Earnings Call: Q4 2018

Feb 21, 2019

Good day, ladies and gentlemen, and welcome to the Matson fourth quarter 2018 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 then zero on your touchtone telephone. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Director of Investor Relations, Lee Fishman. Mr. Fishman, you may begin. Thank you, Josh. 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 13 to 21 of our 2017 Form 10-K filed on February 23, 2018, and in our subsequent filings with the SEC. Please also note that the date of this conference call is February 21, 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 today. Please turn to slide 3 for my opening remarks. Matson's performance in the fourth quarter was in line with expectations with strong contributions from our China service and logistics. Our China service saw higher average freight rates and higher volume compared to the fourth quarter of 2017 as a result of a stronger seasonal demand driven by the U.S.-China tariff situation. The logistics segment in the quarter continued to execute well across all service lines, similar to prior quarters in the year, and nearly doubled the operating income in the year-ago period. For the full year 2018, we had a strong performance in our China service with higher average freight rates, and we had significant contributions from SSA Terminals and our logistics segment. We also saw steady performance in Hawaii. Countering these favorable contributions was the ongoing competitive situation in Guam and a weaker-than-expected southbound seafood season in Alaska compared with the strong seafood harvest levels in 2017. Turning to slide 4, I want to spend a few moments to highlight our current priorities, many of which are executing on the investments we have committed to that are long-term focused and value-enhancing. First, we are focused on completing the Hawaii service fleet renewal, which consists of preparing the vessels to be in service and disposing the last of our steamships in an environmentally friendly manner. It is important that the operational transition is smooth, not only for the vessel schedule but for our terminal operations. In November of 2018, the first of our four new vessels, the Daniel K. Inouye, entered service, and the vessel has performed very well so far. We are actively preparing for Kaimana Hila delivery at the end of this quarter and to be in service shortly thereafter. We currently expect to take delivery of Lurline in the fourth quarter of this year and Matsonia later in 2020. Upon the Lurline entering service, we expect Matson's Hawaii service to be in a fixed nine-ship fleet, which has the financial benefit of one less vessel in operation. With nearly 75% of progress payments made to the shipyards and the in-service dates nearing, we are close to realizing the associated cost benefits from these new vessels, which will ultimately drive higher returns on invested capital. We are in the middle of upgrading our Sand Island terminal in Honolulu to properly service the new vessels and to bring efficiency to our operations. In 2019, we expect to install three new gantry cranes and begin to refurbish three existing cranes. Work on the electrical infrastructure has already started and will be completed in 2020. Beyond this first phase, we are preparing for expansion into Piers 51A and B, which are next door to our current terminal, when Pasha Hawaii moves out to the new Kapalama facility, which is expected to be in 2023 at the earliest. In our last couple of earnings calls, we have discussed our strategy to be compliant with the IMO 2020 fuel regulations. As you may recall, we announced that we will install scrubbers on three of the five vessels in the CLX service and are closely evaluating scrubbers on the other two vessels. Our strategy has not changed. Of the three scrubber installations we have committed to, we currently anticipate two of them to be done in 2019 and the third to be completed in early 2020. We are actively assessing scrubbers on the remaining two CLX vessels. The economics of the scrubbers remain compelling with a two-year payback based on current fuel spreads. We have had a positive experience from scrubbers installed on our Alaska vessels a couple of years ago. Given the good economics and operational performance, we will continue to evaluate scrubbers on our remaining fleet, including our new Hawaii vessels. As I have said before, we always want to be in a position that maximizes optionality for us to find the lowest cost, long-term solution that makes sense for Matson and our customers. As we are nearing the end of this fleet renewal cycle, we continue to expect our leverage level to peak in the mid 3s, which we expect in the first quarter of 2020. After this point, we will use our significant free cash flow to de-lever the balance sheet to the low 2s. We're committed to maintaining investment-grade credit metrics and sustaining our low-cost balance sheet, which we view as a competitive advantage. Last, but certainly not least, we're going to continue to build upon our valuable Pacific network and U.S. West Coast operations through organic growth opportunities. Our most recent efforts have been natural extensions of our services into the Pacific. We're also actively involved in projects in all of the trade lanes and across our business in the logistics segment. Now on to our individual train lane segments. Turning to our Hawaii service on Slide 5. Hawaii container market for the fourth quarter was flat year-over-year. Matson's market share remained stable in the quarter, and the economic conditions within Hawaii remained favorable. In short, we saw steady performance in Hawaii. For the full year 2018, container volume decreased 0.7% year-over-year, largely due to eastbound backhaul volume. Westbound volume was modestly higher year-over-year, attributed to modest economic growth in the state. For the full year 2019, we expect container volume to approximate the level achieved in the prior year, which reflects continued modest economic growth in Hawaii and a stable market share environment. Slide 6 provides an overview of some key Hawaii economic indicators forecast by UHERO for 2019 and 2020. According to the latest forecast, UHERO continues to expect modest economic growth late in the business cycle, supported by low inflation, low unemployment, and a high level of tourism activity. Global economic conditions remain favorable, but there are early signs of a slowing which could restrain Hawaii's economic growth for the next few years. With respect to the construction industry, UHERO's construction-related metrics continue to suggest a plateaued growth profile in the medium term. Although there's been a recent pickup in resort-related construction on Oahu, our medium-term view remains that new construction demand, primarily from master-planned communities and condo projects on Oahu, will offset projects nearing completion. Moving to our China service on Slide 7. Matson's volume in the fourth quarter 2018 was 3.8% higher year-over-year. The eastbound average freight rate was higher in the fourth quarter of 2018 and was a sizable premium to the SCFI. Both volume and rate in the quarter were positively impacted by a stronger seasonal demand in a period that is traditionally not as strong, which we attribute primarily to a pull-forward demand effect due to the U.S.