Earnings Call: Q3 2018

Nov 5, 2018

Good day, ladies and gentlemen, and welcome to Matson's third quarter 2018 financial results 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 operator assistance during today's conference, please press star then zero on your touchtone telephone. As a reminder, this conference call may be recorded. I would now like to turn the conference over to Director of Investor Relations, Lee Fishman. Please go ahead, sir. Thank you, George. 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 23rd, 2018, and in our subsequent filings with the SEC. Please also note that the date of this conference call is November 5th, 2018, and any forward-looking statements that we make today are based on assumptions as of this date. We undertake no obligation to update these forward-looking statements. I will now turn the call over to Matt. Thanks, Lee, and thanks to those on the call. Please turn to Slide 3 for my opening remarks. Matson's results for the quarter were in line with our expectations, with Ocean Transportation results approaching the level achieved in the third quarter last year and Logistics continuing its solid execution across all of its service lines. We are pleased to see the exceptional performance of our Logistics segment for the quarter and year-to-date. For the quarter within Ocean Transportation, we saw a favorable rate environment in China, continued strong performance from SSAT, and steady performance in Hawaii. We also faced unfavorable timing in fuel surcharge collections relative to fuel cost increases, continued negative impact from the ongoing competitive dynamics in Guam, and lower southbound volume in Alaska, largely due to the weaker-than-expected seafood season compared with the strong seafood harvest levels in 2017. In the quarter, we earned net income of $41.6 million, or $0.97 per share, compared with $34.1 million or $0.79 per share in the year-ago period. We generated EBITDA of $91.5 million in the quarter versus $96.2 million in the third quarter last year. Moving on to the outlook for 2018. Based on the performance in the first nine months of the year and current business trends, we are raising our full-year 2018 outlook for Ocean Transportation and maintaining our higher outlook for Logistics. For the full year 2018, we expect Ocean Transportation operating income to be modestly higher than the $126.4 million achieved in 2017. In Logistics, we continue to expect operating income to approximate $30 million. Joel Wine will go into more detail on the financials and outlook later in the presentation. Please turn to Slide 4. After countless man-hours and the exceptional hard work of our employees and the workers at Philly Shipyard, we welcome the first of our four new vessels into the fleet with the arrival of the Daniel K. Inouye. This is a very proud moment for our organization, and we look forward to the arrivals of the Kaimana Hila, the Lurline, and the Matsonia in the coming years. We are also excited for the financial and operational benefits when all of the vessels are in operation. These four new ships and the modernization of the Sand Island terminal will support our market-leading position well into the future. Now on to our trade lane services. Turning to our Hawaii service on Slide 5. Hawaii container volume for the third quarter decreased 1.1% year over year, largely due to one less sailing. Matson's market share remained stable in the quarter, and the economic condition within Hawaii remained favorable. In short, we saw steady performance in Hawaii. For the full year 2018, we expect container volume to approximate the level achieved in the prior year, which reflects a favorable economic backdrop in Hawaii and a stable market share environment. Slide 6 provides an overview of some key Hawaii economic indicators forecast by UHERO for 2018 and beyond. According to the latest forecast, UHERO continues to expect reasonably strong economic growth as a result of low inflation, low unemployment, a high level of tourism activity, and supportive global economic conditions. With respect to the construction industry, UHERO's construction-related metrics continue to suggest a flattish growth profile in the medium term, which is consistent with our view that new construction demand, primarily from master-planned communities and condo projects on Oahu, is offsetting the projects nearing completion. Moving to our China service on Slide 7. Matson's volume in the third quarter 2018 was 3.3% lower year over year, largely due to a dry dock return voyage in the prior year period. I would like to highlight that every CLX vessel in the quarter was full. Our CLX service experienced a higher quarterly eastbound average freight rate versus the third quarter 2017, which again is a sizable premium to the SCFI. Year-to-date in the transpacific trade lane, we have seen a fair bit 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 of the year so far, we've seen a movement to a more balanced capacity demand situation. Specifically for Matson, we had a strong third quarter performance in what is the peak period for the year for the CLX service, and while the fourth quarter is traditionally not as strong as a result of the early shipping cycle to manage holiday inventory, given the elevated demand for the CLX service, we expect to have a stronger fourth quarter than normal. As a result, we now expect an average freight rate for the full year 2018 to be higher than the level achieved in 2017. Volume for the full year 2018 is expected to be modestly lower than the exceptional level achieved last year, largely due to the negative comparison for the dry dock return voyage volume in 2017. Please turn to Slide 8. Since our last earnings call, the U.S. has implemented additional tariff measure of 10% on an incremental $200 billion in imported goods on the heels of the 25% on the initial $50 billion in imported goods. The 10% on the $200 billion in products springs to 25% on January 1st. Although nearly 20% of the goods that Matson transports are subject to these tariffs, as of today, we've not seen any meaningful negative impact from these tariffs. The largest of the product categories on the CLX service is garments and footwear, and these product categories are not part of the current implemented tariff or proposed tariff in future rates. Although a large percentage of our volume is unaffected by the current tariffs, our customers that are subject to the tariffs are preparing for ongoing and escalating U.S.