Earnings Call: Q1 2019

May 8, 2019

Ladies and gentlemen, this is your conference operator today. At this time, I would like to welcome everyone to the Matson First Quarter 2019 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star then the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. I would now like to turn the call over to Lee Fishman. You may begin your conference. Thank you, Lori. 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 May 8, 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. With that, I'll 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 is off to a good start to the year. Ocean Transportation's first quarter operating income came in as expected, with a number of positive and negative year-over-year comparisons. We saw strong demand in our China service, with stronger volume post-Lunar New Year, and SSA Terminals continued its steady performance, excluding the one-time favorable items in the year-ago period. We also faced significant weather-related issues that primarily impacted our Hawaii service. In logistics, another outstanding quarter with stronger than expected operating income as a result of all lines of service performing well. Moving on to the outlook for the full year 2019. We are maintaining our outlook for ocean transportation operating income, and we're raising our outlook for logistics. Joel will go into more detail on the financials and outlook later in this presentation. Please turn to Slide 4. On our last earnings call, I went through our current priorities, which were a mix of operational and financial objectives. Given the size and scope of the priorities, we wanted to provide a quick update on each of them and will continue to do so as we progress throughout the year. I will start with the Hawaii fleet renewal. Kaimana Hila was delivered on March 28, and we placed her into service on April 18, working the PNW Oakland triangulation. Lurline delivery is on track for the fourth quarter of 2019, and her christening is coming up in the middle of June. We look forward to the first of the Kanaloa class vessels entering service, which will allow us to shift to a nine-ship fleet deployment and deliver operational and financial benefits. Lastly, after nearly six months in operation, the Daniel K. Inouye is performing as expected, with actual speed meeting the design speed of 23 and a half knots. Next to the Sand Island Terminal upgrade. I am pleased to report that three new gantry cranes arrived at the terminal in mid-April. Other infrastructure work to support the new cranes, the three retrofitted cranes, and other systems continues, and we expect phase one to end in early 2020. We are nearly seven months away from IMO 2020 regulations coming into effect, and I think we are very well-positioned. We have begun the installation of a scrubber on the first of the three vessels in the CLX service, and our board approved scrubbers on three additional vessels. I will circle back to this topic shortly to provide more detail. Our leverage covenant level for the fourth quarter remained just below three times, and our trailing 12-month cash flow remains strong to fund the vessel and Sand Island Terminal investments. We continue to expect our debt level to peak in the first quarter of 2020, and shortly thereafter, we will begin to de-lever the balance sheet to our targeted leverage levels of the low twos. Last but not least, we continue to source organic growth opportunities that build upon our valuable Pacific network and U.S. West Coast port operations. Some of the opportunities are one-off, non-recurring projects, but good pieces of business, and others are smaller recurring streams that could be long-term beneficial. In logistics, we are finding opportunities in niche areas, such as expanding our 53-foot box fleet and additional contract warehouse opportunities. With improving economic conditions in Alaska, we are looking at a number of initiatives that could benefit both ocean transportation and logistics. Our SSAT joint venture picked up an additional terminal in Seattle this quarter, which I will describe later on, but this highlights another opportunity for us to drive long-term organic growth. Turning to Slide 5. April was a busy month for our operations team, with Kaimana Hila entering service and the new gantry cranes arriving at the Sand Island terminal. The three new gantry cranes have already been installed on the rails at the terminal, and commissioning each crane will occur over the next several months. The new cranes, the retrofitted cranes, and the new vessels are integral in efficiently managing the growth in volumes at our Pacific hub for the next 40 to 50 years. Please turn to slide 6. I wanted to spend a few minutes on our IMO 2020 strategy, given its importance. First and foremost, I wanted to remind everyone that Matson will be 100% compliant with the IMO 2020 regulations on day 1. As we've discussed before, our fuel strategy should maximize the opportunity for the company and provide the means to lower the cost for us and our customers. As many of you know, in 2016, we got a head start over most of the other ocean carriers with the installation of scrubbers on our D7 vessels in the Alaska service. Based on the results of the D7 scrubber program and the available fuel options for us, we initiated a program last year to install scrubbers on 3 vessels in our CLX service, and the first of these vessels is already in dry dock for the scrubber installation. We expect 2 of the 3 vessels to be back in service by year-end, and the third will be