Horizon Lines, Inc. (HRZ) Q2 2008 Earnings Call July 25, 2008 11:00 AM ET
Welcome to Horizon Lines Q2 2008 earnings results conference call. (Operator Instructions) I would now like to turn the conference over to Jim Storey, Director of Investor Relations.
Welcome to Horizon Lines second quarter 2008 conference call. With us this morning are Chuck Raymond our Chairman, President and Chief Executive Officer; John Keenan, President of our Liner Company; Brian Taylor, President of our Logistics Company; and Mike Avara our Chief Financial Officer. Also on hand is Katherine Walsh, our Vice President and Controller.
Our call today will be conducted in the normal manner with Chuck providing an overview of the second quarter, John reviewing our shipping operations, Brian walking you through our logistics business and Mike discussing the financials. Chuck will then provide some closing comments before we open the call to questions.
A few housekeeping items before we begin. Our press release was issued earlier this morning. For those of you who do not have a copy it is available in the Investor Relations section of our website at www.horizonlines.com. Additionally this morning’s conference call presentation is accompanied by a slide presentation which also can be accessed in the Investor Relations section of our website. We encourage you to view the slides during our remarks.
Lastly I would like to draw your attention to our Safe Harbor Statement and remind everyone that on today’s call management will make certain forward-looking statements that it believes to be reasonable at this point in time. Actual results could differ materially from those projected today due to known and unknown risks and uncertainties, the discussion of factors that might affect future results that’s provided in our filings with the SEC. Horizon Lines undertakes no obligations publicly update or revise any forward-looking statements contained in these presentations based on new information or otherwise expect as required by law.
Now let me turn the call over to Chuck.
Good morning and thank you Jim, a new voice on our call. Jim Story joined Horizon Lines earlier this week as our Director of Investor Relations and Corporate Communications. Jim brings extensive experience to this role as he takes on the day-to-day responsibilities of managing the company’s communications with the investor community and other key constituents who influence our investment decisions.
Jim joins us with over 16 years of experience in executive investor relations and communications rolls. His experience includes several years as a reporter and editor covering the stock market for Dow Jones and most recently as VP of Investor Relations for BlueLinx Holdings, a fortune 500 company headquartered in Atlanta, Georgia. Jim thank you and Jim we will be getting out of meeting with you as we progress through the rest of this year.
By now I trust you had a chance to review our press release and the attachments which detail how our second quarter shaped up. We are very pleased to report a $0.33 per share earnings on an adjusted basis versus $0.29, actually a 13.8% increase year-over-year from the second quarter of 2007.
The Horizon team I think did a great job despite a number of challenges including unprecedented increases in the cost of fuels, the continued stag placing in Puerto Rico which is one of our major business segments and a very slight fall off in tourism in Hawaii.
On the fuel it’s just not something that we are able to predict and I think everybody in our business realizes that and has seen that. It’s not something that we’re in. The company continues to perform well; we just have this uncertainty with regard to that major cost item. We’re trying to deal with that in the appropriate way going forward.
Moving to our earning, we are a few continuing positives including an improved mix of freight handle; the fact that we continue to be well aligned with successfully growing companies and brands like Wal-Mart and Casco and Walgreen’s whose retail models are doing very well in these tough economic times. As we look out over our horizon we are obviously uneasy about the energy costs and have therefore adjusted our guidance a little bit for the year to provide a range that we think is appropriate for the times.
We turned our volume expectations as small amount, but we don’t see any real significant deterioration in our markets and our revenues continue to grow. We talked many times about our hedge process which is a company wide process improvement and a competitive improvement process and that’s been invaluable to us. Throughout the company hedge today has established an efficiency focus and a set of marketing process and tools that our firming well into the execution and business culture for Horizon Lines and both in our liner segment as well as in our logistic segment.
With regard to deployments in place now for the next several years we believe that Horizon is very well positioned to generate improved earnings and experience the operating leverage and new earnings streams, as the general economy recovers. I will not comment on the property justice investigation of the carriers in the Puerto Rico trade today except to say that we have moved very quickly and smartly to backfill a few key positions and we’ve reorganized a bit of the Puerto Rico trade line. We feel we have been very responsive to the trade and are well positioned to continue the high level of service that we are known for.