-China tariffs. In the short term, some of our customers have chosen to advance freight ahead of the January 1 deadline where possible. To manage the long-term effects of tariff escalation, our customers have indicated to us that they're exploring different manufacturing sourcing locations within Asia, but for many customers, it could take at least a couple of years to adjust their supply chains to meet all their long-term needs of manufacturer quality and cost competitiveness. The tariffs on the margin will likely have an impact with respect to how our customers source, primarily within Asia. The single biggest factor in Transpacific trade lane heading into 2019 will be the management of shipping capacity versus demand. In the near term, there is potential risk with respect to volume slated in the first quarter that is pulled forward into the fourth quarter. Beyond this, there remains significant uncertainty as to how the end demand will be ultimately impacted by the tariffs and how trade lane capacity in the Transpacific will adjust accordingly. Turning to Slide 9. A couple of weeks ago, a super typhoon hit the Micronesia region, causing widespread devastation in Saipan and Tinian. Matson has served this region for decades. We pledged our support to help these communities recover and are working closely with the American Red Cross and government agency to speed in the recovery efforts. With respect to our Guam service, volume in the third quarter was flat year-over-year and sequentially. The overall container market in Guam was essentially flat year-over-year. Moving on to the full year outlook. We expect an ongoing heightened competitive environment and lower volume in 2018. As we've said before, our strategy this year is to continue to fight to retain every single container of our customers' business. Given our long history in Guam with strong customer ties, a shorter transit time, and better on-time performance, we expect to retain an outsized market share. Moving now to Slide 10. In Alaska, Matson's container volume for the third quarter 2018 was 2.2% lower year-over-year, primarily due to lower southbound volume as a result of a weaker-than-expected seafood season relative to the exceptionally strong harvest last year, partially offset by an increase in northbound volume. To try to put the southbound seafood volume weakness in context, according to the Alaska Department of Fish and Game, the in-season salmon harvest for 2018 is projected to be substantially below the state's forecast, which was over 35% below the 2017 harvest figures. With respect to northbound volume, we continue to see signs of Alaska's economy beginning to stabilize, but await further data to confirm that bottoming in the recession has occurred. For 2018, we expect volume to be modestly higher than the level achieved in 2017, with improvement in northbound volumes primarily resulting from volume associated with the dry docking of a competitor's vessel to be partially offset by lower southbound volume, again, as a result of the weaker than expected seafood season, compared with the very strong seafood harvest levels in 2017. Turning next to slide 11, our terminal venture, SSAT, continues to show strong performance. For the third quarter 2018, SSAT contributed $9.2 million compared to $7.5 million in the prior year period. The increase year-over-year was attributable to higher lift volume. For 2018, we continue to expect SSAT's contribution to our ocean transportation operating income to be higher than the level achieved in 2017. There were a few key factors in support of this view, including the benefits to SSAT from the launch of new global shipping alliances as container flows and supply chains are adjusted between U.S. West Coast terminals, SSAT's reputation as the best operator on the U.S. West Coast, and recent strength in import and export volume on the U.S. West Coast. Turning now to Logistics on slide 12. Logistics continued its strong performance, driving operating income to $9.9 million in the third quarter 2018 versus the $7.3 million in the year ago period. All of the service lines made positive contributions in the quarter. Our transportation brokerage business performed well, primarily due to the well-documented tightness in the trucking market, which plays to Matson Logistics' strength in customer service. With respect to Span Alaska, the business continues to perform well with improving year-over-year volume as the Alaska economy shows early signs of stabilizing. Given Logistics' performance in the first nine months of the year and current business trends, we maintain the higher outlook and expect operating income to approximate $30 million. I'll 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 third quarter and year-to-date financial results. Ocean transportation operating