Earnings Call: Q4 2019

Feb 25, 2020

As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Lee Fishman, Director of Investor Relations. Please go ahead, sir. Thank you, Alexander. Joining me on the call today are Matt Cox, Chairman and Chief Executive Officer, and Joel Wine, Senior Vice President and Chief Financial Officer. Slides from this presentation are available for download at our website, www.matson.com, under the Investors tab. Before we begin, I would like to remind you that during the course of this call, we will make forward-looking statements within the meaning of the federal securities laws regarding expectations, predictions, projections, or future events. We believe that our expectations and assumptions are reasonable. We caution you to consider the risk factors that could cause actual results to differ materially from those in the forward-looking statements in the press release, the presentation slides, and this conference call. These risk factors are described in our press release and presentation and are more fully detailed under the caption Risk Factors on pages 11 to 20 of our 2018 Form 10-K, filed on March 4, 2019, and in our subsequent filings with the SEC. Please also note that the date of this conference call is February 25, 2020, and any forward-looking statements that we make today are based on assumptions as of this date. We undertake no obligation to update these forward-looking statements. I will now turn the call over to Matt. Thanks, Lee, and thanks to those on the call this afternoon. Please turn to Slide 3 for my opening remarks. For the fourth quarter, Matson's performance from its trade lanes came in as expected, but the consolidated results came in below our expectation. Our China service outperformed the year-ago period, which included the exceptionally strong seasonal demand driven by the U.S.-China tariff situation. We saw a modest rebound in our Hawaii trade lane service after several quarters of weak performance, and our logistics segment met our expectations and continued to execute well in the face of softer industry conditions within the transportation brokerage. Despite solid contributions across most of our business lines and trade lanes, we came up short largely due to a weaker-than-expected contribution from SSAT, which I'll discuss later in the presentation. We had a very busy 2019 with the delivery of two new vessels for our Hawaii trade lane service and renovation work at our Sand Island facility, including the installation of three new gantry cranes. We also completed two scrubber installations, with a third in progress at the end of the year. We also opened up a new Span Alaska Anchorage facility to replace two leased facilities. To put this transition period into perspective, since the beginning of 2019 to this earnings call date, we have placed over $600 million of assets into service, disposed of three steamships in an environmentally responsible manner, and stepped down into a nine-ship fleet rotation for our Hawaii service. These efforts were years in the making. For the full year 2019, we had solid contributions from our China and Alaska trade lane services, and logistics had another good year, eclipsing the outstanding performance in 2018. Countering these favorable contributions were lower volumes in the Hawaii trade lane service and a lower contribution from our SSAT joint venture. Turning to Slide 4, we are in the final stretch of our major investment cycle, and I want to continue to highlight for you our current priorities. Starting with our Hawaii fleet renewal, Lurline was delivered in late December and placed into service in early January. Upon her entering service, our Hawaii fleet rotation stepped down from 10 ships to nine ships. Matsonia construction is progressing well, and the vessel is scheduled to be delivered in the fourth quarter of this year. Next to our Sand Island terminal renovation project. During the fourth quarter, we demolished three existing cranes and began modifications on three other cranes that will remain in use. The first phase of the renovation will be complete this year. The second phase will begin towards the end of this year. We continue to prepare for the expansion into Piers 51A and B next door when Pasha moves to the new Kapalama facility across the harbor. Matson was fully compliant with IMO 2020 on January 1st. As of today, three vessels are back in service with scrubbers, and the fourth vessel in the six-vessel scrubber program is in dry dock now. Our scrubber program is on track to be complete by the end of 2020. Given the good economics and operational performance, we will continue to evaluate scrubbers on our new Hawaii vessels. But as I said before, we always want to be in a position that maximizes optionality for us to find the lowest cost, long-term solutions that make sense for Matson and our customers. As of the end of 2019, our leverage covenant was below 3.5 times. We continue to expect our leverage to peak in the first quarter, after which we will use our significant cash flow to de-lever the balance sheet to the mid to low twos. We are committed to maintaining investment-grade credit metrics and sustaining our low-cost balance sheet, which we view as a competitive advantage. With our debt peaking, our focus remains on prioritizing organic growth opportunities. We are actively involved in the planning phases on a number of projects to leverage the combined services of ocean transportation