Our freight contract, renewal rate and business commitments are impressive and I guess we’ll miss if on this call I didn’t recognize and thank all of our associates on our Puerto Rico business team for doing a tremendous job this past quarter in what were very trying circumstances. We do continue to cooperate with the department of justice as that investigation into the Puerto Rico trade moves ahead.
John Keenan will take you through our line of business, John.
I am on page eight and I’m going to start with the Alaska economic outlook. As you know the Alaska economic outlook is very strong, the GSP growth should exceed 5% in the 2008. As you know Alaska being the oil based economy, the record oil prices have boosted the economy doubling the states revenues $10.2 billion. The state’s legislature is considering governor Palon’s proposal for a 1200 per person additional pay out this year as an energy cost relief which certainly will be a boost to the economy.
The job growth in the state of Alaska in the 20th consecutive year is projected to grow about 1.5%. The oil wealth and retail construction in the state continues to grow about 1.1% as an indication to military troop count since 2000 that’s grown by 33% in the state of Alaska. There’s a legislative special session in progress to consider acceleration of the gas pipeline which we have spoken to you about previously and our overall strategy in Alaska is to continue to focus on present partnerships and certainly emerging retail opportunities as well as the big box retailers in the state of Alaska.
Moving over to Hawaii and Guam, when you look at the state of Hawaii, the 2008 GSP growth forecast has been turned to 0%. The visit arrivals year-over-year is projected to shrink by 4.6% in order due to the airlines, specifically Aloha and ATA airlines. The unemployment it has increased from 2.6% is a relatively low number of 3.8% for the state and the commercial and military construction is off-setting some of the short residential sector that we’re experiencing in the state. Some of the barracks that are being rebuilt as well as the naval air station at Pearl are some of the military projects that are ongoing. As you know in Hawaii, the Federal spending per capita is about the sixth highest in the United States.
Looking over to Guam, the consumer in the business competence on Guam remains very high. The big item on the island’s economic outlook continues to be with the expected huge increase in military presence on the island which will have major opportunities for construction, housing supplies both on and off basis, housing prices as well as retail activity. Such strategy and these twp trades just continue to focus on our key commercial and military customers for increased volumes.
Moving over to Porto Rico; I think when you look at Porto Rico, no doubt it’s a difficult operating environment for us today. Proto Rico’s stagnant economy appears to be softening even further. The GDP is now forecast to be a negative 1.2% for ‘08 versus the April forecast of the negative 0.8%. Unemployment is trending down slightly and as the government development bank of Puerto Rico shows the inflation which is significant at 8.9% over the last twelve months and a lot of that inflation is really driven by some of the utility costs that the consumers experience. Utilities have been expensively driven up approximately 70%.
On a positive side the biomedical and the pharmaceutical markets remain a strong source of stability for us on the island and a good source of customer base. The government of Puerto Rico is exercising a little bit more budget disappoint. If you look at the new tax and centre package which is effect of July 1, that’s designed to help both the economy and also to provide variable tax credits to enhance investment on the island.
As you know the polls for the November election show for a business reform candidate, Puerto Rico’s delegate to the US congress Luis Portuno, appears to be a head of the coming and arranged for the governor on the island, but should he be elected he would certainly be the one that’s going to have to deliver and drive the renewed economic growth down on that island.
On August 5, Horizon Lines will celebrate our 50th year of service to the island of Puerto Rico. Again our strategy on Puerto Rico is definitely to put very, very strict cost control while positioning ourselves to take advantage of the economy when she turns.
Looking at our volume updates in the second quarter on slide eleven, we’ve got Alaska’s, the northbound reefers and the automotive moves certainly was set to reduce sea food volumes which we had forecasted earlier in the year. The Hawaii volume has been impacted by lower tourism and reductions from the consumer spending.
Our shipping into Guam remained relatively stable. The Guam outbound volume has certainly been impacted by the closing of some of the garment factories at Saipan. Our Peurto Rico volumes remain off for a week and if you look at the volumes year-over-year it’s down approximately 2.4%. Our strategy in this area is certainly to continue to use the hedge tools that we developed and are ingrained in our organization to help improve our business mix.
On slide 12 unit revenue update; when you look at the unit revenue improving across all trade lanes, we are up about 2.4% net of fuel. The recent volumes growth continues; that’s again our mix that we’ve spoken about considerably, our efforts for folks on our mix upgrade. We are working on our account pays specifically on some of the store pictures, some of the high margin moves that were moving with some of our retail customers in the offshore locations.