income for the third quarter decreased by $2.3 million year-over-year to $48.7 million. This decrease was primarily attributable to the unfavorable timing of fuel surcharge collections and higher terminal handling costs. Partially offsetting these unfavorable year-over-year comparisons were higher container rates in China and Hawaii. Logistics operating income for the quarter was $9.9 million, or $2.6 million greater than the result in the year ago period. The increase was due primarily to higher contributions from transportation brokerage. EBITDA for the quarter decreased $4.7 million year-over-year due to lower other income of $2.8 million and lower depreciation and amortization, including dry dock amortization of $2.2 million, partially offset by the increase in operating income of $0.3 million. On a year-to-date basis, ocean transportation operating income increased by $3.4 million to $109.7 million. This increase was primarily attributable to lower vessel operating costs, higher container rates in China and Hawaii, and a higher contribution from SSAT. Partially offsetting these favorable year-over-year comparisons were higher terminal handling costs and a lower contribution from Guam. Logistics operating income for the first nine months of the year was $23.6 million, or $7.4 million greater than the result in the first nine months of 2017. The increase was due primarily to higher contributions from transportation brokerage and freight forwarding. EBITDA for the first nine months of the year decreased $0.6 million compared to the first nine months last year due to lower depreciation and amortization, including dry dock amortization of $11.7 million, partially offset by higher consolidated operating income of $10.8 million and a favorable increase in other income of $0.3 million. Turning to slide 14 for a summary of our balance sheet. You will note that our total debt at the end of the quarter was $908.1 million, and our net debt to LTM EBITDA ratio was three times based on a trailing 12-month EBITDA of $295.4 million. 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. Slide 15 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 $280.9 million, undertook net borrowings of $68.7 million, and received $31.5 million of cash flows from the sale of equipment, from which we used $56.4 million on maintenance CapEx, $302.4 million on new vessel CapEx, including capitalized interest and owner's items, while also returning $34.9 million to shareholders via dividends. We do expect our leverage ratio to increase as our Hawaii fleet renewal program progresses, but the company's healthy balance sheet, strong operating cash flows, and continued access to attractive financing sources provide ample capacity to fund new vessel construction, consider growth investments, and return capital to shareholders. Turning to slide 16, for the third quarter, we had new vessel cash capital expenditures of $50.6 million and capitalized interest of $5.2 million, for total capitalized vessel construction expenditures of $55.8 million. The percent of completion on the three remaining vessels under construction is noted in the table, along with the updated delivery timing. As you will see, there is no change to the delivery timing of the Kaimana Hila and Lurline, but there is a two-quarter delay with the Matsonia as a result of construction delays in the NASSCO shipyard. As a result of the delay in the Matsonia construction schedule, the schedule of remaining vessel progress payments has changed. For 2018, we now expect the new vessel progress payments to be approximately $317 million versus a prior estimate of approximately $345 million. Lastly, the picture on the slide shows the house being lifted onto the Kaimana Hila in August. We are excited that she is planned to be launched into the water this month at the Philly Shipyard as she continues to progress towards the Q1 delivery date next year. Please now turn to slide 17, where I will discuss our outlook. For the full year 2018, we expect operating income for ocean transportation to be modestly higher than that $126.4 million achieved in 2017. For logistics, we expect operating income to approximate $30 million. We expect depreciation and amortization to approximate $132 million, inclusive of $36 million of dry-docking amortization. We expect EBITDA to be modestly higher than the $296 million achieved in 2017. We expect other income and expense to be approximately $2.5 million in income. We expect interest expense to be approximately $19 million. Finally, for the fourth quarter, we expect our effective tax rate to be approximately 26%. We want to reiterate that in the fourth quarter of 2017, we had relatively strong fuel surcharge collections in ocean transportation, given the nature of the timing of fuel collections in that period. So year-over-year comparisons for the fourth quarter of 2018 should consider the timing of the fuel surcharge collections in the prior year period. As a reminder, it is not uncommon for us to see timing impacts in our fuel surcharge collection activity on a quarterly basis, but over the course of a year, we expect the timing impact of fuel recovery to effectively be minimized. On a final note from a capital expenditure perspective, in our last earnings call, we provided our preliminary strategy with respect to the IMO 2020 fuel requirement regulations. At the time, we mentioned that we committed to a scrubber on one CLX vessel and that we were closely evaluating scrubbers for two additional CLX vessels. As of today, we have committed to move forward with scrubbers on the other two vessels. So the current strategy is to install three scrubbers in