and logistics. We will discuss these opportunities in more detail when they come to fruition. Please turn to slide 5. Before I discuss our trade lane services, I want to spend a few moments on COVID-19 and the anticipated and potential impacts it may have on our businesses. The situation is highly dynamic, and our views today could change materially, positively or negatively as the situation continues to unfold. With that said, the most immediate and direct impact to our business is expected to be an elongation of the post-Lunar New Year lull. Traditionally, we see little activity for a couple of weeks post-Lunar New Year. This year, with the extension of the Lunar New Year by a week, factories idled for additional weeks and supply chains temporarily disrupted, we expect the lull to last longer. Our customers are working hard to get factories reopened in the next couple of weeks, and we anticipate a gradual rise in production throughout March. It is currently difficult to predict when factories will be back at 100% and when the logistics infrastructure will be back to full strength. Our manufacturing customers, in particular, are currently facing three operational issues: a shortage of labor, low or no inventory of parts, and a lack of factory-to-port logistics services. This is on top, of course, of their own efforts to protect their personnel from the virus. Therefore, we do expect the elongated post-Lunar New Year lull to negatively affect our CLX service, Matson Logistics supply chain services, international intermodal volume, and the volumes at SSAT in the first half of the year, with the vast majority of the financial impact in the first quarter. Specifically, the negative impact will consist of less volume and lower average freight rates for our CLX service, lower volume from international carriers at SSAT terminals, lower revenue for our supply chain services business in China, and lower international intermodal volume. However, when the cargo does come back, we think supply chains will be behind the curve, and companies will need to use expedited freight services like the CLX service to get back on track. It is hard to know how orderly or chaotic the recovery will be throughout the rest of the year, but we feel confident that CLX is well-positioned for the volume recovery. With respect to our 2020 outlook, we expect COVID-19 to negatively impact Matson's businesses in the first half of the year, with the vast majority of the impact in the first quarter. While it is difficult to predict with precision the financial impact of COVID-19, we expect the following based on information currently available to us today. For the full year 2020, we estimate the negative impact to be approximately $15 million to our consolidated operating income and EBITDA. The vast majority of the $15 million COVID-19 financial impact is factored into the ocean transportation operating income for the first quarter 2020. The full year and first quarter 2020 outlook for logistics operating income includes a modest negative financial impact from COVID-19. Joel Wine will provide more information on the outlook later on in the call, and we will have more to report to you on our first-quarter earnings call. Now on to our trade lane services. Turning to our Hawaii service on Slide 6. Hawaii container volume for the fourth quarter increased 1.1% year over year due to positive container market growth. For the full year 2019, negative container market growth led to a 1.4% year-over-year decline in our container volume. As we noted in our second quarter earnings call, we saw our retail customers adjust their inventories to the slowing economy as aggregate consumption flattened. A combination of factors, including muted population growth, lower aggregate and per visitor expenditures, and a more gradual shift within construction from condos to master-planned communities also presented headwinds for growth during the year. For 2020, we expect volume to be higher compared to the level achieved in 2019, as some of the headwinds I just touched upon ease and economic conditions within the state remain favorable. Slide seven summarizes UHERO's latest economic forecast. I will walk briefly through some of the key economic factors. Modest GDP growth is expected over the next couple of years, with growth stabilizing in 2020 around 1%. Population growth is expected to be muted after a couple of years of negative growth. The unemployment rate in Hawaii is forecast to increase, although to remain low by historical and national standards. Visitor traffic is forecast to hit a new record this year, despite the negative effects of COVID-19, which UHERO is forecasting to impact traffic in the first half of the year but recovering fully in the third quarter. Growth in real visitor expenditure is expected to remain flattish despite the increase in visitor traffic. Lastly, construction activity remains a bright spot in the economic picture as there is a good pipeline of residential and non-residential projects that could sustain a high level of activity for at least the next couple of years. Our view is that economic slowdown in Hawaii that emerged in 2019 will continue to persist, but recent increases in key economic factors such as construction growth activity and visitor traffic are expected to support continued GDP growth. Moving on to our China service on slide eight. Matson's volume in the fourth quarter 2019 was 4.3% higher year-over-year, primarily due to larger vessel capacity deployed in the trade lane, coupled with strong demand for our differentiated service. Average freight rates in the quarter were modestly lower than those achieved in the fourth quarter of 2018. As a reminder, in the fourth quarter last year, the company experienced unusually strong performance as a result of the U.S.