On our investment performance moving onto 13, it is the great story. When you look at the vessel availability it continues to be exemplary at 99.9%. Our vessel on-time arrival it was like 90.3% number that means 9 out of 10 of our vessels operate to the minute on time in port everyday. The variation that you see there, that 3%, really that’s in Alaska predominantly and that was on purpose. What we did is we took the opportunity to maximize the store on our D7 class vessels up to anchorage and there is a significant cost avoidance and you’ll see that later in the financial with Mike where we did not run our seasonal vessel for several voyages by taking advantage of the extra laudability that we were able to capitalize on in those ships.
The key strategy they had continued focus on our key performance indicators and our vessel operations. If you look at the vessel utilization year-over-year 2007 and 2008 we’ve spoken about that in the past as we enhanced our services with TQ1 and redeployed our fleet that we would have some additional capacity available in each of our market and certainly the position does well for growth in the future.
On page 14, Horizon hedge; continued progress on all of our hedge initiatives and the key one that we really have worked on our fuel efficiency, and this is not only in our terminal, how we operate our trucks of reducing our item, but certainly on our vessels as an example on all of our vessels we have really worked hard, we put a very robust tool on each of the ships so that the vessel captains know exactly how much fuel they’re burning for every leg of their voyage, for every 24 hours of operations which we refer to as our fuel calculator.
We even optimized fleet renewals. That fleet renewal was not only on our ships but also on our containers where we’re really looking at way to triangulate our fleet and reduce empty mile. We focus on our crew and our vessel all the time, not only on the ships but also short side where we are seeing a reduction in overtime in all areas of our company and our hedge benefits as Mike will speak to a little later hampered a little bit by our lower volume. More importantly as we said this is integrated into our business culture and really had positioned the company for long term volumes as our long term efficiencies as our volumes improved.
On page 15, an update on our coastwise shipping initiative; we’ve seen this map before, really our value propositions and network saving and it’s going to give us an opportunity to utilize some of the idle assets that we have. We are systematic about C7 vessel. On the low left hand corner there and these are the customers that are being targeted and the customers that will benefit from the deep draft hub fort model where we gave the hub freight up and down the east coast. Our alliances have been formed especially with labor and the maritime administration and the federal government and in progress of the harbor maintenance tax I’m going to speak to in a couple of slides and our strategy here is really to finalize discussions with potential customers, continue to work with labor and also make sure that we get the harbor maintenance tax taken care of.
On page 16 in Guam a little bit on our terminal investments and our infrastructure in Guam. We purchased three cranes that we expect it to be relocated to Guam and operational by March 2009. In anchorage we will purchase; its been done in conjunction with the expansion in the Port of Anchorage. In the Port of Anchorage we’re investing over $700 million to redevelop that Port and we will own the cranes in that facility.
On the legislative front, the harbor maintenance tax exemption is a bill 3199 which was introduced on June 25. This was to be shown by part of each port. On Title XI funding what we plan on doing is 2009 we are going to work to fully fund this program and make it a little bit more user friendly based on the $5 million funding in the 2008 level.
On 18, Labor Relations; The ILWU, The International Longshore & Warehousing Union as you know we have employees in Alaska and Hawaii as well as ILWU member on the west coast at store Albacore. The contract expired on June 30. We anticipate to negotiate the settlement without any work stoppage but I will comment this morning there was a press release stating that there were some labor action that had extended the Oakland. We are seeing some productivity and however we still anticipate a settlement without a work stoppage.
On page 19, a little bit about our awards and recognitions as you can. You can see some awards and recognitions for logistics, from Horizon Logistics and also in the safety area. On page 20 about Horizon Lines, as you know we at Horizon have always had a very keen focus on the environment. In our environment the policy extends above and beyond all current industry standards especially when you speak to marine fuel. There is some recognition that we see on Horizon Green from the change of shipping and then also on EPX, Smart Way Transportation Partnership.
Now before I turn it over to Brian I think our key takeaways are; we certainly are working very diligently to improve our efficiency to our overall business in spite of very difficult operating environments. We’ve had incredible focus and relentless focus on not only cost control but service within the organization in spite of even facing some of these unprecedented fuel prices.
Thank you and I’ll turn it over to Brian Taylor.
Thank you, John. I’m going to begin on slide 22. We remain very upbeat regarding the future of the logistics business, but it’s clear that the effects of a tougher macro economic environment are having an impact on our existing and our potential customers. Simultaneously building up our sales platform and coping with the full integration of all of our business units including aero has resulted in a longer sales cycle which has impacted our short term revenues in quarter two.