fiscal 2019. We continue to expect the scrubber installation cost to be approximately $9 million per vessel, the vast majority of which for these three scrubbers will be incurred in 2019. With that, I will now hand it back over to Matt. Thanks, Joel. With 9 months under our belt, we can clearly see the financial benefit of a diverse set of transportation and logistics services and look forward to finishing off the year on a strong note. We remain intensely focused on cash flow generation and managing our leverage as we advance our vessel new build program and progress on the Sand Island crane investment. With those concluding remarks, I will turn the call back over to the operator and ask for your questions. Operator? Thank you. Ladies and gentlemen, if you have a question at this time, please press the star then the number 1 key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key as well. We do ask that you place your line on mute once your question has been stated to prevent any background noise during response. Again, there is star then 1 to ask a question. Our first question comes from the line of Jack Atkins with Stephens. Your line's now open. Hey, guys. Good afternoon. Thank you for taking my questions, and congratulations on a nice quarter. Thanks, Jack. Let me just kind of go to the fourth quarter outlook or just, I guess, the broader 2018 outlook and sort of the changes there. If I'm hearing what you're saying correctly, it certainly sounds like the fourth quarter is a bit stronger than what you were expecting three months ago. Do we kind of chalk that up to some pull-forward related to the tariffs, which is going to positively impact the CLX operations? I'm assuming that would impact positively SSAT. Is that sort of the way to think about it? Or if not, what's sort of driving the better fourth quarter outlook than this time three months ago? Yeah, Jack, I think you're on the right path there. It's really the implementation of the additional tariffs as we outlined from 10% to 25%. We do think that there's a pull-forward effect. Usually, Jack, as you know, as we get the merchandise into the stores prior to the holiday season, we usually see a lull in December as most of the merchandise has wound its way across the Pacific and into our customer supply chains. We think there's sort of a beating of the clock factor going on in the broader market in general, and so we will see some pull-forward volumes. As we noted, Matson's principal commodities, footwear and garments are not subject to these tariffs, but nonetheless, we do see it sort of beat the clock and as you rightly point out, that benefits both Matson on the ocean service. It also benefits SSAT and probably to a lesser extent, Matson Logistics as well. So that's the primary driver in the upgrade for the quarter. That may in fact have a little bit of a weaker quarter. We have an early Lunar New Year in 2019, and so it may be some pull forward that reflects some weaker volume post-Lunar New Year, but we'll have more to say about that when we do our year-end earnings call. But I think that's a recap of how we're seeing it. Okay. That makes sense, and sort of is in line with what we're hearing as well in terms of the fourth quarter, first quarter, so it makes sense. Shifting gears here for a minute to Guam. I was encouraged to see that those volumes were flat, both sequentially and year-over-year. Should we take that as a sign that while the competitive landscape in Guam still remains very challenging, that things have at least sort of stabilized somewhat there? Or is that not the way to read that? Yeah, it's hard to know, Jack. I mean, as we've said before, our position has been we're going to fight for every stick of freight, and I think what we've seen is that APL has not seen the momentum that it's hoped for, and we're just going to be continuing to compete. Hard to know exactly what's going to happen in the future, but I think it is fair to say that we have seen a lessening or a flattening as we've lapped the bad news, as their share of the market has stabilized. What they do from here is really hard. It's really up to them and hard for us to know. Okay, makes sense. Then just to go along with that, I saw that you all recently announced another service direct from Hawaii down into the South Pacific. Could you kind of talk for a moment, are there other opportunities like that as you sort, because I know this is one of several that you guys have announced over the last 12 to 18 months that you see in terms of other island communities in the Pacific where it's not going to be something huge from an EWOT perspective individually, but combining can be sort of a nice supplement to what you're already doing within ocean transportation? Yeah. The entry into the Kwajalein market direct from Honolulu really shortens the transit time and provides U.S. flag service into that region. I think that's a positive step. Jack, it does complement our strategy to grow into adjacent markets in the Pacific, and you've seen we did a small announcement of an addition to Christmas Island. Last year, we initiated a service directly into Tahiti, which is on the heels of an acquisition a couple of years ago in New Zealand into the Cook Islands. I do see us continuing to expand a strategy that allows us to link Matson's hubs in Guam and Honolulu into adjoining Pacific markets. This is really, as we see it, a continuation of a strategy that we outlined a few years ago, growing organically into adjacent markets where our service can allow us to grow, and as you say, modestly, but over time, I think can move the needle for us. Okay. Thanks, Matt. Makes sense. Last