-China trade situation. For the full year 2019, container volume increased 3.9% year-over-year, primarily due to stronger volume post Lunar New Year and, to a lesser extent, larger vessel capacity deployed in this trade lane. From a rate perspective, the full year 2019, we achieved a sizable rate premium relative to the SCFI. Reflecting back on 2019, exceeding the 2018 volume level and approaching the 2018 freight rates, both of which were positively impacted in the second half of 2018 by the U.S.-China trade situation, is a testament to the CLX's differentiated service. We continue to win business from deferred air freight and to benefit from deeper penetration into our customer supply chains by our logistics group. Turning to our 2020 outlook, we expect our CLX service to face challenging conditions in the first half of the year as a result of COVID-19, but we currently expect the service to operate as usual in the second half of the year and to be comparable to the strong performance we achieved in the second half of 2019. Therefore, for the full year, we expect volumes to be modestly lower than the prior year, and we expect average freight rates to approximate the levels achieved in 2019. Turning to slide 9. In Guam, Matson's container volume in the fourth quarter 2019 decreased 7.7% year-over-year, primarily due to typhoon relief volume in the year ago period. For the full year 2019, container volume decreased 1.5% year-over-year due to the absence of typhoon relief volume. Moving on to the full year 2020 outlook. We expect volume to approximate the level achieved in 2019, as we expect the highly competitive environment with ATL to remain. As we've said before, our strategy is to continue to fight for every single container of our customers' business. Given our long history in Guam with strong customer ties, a shorter transit time, and a much better on-time performance record, we expect to retain an outsized share of that market. Moving now to slide 10. In Alaska, Matson's container volume for the fourth quarter 2019 decreased 0.7%, with slightly lower northbound volume and modestly higher southbound volume. For the full year 2019, Matson's container volume increased 0.4% year-over-year, primarily due to higher northbound volume, partially offset by the absence of northbound volume related to the dry docking of a TOTE vessel in the year-ago period and lower southbound volume. Northbound volume benefited from the gradual economic recovery in the state. For the full year 2020, we expect container volume to be modestly higher than the level achieved in 2019, with higher northbound volume, including volume related to a TOTE dry docking in the first quarter of this year, and slightly lower southbound volume compared to levels achieved in 2019. Turning to the next slide, 11. The charts on this slide highlight recent forecasts of employment and population growth in Alaska. Alaska's economy continues to recover gradually as the state sees its first employment gains in four years, supported by a short-term budget gap resolution in 2019 to the state's fiscal situation. Despite AEDC's forecast for continued losses in population in the Anchorage area, primarily due to net migration to other areas in the state, statewide population growth is anticipated to remain muted. Overall, we're optimistic about the economic recovery in 2020, but are mindful of the impact of highly influential factors such as the volatility in oil prices and Alaska's long-term solution to address the budget gap on the trajectory of the economy. Turning next to slide 12. Our terminal venture, SSAT, contributed $3 million in the fourth quarter 2019, compared to $8 million in the prior year period. The decline year-over-year was primarily due to higher terminal operating costs and lower lift volume. The decline in year-over-year volume is a function of stronger seasonal demand in the fourth quarter of 2018 as an effect of the U.S.-China tariff situation, as well as the negative impact from a number of blank sailings in the Trans-Pacific trade lane in December 2019. For the full year 2019, SSAT contributed $20.8 million, or $16 million lower than last year. The decrease was due to higher terminal operating cost and the absence of favorable items in the full year 2018, partially offset by higher lift volume. As a reminder, in the second quarter of 2019, SSAT experienced additional expense related to the early adoption of a new lease accounting standard. About a third of the year-over-year decline in that quarter is attributable to these lease-related costs, most of which reversed in the second half of 2019. With respect to the higher terminal operating costs during the year, the majority of those costs were largely attributable to the reorganizations of the Seattle terminals, including the onboarding of a new and eighth terminal under SSAT. This was a relatively complicated set of reorganization involving a number of ocean carriers, some new equipment, and the opening of a new terminal, all while managing to maintain a high level of customer service. For 2020, we expect SSAT's