Earnings Call: Q3 2019

Nov 7, 2019

Ladies and gentlemen, thank you for standing by and welcome to the third quarter 2019 financial results conference call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. If anyone should require assistance during the conference, please press star zero on your touch-tone telephone. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Lee Fishman. Please go ahead. Thank you, Grace. 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 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 November 7, 2019, 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. Please turn to Slide 3 for my opening remarks. Matson's consolidated performance in the third quarter came in as expected. Ocean transportation was slightly weaker than expected, with strong demand in China, but we also saw weakness in our Hawaii market and a softer than expected volume in our Alaska service. In logistics, we saw stronger performance with nearly all service lines making positive contributions to operating income. As a result of the first nine months' performance and our expectations for the business in the final quarter of the year, we are maintaining our consolidated operating income outlook for the full year 2019. We expect a slight decrease in the outlook for ocean transportation operating income provided on the second quarter earnings call, offset by a slight increase in the outlook for logistics despite some market headwinds. Joel will go into more detail on the financials and 2019 outlook later on in the presentation. We're also reaffirming the approximately $30 million in financial benefits in 2020 compared to 2019, with a significant financial benefit coming from the reduction in Hawaii fleet deployment to nine vessels, which I will cover in a moment. Please turn to Slide 4. This table outlines our current operational and financial priorities, and I'll start with progress on the Hawaii fleet renewal. Lurline is on track for delivery later this quarter, and we expect her to be placed into service shortly following delivery. When she enters service, we expect to step down into a nine-ship deployment for our Hawaii service and begin to realize the financial benefits of one less fleet unit. As a result of this fleet transition, two vessels are expected to go into reserve status. The new Matsonia remains on track for delivery in the third quarter of 2020. Next to the Sand Island terminal upgrade. All three of the new gantry cranes were placed in service by the end of the third quarter, and this quarter we've begun the demolition process on four existing legacy cranes. The remaining infrastructure work to support the new cranes, the three retrofitted cranes, and other system continues, and we expect the major cost items in phase one to be complete in the first half of 2020. On to the next priority. Our IMO 2020 preparations continue as we near the effective date of the regulations. I want to reiterate that Matson will be 100% compliant with IMO 2020 on January 1st, and I continue to believe we're very well positioned within our industry. The second of six vessels to receive a scrubber is back in service with a fully operational scrubber. The third vessel is now in dry dock, and we expect the fourth vessel to be in dry dock in the first quarter of next year. By the end of 2020, we will have scrubbers on eight of the 12 active vessels serving our core trade lanes and one scrubber on a reserve vessel. Our leverage covenant level for the third quarter was below 3.25, and our trailing 12-month cash flow remains strong to fund the remaining vessel and Sand Island terminal investments. We continue to expect our debt level to peak in the first quarter of 2020 and shortly thereafter will begin to de-lever the balance sheet to our targeted average level of the low twos. On the organic growth opportunities front, we continue to pursue a number of opportunities to leverage our network in the Pacific and complement our logistics service. Within Alaska, we continue to pursue business that could benefit both ocean transportation and logistics. Lastly, the new Span Alaska Anchorage facility opened in October, and I'll highlight this more in a few moments in my remarks. Now on to our trade lane services, so please turn to Slide 5. In the third quarter, container volume in our Hawaii service declined 2.1% year-over-year, primarily due to negative container market growth. Hawaii's GDP continues on a slowing growth trajectory, despite favorable and resilient key economic factors such as construction activity and visitor traffic. And I'll return to this in a moment. For our full year 2019 outlook, we expect volume to be lower compared to the level achieved in 2018, which reflects less containerized freight volume in Hawaii and a stable market share. From our perspective, the Hawaii container market remains flattish within a slowing Hawaii economy. Please turn to slide 6. This slide summarizes UHERO's latest economic forecast. I will briefly walk through some of the key economic factors. GDP growth in 2019 is