question, I will hand it over. It is a little bit of a follow-up on IMO. I know you all have a very clear strategy in terms of what you are planning to do to install scrubbers on at least three of your vessels, I guess three for now. But when you think about the impact that IMO 2020 could have on the cost structure of competitors, I am not so much thinking about your Jones Act lanes, but more specifically to the competitors in the trans-Pacific lane coming back from China. Is there a way to think about the impact that could have on pricing within the broader trans-Pacific lane looking out 12 to 18 months? Would you imagine that there is going to be an upward bias to pricing as carriers look to pass this through? Because it seems like this could have a pretty significant impact on the cost structure and fuel prices for some of your competitors. I think you are right about that. I think what we are seeing as we get closer to this 2020 implementation, many of the largest international ocean carriers have said they are primarily going to depend on the imposition of additional fuel surcharges to cover what will be a substantially higher fuel cost. I think you may also see some further slowing down of services as they try to manage this increase in fuel costs. But I think the big question that while it is clear that the ocean carriers are going to be incurring additional expense associated with this compliant fuel, what is less clear is the industry on the international side's track record of being able to pass through costs. In my mind, Jack, it is primarily a function of whether or not the international ocean carriers can manage the supply and demand adequately to allow for those factors to be in balance and create a somewhat more orderly market that would allow for those incremental fuel surcharges to be implemented. To the extent that they cannot do that, then I think they are in for a world of hurt in managing that additional cost burden. So time will tell, I think, the way we are seeing it. But that is why we love our position. We think the implementation of scrubbers as was mentioned on three of our five vessels, allows us to continue to, we think, burn less expensive fuel and put ourselves in a good competitive position regardless of what the market conditions. I hope we're right in the premise of your question that there is an orderly market and that rates do go up, and we would certainly benefit from that market if it occurs. I'm just saying that it's not a sure thing that it would occur. Okay. Matt, thank you very much for your answers. Sure. You bet, Jack. Thank you. Our next question comes from the line of Kevin Sterling with Seaport Global. Your line's now open. Thank you. Good afternoon, gentlemen. Hi, Kevin. Hi, Kevin. Matt, just following up on the scrubbers question, you are going to install three scrubbers out of five on your CLX vessels. Can you remind me what is the plan with the other two vessels? Yeah. I think the way we're looking at this, Kevin, is that, as you know, we have three scrubbers installed on our Alaska vessels. Those are to comply with the ECA requirements that were in place. Those are up and running, and as Joel mentioned, we will have three CLX vessels. So six of our 12 core vessels, three in the Alaska and nine in our Hawaii, Guam, and China service, will be installed with scrubbers. We are going to continue to take a hard look at the remaining six vessels. That is the four new vessels and the remaining two vessels. At this point, we are making no predictions, but at the next dry dock period on those vessels, we will be taking a hard look at whether or not we install, over time, scrubbers on the remainder of our fleet. Exactly when that will occur is unclear, but to the extent that the less than two-year payback spreads that we have seen, I think there will continue to be a strong economic case for us to do it. Given that we are relatively small and focused, we are going to be able to implement it than many of the other larger and perhaps less capital-capable companies in implementing a scrubber strategy. One other point on the scrubber strategy that I think is helpful. We cannot predict exactly what the spreads of fuel are going to be in the market once all the market settles out. Some are saying that there is going to be big underlying demands on diesel as this residual product is put into the market. So spreads may narrow, they may grow wider. But we really see this as having the optionality to burn the least expensive fuel. So that option value, we think, is definitely worth $8 million-$10 million a ship, the $9 million a ship that Joel mentioned for our fleet. So for us, it is not a no-brainer, but it seems a pretty strong business case within the larger context. Yeah, that makes sense. Thank you. Joel, you talked about 2018 vessel progress payments, I think moving down to $317 million for 2018 from $45 million because of timing delays. How about 2019? Has that changed at all? That changed slightly. It has been decreased a little bit as well. What's happening is really you're seeing things slide. The last ship is sliding further into 2020, Kevin. Okay. But not a lot. It changed slightly in 2019, but not a big magnitude of change because the delivery date for ship 2 and ship 3 is still pretty much on track, and ship 1 just got delivered last week, so not a big change in 2019. Okay, thanks. Joel, while I got you, as I look out, obviously, your vessel progress payments are decreasing. For the next, call it 5, 7 years, my sense is you guys don't need a vessel fleet replacement program like you're going through now. You're going to generate, I think, significant free cash