-China tariff situation. For the full year 2018, container volume decreased 6.7% year-over-year as a result of the negative comparison for dry dock return voyage volume in 2017 and lower volume during a post-Lunar New Year period. During the year in the Trans-Pacific trade lane, we saw a fair amount of volatility in capacity and demand. In the first half of the year, we saw capacity well in excess of demand, and in the second half, we saw movement to a more balanced supply-demand dynamic. Specifically for Matson, we had a strong third quarter performance in what was the peak period in the year for the CLX service and the fourth quarter performance, which was higher than normal, as I've already mentioned. From a rate perspective, for the full year 2018, we realized a sizable rate premium relative to the SCFI. For 2019, we believe volatility in capacity and demand will remain throughout the year, with Trans-Pacific capacity exceeding demand as trade flow in the first half of the year normalizes following a stronger seasonal fourth quarter of 2018. With respect to Matson, as a result of the unusually strong fourth quarter of 2018 and the first month of this year, we think it's likely growth will be somewhat weaker this year in the traditionally slow post-Lunar New Year period. For the year, we expect our China service average freight rates to be lower than the very strong level achieved in 2018, and we expect volume to be modestly lower than the level achieved in 2018 as the volume normalizes to more traditional levels of activity, particularly in the third and fourth quarters. Despite the effects of trade flow normalizing, we expect our highly differentiated CLX service to have another strong year. It's important to note that this outlook is predicated on a neutral outcome from the U.S.-China trade situation. Turning to Slide 8. In Guam, Matson's container volume in the fourth quarter 2018 increased 10.6% year-over-year, primarily due to the relief volume to support the areas devastated by the super typhoon that hit the Micronesia region. Overall container market in Guam was essentially flat year-over-year. For the full year 2018, container volume decreased 3% year-over-year due to competitive pressure from APL. Moving on to the full year 2019 outlook, we expect modestly lower volume in 2019 as the highly competitive environment remains. 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, much shorter transit times, and a much better on-time performance record, we do expect to retain an outsized share of the market. Moving now to slide nine. In Alaska, Matson's container volume for the fourth quarter 2018 increased 4.2%, primarily due to higher northbound volume. We continue to see signs of Alaska economy beginning to stabilize, and I'll provide a little more color on that in a minute. For the full year 2018, Matson's container volume increased 2.5% year-over-year, with an increase in northbound volume, primarily offset by lower southbound volume as a result of a weaker than expected seafood season compared to the very strong seafood harvest levels in 2017. For the full year 2019, we expect container volume to be modestly higher than the level achieved in 2018, with an improvement in northbound volume supported by improving economic conditions in Alaska and higher southbound volume driven by stronger seafood harvest levels than in 2018. Turning next to slide 10. The charts on this slide highlight recent economic forecasts made by AEDC and the Alaska Department of Labor. The key economic indicators suggest that 2018 likely marked the bottom of the recession in Alaska and that a recovery is underway. The state of the economic recovery is fragile, given the number of external factors at play, such as the impact of trade and volatility in oil prices, as well as Alaska's fiscal condition to address its budget gap. We remain cautiously optimistic that the economy will continue to recover throughout the year. Turning next to slide 11. Our terminal joint venture, SSA Terminals, contributed $8 million in the fourth quarter 2018, compared to $8.9 million in the prior year period. The decline year-over-year was a result of higher operating costs, partially offset by higher revenue, resulting from increased lift volume, primarily from the stronger seasonal demand, as an effect of the U.S.-China tariff situation. For the full year 2018, SSA Terminals performed exceptionally well with a contribution of $36.8 million, or $8.6 million higher than last year. The increase was due to consistently higher lift volume throughout the year. The contribution in 2018 was the highest annual result in the near 20-year period of this joint venture. For 2019, we expect SSA Terminals' 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 2018. Although we are expecting a lower contribution this year coming off an all-time high, we expect a satisfactory level of performance as SSA Terminals remains well-positioned and continues to be the premier stevedore on the U.S. West Coast. Turning now to logistics on slide 12. Logistics capped off an exceptional year with an impressive performance in the fourth quarter. Operating income in the fourth quarter increased $4.4 million year-over-year to $9.1 million, with increased contributions from each of our service lines. For the full year 2018, operating income increased $11.8 million to $32.7 million, with strong performance across all service lines. This result is the highest ever for our logistics segment. Span Alaska performed