forecasted to remain modest, but there is a more pronounced slowdown in effect, which the chart on the left illustrates. Population growth for 2019 remains muted, but UHERO is forecasting it to stabilize in 2020. As you may recall, population has a direct impact on the growth in consumption, especially of recurring goods that we carry to the islands. The unemployment rate is forecasted to pick up slightly, but it remains at or near cycle lows. Visitor traffic is expected to hit new record this year, but it's forecasted to modestly decline in 2020. Aggregate visitor expenditures are forecast to decline this year and next, which represents a small headwind for the economy. Construction activities remain stable at a healthy pace, and the activity appears widespread across the islands. There are large condo projects underway on Oahu, and we're seeing large resort renovation projects on a few of the islands. Residential building is proceeding across the islands, with most of the activity centered on Oahu. Construction jobs continue to inch higher to support the current backlog of projects. As a result, we expect construction activity to remain flat at this higher plateau of activity in the near term. Although Hawaii's economy continues to grow, key factors and conditions remain favorable for continued economic growth. Moving to our China service on slide 7. Matson's volume in the third quarter 2019 was 3.4% lower year-over-year, primarily due to the timing of an additional sailing in the year-ago period. We continue to realize a sizable rate premium and achieved average freight rates during the quarter that approximated the level achieved in the third quarter of 2018. For 2019, we expect this CLX volume to approximate the level achieved in 2018, which is a major achievement since the second half of 2018, and the fourth quarter in particular, was unusually strong due to the pull forward of volume associated with the U.S.-China trade situation. We remain cautiously optimistic that average freight rates for 2019 will approach the healthy levels we achieved in 2018. We believe this level of demand is a testament to the strength of our highly differentiated service within a chaotic Transpacific trade lane, which at various times of the year has seen numerous blank sailings and port congestion issues. Turning to slide 8. Guam container volume in the third quarter was down 2.1% year-over-year within a softer container market. For the full year 2019 outlook, we expect volume to approximate the 2018 level as the highly competitive environment remains. Our strategy remains to fight to retain every single container of our customers' business. Given our long history in Guam with strong customer ties, a shorter transit time, and a significantly better on-time performance record, we expect to retain an outsized share in this market. Moving to slide 9. In Alaska, Matson's container volume for the third quarter 2019 was flat year-over-year. We saw slightly lower northbound volume year-over-year, primarily due to the timing of an additional northbound sailing in the year-ago period, and we saw a modest increase in southbound volume year-over-year. Adjusting for the additional northbound sailing in the year-ago quarter, we saw a modest year-over-year increase in volume. Southbound volume was positively impacted by higher seafood-related volume, but aggregate demand was lower than expected as the seafood season was weaker than forecast and is expected to be well short of the 2017 levels. For 2019, we expect volume to be modestly higher than the level achieved in 2018, with higher northbound volume and approximately flat southbound seafood-related volume. Turning next to slide 10. Our terminal joint venture, SSAT, contributed $8.4 million in the third quarter 2019, or $800,000 lower than the prior year period. The decrease was primarily attributed to higher terminal operating costs, partly offset by the timing of some of the additional expenses related to the early adoption of the new lease accounting standard in the second quarter and higher lift volume. For 2019, we expect SSAT's contribution to our ocean transportation operating income to be lower than the level achieved in 2018, largely due to higher terminal operating costs, partially offset by higher lift volumes. Turning now to logistics, on slide 11. Operating income in the third quarter 2019 of $11.3 million, or an increase of $1.4 million over last year, came in stronger than expected. The increase was primarily due to a higher contribution from freight forwarding, and nearly all of the service lines made positive contributions to operating income. In the quarter, we saw lower transportation brokerage revenue year-over-year, primarily due to lower intermodal and highway revenue, both of which were negatively impacted on a volume basis by the soft truck price market. Operating margin was higher, primarily due to greater contribution from higher-margin freight forwarding revenue. Joel will provide details on the logistics full-year outlook later on in the