flow. Can you outline your priorities as you think about redeploying that free cash flow? I assume you'll delever first, but after that, is it stock buyback, increasing the dividend? Just make sure I'm thinking about it right, too, this kind of next, call it 3 to 5 years, your free cash flow generation. If you could help walk us through your priorities. Sure. Great question because we do see ourselves generating free cash flow in that scenario. It really should start in 2020 because I'll remind folks that in 2020, we'll just have the remaining milestone payments on the last ship, and those milestone payments, when we get through the winter period and we look at March, April, May of the normal cash flow generation of our company, the normal cash flow should generate more cash than those remaining milestone payments. So we should start delevering actually around Q2-ish of 2020. First priority is definitely to pay down debt. We've talked about our leverage ratio going into mid-3s, and we've talked about how on an annual basis, we should be able to delever about a half a turn a year. We'd like to be down at least into our target levels in the low 2s. That means for two or three years, the priority focus will be paying down debt to get down into those strong investment-grade, low twos ratio where we would like to be. Now you are talking about 2022, 2023. Until that timeframe, we would tell you, I mean, a lot of things could change between now and then, of course, but that will be our focus as far out as we can see on a stable performance basis from a priority of cash flow perspective. The dividend is really important to us. We have got a great track record. We have increased the dividend every year since the time of our spin-off, so no guarantees that will happen in the future, but we definitely have talked to our investors and with the investment community about the importance of rewarding our long-term shareholders as we grow our free cash flow per share to reward shareholders with increased dividends over time. Dividends will be on the table for continued sharing with shareholders as we generate cash flow. We have bought back stock in the past, and we have acquired companies and made growth investments internally in the past. We will continue to be looking at attractive M&A, investments and internal organic growth investments during those years, Kevin. The key there for us will be discipline. We have talked about our return thresholds are in the mid-teens from a cash-on-cash return perspective. As we look at new investments, we very much look at it on a cash-on-cash basis, and we like our portfolio of businesses today. We look to grow, but we want to maintain discipline that we are buying quality assets that contribute to our portfolio and return well for shareholders over time. I would lay out those as our priorities as we think about that timeframe. Got you. Thank you, Joel. That is very helpful. Speaking of that, as we look at maybe your pipeline for potential M&A, particularly on the logistics side, are you seeing multiples come in a little bit, or are they still a little bit too pricey for your liking? We're not really seeing things change right now, but it's a very dynamic market right now. Clearly, it's been a strong economy. A lot of logistics players are doing very well right now, given the tight supply-demand characteristics, especially on the supply side with trucker driver shortages and things of that nature. So it's been a very good market for a lot of logistics players. Profitability has increased. But where's the economy going to be in 2019? Will some of these businesses come off a little bit? It's a question, and we really haven't seen a lot on the M&A side that suggests a change in the market. Too early to say, but I think from our point of view, we don't want to just grow for the sake of growing. If we look at logistics businesses, they've got to make sense in the portfolio, in the businesses that we're in today, where we're bringing something to the table, from a synergy perspective or from an overall business congruity perspective with respect to what we have today. I think staying close to home with respect to the businesses we're in is really important. Then, of course, the economics have to pencil out to be in the teens from a cash-on-cash return perspective that I talked about before. So that's what we'll focus on. We haven't seen really a change in M&A pricing quite yet. Got you. Okay. Thank you. Last question, and Matt, this may be a bit of a bigger question for you. You talk about the uncertainty with tariffs and if manufacturing were to move out of China, where it might go, and the impact, and I know could take years. But if that were to be the case, if your customers were to move manufacturing out of China, would you say with your smaller vessels, you would have maybe a competitive advantage, you could get in and out of smaller ports more quickly, or maybe that some of the other larger vessels may not be able to access if that were to happen? Yeah. Kevin, we've done contingency planning. The way we're thinking about this is that if there is some migration of manufacturing capacity out of China, it's likely to migrate to Vietnam, to India, to other places in Asia. So one of the points we were trying to make was that we continue to see China as a dominant player. Ultimately, I believe, and I don't know when that'll occur, there will be a resolution of the U.S.