance Tax Relief for our coastwise trade.

On page 31, capital expenditures, as you look here, we got $20.6 million on our CapEx plan. Lot of it has to do with the key items that are outlined here. I think the takeaway on each of the terminals as you see, what we continue to do is modernize our terminals, improve our technology in our terminals and ultimately improve our service levels to our customers.

If you look at the vessel regulatory and operation and some of these will applied into our fuel savings and our initiatives and our safety and regulatory. Though the $20.6 million is inline with what we had advised you previously and it's going to allow us to continue to modernize not only our terminals, but also our fleet and our equipment.

On page 32, we have our vessel dry dockings, as you see 2008 as our friends in Ocean Transportation Services Group would say it's a fairly light year, this being a low number of dry dockings. When you look at the cash expenditure there, the cash payments projection of $15.8 million in 2008, that relates both the payments on dry dockings performed in 2007, as well as 2008. So our typical dry docking cost has remained consistent throughout the last several years.

And with that, I'd like to thank you. I'm going to turn over to Bryan Taylor, and he's going to be pursuing Logistics outlook. Thank you.

Brian Taylor

Right. Thank you, John. You look at the first slide here, this may help you understand why we are really so excited about this entry of ours into the logistics business. Now the logistics sector over the last ten years clearly is seen as a very strong growing industry. The US outsource logistics market is currently estimated to be about a $114 billion and growing at a rate of 14% per year.

More importantly for us 64% of these $114 billion falls in the domestic transportation area, with roughly $57 billion in domestic warehousing and domestic truck transportation which is clearly our sweet spot. It's a large and growing market that provides huge opportunities, both for us at horizon logistics, especially where we can begin to leverage the strength of the current relationships we have with our broad blue-chip customer base.

On the next slide what you’ll see is really an indication that over the last five months as we put this business together, its become apparent that we have two very distinct product offerings within this company. While we’re single company we look at having two very distinct sales channels. The Aero Logistics model, here we have a group that is highly specialized in specific markets, very deep knowledge and understanding of these markets and the customers that are within each of those segments. We see strong margins due to the high, very high-end product values and service sensitivities of the customers that are within these segments.

In the aero model its usually entails a high degree of special touches to effect delivery of the shipments for the customers. On the Horizon Logistics side really specializing in truck brokerage, container [dredge] or warehouse. Typically you’ll find lower margins in these segments, but clearly higher revenue opportunities over the long-term. And we often see much overlap with the requirements from our existing liner customer base.

In between both of these segments or bridging the segments that we have is an Enterprise Sales Group or National Accounts Team that deals with customers that require services that may touch both of these channels and perhaps other offerings that are part of the minor company.

Next slide really takes us through where we are today. Overheard integration is complete, we are still in the final stages of some systems integration in upgrades all of that to be completed around the 24th of March. We have added increased sales presence within the Aero Logistics business and we are in the process of adding two to three incremental sales resources on the Horizon Logistics channel.

We have also established the new truck brokerage unit in the Dallas, Texas operation and we've completed the integration of this unit together with our truck brokerage teams in Lexington, [El Redo] and SeaLogix businesses that we operate on the West Coast.

We are continuing to add, new systems functionality and this is really designed to help us minimize, difficult data enter functions and enhance the scale ability of our logistics model going forward. The enterprise sales teams established, we've realigned their focus on technology as a component of the logistics total solution.

Next slide, we have really intent, as we move forward to become renowned for our responsiveness and innovation where a customer has a problem Horizon Logistics is going to find a way to ensure that we are capable of resolving that problem. And have a very strong focus on domestic transportation as I alluded to earlier, with niche international air and ocean offerings to compliment that basic core.

And whether our customers may be moving, hi-tech medical or computer equipment or may be they are looking for a vendor managed inventory program, for a solution in Mexico, Horizon Logistics is going to have the capability of developing a very unique solution that will solve their particular pain points.

We are going provide the highest quality offering, with fanatical customer service. True hallmark of the business with staying focus specifically, in serving the lanes and niches that we know well and allow our customers to help drive us new lanes in the future.