presentation, but I'd like to mention that our implied outlook for the fourth quarter is muted as we face a period of more difficult comparisons based on the very strong fourth quarter of last year, which Joel will explain further. Turning to the next slide. I wanted to highlight the new Span Alaska Anchorage facility opened in October, and we're pleased to have this modern facility built to our specification up and running within 15 months of breaking ground. As a reminder, we consolidated two leased facilities in Anchorage into this one larger owned facility. This new facility will bring significant operating efficiencies and the capacity for new service offerings to drive organic growth opportunities. I will now turn the call over to my partner, Joel, for a review of our financial performance and outlook. All right. Thanks, Matt. Now on to our financial results on slide 13. Ocean transportation operating income for the third quarter decreased $4.8 million year-over-year to $43.9 million. The decrease was primarily due to higher terminal handling costs, higher vessel operating costs, including the Mauna Kea lease expense, and lower container volume in Hawaii. The company's SSAT Terminal joint venture investment contributed $8.4 million, or $0.8 million less than the prior year period. The decrease was primarily due to higher terminal operating costs, partially offset by the timing of some of the additional expense related to the early adoption of the new lease accounting standard in the second quarter, and higher lift volume. Logistics operating income for the quarter was $11.3 million, or $1.4 million higher than the prior year period. The increase was due primarily to a higher contribution from freight forwarding. EBITDA for the quarter decreased $2.4 million year-over-year to $89.1 million due to lower consolidated operating income of $3.4 million. A decrease in other income expense of $1.2 million, partially offset by an increase of $2.2 million in depreciation and amortization, which includes dry dock amortization. Interest expense for the quarter was $6.2 million, and the effective tax rate in the quarter was $25.4 million. Slide 14 shows how we allocated our trailing 12 months of cash flow generation. For the LTM period, we generated cash flow from operations of $282.4 million and received proceeds from sale leaseback transactions of $106 million, from which we used $25.1 million to repay debt, $80.6 million for maintenance capital expenditures, $224.7 million on new vessel CapEx, including capitalized interest and owners items, and $1 million on other items, while returning $36.8 million to shareholders via dividends. Our cash flow remains strong to support investments in our new vessels and the terminal upgrade at Sand Island, as well as our other growth initiatives. Turning to slide 15 for a summary of our balance sheet. You will note that our total debt at the end of the quarter was $883 million, and our net debt to LTM EBITDA ratio was 3.2 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 leverage to peak in the mid threes in the first quarter of 2020, after which we will focus our strong cash flows on reducing leverage back towards our targeted levels in the low twos. On an annual basis, we continue to expect about a half a term reduction in the leverage ratio after the completion of our vessel program. As we mentioned on our last earnings call, we are continuing to look at debt capital structure financing alternatives, including Title XI, to further optimize our balance sheet. Turning to slide 16 for a review of our new vessel payments. For the third quarter, we had new vessel cash capital expenditures of $74.6 million and capitalized interest of $3.5 million for total capitalized vessel construction expenditures of $78.1 million. As you can see in the middle table, the Lurline is 99% complete, and as Matt said, delivery of the vessel is expected for later in this quarter. The Matsonia remains on track for delivery in the third quarter of 2020 and is 41% complete. The table at the bottom shows the cumulative and remaining new vessel progress payments. For the remaining three months of 2019, we expect approximately $102.8 million in payments, and as of today, Matson has paid approximately $72.7 million of this amount. For 2020, we expect $62.5 million in payments. With that, let me now turn to slide 17 to discuss our full-year outlook. For the full year 2019, we expect operating income for ocean transportation to be approximately 25% lower than the $131.1 million achieved in 2018, after adjusting for the additional 11 months impact of the vessel sale leaseback transaction of $6.6 million. For Matson Logistics, we now expect operating income to be approximately 15%-20% higher than the level achieved in 2018 of $32.7 million. We expect depreciation and amortization to approximate $135 million, inclusive of $35 million for dry docking amortization. We expect EBITDA to approximate $270 million. We expect income expense to be approximately $1 million in income. We expect interest expense to