Earnings Call: Q2 2017

Jul 31, 2017

Good day, ladies and gentlemen, and welcome to Matson second quarter 2017 earnings 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 is being recorded. I would now like to introduce your host for today's conference, Mr. Lee Fishman. Sir, you may begin. Thank you, Bruce. 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 investor relations tab. Before we begin, I would like to remind you that during the course of this call, we will make forward-looking statements within the meaning of the federal securities laws regarding expectations, predictions, projections, or future events. We believe that our expectations and assumptions are reasonable. We caution you to consider the risk factors that could cause actual results to differ materially from those in the forward-looking statements in the press release, the presentation slides and this conference call. These risk factors are described in our press release and are more fully detailed under the caption "Risk Factors" on pages 11 to 18 of our 2016 Form 10-K filed on February 21, 2017, and in our subsequent filings with the SEC. Please also note that the date of this conference call is July 31, 2017, 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. Before discussing our results, I wanted to welcome Lee Fishman to the Matson team. Over the coming weeks, Lee will be working closely with Jerome Holland as Jerome transitions to a new role with enhanced responsibilities at Matson. I am excited for Jerome and the opportunities that lie ahead for him. On to our second quarter results. Matson's operating results outperformed our expectations, buoyed by stronger demand for our expedited China service, improved lift volume at our SSA Terminals joint venture, and improved performance at Matson Logistics. In addition, the timing impact of our fuel surcharge collections provided a year-over-year tailwind after several quarters were burdened by the impact of bunker fuel price increases that occurred in late 2016. These stronger than expected trends were moderated by lower construction-related cargo to Hawaii as the boom of high-rise condominium developments in Honolulu has begun to ebb, and other real estate projects have yet to advance to the stage of development that translates to meaningful container volume. I feel good about where we are, and I'm encouraged by the strength of our second quarter results. However, looking ahead, we see some areas of uncertainty and are not prepared at this time to raise our outlook for the full year. We continue to expect modest improvement in each of our core trade lanes with the exception of Guam, where we expect further competitive losses due to the launch of a competitor's second ship. As a result, we are affirming our outlook for Matson's 2017 operating income to be lower than it was in 2016 and expect EBITDA to approximate the $288.6 million last year. Slide 4 highlights our financial metrics, which Joel Wine will describe in more detail later. In the second quarter 2017, we earned net income of $24 million, or $0.55 per share, and generated EBITDA of $85.1 million. Year to date 2017, Matson earned net income of $31 million, or $0.72 per share, and generated EBITDA of $137.4 million. Turning to our Hawaii service on slide 5. While the Hawaii economy continued to show modest growth in the second quarter 2017, Matson's container volume declined year-over-year. The early part of the second quarter of 2016 benefited from volume gains when Pasha Hawaii was struggling with service changes and related issue and construction-related cargo was lower as the construction cycle in Oahu transitions from high-rise projects to the master-planned community projects in West Oahu. As a result, we're now expecting our Hawaii volume to be modestly lower than the level achieved in 2016, which also benefited from a 53rd week. In addition, we continue to expect higher than normal operating expenses in 2017 as we've been undertaking the once every five years dry docking of our neighbor island barges. We continue to evaluate our fleet deployment in Hawaii and look for opportunities to improve utilization and lower operating costs while maintaining our leading service. We expect to move between a 10 and 11 ship fleet over the next several months as we navigate through a heavy dry docking schedule, retire older vessels, and progress towards our long-term deployment with the most modern vessels in the trade. Moving on to slide 6 for the latest economic stats and forecast from UHERO or the University of Hawai'i Economic Research Organization. The Hawaii economy continues to perform well with visitor arrivals up, unemployment down, and hotels operating at very high levels of occupancy. While the multiyear ramp-up of construction has eased, UHERO expects enough new activity in the pipeline to maintain employment near current levels for the next several years, generating smaller net