contribution to our ocean transportation operating income to be lower than the level achieved in 2019 due to lower lift volume, primarily driven by the negative effects of COVID-19, partially offset by improved operating cost efficiencies. Turning now to logistics, on Slide 13. Operating income in the fourth quarter came in as expected at $7.6 million, or $1.5 million lower than the result in the year-ago period. The decrease was primarily due to a lower contribution from transportation brokerage. For the full year 2019, operating income increased $5.6 million to $38.3 million, primarily due to higher contributions from freight forwarding and transportation brokerage. This result is the highest ever for our logistics segment. Every one of the business lines performed well during the year, despite some challenging year-over-year comparisons. For the full year 2020, we expect logistics operating income to be lower than the level achieved in 2019. This outlook reflects a continuing soft truck pricing environment that will challenge transportation brokerage margin on a year-over-year basis, particularly in the first half of 2020. The outlook also reflects the expected financial impact to our international intermodal and supply chain service businesses as a result of COVID-19. Slide 14 shows the operating income history of the logistics segment since 2012. Over the last few years, we've witnessed exceptional performance from all of the business lines within logistics, leading to our highest ever operating income and margin in 2019. While we expect 2020 to present more challenging business conditions for all of the lines of business and segment operating income to be lower, we expect logistics to continue to perform relatively well as a result of its diversified revenue streams. I will now turn the call over to Joel for a review of our financial performance and our outlook. Joel? Okay, thanks, Matt. Turning to our financial results on Slide 15, I will start with the fourth quarter results and then walk through the full-year results. Ocean transportation operating income for the fourth quarter decreased $3.5 million year-over-year to $17.8 million. The decrease was primarily due to a lower contribution from SSAT, higher terminal handling costs, and the timing of fuel-related surcharge collections, partially offset by higher contribution from the Hawaii and Alaska services. The company's SSAT terminal joint venture investment contributed $3 million, or $5 million less than the prior year period. The decrease was primarily due to higher terminal operating costs and lower lift volume. Logistics operating income for the quarter was $7.6 million, or $1.5 million lower than the prior year period. The decrease was due primarily to a lower contribution from transportation brokerage. EBITDA for the quarter decreased $3.4 million year-over-year to $61 million due to lower consolidated operating income of $5.1 million, a decrease in other income of $0.4 million, partially offset by an increase of $2.1 million in depreciation and amortization, which includes dry dock amortization. Interest expense for the quarter was $5.6 million, and the effective tax rate in the quarter was 22.4%. For the full year 2019, ocean transportation operating income decreased $40.3 million year-over-year to $90.8 million. The decrease is primarily due to higher terminal handling costs, higher vessel operating costs, including the Maunalei lease expense, and a lower contribution from SSAT, partially offset by higher contribution from the Alaska service. The company's SSAT terminal joint venture investment contributed $20.8 million, or $16 million less than in the full year 2018. The decrease was primarily due to higher terminal operating costs and the absence of favorable one-time items in 2018, partially offset by higher lift volume. Logistics operating income for 2019 was $38.3 million, or $5.6 million higher than in 2018. The increase was due primarily to higher contributions from freight forwarding and transportation brokerage. EBITDA for 2019 decreased $33 million year-over-year to $264.3 million due to lower consolidated operating income of $34.7 million, a decrease in other income of $1.4 million, partially offset by an increase of $3.1 million in depreciation and amortization, which includes dry dock amortization. Slide 16 shows how we allocated our trailing 12 months of cash flow generation. For the LTM period, we generated cash flow from operations of $248.8 million. Borrowed $102 million on a net basis and received $0.6 million from other cash flows, from which we used $91.2 million on maintenance CapEx and $219.1 million on new vessel CapEx, including capitalized interest and owner's items, while returning $37.2 million to shareholders via dividends. Turning to Slide 17 for a summary of our balance sheet. You will note that our total debt at the end of the year was $958.4 million, and our net debt to LTM EBITDA ratio was 3.5 times. As a reminder, the EBITDA we report in our press release and in this presentation is different and lower than the EBITDA calculated under our debt agreements. We continue to expect the quarterly leverage ratio to peak at the end of the first quarter this year in the mid-threes, which will be near or slightly higher than where it was at year-end. After peaking at this level, we will focus our strong cash flow generation on reducing leverage back towards our targeted level in the low twos. On an annual