be approximately $25 million. Finally, for the year, we expect our effective tax rate to be approximately 26%, including the $2.9 million reversal we recorded in the first quarter related to the Tax Cuts and Jobs Act of 2017. I wanted to note that the full-year operating income outlook for Matson Logistics I just walked through implies a decline in the fourth quarter compared to the $9.1 million achieved in the prior year period. We are lapping a strong fourth quarter last year, where volumes and margins in our intermodal and highway businesses benefited from a stronger trucking market. As a result, for the fourth quarter of this year, we expect volume and margins in these businesses to not be as strong due primarily to the softer market conditions. Lastly, Matt earlier indicated that we are reaffirming that we expect approximately $30 million of incremental benefit from our vessel and infrastructure investments in 2020 when compared to 2019. We are also reaffirming that after 2020, we expect approximately $40 million in incremental benefit from these investments when compared to 2019. With that, I'll now turn the call back over to Matt. Okay, Joel. Thanks. As we look to close out this transition year with Lurline entering service, we are making a significant step forward in realizing our previously mentioned approximately $30 million in financial benefits in 2020. As a reminder, we will provide the outlook for 2020 on our fourth quarter call in February. With that, I will turn the call back to the operator and ask for your questions. Operator? Ladies and gentlemen, if you have a question at this time, please press star and the number one key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Your first question comes from Jack Atkins from Stephens Inc. Your line is open. Hey, guys. Good afternoon. Thanks very much for taking my questions. Hey, Jack. Matt or Joel, I guess just to start off on the incremental benefits to 2020 that, Matt, you just highlighted in your prepared comments. That $30 million number, that is an EBITDA number. Is that correct? Yes, Jack. Okay. Got you. Is there a way to think about all else being equal, like the incremental depreciation that you would. I'm just trying to net that down to the EBIT impact from the new vessels. Is there a way to think about that, Joel? Yeah. We haven't discussed that element. We did earlier this year in our February call, in our annual outlook. We did provide some multi-year outlook, Jack, on what we thought our depreciation and amortization numbers would be. So those numbers are still good. We haven't updated those. That's still our approximate estimates for D&A. So the way I would encourage you to look at is look at the $30 million of benefit we've talked about here recently as an EBITDA benefit, and then continue to use what we have out there in our disclosure around D&A. Okay. Perfect. That makes sense, Joel. Thank you. Is there a way to think about interest expense and how that flows now that the capitalized interest income is falling off into next year? Yes. That's a great question, Jack. Thanks for that. We've been purposely highlighting the last couple of years how much capitalized interest there is each quarter. So you can see this past quarter was 3.5 and 3.3 in Q2, 4.7. Those amounts will begin to decline when the Lurline is delivered here in the fourth quarter. We'll only be capitalizing interest on our last vessel, the Matsonia. As of the third quarter of next year when the Matsonia is delivered, that capitalized interest will totally go away. The interest expense going through our income statement will increase commensurately for that no longer being capitalized. Okay. That's exactly the right way to think about it. Okay. That's great. I guess a bigger picture question just on the ocean transportation segment. I guess when we look at the implied operating income for this year, it's right around $100 million, maybe just south of $100 million. You have to go back really to 2011 to sort of find an operating income sub $100 million. I know that next year we've got the new vessels coming in, and that should definitely help with the financial performance, I guess, theoretically. I guess as you guys look at the organization within ocean transportation, are there maybe some other areas where there's some potential efficiencies to be gained or costs that can maybe be trend, just an effort to help improve profitability while the Hawaii market sort of finds its footing. Yeah. I would just say, Jack, it's an ongoing process. Clearly, as you've heard us say throughout the year, Hawaii has been a disappointment for us. We expected more growth. We'll have more comments about 2020, but the environment looks relatively flattish. We've said that on the call. The question is, what are we as a management team going to do, given the more muted prospects for Hawaii? It's likely that we're going to continue to look to grow, and it's likely going to be outside of Hawaii. What asset and overhead and investments are required are yet to be determined. But