gains in job growth next year, followed by a gradual decline on the downside of the building cycle. Building on the neighbor islands, which has lagged well behind Oahu, has begun to show signs of life and is expected to show further expansion, but the pace is expected to remain well below the mid-2000s boom. Turning to slide 7, we wanted to again highlight our Hawaii fleet renewal program. The construction of our four ships remain on budget and on track for scheduled delivery. For your benefit, we have included an updated progress payment schedule by year. Before moving on, I wanted to provide some comments on Philly Shipyard's recent speculative announcement regarding the construction of additional container ships for the Hawaii trade. First, Philly Shipyard has not announced any firm vessel orders beyond the construction of Matson's two vessels. Second, while they recently announced the signing of a LOI, they have not named a counterparty. Third, we believe that adding new or incremental vessel capacity to a market that is well-served by existing capacity of incumbent operators today is uneconomic. As you may know, our primary competitor in Hawaii has announced the selection of a shipyard in Texas to build two new vessels that will address their fleet renewal needs. Fourth, the severe losses experienced over time in Puerto Rico and Transpacific trade lanes provides examples of the detrimental impact that overcapacity can have in this business. Lastly, a new entrant would need to commit substantial infrastructure capital beyond the ships themselves to launch an effective service to Hawaii. Notwithstanding our views, Philly Shipyard has a history of building vessels on a speculative basis, so we cannot dismiss this announcement. Regardless of what happens, I believe Matson will be positioned better in this market than anyone else to maintain our longstanding position as the market leader in Hawaii. Moving on to our China service, Matson's volume in the second quarter of 2017 was 15% higher year over year, primarily due to stronger demand for our expedited service offering and an additional voyage in the second quarter of this year, as we were able to load one of our vessels with eastbound cargo on its return to service from dry docking in China. For the balance of 2017, we continue to expect our proven service to be highly differentiated with a service advantage over the international carriers in the Transpacific. Matson's advantage results from several factors, including our industry-leading transit time, efficient cargo offloading at our dedicated terminal in Long Beach, and superior on-time performance. Longer term, we view the consolidation of international carriers and reformulation of the new alliances in April as potential sources for market improvement longer term in the China trade. Turning to slide 9, as expected, Matson's Guam volume in the second quarter declined year over year due to further competitive losses to APL's U.S. flag container ship service that increased its frequency to weekly in December of 2016. We continue to fight to retain every container of our customer's business and owing to our long history in Guam with strong customer ties and a five-to-eight day service advantage from Oakland and L.A. Long Beach, we expect to retain an outsized share of the market. Our goal continues to be to limit any competitive volume losses. As we expect this to be a highly competitive market situation, we will not be providing any more specific market share comments beyond that goal. Moving now to slide 10. In Alaska, Matson's container volume for the second quarter of 2017 was 1.1% lower year-over-year, primarily the result of continued energy sector-related economic contraction, partly offset by a better seafood harvest and related southbound volume. For the full year 2017, we continue to expect modestly lower volume based on declining northbound freight due to ongoing contraction of Alaska's energy-based economy, partially offset by improved southbound seafood volume. In addition, with the installation of exhaust gas scrubbers on our three diesel vessels serving Alaska now complete, we do not expect to regularly deploy our less efficient steamship reserve vessel in 2017, resulting in lower expected vessel operating and dry dock relief expenses. I would also like to point out that last week, the Anchorage Economic Development Corporation, or AEDC, published its annual 2017 three-year economic outlook. Overall, their outlook is consistent with what we have been hearing from our customers in Alaska, pointing towards a muted economic environment this year and next, with a return to slight growth in 2019 and 2020 as things stabilize. Turning next to slide 11. Our terminal joint venture, SSA Terminals, contributed $6.9 million in the second quarter of 2017 compared to $3 million in the second quarter of 2016. The year-over-year increase was primarily due to improved lift