basis, we continue to expect about a half a turn reduction in the leverage ratio after the completion of our vessel program. Lastly, we are continuing to look at debt capital structure financing alternatives, including Title XI, to further optimize our balance sheet. Turning to slide 18 for a review of our new vessel payments. For the full year 2019, we had new vessel cash capital expenditures of $203.5 million and capitalized interest of $15.6 million, for a total capitalized vessel construction expenditures of $219.1 million. The table on the right-hand side of the slide shows the cumulative and remaining new vessel progress payments. For 2020, we expect the remaining cash payments to be approximately $59 million, which is net of the $5.2 million of cash already in escrow on the balance sheet. The picture on the slide is of the Matsonia on the building ways in San Diego at NASSCO. Matsonia is currently 66% complete, and we expect her delivery in the fourth quarter of this year. With that, let me now turn to slide 19 to discuss our full year and first quarter outlook. For the full year 2020, we expect operating income for ocean transportation to be higher than the $90.8 million achieved in 2019. For logistics, we expect operating income to be lower than the $38.3 million achieved in 2019, and overall, we expect consolidated operating income to be approximately $143 million. We expect depreciation and amortization to approximate $135 million, inclusive of $25 million for dry docking amortization. We expect EBITDA to be approximately $280 million. We expect other income or expense to be approximately $2 million in income. We expect interest expense to be approximately $33 million. Finally, for the year, we expect our effective tax rate to be approximately 26.0%. I want to note that our full-year outlook for 2020 reflects the previously mentioned approximately $30 million of incremental benefit from our vessel and infrastructure investments in 2020 when compared to 2019. As Matt mentioned, we expect COVID-19 to negatively impact a number of our businesses, and we estimate the financial impact to operating income and EBITDA to be approximately $15 million. Although our EBITDA outlook is higher, our net income is expected to be flat year-over-year, and I want to highlight two important drivers behind this. First, interest expense is expected to be approximately $10.5 million higher year-over-year, and this increase is largely driven by the capitalized interest associated with the Lurline vessel moving onto the P&L after she entered service the first week of January this year. Secondly, the effective tax rate in 2019 benefited from a non-cash tax expense reversal of $2.9 million. Excluding this $2.9 million non-cash tax expense reversal, the 2019 effective tax rate would have been 26.0% and comparable to the effective tax rate in our 2020 outlook. These two items in 2020 are expected to add up to an approximate negative $0.25 of earnings per share impact when compared to 2019. Moving to the first quarter of 2020, we expect operating income for ocean transportation to be approximately break even. For logistics, we expect operating income to be lower than the $8.1 million achieved in 2019. I want to point out a couple of things about our first quarter outlook. First, the vast majority of the estimated $15 million financial impact from COVID-19 is expected to occur in the ocean transportation segment during the first quarter, and a modest amount of the estimated financial impact is expected to occur in the logistics segment during the first quarter. Second, with respect to year-over-year comparisons for ocean transportation versus 2019, we expect SSAT equity income to be impacted negatively in the first quarter by approximately $2 million from the lease accounting adoption that occurred in 2019. This year-over-year negative comparison for SSAT is expected to reverse in the second quarter and result in a positive year-over-year variance at that time. With that, I'll now turn the call back over to Matt. Thanks, Joel. To conclude our prepared remarks, we're in the home stretch on both the new vessel build program for our Hawaii service and the first phase of the upgrade of our Sand Island facility. When complete, we'll have the most modern facilities and vessels in the trade lane to service Hawaii and our touchpoints throughout the Pacific well into this century. We remain intensely focused on cash flow generation and managing our leverage as we near our peak leverage at the end of this quarter. We also remain committed to helping our customers in Asia, on the U.S. West Coast, and throughout our network manage through the supply chain disruptions caused by COVID-19. With that, I will turn the call back to the operator and ask for your questions. Operator? Thank you. At this time, I would like to inform everyone, in order to ask a question, please press star one on your telephone keypad. Again, that is star one to ask a question. We have your first question from Jack Atkins from Stephens Inc. Your line's open. Hey, guys. Good afternoon. Thanks for taking my questions. Sure, how are you, Jack? I am doing great, Matt. Thank you. So I guess first question for me will be on just this COVID-19, and I guess there are a lot of unknowns here, clearly, and I get that. But as we think about the impact that this could have to your business in the second and third quarter as some of the backlog is sort of cleared out