-China trade tariffs. Again, without knowing exactly where that is, China has built this ecosystem of high quality. It's not just the garments, but it's the dyes and the buttons and the zippers and the cloth and the expertise and the quality, that is difficult for a Vietnam or a Malaysia or an India to match that quality. The other reality is there already is migration of low-end manufacturing that is already occurring to going on in Vietnam and Malaysia and India as we speak. We think some of that will get ramped up. If there's a total breakdown in relations with the U.S. and China, which we don't foresee, there are other markets where our small ship could go to, whether it's Vietnam or in Thailand and other places where there are relatively small ports that big ports can't go to. That's certainly a possibility, but that's really not where our heads are at right now. Okay. Matt and Joel, appreciate your thoughts today. Have a good afternoon. Thanks, Kevin. Okay. Thanks, Kevin. Thank you. Our next question comes from the line of Ben Nolan with Stifel. Your line's now open. Thanks. Hey, guys, nice quarter. I know that you have or will be putting out your 2019 guidance, I think, next quarter, and I certainly don't want to step on that. But especially as it relates to the core Hawaii and Alaska markets, I'm curious, as you look out into next year, without putting any numbers on it or anything, is there anything that leaves you especially optimistic or maybe pessimistic about either of those two markets, or feeling any differently about those than where you sit today? Sure. Ben, this is Matt. I think our view of Hawaii is very consistent with UHERO, the University of Hawaii's forecast, that would look for flat or very low single-digit growth in the overall economy, at it performing at a relatively high level. I think our views would, at this point, not be very different from that with regard to Hawaii. With regard to Alaska and talking to customers now, the feeling is that they may be through the recession. People are more upbeat about the prospects. We understand that in Alaska, there are a significant amount of projects on the North Slope that are going to be done this winter, different from last year. While we're not a big participant in the North Slope, there are indirect benefits that come from Matson supplying that, and there was a budget issue in the State of Alaska impasse that's been resolved and post-election cycle. There's a little bit of optimism about Alaska. Of course, that is dependent on energy prices. So, unlike other places, a higher energy price is a benefit to the state. So it is still early and subject to where the overall state economy goes there. But overall, we're looking for flat Alaska and potentially up or at least bottoming out in Alaska with potentially some more optimistic views of where the future takes us. That's as best as I can provide. We should have a better feel for that when we do our year-end earnings call. Yeah. I appreciate the color, even to the extent that you're able to give it. That was helpful. Then as it relates to, really, I guess, the West Coast port business, SSAT or maybe the China trade, I've been seeing some interesting trading patterns where the volumes coming into Seattle and Tacoma have really spiked as opposed to Long Beach and Los Angeles, where they're flat to maybe a little down. I'm curious if you are seeing anything unique there, and if there is a change in the trading patterns, how does that potentially play out so far as it relates to SSAT and your business more broadly? Yeah. I think to your point about observations of movement within the West Coast, I think we're seeing very small anomalies. I think at this point, we're not interpreting them to be permanent. It's just more where vessel capacity and supply and demand is, and there is significant demand across the markets right now that may be just where there's more vessel capacity. At the end of the day, the carriers will sell whatever they have available capacity, and perhaps there's less capacity into Southern California, which is traditionally a place where that goes. The nice part about Matson's investment in SSAT is that we have terminals in all three markets. Regardless of where that volume goes, we're going to be able to participate in those markets. So we feel well-positioned regardless of which of those three West Coast markets where the volume comes in. Okay. Then lastly from me, just circling back around to the timing and the delivery of the last, the Matsonia, being a few quarters late. Obviously, that probably has a little bit of an impact on the operating cost savings that you foresee getting out of that. I was just curious if you have any recourse or remuneration relative to the shipyard for the delay, or is that within the parameters of the contract? It is within the parameter of the contract, and there are provisions for a delay. So there will be economic consequences under the terms of the contract for that. They're not majorly material to our overall results in, this case, 2020, Ben. But what I would remind folks is that the $28 million to $31 million that we've talked about of incremental EBITDA benefit of the all four ships being in place compared to our current fleet, the vast majority of that should come when the third ship is delivered because that's the time that we believe we'll be able to ratchet down from a 10-ship deployment in Hawaii to a 9-ship deployment in Hawaii. That is still scheduled for the fourth quarter of next year, 2019. So you might not see a whole lot of benefit in 2019 towards that $28 million to $31 million benefit, but we should see the majority of it actually in calendar year 2020, even if that fourth ship delivery date moves around and moves back in this case. Okay. That's very helpful. Appreciate it, Joel. Okay. Thanks, Ben. Thank you. And ladies and gentlemen, as