in dry dock at year-end, and available in early 2020. After many months of analyzing the fuel strategy on the remaining vessels in the fleet, our board has approved the installation of 3 additional scrubbers, 2 on the remaining vessels operating in the CLX service and the Maunalei. As a result of this approval, there are some operational and financial details that we wanted to make you aware of. First, we expect the installation on all 3 vessels to be complete by the end of 2020. Second, the scrubber on Maunalei will provide additional operational flexibility to use her as a reserve vessel for the CLX and Alaska services. Lastly, we expect each of these scrubber installs to cost approximately $10 million. Now on to our trade lane services. Turning to our Hawaii service on slide 7, container volume declined 2.2% year-over-year, primarily due to one less westbound sailing and the effects of weather-related impacts. We faced difficult weather conditions in the quarter that impacted schedule integrity. In my 33 years in the business, I haven't seen storm activity like this that we had in our operating areas of the Pacific. To get our Hawaii service back in line, we had to run an additional vessel for a short period of time, which increased operating costs by several million dollars. Looking through the weather-related impacts to our service, the container market environment in Hawaii is relatively flat. The economic picture in Hawaii remains favorable, with modest economic growth and steady construction activity. For our full year 2019 outlook, we continue to expect volume to approximate the level achieved in 2018, which reflects modest economic growth in Hawaii and a stable market share environment. Slide 8 provides an overview of some key Hawaii economic indicators as forecast by UHERO for 2019 and beyond. According to the latest UHERO forecast, GDP growth in Hawaii is expected to slow to 1%, but most of the state economic indicators are supportive of continued growth for this year and next. From our perspective, we continue to believe we're operating in a flat container market this year, with modest economic growth and stable construction activity. Moving on to our China service on slide 9. Matson's volume in the first quarter 2019 was 16% higher year-over-year. This increase is primarily the result of one additional sailing and stronger post-Lunar New Year volume. We expected more of a lull in demand post-Lunar New Year, but there were a number of blank sailings or canceled sailings from other transpacific carriers and continued port congestion in Southern California that collectively played right into our strengths as a faster, higher quality service. We also continue to realize a sizable rate premium and achieved average freight rates during the quarter that were modestly higher than the first quarter 2018. For 2019, we believe volatility in transpacific trade lane capacity and demand will remain throughout the year, with capacity attempting to adjust to demand as trade flows normalize following a stronger seasonal fourth quarter in 2018. With respect to Matson, we're expecting our highly differentiated CLX service to have another strong year, with volume approximating the levels achieved in 2018. Specifically, we expect a stronger first half of the year versus the prior year, but expect volume to normalize to more traditional levels of activities in the third and fourth quarters, both of which were exceptionally strong last year due to the pull forward of volume associated with the U.S.-China trade situation. As for average freight rates, we're up against a difficult comp in the second half of the year, as last year was exceptionally favorable due to the U.S.-China trade situation. We remain cautiously optimistic that average freight rates for the year will approach the healthy levels achieved in 2018. This view includes the effect of the annual contract renewal season, which recently concluded with pricing as we expected. It's important to note that this outlook for 2019 is dependent on a neutral outcome to the U.S.-China trade situation. Turning to slide 10, Guam container volume was 4.1% higher year-over-year, primarily due to typhoon-related relief volume. The overall container market was essentially flat year-over-year. For the full year 2019 outlook, we continue to expect modestly lower volume as the highly competitive situation remains. Our strategy remains to fight for every single container of our customer's business. Given our long history in Guam with strong customer ties, a shorter transit time, and significantly better on-time performance, we expect to retain an outsized share of that market. Moving to slide 11. In Alaska, Matson's container volume for the first quarter of 2019 was 5.7% lower year-over-year, primarily due to an expected decrease in northbound volume, mainly related to the dry docking of a competitor's vessel in the year-ago period, and one last northbound sailing falling just outside the end of this quarter. Adjusting for the dry dock volume and the additional sailing in the year-ago quarter, we saw a modest year-over-year increase in volume. The container market in Alaska also grew year-over-year as economic conditions in Alaska continue to improve. Construction activity appears to be ticking up a little, which is good to see at this early stage of the economic recovery cycle. For 2019, we expect volume to be modestly higher than the level achieved in 2018, with higher northbound volume supported by improving economic conditions in Alaska and higher southbound seafood-related volume due to stronger seafood harvest levels than in 2018. Turning to slide 12, our terminal joint venture, SSAT, contributed $8.5 million in the first quarter 2019, compared to $10.5 million in the prior period. The decrease was primarily attributable to the absence of favorable one-time items in the year-ago period. SSAT saw higher year-over-year lift volume as it continues to benefit from strong import volume on the U.S. West Coast. 