there. When I go back and look at the West Coast port shutdown that occurred in late 2014, early 2015, that was a pretty significant benefit to your business. Is there the potential for that, I guess, as we look out into the late spring and summer, and to what degree have you factored that into your guidance range? Yeah. It is a good question, Jack, and like you said, it is a dynamic situation. Every day, there is a new element to the story. But the way we approached this, Jack, is that it was pretty clear what we saw in front of us, which was a number of the international ocean carriers that are canceling their sailings. That is going to hurt SSAT. We saw a much slower than usual ramp-up post-Lunar New Year because of the factory shutdowns and the curfew periods that occurred in China. We could see those negative impacts, and we tallied those to be $15 million. But what we did not do, Jack, is to say how congested and disrupted is the supply chain going to be once we get past this period. And it is clear that we have our own dedicated assets, network, terminal. We have an expedited service, and when things come back, we're hearing anecdotally from our customers that they're behind. Their supply chains are needing to be replenished. We think that our differentiated service offering is going to be in high demand. Without a doubt. Historically, our CLX service has been relatively full after the 4 or 5 weeks post-Lunar New Year, and then are full for the rest of the year. Is there upside? There is upside, Jack. There's upside but primarily in the freight rate section because our volumes are relatively full, as I mentioned. To the extent we get into a very disruptive situation, our service offering will be even more differentiated, and there could be upside. It's really difficult to predict whether we'll see a somewhat orderly recovery or something where the wheels come off. In that latter case, we would definitely see upside that we've not built into our forecast here. You kind of have to make a call on what's going to happen, and it was difficult for us to do that. I guess, just to add to that, in theory, if things start to recover sometime this spring, that's going to correspond to when contract renegotiations are happening. I guess that could be a benefit as well, not just on the spot side of your CLX business, but is there a chance that this could benefit your contractual rates as well, just given how tight things could be at that time? Am I not thinking about that correctly? Yeah. I think to the extent that there is insufficient capacity to carry the trade, that is, if the international ocean carriers remain disciplined in their redeployment of additional capacity into the trade lane, that will help the market, and that will also help our segment. We, from a BCO or the annual contracted segment, we're managing freight off of our ship every week. Our discussions with those carriers are very different from the people with 18,000 TEU ships that are trying to fill them anyway. It's really going to be more spot market and us being selective about cargo. I think your point is a good one, which is if the market become constrained, I think both the annual contracted freight and the spot rate will both benefit from this effect if it comes to pass. Okay. That's helpful. One more question on the Transpacific, if I could. Matt, if you just sort of put your hat on as a market observer for a moment, I've got to think that this is really putting quite a bit of strain on international ocean carriers who you're competing with in that trade lane, that in the best of times operate at very thin margins. I guess, how are you thinking about the market in general as you just look through this year? Could we see some carriers face some pretty difficult financial situations here, given the combination of IMO 2020 and the coronavirus hitting at the same time? I think we could, Jack. I think one of the open questions is for the international ocean carriers is, are they going to be able to recover the extra cost of the more expensive low sulfur fuel. Disruptions like this are very problematic. A number of the international ocean carriers have very high debt levels. I wouldn't take somebody with too clear a crystal ball to think the first quarter results for the international ocean carriers are going to be very negative. To the extent that a very fast recovery does not materialize for them because of congestion or because of other factors, or a slowdown in overall demand, I think it will turn out to be another challenging year for the international ocean carriers. It could result in, for example, back on IMO and slow steaming. All of this chaos and slowdown just sets Matson's CLX service apart in terms of the unique service offering that we get. I would not want to be a CEO of an international ocean carrier this year, let me put it that way. No, absolutely. One quick question and I'll turn it over. It's on Hawaii, just to wrap up on my end here. We saw Hawaii volumes turn positive for the first time in 13 quarters to have a positive year-over-year growth in that lane. Do you feel like you've turned a corner there? Can you kind of talk about what's happening? Because it certainly feels like maybe we're back to slow growth mode again, which is a positive. Yeah, I think that's right, Jack. As we've said, we've been perplexed by the lack of growth in the market, given this relatively strong economic fundamentals in the state