well despite the challenging economic conditions in Alaska, and our transportation brokerage business excelled as the tightness in the trucking market throughout most of the year played to Matson Logistics' strength in customer service. For the full year 2019, we expect logistics operating income to approximate the all-time high level of $32.7 million achieved in 2018. For the first quarter 2019, we expect operating income to be moderately higher than the level achieved in the first quarter of 2018 of $4.2 million. With that, I will now turn the call over to Joel for a review of our financial performance and our outlook. Joel? Okay. Thanks, Matt. Please turn to slide 13 for our fourth quarter and full year 2018 financial results. For the fourth quarter, we earned net income of $20.6 million, or $0.48 earnings per share, compared with $166.9 million, or $3.90 per share in the year-ago period. Net income and earnings per share in the fourth quarter of 2017 benefited by $155 million and $3.62 per diluted share, respectively, from a one-time positive non-cash adjustment arising from the enactment of the Tax Cuts and Jobs Act. Adjusting for the Tax Act impact, our net income and earnings per share in the year-ago period would have been $11.9 million and $0.28 per share, respectively. Ocean Transportation operating income for the fourth quarter increased by $1.3 million year-over-year to $21.4 million. This increase is primarily attributable to a higher contribution from China and the favorable timing of fuel surcharge collections. These favorable year-over-year comparisons were partially offset by higher terminal handling costs. Logistics operating income for the quarter was $9.1 million or $4.4 million greater than the result in the year-ago period. The increase was due primarily to higher contributions from transportation brokerage and freight forwarding. EBITDA for the quarter was $64.4 million or $1.9 million higher compared to the year-ago period, due to an increase in operating income of $5.7 million and other income of $0.2 million, partially offset by lower depreciation and amortization, including dry dock amortization of $4 million. For the full year 2018, Ocean Transportation operating income increased by $4.7 million year-over-year to $131.1 million. This increase is primarily attributable to higher average freight rates in China and Hawaii, and a higher contribution from SSA Terminals, LLC. Partially offsetting these favorable year-over-year comparisons were higher terminal handling costs and a lower contribution from Guam. Logistics operating income for the full year 2018 was $32.7 million or $11.8 million greater than the result in 2017. The increase was due primarily to higher contributions from transportation brokerage and freight forwarding. For the full year 2018, we earned net income of $109 million or $2.53 per share compared with $232 million or $5.37 per share in the prior year period. Adjusting for the positive one-time non-cash adjustment arising from the Tax Cuts and Jobs Act, our full year 2017 net income and earnings per share would have been $77 million and $1.78 per share, respectively. EBITDA for the full year 2018 was $297.3 million or $1.3 million higher compared to the prior year, due to higher consolidated operating income of $16.5 million and an increase in other income of $0.5 million, partially offset by lower depreciation and amortization, including dry dock amortization of $15.7 million. Slide 14 shows a summary of the manner in which we allocated our trailing 12 months of cash flow generation. For the LTM period, we generated cash flow from operations of $305 million, received proceeds from sale leaseback transactions of $134.4 million, inclusive of a $106 million in proceeds from the Maunalei transaction, and had other positive cash flows of $2.6 million, from which we used $0.7 million to repay borrowings, $62.6 million on other non-vessel CapEx, including maintenance CapEx, $338.6 million on new vessel CapEx, including capitalized interest and owners items, while also returning $35.4 million to shareholders via dividends. What is particularly noteworthy for these last 12 months of cash flow is that we invested over $400 million in capital expenditures and actually slightly decreased our outstanding balance sheet debt. Therefore, since EBITDA in 2018 was little changed versus fiscal 2017, this resulted in our leverage ratio staying constant at last year's fiscal year-end level of 2.8 times, despite the $400 million of CapEx. Turning to slide 15, for the fourth quarter, we had new vessel cash capital expenditures of $110.7 million and capitalized interest of $5.3 million for total capitalized vessel construction expenditures of $116 million. For the year, we had new vessel cash capital expenditures of $319.9 million and capitalized interest of $18.7 million for total capitalized vessel construction expenditures of $338.6 million. Note that we also had $18.7 million of interest expense that hit the income statement, so total interest paid on our outstanding debt this year was $37.4 million. The percent of completion on the three remaining vessels under construction is noted in the table, along with the delivery timing. The Kaimana Hila was floated in the graving dock at the Philly Shipyard in November, and we look forward to taking delivery of her, which is scheduled for the end of March. Work on the NASSCO vessels is also progressing well. We noted in our last earnings call that there was a two-quarter delay on the Matsonia as a result of construction delays in the NASSCO shipyard. The shipyard has revised the timetable and now expects only a one-quarter delay, with delivery expected in the third quarter of 2020. At the bottom of the slide, we have detail on the actual and estimated vessel progress payments. As of the end of 2018, we are approximately three-quarters of the way through the progress payments. For 2019, we expect new vessel progress payments to be approximately $189 million, with only $61.7 million remaining in 2020. Please turn to slide 16. On this slide is a year-end summary of our balance sheet. As I mentioned before, our total debt at the end of the year actually declined slightly from 2017's fiscal year-end, and our net debt to LTM EBITDA ratio stayed flat versus the end of 2017 at 2.8 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. 