volume. For the full year 2017, we now expect SSA Terminals to make a higher contribution to our ocean transportation operating income than it made in 2016 as lift volume is benefiting from the launch of the new global shipping alliances, as container flows and supply chains are readjusted between West Coast terminals. Last quarter, we announced plans to expand our relationship with SSA Terminals to include Matson's Tacoma terminal, where our Alaska vessels operate, before the end of this year and those plans remain on track. Turning now to logistics on slide 12. The second quarter 2017 benefited from a full quarter of freight forwarding operating results from Span Alaska. Even while facing the challenging economic headwinds, logistics generated stronger operating results and offset some of last quarter's weakness. We are affirming our full year 2017 outlook for logistics operating income to be approximately $20 million. While the inclusion of Span Alaska's freight forwarding business for the full year is expected to be the main driver of the year-over-year increase, we do have other revenue and cost savings initiative underway to help offset the margin pressure in our brokerage business. With that, I will now turn the call over to Joel for a review of our financial performance and our outlook. Joel? Thanks, Matt. I would also like to take this opportunity to welcome Lee to the team and say thank you to Jerome for his many contributions. Since early 2013, Jerome has led our IR efforts at Matson, and I am very excited about his promotion to lead strategy and corporate development for our Matson Logistics unit going forward. As for Lee, he comes to us with over 10 years of public and private equity experience, and prior to that, seven years of investment banking experience, during which I had the pleasure of working directly with him. We are lucky to have Lee on board at Matson. Now on to our results on Slide 13. Ocean transportation operating income increased year-over-year in the second quarter, primarily due to higher average freight rates and container volume in China, favorable timing of fuel surcharge collections, higher contribution from SSA Terminals, and higher freight rates in Hawaii. Partially offsetting these favorable year-over-year comparisons were higher terminal handling expenses, higher vessel dry docking amortization expense, and lower container volume in Hawaii and Guam. The company's SSA Terminals joint venture investment contribution increased by $3.9 million year-over-year due primarily to improved lift volume. Logistics operating income increased by $4.7 million year-over-year, primarily due to the inclusion of Span Alaska's freight forwarding operations. On Slide 14, year-to-date ocean transportation operating income decreased primarily due to higher terminal handling costs, higher vessel dry docking amortization expense, and lower container volume in Hawaii and Guam. Partially offsetting these unfavorable year-over-year comparisons were higher container volume and average freight rates in China and higher contribution from SSA Terminals. Logistics operating income increased $5 million, primarily due to the inclusion of the acquired Span Alaska freight forwarding business and higher intermodal volume, partially offset by lower intermodal yield. Turning to Slide 15 for a summary of our balance sheet, you will note that our total debt at the end of the quarter was $753.9 million and our net debt to LTM EBITDA ratio was 2.5 times. As previously announced on June 29th, we entered into amendments to our existing unsecured revolving credit facility and long-term private note agreements. Our unsecured revolver was increased from $400 million to $650 million and extended for a new five-year term, maturing in June of 2022. We also made a number of amendments to our existing note purchase agreements, including modifications to certain definitions and covenants, where in particular, the consolidated leverage ratio covenant was amended to provide for additional flexibility during Matson's new vessel construction period. Slide 16 shows a summary of the manner in which we allocate our cash flow generation. For the last 12 months ended June 30, 2017, we generated cash flow from operations of $142.4 million and undertook net borrowings of $289.9 million, from which we used $195 million to close our acquisition of Span Alaska, $69.1 million on maintenance CapEx, and $127 million toward deposits and progress payments on the new vessels. Lastly, we also returned nearly $40 million to shareholders via dividends and share repurchases. As a reminder, our LTM maintenance CapEx has been higher than our normalized range of $40 million-$50 million per year. This was as expected and is primarily due to the completion of the scrubber installation program on our Alaska vessels and other capital projects related to what has been a relatively heavy dry docking last 12 months for