While building up the pipeline is taking some additional time, we do continue to see some very nice wins with existing Horizon customers and in many cases the business that we’re winning with those Horizon customers is benefiting both of logistics unit as well as the Horizon Lines liner unit.
Earlier this year we started a small brokerage unit teamed down in Dallas in February of ‘08. We are seeing some solid successes in revenue growth with the team that we’ve established there and in addition we are also seeing some very good successes in helping fill the empty miles that exist within the Horizon Lines container network. With the evolution of this more robust pipeline that I referred to earlier, we will continue throughout the balance of this year and clearly it’s going to help us form a solid base on which we can build our future growth.
Slide 23; I’d like to talk for a moment about our Sea Logics Truck and Warehouse unit which we believe is very well positioned to assist importers and exporters as they look to streamline some of their supply chain processes on the west coast. We are in the process of relocating to the new facilities. It’s a 180,000 square foot facility that is close to the ports of Los Angeles and Long Beach.
It’s going to provide us with additional capacity in prime locations that are going to allow us to help stage and load some of the export commodities that are moving in this booming export market as well we are going to be there to assist traditional importers as they look for more economical ways to move products in larger equipment for inland distribution and we will be there in this new facility to help provide the solutions that are going to allow them to get that done.
Our trucking unit continues to modernize our fleet. It’s allowing us to comply with some of the new vehicle aid requirements and the tough emission standards that are falling under the new clear air action plan in California. When we see a lot of natural synergies with the existing Horizon Lines customers moving forward, as many of those same customers import from the pacific rim, they also export to locations that are beyond our traditional transact markets.
I’d like to talk for a second about Mexico. On slide 24, our Mexico service offering continues to attract a lot of interest and with the potential that we see for future near sourcing a production from some of our global customers, this really does remain a significant growth target for us in the years ahead. As we’ve done in Long Beach, we’ve also relocated to a new facility in Nevada Texas. It’s a 60,000 square feet facility; we’re going to continue it to invest the appropriate dollars in this business as we see it as a growing business unit going forward.
We are also focused on refining our processes, enhancing the technology that we have to streamline the way that we facilitate harbor movements across the Mexico, US border and as we see that manufacturing continuing to expand in Mexico we also see some tremendous opportunities for us to be positioned as a supplier managed inventory location in that new facility in Loreto.
We are also in the process of building out our Lexington North Carolina facility as the raw materials hub for the textile manufacturing plants in the Caribbean and Central America. Our truck growth for these units as we’ve established in that facility is growing quite nicely and it’s a great compliment to what we’re doing with the operation in Dalais, Texas.
We continue to see the volume in our core lanes growing and it will continue to grow as we begin to engage many new raw material suppliers up and down the east coast. We are adding infrastructure and new technology tools which could create greater economies of scale in this facility and is going to allow us and already is allowing us in fact to expand our presence in the inter-motor rail business up and down the US east coast.
Finally the logistics technology team that we have down in Dallas is really having a huge impact on this business. They are helping us implement new EDI transactions sets and events that give our customers that are demanding real time shipping visibility to help them improve the velocity of their product through the supply chain.
You’ll see our results listed on slide 26. As I mentioned earlier we have clearly falling behind our initial expectations as we have been experiencing a longer sales ramp up as we had expected and clearly we are seeing some softening demands with the existing customers particularly in the aero division. Our largest retail customer in the aero division whose store expansion program fueled the significant portion of our growth in recent years has cut back their ‘08 expansion plans and potentially some of their plans for growth in ’09 as they see the need to react to some of their softening demand conditions.
We really tied our consumer spending patterns. We’ll keep pressure on revenue net of fuel throughout the balance of this year, but we are going to continue to focus on building out that sales pipeline. We expect to see results from the new sales resources that we’ve added; in fact we’ve added six new sales positions in the logistics business in the last six months and will continue to focus on lowering our overall network cost.
In summery in remain very upbeat about the future of the business. While we’ve tampered existing expectations based on rise in fuel costs and some softness that we’re seeing in demand, we are going to continue to invest in human resources, the technology and the process that we’re going to need to position this business to capitalize on the eventual market turn around when it will come. With that I’d like to turn it over to Mike. He’s going to take us through the financial review; Mike.