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 the 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 to the low twos, as we continue to expect about a half a term reduction in the leverage ratio annually. Please now turn to slide 17. Before going through the outlook, I wanted to spend a moment on the impact of the sale leaseback of the Maunalei, which we disclosed on November 27, 2018, as year-over-year comparisons should account for the financial impact of this transaction. On an annual basis, we expect $12 million in lease expense, which impacts EBITDA directly, and $4.8 million in lower depreciation and amortization, including dry dock amortization. The net of which results in reduction in operating income of $7.2 million annually. Please keep in mind that we had the effect of this transaction for one month in 2018 versus a full-year effect expected in 2019. With that said, let me now turn to slide 18 for our outlook. For the full year 2019, we 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 expect operating income to approximate the level achieved in 2018 of $32.7 million. We expect depreciation and amortization to approximate $130 million, inclusive of $31 million for dry docking amortization. We expect EBITDA to approximate $286 million or roughly flat to the 2018 level after adjusting the 2018 results for the additional 11 months impact of the vessel sale leaseback of $11 million. We expect other income expense to be approximately $2.7 million in income. We expect interest expense to be approximately $24 million. Note that 2019 interest expense would be approximately $4 million higher had we not executed the vessel sale leaseback transaction. Finally, for the year, we expect our effective tax rate to be approximately 26.0%, which excludes a positive non-cash adjustment of $2.9 million we expect to make in the first quarter of 2019 as a reversal of the Tax Cuts and Jobs Act expense adjustment we made in Q1 of 2018. For the first quarter of 2019, we expect ocean transportation operating income to be approximately $10 million, which is lower than the level achieved in the first quarter of 2018, primarily due to the unfavorable comparisons from the absence of positive one-time items at SSA Terminals, LLC in the year-ago period and Alaska northbound volume associated with the dry docking of a competitor's vessel, which also occurred in the first quarter last year, as well as the effect of the vessel sale leaseback transaction. For Matson Logistics, Inc., we expect operating income to be moderately higher than the $4.2 million achieved in the first quarter of 2018. Please turn now to slide 19. Because we have a few sizable non-new vessel CapEx projects currently in the works, I wanted to spend a moment discussing our other capital expenditures as noted in our financial statements. For 2019 and 2020, we expect other capital expenditures, including maintenance capital expenditures, to be approximately $120 million and $85 million, respectively. These projected figures are above our targeted level of maintenance capital expenditures of $50 million due to three main projects, which I will now walk through briefly. The first project is the first phase of the Sand Island terminal upgrade, which we highlighted in our investor materials last March. This project consists of three new gantry cranes, refurbishment of three existing cranes, and the upgrade of electrical and other infrastructure to support the operation of the cranes. The cost of this project is approximately $60 million, and we expect the project to be completed by the end of 2020. The second project is the scrubber program on the CLX vessels that Matt Cox touched upon earlier in this call and that we discussed on the last two earnings calls. The project currently consists of scrubbers on three of the five CLX vessels with a cost of approximately $9 million per vessel. We expect two of the three projects to be completed this year and the third vessel scrubber installation to be completed in early 2020. The last project I wanted to highlight is the construction of a new cross-dock facility in Anchorage for Span Alaska. We currently have two facilities in Anchorage, and this project will help Span Alaska consolidate into one facility, a more efficient and better-located facility, which will benefit our customers and produce operating cost reductions. The cost of the project is approximately $26 million, including the purchase of land, and we expect the project to be completed by the end of this year. Please now turn to slide 20. Given the capital spending on the non-new vessel projects and the other projects I just described, we wanted to provide longer-term estimates through 2021 for depreciation and amortization, including dry dock amortization as well as interest expense. For depreciation and amortization, including dry dock amortization, we continue to expect $5 million-$8 million in savings from the new vessels versus the 10-ship fleet we currently deploy, which includes steamships. The non-new vessel projects I described are expected to add approximately $5 million to depreciation and amortization by 2021, which will produce a total D&A level in 2021, very similar to the level in 2017, as you can see from the top chart on this page. In the bottom chart, we show estimates for interest expense and income statement and capitalized interest out to 2021. The amount of capitalized interest will decline with the entry of each new vessel into service, the last of which is expected in the third quarter of 2020. Note that total interest is expected to peak in 2020, as we have said previously, and income statement expense is expected to peak at approximately $35 million during this period. Importantly, these interest expense assumptions are based upon today's LIBOR levels. Approximately a third of our expected 2019 interest expense is associated with our floating rate revolver borrowings, and this is subject to higher interest costs should LIBOR rise over this period. With those more detailed CapEx, D&A, and interest comments complete, I'll now turn the call back over to Matt. Okay, Joel. Thanks. To conclude our prepared remarks, the diverse nature of our transportation and logistics businesses really rang true in 2018. The favorable contributions in our China service, SSA Terminals, and logistics outweighed the impact of ongoing competitive situation in Guam and lower southbound volume in Alaska. For 2019, we expect the diversity of the business drivers to continue to bring consistency for