us. Finally, on June 29th, our board announced the fifth consecutive annual increase to Matson's quarterly dividend, underscoring their confidence in the long-term prospects for our business and commitment to rewarding shareholders through dividends. While we expect leverage to increase as our Hawaii fleet renewal program progresses, our 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. With that, let me now turn to slide 17 to discuss our full-year outlook and provide our thoughts on the third quarter of 2017. As Matt indicated, we feel good about our year-to-date results, especially the strength shown in the second quarter, particularly in our SSA Terminals business and the good performance and resiliency shown in both our Alaska and China businesses, despite underlying weak market conditions. Nevertheless, despite these strengths, there do remain other uncertainties, such that as a result, we are reaffirming our full-year outlook at the previously stated levels in our last earnings call. To start with, we continue to expect full-year 2017 consolidated EBITDA to approximate the $288.6 million achieved in 2016. Based on our increased capital and dry docking spending, we expect depreciation and amortization to increase by about $15 million this year to $150 million, inclusive of approximately $50 million of dry docking amortization, which would lead to 2017 consolidated operating income of approximately $140 million. Of that total, as Matt mentioned earlier, we continue to expect Matson Logistics operating income to be approximately $20 million. From those items, it follows that we expect ocean transportation operating income for 2017 to be lower than the $141.3 million achieved in 2016. We expect interest expense for the full year 2017 to be approximately $25 million, and our effective tax rate for the full year to be approximately 39%. In the third quarter 2017, we expect ocean transportation operating income to be moderately higher than the $42.7 million achieved in the third quarter 2016, and we expect Matson Logistics operating income in the third quarter 2017 to approximately double the $3.5 million achieved in the third quarter 2016. I'll now turn the call back over to Matt for his final remarks. Thanks, Joel. Looking ahead, I remain confident in the long-term prospects and strong cash flow generation of Matson's core businesses, which will provide the foundation of our fleet renewal investments and continued value creation for our shareholders. With that, I will turn the call back to the operator and ask for your questions. Thanks. Ladies and gentlemen, if you have a question at this time, please press star then one on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Our first question comes from Jack Atkins from Stephens. Your line is now open. Hey, guys. Good afternoon. Thanks for the time, and Jerome, congratulations on your new role. Thanks, Jack. Matt, if I could just start with a couple questions about Hawaii. You referenced in the press release and also in your prepared comments around some slowing construction trends in Hawaii as the high rise boom there sort of ebbs a bit. Could you refresh us on what your LTM or maybe if it's more helpful this way, 2016 volumes which were tied to construction, what sort of levels were they and how should we think about future growth within that particular customer vertical? Do you think you can sort of hang on to the volume levels that you have now, or do you anticipate those maybe ebbing a bit as we look out over the next couple of years? Yeah, Jack, I'll take that and then I'll toss it over to Joel for some of the specific figures. Our feeling, it's an interesting environment. If we see the Hawaii economy continue to provide well, and we talked about unemployment, state product, visitor arrivals. We can add the banks are reporting record earnings and loan growth and deposit growth. So overall, the economy feels good here, and I think we eventually will see an ebbing. I think where we are now, though, is that a lot of that high-rise construction is in its final stages. We are excited about the long-term prospects in West Oahu, single-family homes and planned development activity. The light rail system is still underway. There's a healthy amount of military construction. There's other infrastructure work that continues to need to be done to the sewer systems and other things. So we feel okay about the economy and its prospects. It's just there are periods where we're, at least at this point, seeing a flattening out of that freight that is related to containerized volumes. So again, we're feeling okay. We're seeing it's a little flattened out. It's likely to be somewhat flat-ish over the next few years in containerized volumes, but consistent with a relatively healthy economy. So it's going to be relatively slow growth over these next few years, but still growing, is kind of the way we're thinking about it at this point. Then