Brian thank you, good morning everyone. Let me kick off by saying, first we’re pleased to achieve some pretty good results in a place of a difficult economic and fuel price environment. I’ll start with operating revenue on page 27. Our revenue for the second quarter grew nicely up $35.3 million, 11.9% over 2007. Operating revenue for the first six months jumped $67.5 million also 11.9% versus last year.
Page 29, provides more information on the factors that drove the nice increase in revenue. For the second quarter revenue per container grew by $349 or 9.7% in the second quarter and is reflected in both the higher fuel cost recovery and the rate improvements that to see below. Our two 2007 acquisitions; Aero and Hawaii Stevedores combine to contribute $10.5 million of additional revenue. These positive factors more than off set the volume decline primarily in Puerto Rico, total declines about 1700 loads.
For the six months rate per box increased 9.3% about $335 and again is reflected in the improved fuel cost recovery as well as the higher rates. Acquisitions accounted for $20.6 million of the $68 million increase. Volumes declined again a little bit by the 2400 mark and has slightly off set the gains that I just spoke to.
Starting with operating income let I mean first say that all the adjusted numbers are adjusted in 2008. The two items; $2.4 million of legal fees in conjunction with the anti trust investigation and $800,000 for severance expense, a voluntary program for some of our union for employees; about a two year pay back on that investment. So, looking at operating income again on an adjusted basis down $3 million or 13.1%; a number of factors, lower volume, the 1700 loads I referenced before, the margin loss from that was about $3.6 million. We’ve accrued a bonus in the second quarter of 2008. We did not do so in 2007, but had a $2.3 million accrual there.
Higher vessel lease expense in the second quarter was $2.1 million. You may recall our TP one vessels were fully deployed by early June, so this will be the last quarter we have a variance on this item, while probably we’ll have $8 million of expense or $32 million in total for each quarter.
Overhead was up slightly about $2 million. In a number of factors we did have additional employees from our two acquisitions. We have some non cash stock based compensation and a 3% general marine increase for our employees.
Rates at the fuel improved nicely 5.7 and this is on a net basis, a 2.4% increase excluding the fuel surcharges. Thus our operating expenses were reduced by $2.5 million. John spoke to the all time record low to bill the number of containers we got on our Alaska vessels and that allowed us to sell our seasonal vessel to fair banks less frequently. The renewed TB1 starter calls like we had last year when we brought in the new ships and took out the old ships and we had fewer dry docks in 2008, therefore a little bit less amortization expense.
The six months results really reflect a lot of the same factors outlined through these quickly. Vessel lease expense higher $8.2 million, the volume short fall we had 2400 loads, the marginal impact was $5.4million. Two items in overhead, the bonus accrual, $2.3million in stock compensation are referenced 1.2, also impacted the six months. Non transportation revenue was down about 2.5, but rate net of fuel was up $11.8 million, so a nice increase there and we had $3.2 million of vessel savings from the same three factors that I referenced in the quarter.
Turning to page 31, you see adjusted EBITDA decline by $4.2 million and $10.6 million for the six months. Again it’s the same factors I’ve discussed on the operating income change that also affected EBITDA. On page 32 is adjusted net income in addition to the two items impacting 2008. There are two items in 2007 where we felt the perfect adjust, but we fell through a comparable apples-to-apple basis. The $2.6 million deferred tax revaluation benefit from our tax election was adjusted as well as a $0.5 million loss for the early extinguishment of debt in 2007.
So with those adjustments for the second quarter, adjusted net income of $9.9 million yearly was at $10 million last year as $3.5 million of interest expense savings offset $3 million adjusted operating income shortfall. Of course we did a refinance in last August in falling interest rates as well as the three opportunistic refinancing allowed us to reduce our planning cost of debt from 8.8% down the 4.5% over the last year.
Looking at the six months results adjusted net income of $12 million is $2.4 million behind that of last year; a shortfall of $7.9 million in operating income more than offset to savings that we enjoyed from our interest expense up about $5.7 million. Looking at EPS and how this all translates, again diluted adjusted EPS jumped 4% over to 13.8% over the prior year benefiting from our lower share count.
You’ll recall that we did acquire 3.8 million shares from August last year through January this year and the two share repurchase programs reducing our shares outstanding from just over $34 million at the end of the second quarter of 2007 to just over $30 million at the end of 2008. Six months EPS fell by $0.03 or 7.1% as below net income, but unfortunately more than offset the reduction in the shares outstanding.