of Hawaii. In talking with a number of our customers in Hawaii that support the trade lane, and talking with the contractors that are building these various projects, people are pretty upbeat about this year. I think we're feeling like we're hoping, although it's modest, that we're going to see growth in the market after a number of quarters, as you've rightly pointed out, where the growth has been flat or disappointing. I think we're feeling okay about where we are right now. Okay. Matt, Joel, thanks very much for the time. Okay, Jack. Thank you. Okay. Thanks, Jack. Your next question comes from the line of Steve O'Hara from Sidoti. Your line's open. Hi, good afternoon. Hi, Steve. Hi, Steve. Hi. Just quickly on the first quarter breakeven for ocean transportation, did you quantify how much of that is expected to come from lower SSAT versus just pure ocean transportation? No, Steve, we didn't. What we did say is for the total $15 million impact of COVID-19, the vast majority of it would be Q1 and would be ocean transportation, modest impact on logistics. But we didn't further break that down between SSAT and our other businesses, CLX, et cetera. But we do believe a meaningful impact will occur at SSAT. Okay. I guess if I look at last year, I think you guys put up operating income about 9.4, but I think SSAT was almost most of that, or it was $8.5 million or so. So, I guess it seems like despite what seems like a pretty significant impact, maybe year-over-year decline isn't as bad as maybe it could be feared to be? Are you saying for COVID-19 by itself or in what regard? Yeah, I guess, it looked like you guys were almost breakeven within ocean transportation last year without SSAT. With SSAT this year, I have to expect volumes to be down significantly at West Coast ports. I would think that would be a pretty hit to operating income or the contribution there. I guess it just seems like that is not as bad as it looks. No, that's a piece of it. Now remember, we do underneath all of this, importantly, is the reaffirmation, and we're seeing it, of the $30 million of benefit from the new vessels. For instance, this year's first quarter will be a non-ship deployment versus a 10-ship deployment. The core profitability underneath this is improving. It's just being battered around by some of these other factors like COVID-19. So this year's numbers will be benefiting from certain of those positive trends from the investments. Okay. In terms of CLX, I think you guys were talking at a conference recently about you were still sailing with the CLX service right now. Can you just talk about maybe what the conditions are like right now, what capacity utilization is right now out of that service? Yeah. Steve, this is Matt. I can do that. I think your first point is right. We, unlike a lot of the international ocean carriers, did not void any of our sailings, in part because it's part of an integrated network that requires it to be back on the West Coast to load freight for Hawaii and Guam and Okinawa. So we did not. I think what we saw are a much lower than average post Lunar New Year freight volume as the factory shut down. I think without getting too specific, what I would say is that every week we're seeing increased demand as factories are reopening. Just as a checkpoint, this week we're likely to see sailing utilization levels in the 60%-70%. But we're seeing week by week improvements. We expect to see that continue to improve and is embedded in our thinking around the $15 million first quarter impact of that, together with SSAT and the other items that Joel will walk through. But we're seeing strong week-by-week improvements, and we expect it to continue to go from here. We do know that that which is moving in an environment is typically late and is typically very interested in trying to get onto the CLX service. We continue to think that we're going to have strong demand. Okay, then maybe just to follow up to Jack's question. It sounded to me like you didn't have any real rate benefit should one come to pass, baked into the full-year guidance, assuming things are a little chaotic after things start to clear up. Is that fair? Are you kind of assuming flat year-over-year rates out of China and within SSAT? Or are you expecting some benefit, but maybe a muted benefit given there's so much uncertainty? Yeah, I think the way I would describe that within the CLX or our ocean transportation segment is we feel that in 2018 and 2019, let's just call it second half, which we'll start, the freight rates are premium to the market have remained very strong. We expect that the second half of the year, we're going to see freight rates like we've seen in 2018 and 2019. What we have not factored in is a meltdown in our competitors' transportation service offerings that would allow us to charge significantly more than what we've seen in a normal, orderly, healthy premium market. It could occur, and if it does occur, which we did not forecast, there could be some rate upside there, but our ships are likely to be full, whether it's an orderly market or a chaotic market, given our limited size ships. Okay. Thank you very much. Okay, Steve. Thank you. Okay. Your next question comes from the line of Ben Nolan from Stifel. Your line is open. Yeah, hi. This is Frank Galante on for Ben. Hi, Frank. Hi, Frank. Hi. I know first priorities for capital redeployment is obviously finishing the new build program and then reducing leverage