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 the normalization of import volume on the U.S. West Coast after a stronger seasonal demand in the fourth quarter of 2018. Although we're expecting a lower contribution this year, we're coming off an all-time high, and we expect the overall environment at SSAT to be satisfactory. Of course, it remains well-positioned as the premier stevedore on the U.S. West Coast. As you may have seen in the news, in April, SSAT initiated service at an additional terminal in Seattle as part of a new opportunity in the port area. Accordingly, Matson moved into Terminal 5 or T5, which becomes the eighth terminal on the U.S. West Coast for our joint venture, SSAT. We look forward to continued long-term volume growth across the terminals in Seattle and Tacoma, as well as additional opportunities to grow organically with SSAT. Turning now to logistics on slide 13. This team continues to deliver strong performance. Operating income in the first quarter of 2019 of $8.1 million, or an increase of $3.9 million over last year, came in stronger than expected. The increase was due primarily to higher contributions from transportation brokerage and freight forwarding, but all the lines of service posted year-over-year improvements. Span Alaska performed well as a result of improving economic conditions in Alaska. In the interest of time, I'll skip over the logistics outlooks Joel will provide later in the presentation. With that, I'll now turn the call over to my partner, Joel, for a review of our financial performance and outlook. Joel? Thanks, Matt. Now on to our financial results on slide 14. Ocean transportation operating income for the quarter decreased to $15.1 million year over year in the first quarter to $9.4 million. The decrease was primarily due to higher vessel operating costs, including weather-related impacts and the Maunalei lease expense, higher terminal handling costs, and lower container volume in Alaska and Hawaii. Partially offsetting these unfavorable year-over-year comparisons was a higher contribution from the China service. The company's SSAT terminal joint venture investment contributed $8.5 million, or $2 million less than the prior year period. The decrease was primarily attributable to the absence of favorable one-time items in the year-ago period. Logistics operating income for the quarter was $8.1 million versus $4.2 million in the prior year period. The increase was due primarily to higher contributions from transportation brokerage and freight forwarding. EBITDA for the quarter decreased $12.8 million year-over-year to $49.3 million due to lower consolidated operating income of $11.2 million, a small decrease in other income of $200,000, and a reduction of $1.4 million in depreciation and amortization, which includes dry dock amortization. Interest expense for the quarter was $4.6 million, and as a reminder, capitalized interest associated with the Kaimana Hila vessel ended at the beginning of this quarter when the vessel was delivered. Therefore, we will have a greater amount of income statement interest expense each quarter going forward this year. Lastly, on the tax rate for the period, as we mentioned on our fourth quarter call in February, we expected a non-cash adjustment of $2.9 million related to the reversal of an expense adjustment in 2018, arising from the enactment of the Tax Cuts and Jobs Act of 2017. Adjusting for this favorable one-time item, the effective tax rate for the quarter would have been 29%, and we expect the effective tax rate to remain higher in the second quarter than our annual outlook figure due to the timing of adjustments recorded throughout the year. Slide 15 shows how we allocated our trailing 12 months of cash flow generation. For the LTM period, we generated cash flow from operations of $308.5 million, received proceeds from sale leaseback transactions of $134.4 million, and had other positive cash flows of $3.7 million from which we used $35.4 million to repay debt, $63 million on maintenance CapEx, $301.8 million on new vessel CapEx, including capitalized interest and owners items, while returning $35.8 million to shareholders via dividends. In short, our cash flows remain strong to support investments in our new vessels, the terminal upgrades at Sand Island, and our other growth initiatives. Turning to slide 16 for a summary of our balance sheet. You will note that our total debt at the end of the quarter was $868.1 million, and our net debt to LTM EBITDA ratio was 3.0 times versus 2.8 times at the end of 2018. 