on the specific volumes? Yeah. Jack, on the volumes, to put it in perspective, we don't report the exact volumes by subcategory, but we have commented that it's been a single-digit number, a high single-digit number over the last couple of years. To put that in perspective, the construction volumes at the previous peak, if you go back to the 2000s, was up into the teens, and then that came down to almost zero as all the construction projects ran off in 2009, 2010, and 2011, and then built back up to a mid to high single-digit type of number by the time you roll into 2014, 2015, 2016. That's where we believe it'll kind of stabilize, and we'll go through ebbs and flows as certain markets transition, as Matt's talked about. But that puts an order of magnitude on it for you. Okay. That's helpful, Joel. So it sounds like volumes are certainly higher than they were during the recession, but nowhere near where they peaked out at in the mid-2000s. That's helpful color. Matt, I guess for my second question, you referenced the Philly Shipyard announcements, and I don't want to get too into that because obviously there's some sensitivity around that specific topic. But I would like for you to maybe expand for a minute around some of the infrastructure issues that you referenced, which may make having a third competitor come into Hawaii, more challenging. If you could just expand on that for a moment, because I think that's maybe something that folks don't understand. It's one thing to build a vessel, but it's another thing to be able to unload cargo, for example. If you could just comment on that, I think that'd be helpful for folks. Sure. There is adequate berth space in Honolulu Harbor. What there lacks are crane rails and gantry cranes that would allow for the efficient loading and unloading of these large 3,600 TEU vessels. There has been a harbor modernization project here in the state, in Hawaii, and it is focused on building a brand new terminal across from Sand Island, where Matson's operations is, that Pasha will be moving into, and Matson will be moving in. Right now, Pasha is just next door on Sand Island. They will be moving to a new site, and Matson will get the full reach of the terminal. Matson currently is at three different locations in the harbor complex. Having Pasha move across to a new terminal would allow Matson to be onto a single terminal, allow us certain efficiencies, and it is long overdue. There are no other places in the state that have rail-mounted gantry cranes that would allow for the efficient unloading. So an operator here would have to use mobile harbor cranes, and with these very large ships, it is not doable, but it is highly inefficient. It is just another obstacle that any operator would have to deal with. Okay. That is helpful, Matt. Last question from me, and I will turn it over. I know that you all reiterated your 2017 outlook for the logistics business, but it just seems like that segment has been outperforming over the last several quarters since the Span acquisition. Just curious, is Span outperforming your expectations relative to when you made that initial purchase? If you could maybe comment around what is happening in the core highway and intermodal logistics business, which I know has been relatively challenging, but it seems like it is holding up okay. Yeah, I cannot comment, Jack. I would say, as you know, when we initially announced the acquisition of Span Alaska, we were well aware of the slowing economy in the state of Alaska. Our own internal expectations and the value in which we applied to a multiple of earnings was also lower, understanding that we would be going into a period of lower volumes in the state. I would say that we have done a little better than our modest expectations at the time we did the acquisition. So that is positive. The other thing I would note is, like Matson's Alaska operations, Span Alaska is more focused on the Anchorage market rather than the North Slope and some other sectors in the state that have been much more hard hit. Matson's ocean volumes and Span Alaska's, each of which has focused, again, on the Anchorage economy rather than the North Slope, has allowed it to suffer a bit less than other operators and a little bit less than our own expectation there. With regard to other lines of business, Jack, we have seen some of the same margin pressures that other intermodal operators have reported. But we continue to perform well in each of our lines of business, rail and truck brokerage, the warehousing businesses. Each of our lines of business is doing well. Again, we are acknowledging that we are seeing some of the same margin weakness that others are seeing on the intermodal side, especially. But overall, we are feeling good about and continuing to invest in the various lines in our business outside of the Span Alaska business. We are feeling okay about logistics, Jack. Okay, great. Well, Matt, thanks