over time. But are there any kind of growth initiatives outside of the fleet renewal program? We saw last week Maersk bought a warehouse on the West Coast. Is that something that would be interesting to Matson as a kind of tuck-in acquisition? Yeah, thanks for the question, Frank. The answer is we've been looking for organic growth opportunities across all of our trade lanes. Even though this vessel build program has been going on for three or four years, we've been continuing to look at ways to expand and leverage off our footprint today into more business for our customers, whether that's in the lower 48 or other locations. Alaska is a good example of that, where together with our logistics business and ocean transportation business, we're trying to originate more freight from cradle to grave. The oil and gas segment is a piece of that. And we've grown in the Pacific by adding some services off our hub and spoke operations and locations in the Pacific. Those kind of opportunities we're going to continue to look for organically. We also told investors, even though our leverage ratio has been increasing, we've also been looking at M&A actively. If we saw good acquisitions that fit our strategic criteria, we would go forward with those and believe we can finance them. Really no change with all of that in our growth initiatives. Now that we're coming to the end of the vessel build program, we're still looking to grow in both those ways. Okay. Yeah, that's helpful. Thanks. I had a kind of follow-up on the Hawaii trade lane. As Jack mentioned, container volumes are actually pretty good, but the automobiles took a bit of a dip, and I know that happens from quarter to quarter. If you guys could talk about that a little bit, is that just a seasonal or a timing decline, or is there potential for further declines on the automobile side? Yeah. Frank, the approach on autos, you'll notice that as we go through quarterly explanations and calls, auto volumes are listed, but we don't often talk about auto volumes being a driver of our profitability. While the cars fit into two or three different buckets, the manufactured cars that all the large car companies make retail sales in Hawaii, and we carry our share of those cars, as does our principal competitor, Pasha Hawaii. We also move military vehicles. We carry privately owned vehicles as people relocate to or from the state. Those are different segments of cars we carry. I think from our perspective, what we have been focused on is carrying profitable cars. Carrying cars that because of the competitive situation between ourselves and Pasha Hawaii, a lot of the manufactured car prices have come down over a number of years to a point where there is not a lot of profitability in those. What we're actively doing is carrying the right cars and making money on those cars rather than carrying lots of cars. That has been our approach and that will remain our approach. Honestly, there are lots of cars where we spend a lot of activity and really make next to nothing on them. You shouldn't assume that our profitability is down because we're carrying less cars. We're just trying to be more selective in the cars we carry. No, that makes a lot of sense. Pretty helpful. Thanks very much. That's all I had. Okay, Frank, thank you. Thank you. Again, to ask a question, please press star one on your telephone keypad. Again, that is star one to ask a question. We have your next question from Steve O'Hara from Sidoti. Your line's open. Hi. Thanks for taking the follow-up. Just on CapEx, can you just talk about, and maybe I missed it in the slide deck, but can you just talk about CapEx maybe outside of acquisitions and things or, let's say, outside of the ship program for 2020 and 2021. I guess outside of ships including the scrubbers and things of that nature and Sand Island, et cetera. Sure. Thanks, Steve. Big picture, we still believe our maintenance CapEx level, absent any new vessel spend, is around $50 million a year. We will be higher than that here in 2020, and we haven't commented beyond, but some of these projects will continue, and I'll explain. The biggest items that will continue in 2020 are the scrubbers. Each of those are approximately $10 million per scrubber. There'll be three enacted this year, so that's an additional $30 million. Then the other big piece is what you mentioned and alluded to, which is the infrastructure work at Sand Island. We installed the three cranes last year in 2019, and now we're finishing the final work on mainly the electrification and the power and backup storage power for those cranes, and some of that's a pretty significant investment as well. That will continue in 2020. Mainly because the Sand Island work and the scrubbers will be over the $50 million number in 2020, and then a little bit of that Sand Island work will spill over into 2021. But we really should be glad passing down towards that $50 million number in 2021, 2022 time frame. We'll have more to say on the details there as we get closer to the end of the year. Okay. All right. Thank you very much. Okay. Thanks, Steve. I'm showing no further questions at this time. I would now like to turn the conference back to Mr. Matt Cox. Sir, please continue. Thanks, operator. Okay, that's it for us on our end. Look forward to catching up with everyone on the first quarter call. Thanks. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, and have a wonderful day. You may all disconnect.