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. Going forward, we do expect our leverage ratio to increase as we near the end of the Hawaii Fleet Renewal program and the first phase of the Sand Island terminal upgrade. We expect a leverage ratio 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 of 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. Before leaving the slide, I wanted to point out that in the first quarter of 2019, we adopted the new lease accounting standard, ASC 842, which resulted in a few new line items on the balance sheet, which are $243.3 million in operating lease right-of-use assets recorded in long-term assets, $54.3 million in short-term operating lease liabilities, and $196.7 million in long-term operating lease liabilities. The impact of this accounting standard is relatively modest because we own a substantial percentage of our vessels and equipment. I also want to note that the adoption of this new lease accounting standard has no impact on our leverage covenants in our debt agreements. Turning to slide 17 for a review of our new vessel payments. For the quarter, we had new vessel cash CapEx of $16.2 million and capitalized interest of $4.7 million for total capitalized vessel construction expenditures of $20.9 million. As you can see in the middle chart, the Lurline is 85% complete. Her christening is set for the middle of June, and delivery of the vessel is slated for the fourth quarter this year. Matsonia remains on track for delivery in the third quarter of 2020. The table at the bottom shows the cumulative and remaining new vessel progress payments. For the remaining nine months of 2019, we expect approximately $172.5 million in payments, and for 2020, we expect $61.8 million in payments. With that, let me now turn to slide 18 to discuss our full year and second quarter outlook. As a result of the strong performance of logistics in the first quarter, we have updated our full year outlook. For the full year 2019, we continue to expect operating income for ocean transportation to approximate the $131.1 million achieved in 2018 after adjusting for the additional 11 months impact of the vessel sale-leaseback of $6.6 million. For logistics, we now expect operating income to be moderately higher than the level achieved in 2018 of $32.7 million. We expect depreciation and amortization to approximate $130 million, inclusive of $35 million for dry docking amortization. We expect EBITDA to approximate $288 million or higher than the 2018 level after adjusting the 2018 result for the additional 11 months impact of the vessel sale-leaseback of $11 million. We expect other income to be approximately $2.7 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 million, excluding the $2.9 million reversal we recorded in the first quarter related to the Tax Act. For the second quarter of 2019, we expect ocean transportation operating income to be moderately lower than the $36.5 million achieved in the second quarter of 2018. For logistics, we expect operating income to be modestly higher than the $9.5 million achieved in the second quarter of 2018. Please turn to slide 19. On our fourth quarter call, we provided estimated other CapEx, including maintenance CapEx, for 2019 and 2020. In light of the expansion of the scrubber program to include three additional scrubbers, the estimated CapEx for 2020 is expected to increase by $27 million to a total of $112 million. As for the estimated figures we provided on the fourth quarter call for depreciation and amortization and interest expense for 2019 through 2021, the additional scrubber CapEx will not materially change the estimates we previously provided. I will now turn the call back over to Matt for his final remarks. Thanks, Joel. We're pleased with our start to the year and look forward to progressing through the year on our new vessels and the Sand Island infrastructure project. We remain intensely focused on cash flow generation and managing our leverage levels as we head down the home stretch on the last two new Hawaii vessels. All right. At this time, I would like to remind everyone, in order to ask a question over the phone, please press star then the number one on your telephone keypad. Again, that is star one on your telephone keypad. Your first question comes from the line of Steve O'Hara from Sidoti. Please ask your question. Hi, good afternoon. Hi, Steve. Hi, thanks for taking the question. I guess on the pricing and negotiations with the China service, can you just walk me through the way the rates work in that market, given the fact that it sounds like there's a lot of clarity in terms of what happens with rates next year with IMO 2020 and fuel and all that. Yeah. So it's an interesting dynamic, Steve. Let me speak to both Matson and the trade in general, and I'll make sure I distinguish between the two. I would say for Matson and for the trade, these first comments are around the rollout of the IMO 2020 and the new fuel standards. What you see happening there on that dynamic are most trans-Pacific carriers have not installed scrubbing devices like we have, or emission scrubbers. What we understand in the market are the discussions and mechanisms around how to handle the fuel impact have been put off until the end of the year as they get more sense, probably in the fourth quarter when they need to be actually purchasing this fuel so that they have it available, or they have the non-compliant fuel out of their systems before January 1. My sense is that there's a lot of wait and see. There are discussions about mechanisms and I think for the customers of the international ocean carriers, it's sort of a wait-and-see approach in terms of determining what is the impact, and of that impact, how much is that going to be borne by the customers versus absorbed by the international shipping lines. It's a really open question. I would say for Matson, who has the advantage of having a scrubber strategy, our discussions with our customers was somewhat different in the sense that our discussion was around seeking to earn a reasonable return or a recovery of the cost of installing the emission