As we look to '08 for services we are going to state the course our focus on our core service offerings recognizing that throughout the course that you may have to adjust our sales a little bit. Lot of emphasize in '08 is going to be placed on expanding our expediting service offering that falls within the Aero Logistics model, building out that truck brokerage business which is clearly going to lead other opportunities for us to expand with our customers.

Building out the trucking and warehousing services of the Sea Logix business on the west coast Lexington North Carolina facility and other new facilities that we may contemplate throughout the balance of 2008.

In Mexico we are going to grow our capabilities in operating capacity to where Horizon Logistics becomes the knowledge and service experts that customers turn to when they have shipments moving in and out Mexico.

We want to expand our international air service where we are not going to competing with expeditors or other large contract carriers, but really looking for specifically niche opportunities whether may be moving in 8-foot medical magnet for some medical equipment or perhaps some construction, heavy construction equipment that requires some specialized handling.

Next slide lays out our 2008 logistics plan. This is clearly an aggressive, but achievable plan. We have revenue base of $245 million and an EBITDA target of $4 million in 2008, but I do need to point out is that this plan does continue roughly a $184 million in inter company transfers that today are handled at cost for Horizon Lines. And you can see those reflected in the elimination accounts. These are services that the logistics company today provides to Horizon Lines, primarily focused in truck and rail transportation, some container dredge that we do on the west coast and as well as the technology services.

Clearly we are focused on growing the profitability of the Aero business, which we expect will generate $5 million in 2008 showing a very nice return on the investment that we just made in August of last year.

Obviously, we see growth in the truck brokerage segment and greater inter company synergies and a lot of focus on continuing to improve the results that are coming out Sea Logix our trucking division on the west coast. We have clearly separated them out as a division with their own standalone P&L and we expect to see better things going forward.

I do need to say we’ve added a little bit of incremental overhead to this business as we started out. Clearly what we’re trying to do is position this business to be a scalable model that is capable of quickly ramping up and handling significant growth going forward. And when you take a look at this business and beak out the inter company transactions, take away that $184 million that we’re doing at cost for Horizon Lines. What you see is a logistics business that today has a revenue base of roughly $61 million generating an EBITDA margin in the range of 67%, which is clearly consistent with similar industry comps.

With that I am going to turn it back over to Mark.

Mark Urbania

Thank you Brian. Lets jump right into it looking at the financial guidance. For 2008 its looks that they are comparatively to what we provided you a couple of months ago. I wanted to give this summary information at front and then we’ll do the analysis behind it.

But on the surface if you look at the revenue change we brought revenue down to temper our volume assumptions. EBITDA remains the same, because we’ve revised and quite frankly cut some of our expenses. Compared to November of 2007 guidance our diluted EPS is up. Its up primarily due to the share repurchase of $2.8 million share over the last 10 weeks and our cash flow guidance remains unchanged. I do want to make mention to you that going forward we plan in providing annual guidance. We plan doing that for a couple of reasons.

We believe its more inline with our long-term approach to running our business. In addition, it eliminates a timing differences, quite frankly that restored our quarterly results. The examples I used there is a revenue recognition policy, requires that a vessel that departs at 12 midnight, we include in it the results for the current period. If a vessel that departs at 12:01 happens it removes on average approximately $1 million of revenues and shifts that into the next quarter. This did in fact happen in December. So our results for the fourth quarter would have been better both on the EBITDA line and on the earnings per share line if it wasn't for, really what we call mid to mid to late sailing.

For those of you that are modeling 2008 on a quarterly basis, I would -- may I suggest that you review our results from 2005 from 2007 to accurately reflect with the seasonality in our business. As you may know, the third quarter is typically our strongest quarter from a earnings perspective followed by the fourth quarter, the second quarter and then the first quarter.

I think it is worth mentioning, that this change is in now way an attempt to hide or mask any short-term issues. I can assure you of that. It simply represents a more accurate approach to running our business.

On the next page, the segment breakdown, as we represented earlier, we would break down going forward the core liner business and the logistics business that Brian just talked to you about. How we did that $184 million in elimination is the services that the logistics business is providing to the liner business at cost. Although, there is a revenue elimination, there is no inner company profit elimination. On a consolidated basis you can see the numbers there and goes up to 180.