for example, you saw us redeploy the Kaimana Hila, one of the new Aloha Class vessels into our CLX service. In part, it's to cover the scrubber installations that we're in the middle of. But to the extent, for example, that the market remains muted in Hawaii, does it have a more permanent place in our CLX? Those are the kinds of things we'll look at to make sure that we've got our assets deployed in such a way that reflects our maximum ability to leverage those assets. Then the ongoing blocking and tackling of operating costs happens every day behind the scenes here, and we're always looking for ways in which to become more efficient and to operate very effectively. So I would say that's more of an ongoing process. Okay. All right. Got you. Then last one from me, and I'll hand it over, but with IMO 2020, it's now just around the corner. We've been talking about it for so long, it's hard to believe it's almost here. But I guess, Matt, just be curious to know what you're hearing. I found it interesting that we really haven't seen the changes in prices within the distillate markets of any significant magnitude. I'm just curious why you think that's the case and just sort of what you're hearing out there, if it's enforcement, if it's adoption to IMO 2020. I'm just curious what's going on out there and why you think we haven't really seen fuel prices really change all that much, given I think that's been the expectation now for quite some time. Yeah. Our sense is we're just getting into it. If you look at current pricing, contractual spreads, Matson has, we think we're well-positioned. We've dealt with all the suppliers that provide different grades of fuel depending on our fleet. As you know, part of it will be the higher sulfur content for the use in our scrubbers, and our newer ships will be using the compliant fuel. We've secured all those sources, feel really good about them. There are current spreads that we see in those markets which are consistent with what we're seeing around the world. I think what you're going to see here in the last or just in the next 4 weeks or 6 weeks or even sooner, in the case of the international shipping lines, they're in the process of taking vessels out of service and removing the non-compliant fuel. You are going to start seeing increases. People are starting to purchase this fuel now. I think we are just at the very beginning of it. Again, you might have noted that Matson had announced a fuel surcharge increase from 32% to 35% in our Hawaii and Guam trade. We actually took fuel prices, our surcharge down 2% in the Alaska trades because we are going to continue to burn the higher residual fuel content given the scrubber installation. We have already made the step that we need to make. We have got a very good ability in our other trades, including our China trade, to recover the higher fuel costs. I think we will start to see it. Whether the market accepts it and the larger dynamics on the international side remain unclear, but Matson feels really good about the investments we have made, and we feel really good about our ability to recover fuel through our various surcharge mechanisms. Let us wait and see. Time will tell, but we feel really good about the position we find ourselves in. No, absolutely. You guys are in a fantastic spot to take advantage of market dislocations on that. That is why I was just curious. Okay, guys. Thanks again for the time. Okay, Jack. Thank you. Thanks, Jack. We also have Ben Nolan from Stifel. You may now ask your question. Great. How's my favorite management team doing? Good, Ben. How are you? Yeah, don't tell anybody that, though. I don't want it to get out. I'm still trying to wrap my head around Hawaii a little bit and the fact that the GDP is growing, but the container volumes aren't. Do you think that there is any element of a shift in mode at all? I know in the past, we talked a little bit about aviation and curious if there's any air freight dilution per se. But also given all the trade wars and we've seen West Coast volumes flat to slightly declining coming in from international. Is there maybe more direct cargoes coming in directly into Hawaii from Asia or elsewhere? Or is consumption just lower? How do you see all that? Yeah. So we took a deep dive. It's a great question, and we said we've been disappointed, and this is one of our core markets, right? So I think it's been first of all, we looked at air freight. There is an Amazon effect of Amazon Prime, and so there's a very small slice of the market that is using Prime like everywhere else, but it's limited to a container a day equivalent of cargo that goes into Hawaii. So it's very small. We are similarly keeping an eye on all the international freight volumes that come directly from Asia into Hawaii. There have been no discernible changes in volumes at all. But we've seen some of our large customers be more careful about inventory management. We've seen a little bit of slowdown in, there's a small net migration of people out, but just small on the margin. Construction has