scrubbers. But once the recovery is complete, it's our customer's expectation and our belief that we will continue to have a very effective fuel pricing relative to the rest of the market. But again, in the big picture of things, Matson has a very differentiated service and we don't compete on fuel anyway. I would say that with that backdrop, Matson, some portion of our business is done on that May 1 to April 30 contracting cycle. We had a satisfactory outcome with regard to our customers in terms of that portion of our business. The rest of it is on a more spot basis with shorter-term contracts. But again, we feel very well positioned given our highly differentiated service. Okay. Thank you. Just following up to that, what does the competitive landscape look like in the Jones Act trades that you are in? Is everybody going to be compliant to your knowledge by the date, and if not, how does that work? Yeah. What we know is that I will start with the Alaska trade. You know, Steve, I mentioned that we are We have installed emission scrubbers, and our base fuel cost will not change. What we have needed to do for IMO 2020 has already happened in the Alaska trade. Our principal competitor in Alaska is Totem Ocean Express. They are burning compliant fuel now, and they are in the process of taking a slightly different approach, which is to convert their vessels to accommodate liquefied natural gas. So they are in the process of converting their vessels to an LNG solution that will likely happen over a longer period than 1/1/2020, but will be fully compliant, it is our understanding, as they are today by burning low-emission fuel. In the Hawaii trade, where our principal competitor is Pasha, they have two vessels that are compliant now. These are roll-on, roll-off vessels. They have two vessels, as we know, are under construction now. Those will be delivered sometime both during 2020, after January 1, 2020. They are in the process, we do not know, but they still have two remaining steamships that will no longer be compliant, and they have not indicated what their plans are with respect to how they are going to address compliance on those remaining steam vessels that are in their fleet. So, I would not predict any significant changes on 1/1, although I can say that we are very confident in our ability and a plan in place to be fully compliant from Matson's perspective on 1/1. Okay. All right. Thank you very much. Sure, Steve. Our next question comes from the line of Jack Atkins from Stephens. Please ask your question. Hey, guys. It's actually Andrew on for Jack. Thanks for the time today. Matt, I wanted to follow up on one of those previous questions around the pricing in the Trans-Pacific lane, your China service. I guess we've heard from some of our contacts we talked to about carriers looking at putting in a floating bunker surcharge. I don't know if that's the right term to call it, but something along those lines in their contracts. Is that something that, one, you guys put in your contracts, or two, that you guys came across during bid season this year? Yeah. There are existing floating bunker mechanisms that we also, and the trade uses today. There are various calculations in the way that those are addressed. I think it's fair to say, and thanks for asking, Andrew, to be a little more precise, that there are existing mechanisms in place to handle this floating or this fuel surcharge or a bunker adjustment factor or a BAF, or there's different terms for it. But it's largely those mechanisms which will need to be addressed and whether or not those mechanisms need to be adjusted based on the higher cost of fuel, all is going to get kind of played out in the fourth quarter of this year, we think. At least that's what we understand. But you're right. There are existing floating bunker mechanisms. Whether the existing mechanisms allow for carriers to recover their full cost of fuel remains unclear, but there are mechanisms in place. Okay. That's helpful. Then Matt, you guys called out some weather headwinds in Hawaii during the quarter. I think you said in your prepared comments it was several million, I think is the word you used in terms of the impact. Yes. Is there any way you can help us put maybe a finer point on that, maybe from a volume or an EPS standpoint, just to get a sense for the headwind you faced. Then also in Hawaii, the guidance of the year, flat volumes. I know that the weather, I think one less sailing impacted the first quarter results. But as you look out the rest of the year, is there any green shoots that you see in terms of maybe getting those volume, seeing a little bit of a tick up in volume to kind of get back to that flat level? Yeah. So I think with regard to the cost of in the first quarter of the weather-related days, we said several millions. You can use $2 million pre-tax as a good proxy. Again, that'll get you in the ballpark as we had to deploy additional vessels and we had to do other things in order to try to keep our base schedules intact given the difficult weather situation. Of course, we do not expect significant weather-related delays now that we've gotten out of the winter months, and that's baked into our thinking about the rest of the year. I would say, I wouldn't want at this point to go above our general feeling in the Hawaii trade for we're seeing very low single-digit growth in the overall economy. It hasn't translated into freight volumes. It hasn't over the last couple of years translated into meaningful freight volumes. We're just approaching it being relatively flat