a reminder, if you have a question, please press the star then the one key on your touch tone telephone. Our next question comes from the line of Tom Cho with Wells Fargo Securities. Your line's now open. Thanks. Good afternoon, guys. Good afternoon. Hi. Hey. I know you talked about some of the option value with the scrubber installations, but how should we be thinking about the payback period of those investments? Is there an incremental repricing strategy for the cargoes going forward, or how should we kind of think about that? Yeah. Tom, the way we're thinking about it is that we expect to recover the incremental capital cost in the scrubbers through our fuel surcharge mechanism. I think as you may know, Tom, in many of our trades, we have fuel surcharge mechanisms in Hawaii and Guam and Alaska that allow us to effectively recover our fuel cost in the trades. What we think this allows us to do is to keep our fuel surcharge as low as possible once we've recovered the capital related to those scrubber installations. For us, there is a very clear payback. We said before in earlier presentations that at today's spreads between the MGO and the residual fuel, there's a less than two-year payback, and to the extent those spreads widen or shorten or narrow, then the payback period would be adjusted. But in any event, there's a very strong business case for Matson in making these investments. And over time, we would expect to remain competitive in our marketplaces, being in a position to be able to burn the least expensive fuel and remain competitive in those markets where we're able to recover our fuel surcharge. Got it. So when we're thinking about modeling the amortization of those costs, we should really be looking at second half of 2019 through 2022, is that correct? No. From an accounting perspective, they'll be amortized over a longer period of time. Most of these scrubbers can last the remaining life of the vessels themselves. Sure. So we haven't announced and done the final work to tell you exactly what that depreciation schedule will look like. But in some cases- Okay it could be over 10 years. Matt was talking about the economic payback period. Yep, perfect. When we talk about the cargoes that are being pulled ahead of the January 1st tariffs, can you give us a bit of a split on how much of those cargoes you've seen in Q3 and what's being laid on for Q4? Or if there's any color on if it's split evenly or so. Yeah, it's hard to know or generalize. Our comments are anecdotal comments from customers. I think, in some cases, it's really all over the place, so it's really hard for us to aggregate in talking with our small sliver of customers. Again, some customers have the ability to do it, others don't. Others have tried to ramp up and source from other locations. So it's kind of all over the map. So it's difficult to know other than just knowing generally, that customers have tried to pull forward, let's say, spring merchandise, stuff that would normally ship in the first quarter, to try to cover that spring inventory. But in many cases, customers have limited ability to store it in their warehouses. So I would say there is a pull-forward factor, but exactly what percentage it is, it's really hard to say. Yeah. Brian, you remember in the third quarter, we're full, and we're full almost every third quarter. Most of our sailings are always full. So in this quarter, it's more of an impact on rate. The fourth quarter, as Matt mentioned earlier, there is the typical lull in the December timeframe. So if we see higher volumes this year in December that are persistent to the end of the year, that's where you'd see some volume impact relative to previous years where you see some declines in the month of December. But for the third quarter, you should look at our volumes. The main driver of difference in this third quarter volumes versus last year was just dry dock, additional voyages from last year where you had ships returning on dry dock. But for our core service, our weekly service, we were full last year and we were full this year. Got it. Just switching gears to the logistics segment. Can you give us a little bit more color on what you're seeing in the trucking market? I think a couple of quarters ago you mentioned consistent market share gains due to the early ELD implementations. Is that still going on or what do you see your competitors doing in that space? I think what we're doing in our logistics business is what I think other logistics providers are doing, which is, in order to secure actual truck capacity, we're needing to pay the trucking company more in order to ensure that they carry the load. That increase in cost is passed on to the customer, as well as a reset of margin that's occurred industry-wide. Our truck brokerage business, we think, is not behaving or performing differently. It's allowed us to have a reset with our customer, and the customer is not about in some ways, it's less about price and more about being able to take the load off the dock and get it to its destination rather than to try to knock another $10 off the rate because that's where the market is. I think our experience is very consistent anecdotally of what we're hearing from other truck brokers and domestic providers within the U.S. Great. That is helpful. That is all for me. Thanks so much. Okay, thank you. Thank you. I show no further questions at this time. I would like to turn the call back over to Matt Cox for any closing remarks. Okay, thanks, operator. Thanks for everyone for listening in, and we will look forward to catching up with our year-end 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 great day.