been a little slower, but in talking to our construction customers who are moving in, they feel they personally, and their businesses, are projecting towards a pretty solid 2020, based on what's in the backlog, as we mentioned in our comments. So it's a little unclear about what's going on. It's probably a combination of factors, including, of course, an overall slowing in the growth rate. But absent a U.S. recession or some other shock, we're continuing to expect a flattish environment. We're not saying, "Okay, this is the beginning of a big slide." We're careful not to say it because we don't believe it. None of our customers are telling us that, and that's not what the economic stats are telling us either. But I acknowledge it's a bit of a puzzle. Okay. Now, switching over to Alaska a little bit. Span apparently was the real rock star of maybe the whole company last quarter. And that's despite the fact that the Alaska volumes were sort of unimpressive. And I guess the new cross dock doesn't really even kick in until this quarter. Market share gains, is that business doing anything different, or is the trajectory of that business different than maybe you thought that it was? Well, first of all, we've seen increases across all of our lines of business, except the rail and truck brokerage in the last quarter, as we started to see that overall market change. But if you were to look at the income statement by segment, which you can't because we don't show it to you, all of our lines are contributing in year to date above last year, including Span Alaska, which of course, is a large part of the now consolidated operating income. And Span has done well. Span has continued to perform well. Just as a reminder, when we acquired Span Alaska a couple of years ago, they had, in the previous year before we acquired them, purchased another Alaskan freight forwarder, PAF. And they were continuing to wring out the internal efficiencies on the mainland side. We're also now taking the second step to consolidate our two warehouse operation in Anchorage to a single warehouse there. But I would say they've continued to perform as or better than we expected, and they have performed, when we acquired the company a few years ago, we knew at the time that the state of Alaska was likely going into a recession, which in fact did occur. And the volumes there have been good. But I think it's a lot of factors. Clearly Span has done well, but we've got a lot of well-performing units, and even within our domestic brokerage lines of business, we've seen reductions in volume, but the margins in our brokerage businesses have remained pretty healthy, which has helped our overall contribution as well. Okay. That's helpful. And just sticking on that for a second, the new cross dock in Alaska, the impact from that is part of the $30 million or $40 million in 2021. It's all incorporated in there, correct? No. It's not in that $30 million number. Okay. Is there any way to maybe quantify, does it just make you a little bit more efficient or is it material in terms of? It's not going to be material in 2020. We still have a couple of the existing leases that are scheduled to continue in 2020, so we're not going to get a necessarily immediate benefit on the lease expense side. We'll get some benefit on the efficiency side and on the final delivery side. But it's not something material that we've baked. We'll of course include what those amounts are in our annual outlook in February, but it hasn't been such a big number that we called it out in advance. I would say, this is Matt, one of the things that we are excited about is our ability to serve our customers faster, make that freight available earlier upon delivery. So there's a lot of operational benefits that will be seen from our customers in that business, which I know our team at Span are very excited about. Great. Okay, I appreciate it. Thanks, guys. Okay. Thanks, Ben. Thanks, Ben. Next up is Kevin Sterling from Seaport Global Securities. Your line is open. Thank you. Good afternoon, gentlemen. Hi, Kevin. Hi, Kevin. Matt, if I can follow up a little bit on Ben's question and talking about international and your China service, and international air freight has been pretty weak this year. Your China container volumes were down, I think it looks like 3.4% year-over-year. When I think of your China service, it is essentially a deferred air freight offering. Is there a correlation there, do you believe, between some of the weakness you saw in your China service in terms of volume as it relates to what we are seeing in the international air markets? I think what you are seeing is the numbers are a little misleading in the sense that we had an extra sailing in the prior year quarter that we did not have this quarter, but otherwise, we were full every week. We could have said that a little differently. But what we are seeing is, when we looked at 2018 and we said, because of all these tariffs and deadlines, we just saw this unbelievable contribution from our China trade lane. What you are