the consolidated group. We remain intensely focused on cash flow generation and managing our leverage as we advance on the last three new Hawaii vessels and to finish off the first phase of the upgrade of our Sand Island terminal facilities. Personally, I like where we are at Matson. We're positioned well in each of our key markets, and I'm very excited by the investments that are currently underway. With that, I will turn the call back to the operator and ask for your questions. Thank you. Ladies and gentlemen, if you have a question at this time, please press the star then 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. Again, that's star then one to ask a question. To prevent any background noise, we ask that you please place your line on mute once your question has been stated. Our first question comes from Kevin Sterling of Seaport Global Securities. You may proceed with your question. Thank you. Good evening, Matt, Joel, and Lee. Hi, Kevin. Hi, Kevin. Let's see. Matt and Joel, you guys talked about your leverage peaking, I think in Q1 2020 at, I believe, the mid-threes level, and then after that, you will quickly delever. Did you say when you might get back down to the mid-twos? Is that by the end of 2020, or we are looking at maybe 2021? Yeah, Kevin, we said we expect to delever about a half a turn a year. Okay. So just illustratively, if we were at 3.5, then we would be down at 2.5 in about two years. Got you. Okay. Thank you. Along those lines, thank you for that additional outlook with your D&A and CapEx beyond 2020. I understand the higher levels of CapEx you have now and into 2020. Beyond that, say 2021, do you expect your maintenance CapEx to return to the more normal level of $50 million? Yeah, Kevin, this is Matt. I would say yeah. We see our long-term CapEx levels, maintenance CapEx that is, to be in the $50 million range. We have talked about the major investments that we have highlighted, and as we have talked about before, the next major capital cycle would be the likely replacement of our Alaska vessels, which will take place sometime between 2025 and 2030. There is a period under which we do expect to have significantly lower CapEx post this period. Okay, got you. No, thank you. Matt, you mentioned in your prepared remarks about your CLX outlook for 2019. I think that is really, you said, based upon a neutral outlook for U.S.-China trade relations. If the trade war is resolved, I understand that is a big if, where could the upside come from, do you think, with CLX? Would it be volumes, rates, or maybe both? How should we think about that if we get a trade war resolved? Yeah. I think if we get a good outcome on this trade dispute, which I know we are all hoping for, I would say that what we would, so there are two parts to the China market as you have heard us talk about many times. One is the amount of demand, and I think it is in part a driver of where the U.S. economy is and the other factors that are going to drive this Trans-Pacific demand. Then the other factor really is the amount of deployed capacity by the other international steamship lines. So in order to have an orderly general Transpac market, we would need to have a reasonably successful outcome of the trade negotiations and the international ocean carriers deploying the right amount of capacity and not an overcapacity. But that is not to say that even if we have a more choppy outcome on trade negotiations, as long as the international ocean carriers deploy only the amount of capacity that is required for the market, then we still should be in pretty good shape. With regard to your question about now back to Matson, the upside for us is primarily in rate, given that effectively, other than for two or three weeks a year post-Lunar New Year, when our ship is only partially full, we are basically full every other week of the year. So there is not a ton of capacity upside for Matson. It has to be in the rate side. Okay. Yeah, thanks, Matt. Last question from me, and I believe you guys mentioned this before, so if you could just remind me, I would appreciate it. Can you quantify for us again the financial benefit of one less vessel in operation? You talked about going from 10 to 9. Yeah. That one fleet unit, Kevin, we've said, is $13 million. Okay, great. Thank you. That's all I had. Congrats on a very good year. Thanks, Kevin. Thanks. Thank you. Our next question comes from Ben Nolan of Stifel. You may proceed with your question. Great. Thanks, and thanks Matt and Joel. I had just two quick questions, hopefully. Number one, I understand the idea behind the leasing, especially of something of an older ship and being able to get a lot of cash out of that, in terms of managing the leverage. Just curious if that is a lever that you might be looking to pull again, or I suspect you could, but is that very high on the list of tools that you might deploy? Ben, no, it is something we could do again, but we don't think it's something that we need to do. We think this one transaction's optimized us. If we're in a downside scenario or some recessionary scenario in the very near future, we could do it again, but we don't think that we'll need to. Okay. Then switching gears a little bit to SSA Terminals, obviously, had a good year, hard to match that. But I know that in the past you guys have talked about possibilities to expand that certainly, perhaps in the Northeast or other areas across the West Coast. How are you thinking about that in terms of the likelihood that there might be some opportunities that materialize on the SSA Terminals side over the coming 12, 24 months? Yeah, Ben, this is Matt. I would say that the scope of our joint venture geographic scope is on the U.S. West Coast. So that isn't to say that we could look at jointly doing something outside of that area, but the prime focus of the joint venture is within that geographic area. But I would say within that geographic area, we're looking at now a discussion of a potential new terminal. It's been publicly announced, Terminal 5 in Seattle. There's a lot of moving pieces of international ocean carriers moving around as the Port of Seattle is looking at opening up new space closest to its downtown and migrating some others off of Terminal 46 and some other stuff going on. And there's no finalized deal there yet. But there's a possibility of us picking up an eighth terminal. We have seven terminals in the joint venture now on the West