Page 34 addresses free cash flow and just the bulk -- I think this is a really good story. You’ll see that free cash flow $9.1 million is nearly $4 million to $6 million better than the first six months of 2007. The $4 million to $6 million improvement was driven largely by three factors; lower vessel lease payments of about $20.5 million. You might recall that last year on January 1 we had a $39.5 million mid term bloom payment on our three Alaska vessels, these are the older June type lease vessels; we did not have that bloom payment so that’s a $20 million cash reduction in vessel lease payments.
Working capital consumption really plays in this, an area of intense focus for the company, a $12.1 million improvement. Accounts receivable accounted for the back half of that and some of the other working capital items contributed the difference. There also is a bonus payment paid in January of 2007, our 2006 bonus and there was not a bonus reflected since there was no payment in 2008 for the 2007 year.
Net cash flow at $70.7 million was about $93 million higher than last year primarily attributable to the $46 million increase in free cash flow. I’ll just walk you through it and also net debt borrowings increased by $78.3 million. As you seen net borrowings in 2008 are nearly $45 million versus repayment to 2007 of about $31 million. We used these borrowings in 2008 to complete our share repurchase program by in fact $29 million of stock in January of 2008.
I’ve added a new slide to our presentation this time on page 35 on liquidity and credit facility complaints. I want to do two things; first, clear off any confusion by stating we have plenty of liquidity and also to let you know that we are very comfortably in keeping in line with the credit facility and financial covenance. You’ll see at the end of the second quarter we had corporate liquidity of nearly $100 million from our cash and revolver ability and we also made a revolver repayment or payment of $10 million during the quarter.
Our interest coverage ratio at 4.56 times was significantly higher than required 3.5 times maximum. Net coverage ratio again is calculated by dividing adjusted EBIDTA by net interest expense. Our senior secured leverage ratio at 1.94 times was well under 3.00 times maximum and again the senior secured leverage ratio the same implies. This does not include our unsecured comfortable notes in the calculation.
Turning to our financial guidance on page 36; we’re reducing guidance for 2008 really for one reason and one reason only; there are some small puts and takes from both ways, but the historic rise in fuel prices has impacted all of us and as we look at that guidance we just really feel it’s prudent and necessary to reflect those current spot prices as well as future deals and curve prices. So that reason essentially counts for the whole reduction in our guidance of about $10 million. So based on the occurrence, our historic fuel price levels and economic market conditions we are projecting operating revenue now at $1.335 billion to $1.365 billion up actually from $1.315 billion to $1.350 billion previously and higher fuel surcharges accounts for most of that increase.
Adjust EBITDA now at $150 million down from the $145 million to $160 million that we discussed with you back in April. Diluted EPS to a $1.03 to $1.43 from the previous 130 to 169 and free cash flow, this is adjusted of $40 million to $50 million down from the previous $72 million to $87 million. Again our guidance does not include legal fees or the potential impact of the pricing investigation which cannot be estimated at this time. For full year 2008 we are anticipating legal fees is about $6.5 million in comparable cash outlays in our cash flow, full cash you see back behind the appendix.
So wrapping up with guidance we maintained a $50 million guidance range. We thought it’s prudent to add a little bit to the range on the sales outside. In the event we have further upside risks in fuel prices over and above the occurrence 7% fuel prices function that we have in our numbers. They are showing a break down of the guidance is projected on page 37. The line sure shows this is of course a still with the line business at $142 million and logistics kick in nearly half a million dollars this very first early year in the history.
In terms of major assumptions you see those listed here. So in spite the clients in our volume by trade lanes and overall a 0.4% percent decrease compared to a previous 0.4% increase. Bulk of fuel again is really the story here. $710.00 represent 38% increase over the consumption of $515.00 per ton. Unfortunately the recent $22.00 decline in crude oil from 147 to 145 as not yet been reflected in any meaningful reduction in the bulk of fuel; we’re hopeful that the pull back in crude is sustained and drops further as some predict and that bulk of prices follows soon.
However again we felt that it’s prudent for forecasting guidance purposes to reflect the bulk of the total curve and the curve spot prices and of course as bulk of flow is below $710.00 we will likely benefit; if it exceeds that we will likely have exposure. I would remind you though there are many factors that impact fuel price on a net basis including fuel surcharge, recovery amounts, the timing of those recoveries, fuel consumption efforts that John and his team have done a great job on getting record consumption on our new vessels and all that will impact bulk of expense. A couple of other few trade line drivers have also been presented that we look at in terms of our guidance.