hearing us say now is that we now believe that both volume and rate have approached or will be the same as the unbelievably good year in 2018 was repeated in 2019. We are seeing a continued strong interest in moving cargo out of air freight. And of course, we have our traditional garment, electronics. We're seeing e-commerce, and a lot of stuff is looking for ways to move out of air freight into our deferred air freight product. I don't want to say we're beating them off with a stick, but the demand has remained very buoyant. I think that's what our corporate communication team would encourage me to say instead of beating them off with a stick. No. Okay. No, that's very helpful. Thank you. I think that's a very good explanation. You may have touched on this, I apologize if you have. Some of the weakness we saw in Alaska this quarter, do you think it's combined to Q3, or could it linger? Well, there's such a strong seasonal component to the Alaska trade, right? It's the second and third quarter, it's the tourist season, it's the construction season. I think we've seen, I would say, a more normal sort of looking third quarter going into the fourth quarter. Nothing pops out at us. Despite the weaker volume, we feel really good about our position in the Alaska market and the investments we've made. Time will tell. I know we're talking to a number of our customers, including the North Slope folks, and there's a lot of investment that's going on in the North Slope. We're not necessarily a large participant in the North Slope market, but the entire state benefits from the investments that go through that Anchorage gateway up through to the North Slope. While there's questions about the overall economy, the North Slope remains a silver lining to the state's economy. Southbound, I would say conversely has been a little disappointing. It's an every other year fishing season based on Mother Nature, and the southbound volumes partly due to a lower fishing harvest and catchment in the markets we participated in than we expected. If there was a downside, it was just a little bit in the disappointment there. But overall, we're feeling okay or pretty good about where we are in Alaska. Got you. Okay. Lastly on logistics, obviously you mentioned freight forwarding and Span just really being the star there, but also it seems like you took advantage of some of the capacity looseness out there in truck brokerage and intermodal and bulk capacity, much cheaper and better. Do you think what we're seeing in logistics, as you've scaled that business, are you guys getting better at buying capacity, or is it just you're taking advantage of what the market gives you? I'd like to say the former, but it's more of the latter. I think the market has changed. I think if you are an asset-based truckload guy, and we've seen through other quarterly reports, those guys have taken a pretty hard turn on their margins and volumes, in the markets and the same on the rail side. There was almost no peak season surcharge on the rail network this year. But for us, in our business, the margins have held up better than the asset base overall rates have been in the market. As we all know, the peak season's been relatively muted. But I would say, the benefit, and I've said this a few times, is we had through the last cycle, the benefit of resetting our margins on all that rail and truck brokerage business and moving away from some of the very thin margin business. The management team at Matson Logistics and Rusty and his team like where they are. Now, of course, the market's going to change and we'll have more to say about the market in 2020 at the year-end earnings call, and it's likely to be different, but we'll see what happens. But I think overall we're feeling pretty good about our position and where we are as we end the year. Got you. Okay. I'm relieved. I thought you were going to give all the credit to Jerome. I know Jerome. He's the behind the scenes guy in charge of everything, basically. He's doing a good job. That's all I had. Thanks for your time today. Okay, Kevin. Thanks. We also have Steve O'Hara from Sidoti & Company. Your line is open. Hi. Good afternoon. Hi, Steve. Hi, Steve. Hi. Just, I guess going to the outlook for Matson Logistics. In the third quarter, you had good margin improvement on declining revenue. Then I guess we are looking for a decline in operating income in the unit. I am just curious what the dynamic between Q3 and Q4 is. Is it because of the way the I know you had a very strong year last year, but is that the normal seasonality in the business? Is that what is happening as well as having a real good year last year? Yeah, the seasonality is a factor, so it is both those things, Steven. Last year we declined just a little bit, Q3 into Q4 is about $800,000. This year, probably a little bit more. Remember, Span is a very big piece of that business, and Span is more seasonal, just given the nature of the Alaska business than the traditional brokerage businesses. So it is going to, on average, introduce a little bit