to the market. I think we're more optimistic about Alaska and starting to see there, but in Hawaii, our best thinking at this point, just because we haven't seen it, is a significant incremental growth in the overall market. It's a little ahead of where we'd like to be in terms of how we're approaching the Hawaii market. Good deal. Last one for Joel. I guess as we look out, the new vessel payments start to wind down this year and then especially in 2020. I think you guys added some CapEx next year for the new scrubbers. Maybe if you could, just from a high level, talk through some of your committed CapEx that you see for next year and maybe how you're approaching or thinking about potential free cash flow in 2020, now that the new ships will be in the business and these payments are kind of winding down. Sure, Andrew. In terms of the commitments next year, it's all baked into the $112 million number we talked about in our CapEx schedule slide. Even on top of that, you get the $112 million plus the $62 million for the vessel payments. We expect to have free cash flow somewhere near that number, potentially higher if we're at the run rates, that we maintain the run rates where we're at today. The first priority will be to de-leverage. That's the first priority after, of course, we invest in our business. Maintenance CapEx, some of the organic growth that we've been talking about, which is baked into those CapEx numbers, those are key priorities for us. But after we have additional free cash flow above those, de-leveraging back down into the 2s and our target level, low 2s, is the first priority. Over time, we're certainly open to M&A as long as we remain disciplined and hit the strategic and financial targets that we've laid out. That'll always be an option for us to grow. Then we'll look at the dividend. We've had a good track record of growing our dividend commensurate with our growth in free cash flow. That's something we'd like to continue. We're not opposed to special dividends either, but returning that capital through all those mechanisms will be on the table for us as we generate that free cash flow. Good deal. Thanks for the time, guys. Thanks, Andrew. Yeah, thanks, Andrew. Your next question comes from the line of Ben Nolan from Stifel. Please ask your question. Great. Thanks. Good quarter, guys. My first one relates to the logistics business. Obviously, it has been a few quarters now, and it continues to do really well, and the margins in particular are really hanging in there well. I appreciate that broadly speaking, the industry is in a good place and margins are largely wider, but is there anything else that you would point to that maybe gives you a level of comfort that maybe you are doing something a little bit differently than maybe you had been? Obviously, Span helps, but is it something that can keep those margins a little bit higher, even in periods of time when maybe cyclically it is not as good of a market? Sure. Well, let me start off by saying that this unit continues to shake and bake, to use a Ricky Bobby phrase. We are really happy with the performance of the unit. I guess the way I look at it is, and Ben, you have heard us say this before, the first thing the team did was to look at our entire portfolio of business, and we are very disciplined about repricing significant portions of the business, or if the margins couldn't go up to levels that we thought were where we needed them to be, to shed those businesses. There has been a significant effort underway to reprice our entire transportation brokerage portfolio. We think that, certainly in this current economic environment, that that will continue to pay dividends for us. You were right also in calling out Span Alaska. We do not separately break out the margins in Span. It is a different business, and the margins are a little bit higher. So some of the drifting up of the margins from the old days is a result of just the mix of the margin. I would say, and every single one of our lines of business, our China logistics business, our warehouse business, each of them are contributing and improving. It has been great. So to your question about how sustainable are the margins, I think through this current economic environment, we do expect margins to remain elevated. Now, if there is a recession in 3 or 4 years and the market dynamics change, that is a different bet. But in this current economic environment and climate, which we do not see as changing in the near term, I think we are going to continue to produce very strong high margin. I think that can be replicated through this cycle. So we are very optimistic about it. Okay. That's helpful. Another thing that came up that obviously shifted things around a little and SSA Terminals, LLC had added a peer in Seattle. Are there any implications to Matson away from SSA Terminals, LLC there? I mean, is this neutral to your business as a whole and additive to SSA Terminals, LLC, or how should we think about that? Yeah. I think I understood your question, but I think the way we have seen this, Ben, this has been at least a 20-year joint venture, and Matson's position has been, we would rather the joint venture continue to reinvest and grow its footprint on the U.S. West Coast. As opportunities have presented themselves, we want to increase that joint venture share of the total lift market. For example, the Terminal 5 or T5 lease that we put in place allows for other carriers to come on T18 and some of our other joint venture terminals, to increase our volume in the Seattle-Tacoma area. That's