The 2008 major budget assumptions, John Kennan went through this. In back in November when we shared with you, I don't think we shared with you these volumes assumptions on a piece of paper, but we did talk you about it. We said that our expectation was for a 5% revenue growth. We've said and since brought that down as John talked about to 3%, in Hawaii we were targeting 2% now we're targeting 1%, Guam 9%, 5% and it really relates to what I call as John talked you about Saipan. In Puerto Rico our expectation for this year is already been reviewed is flat.

So from our volume perspective we brought for the company overall down from 3% to 1.5% which in our view is that's a very realistic outlook given current economic conditions. We slightly reduced our, what we call, unit revenue increase or rate per box as John Kennan referred to it.

On the next page what we provided is really a revenue bridge that you could do the math and see how we ended up 2007 and how do we get to the mid point of the guidance. And really quite simply broken down in the few buckets here, the volume container increases a bit on those real estate volume assumptions is $15 million, rate increases, very reasonable rate increase of $30 million, fuel surcharges are $40 million, the acquisitions that we made will contribute $44 million and then other-non transportation revenues for us really represents the increase in sales to Merck, as a results of our new ships we brought on and the changes in that West Coast network.

On the next page looking at an EBITDA guidance bridge, from the original guidance we gave in November to know the obvious question is how did you bring, revenue and still maintain your EBITDA guidance and what we've attempted to do here is really to lay that for you, but from a revenue reduction perspective you can see the effect of the lower volumes and slightly lower rates.

And where we really offset that cost which is on the vessel side. We do use a seasonal vessel. In Alaska, (inaudible) as you know we’ve taken some operating days. That was contributed a little bit there. And then on fuel side, as you know fuels obviously are major focus for us and one of the reasons that we weren't able to make original plan for quarter. So, we have real strong program in place led by John Keenan on fuel conservation program. We expect that to yield $3.3 million for.

Then I mentioned overhead cost reduction. We reduced our overhead accrual down by opposing a higher threshold target to achieve a 100% payout. And then the overhead expenses of 2.8 on various areas throughout the company and the overhead is, as we really pump it down in control expenses throughout the company.

On the next page, it really takes you on EBITDA bridge. How did do we get from our actual EBITDA of 160 million in '07 to 180 million, which is the midpoint of guidance range for 2008. I think that sums that up nicely for you. Revenue margin increases contribute 33.1 through our lower volume and rate assumptions. Increase in vessel operating leases, that's a full year 2008. As you know we've brought the new vessels on board. Late first quarter, early second quarter of 2007, so this represents a full year of those expenses. As Brain mentioned, the acquisitions will contribute 4.4, nearly 13 million in EDGE benefits. We are very pleased that program is on track. Terminal, rail and truck increases that just normal operating cost increases for us. The bonus accrual, which we didn’t have in 2007 and now put in the plan for 2008 and the other is really capital. So that in summary, a bridge how we get to 160 to 180 which we feel very good about.

On the next page, free cash flow we are excited to talk about this page. If you look at our free cash flow projection here starting with EBITDA, the midpoint of EBITDA of a 180 and these are the really, really the components, stock based compensation is a non-cash charge, so that's an add back.

We really focused on working capital. We made nice progress in the fourth quarter on that. We will continue to make progress, as we work and bring our day sales outstanding down. The other big bucket is capital expenditure. We have already shared with you $20.6 million planned in 2008. The dry dock expenditures, that John talked you about only two dry-dock with the cash implications are nearly $16 million, that really relates the timing of payments for past dry-docking. And in interest expense, interest expense effectively about $30 million. So, if you do the math on that that gets you to the midpoint of our cash flow guidance of 120.

Wrapping up on our outlook, we can see all the bullet points there. The points on this stage are obviously all positive factors that will enhance the operations and financials of 2008. I think the key point that is not listed here is, the fact that we have realistic revenue drivers we had adjusted our cost drivers accordingly to reflect that. We believe that under current market condition a lot of this in our control and we look forward to a good 2008 and certainly from a financial perspective much improved over 2007.

With that, I will turn it over to our Chairman and President, Chief Executive

Office Chuck Raymond for final thoughts.

Chuck Raymond

Okay Mark. Thanks very much and as you and John have explained, this plan for 2008 is a little bit different. Its built on pretty conservative volume assumptions. I wouldn't call conservative I'll call them probably good strong estimates of what we are hearing from our customers, validating the business volumes that they are anticipating and so therefore our plan represents a set of sustainable assumptions.