again for the time, and congratulations on a nice quarter. Thanks, Jack. Our next question comes from Ben Nolan from Stifel. Your line is now open. Yeah, thanks. My first question relates to SSAT. It was really quite a quarter on that front, it seems like. You alluded to the changing of alliances and that sort of thing that is being helpful. Can you maybe help me, and from a longer-term perspective, do you think this is a bit of a new normal? Or was there something in the quarter that, be it seasonality, whatever, that made it exceptionally good? Yeah. Ben, this is Matt. I think we're feeling good about our position. I think there was a fair bit, as we mentioned in our prepared comments, of moving around, either from acquisitions or from the reformation of alliances and the use of individual terminals, and many shipping lines have their own terminals on the West Coast. But as it all settled out, it looked like SSAT, although there were some negatives and some positives at terminal by terminal on the West Coast, overall, we've ended up with more freight volume. The SSAT business, terminal operating businesses, are highly sensitive, as you know, to volume because it's largely a fixed cost business, and if you can put more volume over it provides a tremendous leverage from an operating perspective. We see this as the new normal. We'll see if there are other acquisitions and other things that happen, but based on the recent reformulation of these alliances, and they're all settled in, we expect this level of volume to continue. Okay. Well, that's good news. Then as it relates to specifically the Hawaii trade, and I know how the whole new competitor thing plays out is still very much up in the air, but did notice that I think one of the Asian liner services announced that they were expanding on their Asia trade directly to Hawaii. How big of a risk is that to your overall business? Or is it just on the margin and probably not very impactful? I would say it's closer to the second of your two explanations, but I'll provide a little context. Matson carries a small amount of freight from Asia on our CLX service that it'll be loaded in Shanghai, Ningbo, that would go all the way around to L.A., Long Beach, stay on our vessel there, and then get discharged in Hawaii. Again, because of the relatively longer transit time, we do carry some cargo, but not a lot. The primary carrier has NYK, a Japanese line. APL, who we compete with in Guam, has announced its intention to start a service from Asia to Hawaii in competition with NYK, and which NYK then announced that it was increasing its frequency from every two weeks to every week. That segment, that is the Asia to Hawaii segment, totally unrelated to our West Coast to Hawaii segment, looks like it will get more competitive. Matson, as I said, carries a very small amount of that cargo. Some of our cargo originates from neighbor islands for which the other carriers don't have connecting services. So while we might see some pressure on the margin, we don't expect it to be very significant. Okay. Then lastly for me, I know this isn't always a small part of the business, but it seems like once or twice a year, something is added to the South Pacific side, most recently with the Marshall Islands U.S. flag business. I'm curious how deep into your footprint you are with respect to that part of the world now. Is there still much more wood to be chopped, or are you pretty close to where you think that ultimately you could be? As you know, we've been interested in trying to link our network in Honolulu and in Guam to increase our presence in the regions around it. I would say that we were excited about increasing our frequency and service to the Samoas and Fiji with our South Pacific Express, which again hubs off of our terminal in Honolulu. We do think there's more there. These are small markets, but I think we can compete effectively and make money as bolt-ons into these adjacencies. I think there is more for us to do. We'll do this over time. Again, I would just remind investors, these are relatively small markets, so there is earnings potential. But I think most understood or should be viewed within the context of a bolt-on that provides relatively modest enhancements. But again, it leverages off our network and allows us to grow organically. It is definitely desirable from our perspective. Right. Okay. That does it for my questions. Thanks a lot. Thank you, Ben. Our next question comes from Steve O'Hara from Sidoti & Company. Your line is now open. Hello? Hi, Steve. Yes. Hi, Steve. Sorry about that. How you doing? A question on the areas. It sounded like you were unsure about in terms relative to your guidance and kind of sticking with the current guidance. Are we talking about Guam and maybe Alaska and China rates, or was there something else in there that, or maybe one of those wasn't it? Well, it's a combination of things. I think as