probably not going to be a needle mover in terms of operating results in 2019. But we do expect moving into the future, it will just be another element that allows SSA Terminals, LLC to continue to step up and grow. I should say, the distributions from SSA Terminals, LLC remain very healthy. But we've always been focused on identifying organic growth in that joint venture, and we'll continue to do so into the future. I'm not sure if I answered your question fully, Ben. No, that's helpful. I guess the other part of my question was, is there outside of SSA Terminals, LLC, just in terms of the Matson standalone business, does this have any real impact on how you do business other than maybe calling it a different spot? No, I don't think so. The joint venture terminals are defined on the U.S. West Coast. Carrix, the parent company of our joint venture partner, operates marine terminals in other parts of the world. Those are not something that we would look to participate in. I can think of no other benefit or detriment to this joint venture. It operates on a relatively standalone basis. I can't think of anything that would impede anything that has to do with Matson associated with this investment. Yeah. Ben, I just throw out a reminder. For our Hawaii operations, we call on Seattle, but our competitor Pasha does not, so there's no impact relative to competition for our Hawaii trade. With this move and then for the Alaska trade, both we and our competitor, TOTE, call down in Tacoma. We actually don't call Seattle. None of this Seattle movement from one terminal to another for us had any impact whatsoever on our Alaska business or our competitors. Okay, that's helpful. Lastly from me, I wanted to circle back to make sure I understood your comments about the scrubbers. You talked about in negotiations with your customers, there's sort of an earn back of the capital costs associated with the scrubbers and the contracts after which it's effectively fuel neutral. Other than just getting back your investment, is there any way that these can give you sort of a competitive advantage or enable you to sort of earn returns over and above just earning back? Yeah. I think we do believe that for Matson, installing scrubbers is the right thing for us to do. It allows us, over a long period of time, to burn a less expensive mix of fuel. What the spreads are relative to the others, it's difficult for anyone to know. For us, it's really about optionality. We want to earn an adequate return on the scrubbers, and we continue to be confident in our ability to do it. We have fuel surcharge mechanisms that allow us to recover most of our fuel or all of our fuel in the Jones Act trades. Once we recover the capital cost of these scrubbers, I think our goal would be to operate as economically as we can and be as competitive as we can. For example, I've just mentioned in the Hawaii trade, we understand that the Pasha ships will be burning LNG once they're delivered from day one. At least those are the announcements that The Pasha Group has made in that regard. I would expect it to, I don't know exactly where the equivalent BTU cost per container is on LNG relative to conventional fuels that can be treated with emission scrubbers. But again, we want to be competitive. I think it would be an overstatement to think that we could gain a competitive advantage. But I can tell you, for example, in our discussion with our China customers, it's a lot easier for them to understand our approach, and it's much more transparent than trying to use a very complicated fuel surcharge mechanism that is really difficult for them to understand. We're simple and transparent, and I think our customers appreciate that approach. That might translate into better customer relations, more volume eventually or something like that. Yeah. We don't like to boast very much, but we already have a terrific reputation in the China trade as straight shooters, and this just reinforces that we know what we're doing, we're credible, and we're reliable. So I think it just enhances what I think is the best reputation in the Trans-Pacific trade. Great. All right, thanks. Appreciate it, guys. Okay. Thanks very much, Ben. Thanks. We have a question from the line of Michael Webber from Wells Fargo. Please ask your question. Hey, good afternoon, guys. How are you? Hi, Mike. First off, it is a great Talladega Nights reference, Matt. I appreciate it. I wanted to loop back to, I think you kind of touched on this with your answer to Ben's last question, but as it pertains to actually passing through, I guess, your fuel surcharge mechanism, one, are you guys going to look to secure your forward HFO fuel supplies on a long-term basis? Then two, how does that actually work its way into your fuel surcharge mechanism if you have hedged that far enough out, I guess, on a forward basis? I am just curious how that would work. Yeah. Let me differentiate our trades, because in the Jones Act trades, we have a fuel surcharge mechanism that, as you know, allows us to recover 100% of our fuel. So we have an economic mechanism that allows us to recover our fuel over time. In other words, there can be quarters where if you see a big change up or down, Yeah that we can be over or under collected. But given that we have an economic hedge, we do not need to engage in a financial hedge in our Jones Act trades, nor do we expect we are going to need to in the future. Yeah. I'm sorry. I guess that was the question was, do you think you need to, in terms of the payback period on the scrubbers, the last thing