We have spend a lot of time talking about EDGE and I would just point out that we are real fortunate that we started this program a year and half ago, it has paid off well, it's positioned the company to operate more efficiently, particularly in the economic environment that we are in today. It has helped us to sustain our service levels those are levels that continued to be loaded by our very best customers, whether in the logistics sector or in liner business.

We've got a very sustainable market share in each of our trade so we have undershot this economy a little bit and if the markets are a bit stronger than what we've represented here than there's clearly some operating leverage and upside to our numbers.

Now the key point, I think that Mark pointed out is our cash generation, that's impressive, it's sustainable and while our earnings per share growth for 2008 over 2007 when you do the math and look at the guidance it's going to be in the in high 50s low 60% range. That's clearly impressive.

Horizon continues to be a household brand in our markets, our company continues to be managed by professionals all of whom have track records of success. So we're happy to share these plans with you.

We will now turn this back to the moderator and take any questions you might have.

Question-and-Answer Session


Thank you and ladies and gentlemen we’ll begin the question and answer session. (Operator Instructions). And our first next question comes from [John Chappell] with J.P. Morgan. Please go ahead.

John Chappell - J.P. Morgan

Thank you. Good morning guys.

Chuck Raymond

Hi John.

John Chappell - J.P. Morgan

You quickly went through the share buyback program putting your money where your mouth was, just curious about the uses of this free cash for 2008 and beyond as you balance kind of near term market opportunities whether the acquisitions on the logistic side and the core business, whether that means share buybacks if the stock continues to kind of be where it was when you were buying back late last year early this year?

And also as it pertains to future fleet expansion or renewals with new bills for the next decade, so how do you balance those three types of things with the cash flow generation that appears very strong for ’08?

Mark Urbania

Well John, we’re very pleased with cash flow generation as we pointed out its going to be strong. The share repurchase program that you mentioned, we basically finance on a revolver. So we’re going to take some of that free cash flow that we are generating and going to use it to pay for that share repurchase program, which really brings us down into lets call it $7 million range.

We’ve share with you and others that our plans is to grow logistics so we’ll be actively working for opportunities during 2008 to grow that logistics business and that could be some use of cash. Absent and other strategic opportunities that provide a superior level of return where the cash invested will likely use it to continue to pay down a revolver which in essence create more liquidity for us so that, we could pursue other opportunities.

On the long-term asset front, the way we are looking at that is, we will begin the program when we feel it's necessary and right now we are targeting some time pass the 2012 timeframe, which is a little ways away.

John Chappell - J.P. Morgan

Just to clarify. Did I interpret to mean another share buyback program is probably not likely in the immediate future? Something changes dramatically with the broader economic outlook?

Mark Urbania

John, as we stated in the past related to share buyback program, I think that we will have to see how things respond, how we go throughout the year, how our stock reacts and we will make that decision with the Board when that time comes.

John Chappell - J.P. Morgan

Okay, Chuck and John are there any opportunities that may present themselves if the economy actually turns out to be weaker than expected?

Chuck Raymond

Yeah I think we have a got very good plan here in the company that we gone through should we have a serious recession broadly in the US. I know we clearly had that in the Puerto Rico market, actually state inflation in Puerto Rico over the last two years. And we can variablize our services quite a bit. So, we are pretty comfortable. We can slide our cost down if and as softness comes to us.

John Chappell - J.P. Morgan

And last one. John mentioned the fuel expense savings and the focus on that. Then Mark highlighted in the financials for the '08 guidance. May be it's too detailed for this forum but could you explain a little bit on how your actually going about this fuel efficiencies in savings.

John Keenan

Yes, John. It's John Keenan. How are you?

John Chappell - J.P. Morgan

Pretty good.

John Keenan

Good. Let me just take you through that. One of things we have done, as we have taken look at the each of the pro forma's for our ships and have gone back in adjusted speeds, where we can, so with a reduced a speed on the other (inaudible) less consumption. Within our EDGE process we are making sure that we get ships out on-time, so that they arrive on-time and they're burning at the most economical speed.