So to wrap up we delivered I think very good results in a tremendously challenging fuel price and economic environment. We are happy to deliver the results to you today. Our trade line is pretty much in line with our expectations for the second quarter. Fuel again is the wild card for the second half of year and the unprecedented 38% increase since April and how that tracks through the rest of this year. We will continue to do everything we can do to control cost and limit the impact of bumper prices and we hope for fast growing fuel prices in second half of the year. So with that I would like to turn the call back to Chuck Raymond to wrap up.
Thanks Mike, so I’ll conclude real quickly here. I think Horizon is kind of done the turn around and turned the corner from the disappointments of the last couple of quarters. We think this is a solid investment opportunity and a great business. It’s a brand that is the premier brand in its sector providing life line businesses, connecting Puerto Rico and Alaska; Hawaii and Guam to the local 48, the company is renowned and regularly cited again for its high service and reliability levels.
It’s holding and maintaining the largest market share. We’ve delivered an impressive performance record over many, many, many quarters unfortunately we had to recently buy some extraordinary events and of course fuel is an issue that as Mike pointed out, we’ve adjusted our guidance down. People are pushing in their in the event that fuel behaves definitely than we expect it to and as a company that as Mike pointed out with our cross of debt at 8.8% down now to 4.5% generates impressive cash flows that will sustain our growth and business development and related sectors of domestic transportation and in logistics going forward. So with that we’ll turn the call back to Mary and sure want to take questions from our interested investors; Mary.
(Operator Instructions) Your first question comes from the line of Jonathan Chappell with J.P. Morgan please go ahead.
Jonathan Chappell - J.P. Morgan
Chunk or John; the first question has to do with something we’ve been hearing a lot in the international markets but I don’t think you addressed directly and that’s slow steaming. Is slow steaming having any impact whatsoever on your fuel efficiencies and your ability to kind of offset some of fuel price increases?
John good question. What we’ve been doing in line with our hedge processes is really focusing on making sure our ships get out on time and in some of our networks we’ve changed some of our performance to give us a little bit more reserve time and we are able to reduce our speed between ports.
Jonathan Chappell - J.P. Morgan
Okay, and are you seeing lot of that from I would guess and say your competitors or from other people; may the TP1 is slow steaming a little bit more prevalent?
You know what I’m not seeing that John.
Jonathan Chappell - J.P. Morgan
Okay; John another question for you on the Alaska trade you portrayed a very strong economic outlook on that assumptions page you even raised the GSP forecast, for Alaska you cut your volume expectations. Is there something else going on in the Alaska market that gives any type of cause for concern?
No I think John but if you recall the (Inaudible) was reduced by 28%, so some of the volumes are varying that you can see within our market is based on the southbound.
Jonathan Chappell - J.P. Morgan
Mike two questions for you on the hedge benefits. Last time the guidance for ‘08 edge was taken down a little bit to about $9 million for this year which I think was versus like 12 or 13 at the beginning of the year. There is mentioned that the volume impact might put some pressure on hedge; are we still looking at $9 million benefit this year incremental or is it potentially a little bit lower?
No that’s still appropriate John. Roughly $9 million as you point out was the total of target. $4.4 million was through revenue margin and volume improvement, the rest was the cost saving. We’re on track with all the cost savings, so I think nine is appropriate.
Jonathan Chappell - J.P. Morgan
Okay, and then finally, can you just update us on the status; how much remains on your share buy back authorization?
There is nothing left at this point on the authorization. We did use the entire $50 million November through January.
Jonathan Chappell - J.P. Morgan
Okay and Chuck you mentioned in your closing remarks a good investment opportunity; do you think that you will be going to the board any time soon with a new authorization program?
We are not going to take that off the table John. It’s obviously something we have to look at very carefully and it’s one of the consideration.
Thanks your next question comes from the line of Kevin Sterling with Stevens Inc please go ahead.
Kevin Sterling - Stephens Inc
Chuck if you had to break it down how much of your reduction in guidance is related to fuel versus volume reduction; it looks like the bulk of it, but if you could break it down may be percentage wise for us?
Kevin Sterling - Stephens Inc
Okay, and this might be a question for Mike; it looks like your SG&A expenses were up 34% year-over-year; what were the primary drivers behind this increase?