Coast. This could potentially add an eighth sometime this year, and that has been previously announced by the Port of Seattle. That is an example. We continue to be very interested in working with our port partners at SSA to grow this joint venture. The nice part about the joint venture, as we have mentioned many times, is they are the best terminal operators on the U.S. West Coast by far. There continues to be interest by various alliances in having SSA Terminals, LLC conduct its operations. We continue to be very open over time, as we have been over the last two decades, in not necessarily pulling our dividends out, but continuing to focus on retaining the capital inside that joint venture to grow it and get the kinds of results that we experienced in 2018. We again continue to be very bullish on this joint venture and our joint venture partners. That was very thorough. I certainly appreciate it. Thanks, Matt. Nice quarter, guys. Okay, thanks, Ben. Thanks, Ben. Thank you. Our next question comes from Jack Atkins of Stephens. You may proceed with your question. Hey, guys. Good afternoon. Thanks for taking my questions. Hi, Jack. Matt, if I could start with a question on IMO 2020, and I know you discussed this in your prepared comments, but I guess as I am thinking about it, you guys are, just from my perspective, really positioned, I think in a really advantageous way as this regulation sort of takes effect. I would just be curious to get your thoughts on IMO 2020 and with the fact that you have scrubbers installed in your Alaska fleet, you are going to have some scrubbers installed on the China fleet which also services Hawaii. How do you think about the potential to either pick up some market share or pick up some margin overall, just given the fact that you are going to have a significant competitive advantage with your fuel input cost versus your competitors? Yeah, it is a good question, Jack. I think our primary threshold first was to make sure we feel we are well-prepared. With regard to the domestic trade, the Hawaii trade, our Alaska trade, our logistics businesses, and those kinds of things, we have and continue to expect our fuel surcharge mechanisms to help cushion any increases in costs in those trades. Although you rightly point out that in our Alaska service, that we do have scrubbers installed. Our competitor is burning more conventional motor fuels. The same perhaps is true in Hawaii. Our main goal at this point is to keep our fuel surcharges as low as possible, and compete on other services. It is a little hard for us to speculate as to whether it provides us a competitive advantage. I would note in the China service, though, a number of CEOs of large international ocean carriers have talked about an additional $15 billion fuel bill for the international ocean carriers, and it requires a level of discipline, in trying to be effective in collecting fuel surcharges. Candidly, the track record of international ocean carriers being able to recover their fuel costs is not very good. I would just say, we believe ourselves to be well-positioned, that it might create opportunities on the China side. If the markets are in chaos, Matson thrives in chaos. This is an area of lots of uncertainty, but we feel extremely well-placed for whatever happens in the marketplaces in which we operate. Okay. That makes a lot of sense. I guess a two-part question on sort of what is going on in the Trans-Pacific lane. Could you maybe comment around contract season and sort of how you think the contract bid season is going to play out? Obviously, second half of the year, very difficult comps in the spot market. Would just be curious to get your thoughts on sort of the just overall contract rate environment in 2019 for the marketplace. Then just as a follow-up to that, how did the fourth quarter play out with regard to pull forward versus your expectations? Obviously, October you saw a significant pull forward of freight per the data, but it seems like December maybe did not see as much as we were initially expecting. I just would be curious to get your thoughts on how that played out. Sure. With respect to how we see the China rate environment turning out, I think first of all, it is too early to tell, is the short answer, but in the next month or so, we are going to start seeing as we get into this April season and the contracting that goes on in this process. But what we understand is the international ocean carriers are pushing hard to create a mechanism in their annual service contracts that would allow them to recover higher fuel costs from January 1, 2020, through April 30. As you know, Jack, the contracting season is May 1 to April 30. So international ocean carriers are focused on trying to get mechanisms in place that would allow for them to pass through the higher cost of the IMO fuel post 1/1. So far their customers are pushing back strongly on that. There continues to be, at this early stage, something of a stalemate, but again, it is yet very early in the process. So our view is that is probably going to be the most important element to watch for in the contracting environment, followed closely by how much deployed capacity are they going to put in the trade? I think if there is any lesson for the international ocean carriers, when you look at the first half versus the second half of 2018, was that if you put too much capacity in, rates fall, and if you try to better manage supply and demand and match it with capacity, you get a much better rate outcome. So that is about all I have other than kind of stay tuned on the rate environment. Forgive me, I did not write down your second question. No, that is what I get for asking a rambling question. But I guess the second part, Matt, would just be how do you think about or how did the fourth quarter play out with regard to the pull forward? Obviously, you guys were expecting some, we saw some, but did December see the type of pull forward that you were initially expecting when you gave your guidance in early November? Yeah. I often, Jack, will be commenting on market conditions versus Matson's conditions, so let me be clear here. Matson saw extremely strong demand all the way through December and all the way through into January. What happened was that because of the pull forward of, or the threat of the change in tariffs, a lot of cargo got advanced, which created a significant amount of congestion in the L.A. Long Beach Port