And then the third and a very important area we're focused on is on the operational aspects of each of the power plants, from a, an on-board perspective, and looking at our reduction in that area. And Joe Breglia and our Ocean Transportation Services team, leading the charge with that and we're very, very optimistic with what we see.

John Chappell - J.P. Morgan

All right. Thanks, John, and congratulations on your award.

John Keenan

Thank you.


And your next question comes from [Kevin Sterling] with Stephen Inc. Please go ahead.

Kevin Sterling - Stephens Inc

Good morning, gentlemen.

John Keenan

Good morning, Kevin.

Kevin Sterling - Stephens Inc

Chuck, you talked a lot about the EDGE program and how guys exceeded your goals for 2007. What is your outlook for EDGE cost savings for 2008? Has it changed since we initially started talking about that?

Chuck Raymond

Kevin, good morning. No it has not, we're consistent with that. Well be, as you see we have built in our plan this year of $13 million of savings that has us at a run-rate of $25 million. And then we have some more to go in 2009, which will at that time have us at a run-rate of $40 million. So that plan has been right on the money so far, maybe there's a little upside there but we're quite pleased with the -- as John pointed out the cultural change that's brought to the company and to the knowledge that we've questioned the Board with that program.

Kevin Sterling - Stephens Inc

Okay. Great. Thanks. And Mark, just probably a question for you, your tax rate was little low this quarter. How should we think about that going forward, and what's primary driver of the lower tax rate this quarter?

Mark Urbania

Given the primary driver for the lower tax rate in the fourth quarter is lower earnings. As we've explained in the past our tax rate will move around depending on the earnings. So obviously, there is no tax rate in Puerto Rico, so it depends upon how Hawaii and Alaska perform that can create a up or down movement in our tax rates. So our tax rate for the fourth quarter, I believe was around 14% and we’re modeling a tax rate for 2008 of 20%.

Kevin Sterling - Stephens Inc

Okay thank you. And how many shares, another question for you mark, how many share did you actually repurchase on your stock buy back program?

Mark Urbania

Kevin, we bought back in the last I call it 10 weeks approximately 2.8 million shares.

Kevin Sterling - Stephens Inc

Okay thanks. That great. And this my last question it’s a broad question. Talking about the short sea initiative as you there has been and you guys touched on your presentation, there has been a lot of talk lately about eliminating the double harbor tax, how are you thinking about if this tax is eliminated and to position Horizon Lines to take advantage of this?

John Keenan

Yeah Kevin this is John Keenan. Let me take that one thank you. As you now we’ve some vessels that have been freed up as a result of our TP1 initiative and our deployment. We continue to work on our business model, we’ve met with the international carriers and some large domestic shippers, our terminals and also ship board unions and personnel who looked at and we’ve some various templates and models outlined for us to put into place at the appropriate time. We’re working to eliminate that harbor maintenance tax on the coastwise trade in east coast and Gulf. Building on a support as you know that was given to the Great Lakes region as we receive some positive feedbacks. So I thin we‘re very well positioned as an organization. We continue to evaluate at an appropriate time we’ll implement it.

Kevin Sterling - Stephens Inc

Okay. Well thanks a lot, that’s all I have. Thanks for your time today.

John Keenan

Thank you.


Thank you. And ladies and gentlemen if there is any additional request (Operator Instructions) And our next question comes from Chaz Jones from Morgan Keegan. Please go ahead.

Chaz Jones - Morgan Keegan

Hey good morning guys.

Chuck Raymond

Good morning, Chaz.

Chaz Jones - Morgan Keegan

You guys gave a lot of detail in the presentation and certainly I appreciate all the visibility that you gave in the 2008. But I guess if I just try to summarize quickly the changes that you made in the guidance. Net income actually came down a little bit from your old guidance. But, that was mainly due to a higher assumption in interest expense and tax rate. And then revenue came in a little, but that was, mainly driven from volume, slightly less related to rate, but the increased EPS is driven by a lower share count is that kind of accurate summary?

Chuck Raymond

Yes, you did, you summed it out pretty well there.

Chaz Jones - Morgan Keegan

Okay great. And then may be a follow up on John's question about CapEx, Mark. I guess you said you really didn't expect to ramp up equipment replacement needs until 2015 should we anticipate the CapEx, I guess from 2008 to 2012 to kind of may be trend in that, may be $20 million, $30 million year range?