you would want would be to not be able to get access to HSFO to utilize the scrubber. So I guess the question is, within the pass-through mechanism, passing through all of your fuel costs, I guess, is that done on a real-time basis? Or the actual nuance of the mechanism, I guess, is what I was trying to get at. I don't know if that was particularly clear. Yeah. Okay. Well, that's helpful. I think we've been in discussion with our fuel suppliers and are reasonably confident that fuel is going to be available. Okay. We also remain confident that our fuel surcharge mechanisms are going to allow us to recover over a fairly short order the capital cost of putting those in. And we continue to think it's the right decision for us. Then I was just going to comment on China. There's more pieces moving in that trade. But again, we were satisfied with the contract increases we got, a portion of which was going to be assigned towards the beginning of the capital recovery process of these scrubbers, and we continue to feel confident in our ability to be able to recover all the capital cost. Okay. I can follow up off one in terms of the details of the surcharge, I guess. Matt, as it pertains to your guidance, and I think it's just kind of going through one of your earlier slides, just kind of referencing the westbound volumes. You mentioned one fewer sailing, and Q1 numbers that were just a touch inside of 2018. Just from a volume basis, you also kind of pointed to a 2019 volume outlook that looks like it was going to be relatively on par with 2018. Is the implication there that you guys are seeing or have already started to see the seasonal bump that you would need to kind of get back to that 2018 level from a volume basis? 2018 was a pretty strong year, and you had a pretty sizable bump in Q2. I'm just curious if you've seen that early indication. Yeah. I would say that, of course, as you know, Mike, the second and third quarters are the big quarters for the Hawaii trade. That's seasonally when a lot of it moves. Of course, the overlay there is around construction projects that have their own life that add volume at different phases. Yes, we're a little bit behind last year. There's always a little noise if a voyage sails a day later or a few hours later and falls into the next quarter, so we were trying to call that out. Yeah. But I think overall, our feeling is that while we're a little behind in the first quarter, we think the seasonal factors are going to allow us to end the year about where we finished 2018, and implied in that is we don't really see any big share shifts as we go through the rest of the year. So we're looking for a flattish environment, and we will do better as the seasonal elements start to kick in the second and third quarter. Although I think we've called out our second quarter guidance, Joel did, and our comments are consistent with our expectations for Hawaii volumes and all the other volumes that are embedded in our trade. Okay. Yeah, no, that's helpful. And then I guess the last one, just big picture, Matt. The last vessel you guys took from Philly Shipyard, I believe it's the last commercial vessel that they've built. In the scenario where there would only be one provider of commercial Jones Act tonnage at the kind of scale that you guys would need, I guess, being Matson. Is that a positive or a negative for Matson on a long-term basis? And if it's not at least a minor concern, I guess, why? I guess, what would some of the mitigating factors be there? Yeah. I guess as we see the world, first of all, Philly Shipyard has built two beautiful ships. Our engineering teams and our operating team, these vessels are operating well at or above spec, and the yard takes such pride in its work. We're rooting for that yard to survive. But having said that, and nobody knows what's going to happen, whether they convert to military work or whether they get some additional ships. We know they're working hard trying to find their next contract. But tactically, with regard to Matson, after we take delivery of the two Matson ships, the Kanaloa class vessels, we're going to go through a relatively long period where we're not going to need to build ships. Those ships that we are going to be building next are somewhere in the second half of the 2020s, sort of mid to late 2020s. Those are for the Alaska ship as replacements. Those are likely to be somewhat smaller than these very large ships, and that opens another level of yard to be able to bid on the project. I guess while we are rooting for Aker to survive or Philly Shipyard to survive, we know that we are going to be in great shape moving into the future. We are not going to be back in the market unless there is some acquisition or some other opportunity, and that would be a good news story for some time. Those are my thoughts at this point. Nope, that is fair. I appreciate the time, guys. Thanks. Okay, Mike. Thanks. Thanks, Mike. Again, if you have any questions at this time, please press star followed by the number one on your telephone keypad. Again, that is star one on your telephone keypad. We will pause for just a moment to see if there are any additional questions. All right. There are no further questions at this time. Speakers, you may continue. Okay. Well, thank you so much for your attention to the call. Again, I think we are off to a good start for the year, and we look forward to catching up with everyone on the second quarter call. Aloha. This concludes today's conference call. Thank you everyone for your participation. You may now disconnect.