Complex, a significant backlog of rail demand, a significant filling of West Coast warehouses, and causing lots of disruption in chassis and terminal availability. There were a number of what they call extra loaders, which are unplanned large ship arrivals, which threw the Southern California Port Complex into disarray, which plays exactly into Matson's strengths. In a period where we otherwise might have been a little slower, cargo was getting frustrated inside of ocean carriers terminals for 7, 10 days, 14 days. Before they became available, and the rail service was similarly negatively impacted. While we do think there was a definite pull forward in the market, the disruption caused by that pull forward put Matson in this highly differentiated sweet spot, where if you actually want to get your cargo and not have it held hostage on one of the terminals, we were the carrier to use. We do think there was a pull-forward effect. We do think it will be a little bit slower post-Lunar New Year. But those are our thoughts on how it impacted us in the quarter, Jack. Okay. Thank you, Matt. Last question from me, and Joel, this one is for you. Just want to echo Kevin's comments around kudos on the longer-term depreciation and CapEx and interest expense guidance. But when we think about 2019 cash from operations, obviously 2018 was just a very strong year in terms of cash from operations. How are you thinking, and I know you don't want to provide specific cash from ops guidance, but how should we think about the direction of cash from operations in 2019? Do you think you could maintain these levels that you saw in 2018? Or I'm just trying to think about modeling out free cash flow this year. Sure. Well, the key driver, you start at the top of EBITDA. So, in our outlook, we're basically saying EBITDA is going to approximate last year's level, but then adjust downward for the sale leaseback transaction. Everything below that is going to be working capital items, dry docking items, tax items, et cetera. A couple elements of why this year was particularly strong, we had EBITDA in line with our general expectations for the year, but we also had a lot less dry docking in 2018 than we did in 2017, so that was a very helpful item. We're continuing to focus. SSA Terminals had a really good year, so the focus in cash flow generation coming out of SSA Terminals was strong. We're very focused on working capital as a company, so we did see some improvements in working capital in 2018 that if sustained then it wouldn't be year-over-year increases in 2019. But overall, Jack, there's no reason we can't still put up very strong cash flow numbers in 2019. But it's going to be driven by more things below EBITDA in the working capital and dry docking side than it would be on anything from EBITDA. Okay. Makes sense. If I could just maybe sneak one more question for you, Joel, in here on depreciation and amortization. The 2021 number, it's a pretty big step-up versus 2020. Is that due principally to higher dry dock amortization? Because if my memory serves, you guys will be kind of going into a two-year period of higher dry dock amortization at 2021, 2022. Is that the right way to think about that? Yeah, that's a big piece of it because we do our It's every five years, so 2016 and 2017 were big years, and then you begin to get into that in 2021 as well. So that's a piece, as well as the full year effect of the last vessel that's delivered in third quarter. Okay. So those are the two biggest drivers of that additional $10 million increase. Okay, great. Thanks again for the time, guys. I appreciate it. Okay. Thanks, Jack. Thanks, Jack. Thank you. As a reminder, ladies and gentlemen, that is star then one to ask a question. Our next question comes from Steve O'Hara from Sidoti. You may proceed with your question. Hi, good afternoon. Hi, Steve. Hi, Steve. Hi. Just a question on the previous guidance on the, or I guess, cost outlook on the ships and the benefits there. I know you had said you expected D&A to be lower or that expectation was still the same. I think it was $28 million-$31 million was the reduction in operating costs going from 10 to 9. Is that still the same aside from maybe the $5 million additional that you get from the investments in 2021 or something? Steve, big picture, yes, everything's the same. The core economics of the $28 million to $31 million benefit from the four ships is still the same. About $13 million of that was the reduction of 10 fleet units down to nine. The other half came from partly efficiencies in our auto rolling stock business, given the garages on the third and fourth ship, and just general lower maintenance and repair costs across all four vessels. So that core of $28 million to $31 million is still the same. On the D&A side, and that's part of the reason we wanted to give longer visibility here, there's a lot of moving parts. I mean, we've got the scrubber projects. We've got the other projects I mentioned on the CapEx slide. We wanted to layer in all these new projects on top of the $5 million to $8 million reduction from the vessels themselves so we could give investors a good picture of the next couple of years and how that plays out. But embedded into all these new numbers that we just showed you is a consistent improvement in benefits from the four ships themselves. Okay. Can you remind me what the one-time benefit was in SSA Terminals, LLC last year and what that was from, the size and the- Yeah, that was about $3 million, and it came from just a whole slew of year-end adjustments as they closed their accounting books. They're a January 31 year-end. If they have year-end adjustments, it hits us in Q1. So that's what it was last year. Okay. Then just on logistics, I think you're looking for kind of flattish operating income in 2020 but up in the first quarter. What's happening later in the year that's maybe not as favorable? Is it related to the pull forward that you talked about earlier, or the very strong demand with tariffs, or is there something else going on that's maybe weakening things as the year goes on? Yeah. I think our view was we, like many other logistics operators, had the ability to effectively reprice our entire portfolio of businesses on the brokerage side. So we got the benefit of it as the year went on. We're beginning to lap the good news with regard to the repricing and some of the other favorable dynamics as we move forward. So I think we