Mark Urbania

Chaz. Let me, be clear about that make sure that there been confusion. When we look at the capital in our company, capital spending and I am talking about capital spending out side of ships now, okay. We generally spend somewhere between $20 million to $30 million gain. But last year we spent 30, primarily as a result of some terminal improvements that were needed for productivity changes in two of our offshore terminals, but absent that we are generally in the 20, 25 range. So you can expect us going forward for modeling purposes between the $20 and $30 million range.

Even with that we feel very, very good about our cash flow generation Chuck mentioned that cash flow generation ability of the company is sustainable, it is sustainable, you'll see these kind of numbers or higher as we continue to grow the business from a cash flow perspective. So as we get out a little bit further and look at larger asset replacement, we feel like from a cash perspective we'll be in good shape when that time comes.

Chaz Jones - Morgan Keegan

Okay that's helpful. May be more of a modeling question as the logistics business ramps up, I assume associated with that ramp up is going to be increased purchase transportation expense is that going to flow through that the operating expense side of the P&L?

Chuck Raymond

Yes absolute

Mark Urbania

It would, but it would be encapsulated within a logistic business and Brian and or I will be sharing these details, but one thing that we're going to do going forward as I mentioned is we're going to break up the key metrics, key financial metrics of four logistics business in terms of revenue and EBITDA so that our investors can feel how we are doing against the dollars that we are spending to grow that business.

Chaz Jones - Morgan Keegan

Okay. And then one last question and I know you'd you really don't want to focus on the quarterly results, but I can't say that relates to Puerto Rico in your guidance for the year kind of flat volumes. And again may be you don't want to answer this but within that guidance and is that flat for the year, the way that you guys see it or does that assume that may be we are off, here in the first half of '08 and then by the time we get to later in the year, that volumes do start to improve year-over-year, but kind of net, it's flat for the year.

Mark Urbania

Chaz we on the volume and rate assumptions that John Keenan shared with you for our core line of business. Those are pretty flat throughout the year. The volume for us are typically a little lighter in the first quarter and that's why our earnings, as I shared earlier when you look at business over the last three years, typically first quarter from an earnings perspective, will be the lightest. The third quarter would be the strongest and then the second and fourth quarter, will be pretty much on par with one another. So, that's how we are thinking about it.

Chaz Jones - Morgan Keegan

Okay. That's all I had, best of luck at 2008.

Mark Urbania

Thanks Jeff.


Thank you. Your next question comes from Peter Wahlstrom with Goldman Sachs. Please go ahead.

Peter Wahlstrom - Goldman Sachs

Good morning.

Chuck Raymond


Peter Wahlstrom - Goldman Sachs

Just following up on that last question actually, particularly with Puerto Rico, if we think about flat volumes across the year, given that the year-over-year trends that we have seen over the last eight quarters or so, do you still see that being flat or roughly flat in first quarter or even first half of the year versus second half of the year.

John Keenan

Yeah, we did and this is John, let me take you through that. If you look at and we generally like to refer to the JOC stats, which give the volumes in Puerto Rico and if you look at '05 to '06 volumes down 7.7%, '06 to '07 down 4.1%, so a total 13% in volumes and when you look at what we've done on our budget and you know there is little bit of a seasonality in the Puerto Rico trade lane. And what we do as we manage our capacity to that seasonality, but when you think about how we set our budgets up for 2008, you need to look at that 13% volumes decrease over those two years and we're flat based on that. That help you?

Peter Wahlstrom - Goldman Sachs

Yes, yes, very helpful. Thank you.

John Keenan

Okay. Chuck might have a little bit to add on this.

Chuck Raymond

Well, we obviously talked to lot of customers on the Puerto Rico, and we see it changing little bit. As we been through period of stack inflation down there, it bottomed out, we believe back last quarter. Started back in May of '06, when the rating agencies were about to and did in fact downgrade their general obligation bonds. The Common Wealth took the appropriate steps to deal with that. The biggest one was to restructure their taxed regimes in Puerto Rico. That has worked, they have actually increased their tax collections, and their structural deficit has been reduced more than 70%.