we or Joel mentioned in the call, we continue to do better than our expectation in China, and our service remains highly attractive and highly differentiated. That was an area of strength. SSA Terminals was an area of strength. We've had a bit of concerns about the growth in the Hawaii market, at least where it is at this point in time. That's a question for us. As you pointed out, Guam remains a dynamic situation and highly competitive, so a little hard to predict on those areas. We have some things that we think are strong and will continue to be strong. Alaska, we've done well in a weaker economy than we expected. We've got some things that are a little on the positive side, a couple things that we're watching closely, which has provided us a balance of not wanting at this time to change our full year outlook despite a second quarter pretty good performance. Okay. Thank you. On the Philly Shipyard news, I guess if they go ahead and build them on spec as I guess you said they've done in the past, what ends up happening with those ships? Does somebody decide to take them and use them anyway, even if they weren't maybe planning on entering the market? It doesn't seem too logical, but just wondering what your feeling might be there. Could these ships be used in other Jones Act trades where if somebody doesn't decide to use them for Hawaii, they could be used elsewhere? Yeah. It's really unclear where the pathway forward for these ships are and their operator, whether they get built at all. If they get built, where do they get deployed? Clearly, the shipyard has focused on Hawaii, so if they're a stakeholder in it, then presumably that's where they'd go. If you look at the other primary Jones Act trades, Puerto Rico, they have, as I understand it, at least four new container vessels and a barge operator there, so that market is relatively well-covered. Alaska, as we know, is well covered with the existing incumbents, as is Hawaii. Exactly, while they've announced their intention to look at this as a business, it remains unclear given that the market is adequately tonnaged with the existing or incumbent competitors. It's a real big question mark for us, Stephen, difficult to speculate on exactly how this all shakes out. Okay. Does that news change your plans on retirements, or has it changed your plans on retirements or keeping vessels on longer than maybe you'd expected? Or is that kind of a hurdle you intend to cross later on? Yeah. We don't intend to have any changes. Again, with our four new ships, we're going to be able to retire seven of our near-end-of-life steamships and have a fully modern, compliant fleet. We're going to continue on. Our plans are not changed at all by this speculative order. Okay. All right. Thank you very much. Okay, Steve. Thanks. Our next question comes from Michael Webber from Wells Fargo. Your line is now open. Hey, good morning, guys. How are you? Good. Hi, Mike. Good, Mike. Hey, good. Matt, I wanted to follow up with a couple questions on Philly. In your prepared remarks, you come to a worst-case scenario, which I would have to imagine the worst-case scenario to Puerto Rico seems relatively appropriate. But you also mentioned that regardless, you would be positioned as the strongest player, which seems like a pretty rational statement. I guess my question is, do you view being the strongest player in a market that comes to resemble Puerto Rico as being an acceptable outcome to the current situation, being that you guys have a cost of capital advantage over everyone in the space? Would that be an acceptable outcome in your mind? Well, I don't know if I'd use acceptable or not acceptable. I would say if it happens, we will be prepared to react to it. Of course, it's unwelcome and unwise. But owing to our scale efficiencies and our other sources of income and the longstanding position we have in this market, we expect to be here and remain here. Exactly how this dynamic happens, we do note that another more capacity entering the market is something which will likely not produce an acceptable economic return to the person coming into the trade. Certainly, we would also expect to be negatively impacted, but beyond that, it's hard to say exactly how it shakes out. Right. And you mentioned, this is not a new trade for them, right? This has happened once or twice before, most recently with some tankers. So I'm just curious, is there a point in time or a benchmark that you guys look at which point you get more aggressive and/or creative around either taking those ships out or trying to find some sort of solution to keep that Puerto Rico scenario from happening? Are we there yet? Is there a milestone that you look at and say, "Okay, now we've really got to get serious about dealing with this? What we've said is what we know. It's really hard to speculate beyond that, Mike. Okay. Fair enough. Joel, just one more from me. You went through the details on