more Q1 and Q4 seasonality in logistics relative to before. So that is definitely a factor, then the softening in the brokerage businesses that we talked about is the other important factor heading into this year's fourth quarter. Okay. Then maybe on the financial benefits commentary. I am just curious in terms of how that translates into cash flow. It would seem like taking out interest costs from that should get you to pretty close to operating cash flow. Maybe if you could tell me if you expect to be a cash taxpayer, and if not, when that might become a factor. Then just talk about maintenance CapEx going forward, maybe on a long-term run rate as opposed to with the current program as well. It looks like you guys should generate good free cash flow in 2020 and 2021, but I do not know if you could just delve into that a little bit. Sure, Steven. Always happy to talk about cash flow. We still expect that strong cash flow we have been talking about for a while. So the first part there, the $30 million, that really should translate into EBITDA and directly to cash flow. The reason is because most of that is coming from capital we have already put out the door. So if you look at rationing down from 10 ships to nine, well, that is because of the vessel expenditures themselves. If you look at the scrubbers, that capital would have gone out the door for the most part, and then we have got some of that still in 2020, but after the scrubbers are installed, then there is no more capital going out the door. So it is coming from efficiencies in our rolling stock, and better capacity utilization in our garages, so that is tied to the capital of the vessels themselves. Then the other item is the cranes that we have invested in in Sand Island. So most of that is all behind us, and so we are ready to reap the benefits. So think of the $30 million as translating at a very high pace into free cash flow. Then the second part of your question around maintenance CapEx, we still feel good. $50 million. There will be some years where it is higher, there will be some years where it is lower, but that is a good run rate for us as we look at the next 5, 10 years. If we see that changing, we will certainly update investors. But we still feel good that when we get through this period of time and finalize the longest item, which is the Sand Island terminal upgrades, that we will be landing around that $50 million free cash flow number. When you look at the upside on the EBITDA and then getting back at some point to the $50 million of maintenance CapEx, and then the other item is the cash taxes point that you mentioned. We believe that is still about 2 years away before we are going to be a cash taxpayer. So you are looking at very strong free cash flow numbers back half of 2020 continuing into 2021, 2022, and beyond. Okay. Then maybe just on use of that cash flow, I know you want to delever relatively quickly. Then, so when you begin to delever, is there a point at which you start to divert more to share repurchases, things like that, maybe increase the size of the dividend? Is it based on, is there a leverage range you can talk about? Yes. The target leverage range is that low 2s, and so we do want to get back to that level. We also believe long-term in rewarding our shareholders with an increasing dividend as we earn it through free cash flow generation. So that will be a part of the equation. We have also said we are not opposed to special one-time dividends, and we have done share buybacks in the past. So what you are going to see from us is looking at all those different alternatives to maximize the benefit to shareholders from a long-term cash flow ROIC perspective and overall shareholder value perspective. So all of those things will be on the table for us to look at what is the best equation as we look at 2021, 2022, 2023, 2024. Those years as our leverage comes down and begins to glide path towards the low 2s where we want to go or lower into the 1s. We will look at those other return of capital alternatives. Then we talked a lot about M&A and the priorities in M&A, and the key there is finding things that fit for us, but also being disciplined and not stretching ourselves. Make sure we are very disciplined with respect to our financial criteria and fit criteria. So that is the way we have articulated how we will think about capital allocation in the years to come. Does that make sense? Yeah. No, that helps. All right. Thank you. Okay. Thanks, Steve. Once again, in order to ask a question, please press star then the number 1 on your telephone keypad. I am showing no further questions at this time. I would now like to turn the conference back to our CEO, Matt Cox, for any closing remarks. Okay, operator. Thank you. We will look forward to speaking with everyone at our year-end earnings call in February. And we hope everyone has a safe and enjoyable holiday period if we do not talk to you before. Aloha. Ladies and gentlemen, that concludes today's conference call. Thank you all for joining. You may now disconnect your