With that in November both Standard & Poor's back on actually, in May, Standard & Poor's not in November, Moody's improved the outlook for the Common Wealth from negative to stable and confirmed that they are beckoning investment grade status. Now since that began, we think the structure is in place to continue enhance that improvement, revitalizing the economy

Even though that outlook looks a little challenging, we feel recession that began in 2006 is probably still there, working it's way out right now, starting to get a little bit of growth, and the local legislator and the governor have done a couple of things to restart the economy. I think probably the most significant thing is recently a $25,000 tax-credit applicable to the purchase of a new home, legislators still has other measures that they're working on that they want to trigger during 2008.

So again, you look at the traditional results of recession, falling home values, high cost of consumer credit, shrinking job markets, higher prices for gasoline in particular. The major fear in Puerto Rico is that of a further decline in employment and that's really the only one, because when you think about the Puerto Rico family they tend to be pretty highly leveraged with credit card loans, with home mortgages and automobile loans, the costs of all those are coming down now with the recent Fed action.

On the income side the Puerto Rico family is not really too dependent upon earnings from their bank accounts or their savings accounts to sustain there lifestyle. So as those interest rates actually come down on the income side they are not impacted very much. So it's a net good story, again, the unemployment down the Inland is 10% maybe a little bit above that today. But this being an election year and with the tax revenues now coming up, we think that the local legislator and the governor will use those tax revenues in part to pump up employment, especially in the Public Works area as we get closer to elections. So, that’s a little bit of a long story, but we've done a little more research than we have historically in Puerto Rico, and I think we feel better about it now.

Peter Wahlstrom - Goldman Sachs

And the color is certainly appreciated. Thank you. In the event of a more sustained downturn, if we think that Puerto Rico has at least stabilized if not touched on the bottom, which other region do you see having more economic risk? Is it Hawaii, is it Alaska or may be is it you inland logistics business?

Chuck Raymond

Yeah, honestly we don’t see, in the grand scheme of things the inland logistics business is a relatively small part as you can see of our EBITD and our cash flows. But turning to the liner business, Alaska is in great shape. Form that say, an oil based economy, twenty years of consistent growth up there. A lot going on with the retail sector as John mentioned. We are in good shape in Alaska.

Hawaii would probably be one that we'd be little concerned about. In Hawaii, we have tempered our appetite for volume, tourism particularly foreign tourism with the value of the dollar is pretty attractive. We shouldn't discount the fact that EUR 0.67 now. I mean we are getting a lot of European tourists in Puerto Rico and starting to see a lot of them in Hawaii. And then again, when you look at our revenue stream with what comes from the military sector, what comes from our contractual agreements with Merck etcetera there is not a whole lot of our revenue stream that subject to recessionary forces.

Peter Wahlstrom - Goldman Sachs

Okay, and then I take it, you haven't received any sort of push back from customers regarding either fuel surcharge increases or absolute rate hikes given the current micro environment?

Chuck Raymond

We haven't abused that the surcharges, in fact there are surcharges. As you know, from last year, didn't come up as fast or as immediate as our cost of fuel came up. Our cost of fuel, on a per tonne basis back in the first part of the year, I know, we were buying fewer $281 tonne in January and by the end of December, we are buying at $464 tonne.

We certainly didn't increase our surcharge by 100%. So, we were pretty reasonable with regard to that. And in terms of general rates increases they are generally simply, just to absorb the inflationary cost that our business related to rents and wages.

Peter Wahlstrom - Goldman Sachs

Okay. Very good. And last question for you, just kind of checking the box here. Does the company review the technical collections bill and tonnage tax adoption situation to be permanently resolved or is there a possibility that this could re-service in 2008?

Mark Urbania

They teach you in law school never say never. Let me say this about that. As you know, that technical corrections bill went through the house in Senate with the Puerto Rico negative language removed. I will say we are confident that the matter is not going to be raised again.

Peter Wahlstrom - Goldman Sachs

Okay very good. Thanks very much.


Thank you. And management I am showing that there are not future question. We will turn it back to you for closing comments.

Chuck Raymond

Okay well. Thank you very much. As you know, we will be on a call on April the 25th to give you the results of our first quarter financials results and business results. But thank you for your interest and hope you will have a good day.


Thank you. Ladies and gentleman that will conclude today's teleconference. We do thank you again for you participation and at this time you may disconnect.

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