bumping the revolver. I think that got announced, I think, in June. Can you remind us what your firepower is right now beyond the capital that's required to deliver the existing order book? Well, just to remind you on the revolver, we had a 400 revolver. It is up to 650. If you look at our available borrowings under that, it would be in the magnitude of $250 million of available capacity if you look at where our covenants are struck, and we have got some flexibility to go above that, but we are at the low end of the covenants are. We have got firepower there. We have got ready access to additional capital should we seek to do that or need to do that in the next two years. In addition, Mike, we have got the cash flow coming from the business, the cash flow from operations less the maintenance CapEx over the next two years as well. Through all those items, we will have plenty of capital to fund the remaining payments on the vessels. But it will be a combination of those different factors, not just from the revolver availability. Right. No, I am just thinking about excess capital to deploy maybe elsewhere beyond what you have already got allocated for the vessels. Yeah. Let me just say, we do not feel capital constrained. Right. As investment opportunities come up, we believe we will be able to pursue those. We are very mindful of where that leverage ratio is going. It is important for us to maintain investment-grade statistics, and that was reflected in the amendments that we worked on with our lending group. We are very mindful of where that is at. But in general, we do not feel capital constrained to pursue opportunities as they come our way. Fair enough. Actually, one more for me before I turn it over, and Matt, this is just a quick detail question. The new orders at Philly, I think they are being classified as Aloha Class-like. Do you guys actually have IP at Philly with the Aloha Class? Would those actually be Aloha Class vessels that are getting built, or are they just built to similar specs? We don't have IP. In today's world, a lot of these vessel sizings are electronic. There are some proprietary features of the vessels, which they are not able to replicate, which are unique to the Hawaii trade, without going into specifics about what those are. The vessel is a generally generic vessel. I mean, I'd say generic, it's dual fuel. It's high spec and high capability. I don't mean to suggest otherwise, but it doesn't have a ton of IP in it that they can't replicate using their Korean technical partners. Okay, that's helpful. All right, thanks for the time, guys. I appreciate it. Okay. Thanks. Our next question comes from Kevin Sterling from Seaport Global. Your line is now open. Hey, good afternoon, everybody. This is actually Will on for Kevin. Just wanted to really quickly double-check some numbers I think I heard. I was trying to scribble them all down. Operating income forecast for 2017 of $140 million, with $20 million of that going to Matson Logistics. Correct. Is that correct? And operating income for the ocean in Q3, moderately higher year-over-year. Correct. That kind of implies Q4 we are going to be down from the level seen in Q4 last year. Can you kind of talk about the Q4 dynamics? Is that a larger top-line step down, more expenses? What is kind of going on in Q4 there? Will, this is Matt. I will comment, and then I will ask Joel to comment. One of the items year-over-year was that with the Hanjin Shipping bankruptcy, we saw very high China demand post Hanjin Shipping bankruptcy as there was a lot of stranded freight in the market. As you know, the fourth quarter, a lot of the seasonal holiday shipments are moving in the third quarter and early in the fourth quarter, but are mostly shipped for the quarter in order to make the holiday sales patterns. We do not expect quite as strong a fourth quarter in our China service as we did last year. Then I will turn it over to Joel to comment on other factors that might be noteworthy. Yeah, that's a factor. The other one is, remember we had a 53rd week. This year with the 52 week, there's a little bit of impact from that as well. Okay. The last factor is in Guam. In Guam, you've got a whole year. APL deployed their second vessel to have a weekly arrival towards the end of December of last year. We have a whole another year of APL in Guam with a weekly arrival versus last year's fourth quarter, it was only every other week, and with the big time transit differential. That's a year-over-year impact when you look at the fourth quarter as well. All right. Well, thanks. I just wanted to clear that up. That's all from me. Okay. Thanks, Will. At this time, I am showing no further questions. Okay. Operator, thank you. Thanks to everyone for listening today. We look forward to catching up with everyone on our third quarter call. Aloha. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may all disconnect. Everyone, have a great day.