continue to feel that the unit will perform very strongly after a record 2018. We think we're going to replicate it. But I don't think there's anything particular about because we're saying we're going to have a stronger first quarter, that implies there's other new negative things that are opening up. But more rather, we think as the full year progresses, there might be a fourth quarter impact in 2018 that ends up performing strongly than the fourth quarter of 2019 because of some of the pull forward and other congestion that we saw. But we're not trying to make any significant statements, Steve, about new negatives that are opening up relative to the strong performance we're seeing. Okay. Then maybe lastly, with the ship. Looks like the fourth ship moved forward a little bit. Can you just remind me what the issue was there on the timing? Why was it delayed? Was it commodity related or cost related there? Yeah. The impact there was the yard in which we were constructing those second two vessels in San Diego at NASSCO, had a dry dock or a construction dock that had some flooding and took it out of commission, and they had to re-jiggle their delivery schedule. Initially gave us a number that they've now pulled in because they've been able to figure out how to deliver it closer to its original due date. So nothing more than a better plan, a recovery plan from the shipyard related to that incident. Okay. All right. Thank you very much. Okay, Steve. Thank you. Thanks, Steve. Thank you. Our next question comes from Michael Webber of Wells Fargo. You may proceed with your question. Hey, good afternoon, guys. How are you? Good, Mike. How are you? Hi, Mike. Good. Most of my questions have been asked, but I wanted to touch on just a couple sector points. Would certainly agree on the, I guess, the degree of skepticism around the international container lines' ability to pass through an exogenous shock to their cost curve. I am just curious, considering that you do share a customer base, have you noticed any material change in that customer base in terms of the way they are approaching booking their freight, the way they are thinking about credit risk? Or have you just noticed anything aside from just a degree, kind of a tense stalemate as everyone kind of stares at their attempts to pass that through? Yeah. It's a good question, and it's a little early to tell, Mike. I would say one of the factors that we've not talked about, I don't think it's going to be a cascade effect, but I think a lot of our customers who were, because of the tariff situation as it played out, if you sourced from multiple Asian countries, given the political risk, you were looking to see if you could expand sourcing from your second country outside of China. If you were a sole sourcer inside of China, you began to look at developing a China plus one strategy from customers, just making sure and hedging their production sourcing. But these things are not easily done, and they're done over many years. That was something that occupied some of our customers' minds. I think the other point I would make about the change in sourcing is there's always a sourcing that is looking for lowest cost anyway. So we saw our normal customers in China looking to source in Vietnam and other low-cost countries. But that follows the last 30 years of cargo moving from Japan to Taiwan, from Taiwan to Korea, from Korea to China, from China to India and Australia, I mean, in Vietnam. So that sourcing thing is, I think, part of a larger factor. Exactly how this, back to part of your question about IMO and the kind of standoff, a little hard to tell. My sense is if the carriers don't get a satisfactory outcome with regard to mechanisms that allow them to recover all or part of their fuel surcharge, they're going to take a very hard look at deployed capacity. But that's only speculation on my part. Got you. Well, that kind of leads into my last question, just around that deployed capacity. We've seen there's an oversupply of megamax kind of ultra large tonnage on Asia to Europe, and it started to spill over, not necessarily to Transpac. It's been mostly kind of in the Mid Eastern routes. But there's been more kind of one-off megamax vessels kind of trading Transpac. I don't think anyone has any on a string yet. But as you think about the way, I guess maybe just how do you think about the dynamics over the next kind of three to four years, or maybe longer, when it seems inevitable that we're going to see some ultra large tonnage actually on Transpac, and how that impacts your speed advantage and ultimately your premium service? Yeah, I think we could not be better placed. I think you are going to continue, the premise of your question I agree with, which is larger and larger ships, even 10,000 TEU ships moving to 14,000 TEU ships as those ships are deployed from Asia to Europe to the Transpac. I see more pressure on consolidation among ocean carriers, more pressure on potentially slow steaming as a solution to a partially successful IMO, if they do not get that back in the mechanism, more grouping of big, large ships, making terminals congested, which allows us to continue to stand apart in our service offering as a deferred air freight type of product. So I feel very confident in the long-term prospects and the macro trends for our little express China service. Yeah. It would seem that way. Out of curiosity, do you think it is likely within the next 3 or 4 years we would see an actual string of megamax carriers trading Transpac? Well, yeah. I would expect to see larger ships of 14,000 TEUs and strings of those over the next few years. I think if you look at investments that SSA Terminals, our joint venture, is making, newer, larger cranes at one of our terminals in Oakland International Container Terminal, the largest cranes to accommodate that. We continue to position our joint venture to be able to accommodate those because we do expect they are coming, and strings of those to be coming. Okay. That is interesting. All right. I appreciate your time, guys. Thank you. Okay. Thanks, Mike. Thank you. I am not showing any further questions at this time. I would now like to turn the call back over to Matt Cox for any further remarks. Okay. Thanks, operator. Thanks, everyone, for listening. We look forward to catching up with everyone at the first quarter call. Aloha. Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Everyone, have a wonderful day.