SG&A was increased for a couple of reasons Kevin. Remember we did have our acquisitions so we do some additional cost there for new employees at HIS. We also have our regular 3% percent narrow increase. We have some additional stock based compensation of about $1 million dollars and depending if you are looking at the adjusted numbers in the 10-Q, we do have $2.4 million of legal expenses accrued in addition to bonus of $2.3 million accrued in the second quarter in the six months that you did not see last year; so all of those factors we account for. No worries, one head count that we’re being very prudent in that area; it’s these factors I outline.
Kevin Sterling - Stephens Inc
Okay thanks and Chuck in relation to your antitrust legal expenses it looks like you are anticipating $6.5 million for the rest of 2008; it might be hard to anticipate, but do you think, do you expect continued legal expenses in 2009 or do you think the $6.5 million would be about the end of those expenses?
Well Kevin that investigation is moving forward its pretty slow frankly I think we are going to continue to see some expenses in the 2009, but I think the bulk of the expenses were occur during 2008.
Kevin Sterling - Stephens Inc
Okay, and this is for Chuck or John. As you mentioned in your presentation we’ve talked about before, there’s been a lot of talk about the harbor maintenance tax; when do you think we will see short sea shipping along the lying sea board; could this be an ‘09 even or you think we could may be even seen something little bit earlier.
Well Kevin as you know the initiation of that service is fairly contingent upon the harbor maintenance tax exemption and we are working diligently to make sure that happens. Our goal is try to get something in the water by the first quarter of 2009.
Kevin Sterling - Stephens Inc
Okay, and lastly Chuck with your free cash flow is your primary objective still to pay down debt or would you guys look at any acquisitions; I know you talked about may be possibly considering another buy back, may be you could talk a little bit about what you intended to do with your cash?
Unless there is an extraordinary opportunity out there on the acquisitions front I would take that off the table. I believe that our cash is going to be used for one of two purposes either two continue to pay down debt or on an opportunistic basis buying back shares. I don’t think an acquisition again is something that we have to do right now.
Thank you and your next question comes from the line of Chaz Jones of Morgan, Keegan. Please go ahead.
Chaz Jones - Morgan, Keegan
I want to ask a quick question related to the comments on the productivity loss with the negotiations on the west coast; is that having any material impact one and then two could you remind us -- and I am not saying that we are going to have a strike, but could you remind us what type of impact that strike had us last time that we were going through this process?
Yes Chaz this is John Keenan, I will take that one. The west coast when you speak to extended labor action or slow down in productivity loss, we are not seeing a significant impact, so there’s really no material impact on our business today. When you go back to the work stoppage or the lock out that occurred six years ago that was a fairly significant impact, the ports were closed for approximately 10 days and it was a significant impact to the economy and ships getting backed up and as I mentioned we don’t anticipate a work stoppage.
Chaz Jones - Morgan, Keegan
Okay, and then just in terms of the volumes and may be your take on where the different trade lanes are, may be the broader economy in a sense I mean are we closer to volume stability; do you anticipate that happening in the next six months. I know you adjusted the volumes down here again but are we the closer to that bottom out there in the economy?
Chaz we are projecting lower volumes over all. The major culprit there is some reduced demanded that is driving down a little bit of the consumer spending, over all slowing, some of the economies that we are seeing; with the inflation that you are seeing in Puerto Rico so I think what we put forward is a fairly accurate forecast of what we see in the markets between now and year end.
(Operator Instructions) Your next question comes from the line of Michael Levite with Chesapeake Partners. Please go ahead.
Michael Levite - Chesapeake Partners
Hi, to what extent are you hedged, what percent of your fuel is hedged?
Michael we currently do not hedge any fuel. We are selective and opportunistic in our purchases to take a prevalence of lowest cost at our port location, but we do not have any financial hedges in place at this point.
Michael Levite - Chesapeake Partners
Okay any plans or no to reduce the total cost…
Right now it’s very difficult to get up reasonable counter party I think on a financial hedge. So I think we will stay with our current practice for now.
Thank you, ladies and gentlemen. That will conclude our question-and-answer session today. I will turn it back to Mr. Raymond for closing comments.
Okay Mary thanks very much. Thanks for your interest and your questions and enjoy the remaining weeks of the summer, travel safely and we’ll speak with all of you at 11:00 am on October 24 when we will have our third quarter earnings call. Thank you and good day.
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