Earnings Call: Q4 2015

Feb 23, 2016

Good day, ladies and gentlemen, and welcome to Matson's fourth quarter 2015 financial results conference call. At this time, all participant lines are in a listen-only mode to reduce background noise, but later, we will be conducting a question and answer session. Instructions will follow at that time. If anyone should require operator assistance during the program today, you may dial star then zero at any time in order to speak with an operator. As a reminder, today's conference call is being recorded. I would now like to introduce your first speaker for today, Jerome Holland, Director of Investor Relations. You have the floor, sir. Thanks, Andrew. Aloha, and welcome to our fourth quarter 2015 earnings conference call. Matt Cox, President and Chief Executive Officer, and Joel Wine, Senior Vice President and Chief Financial Officer, are joining the call today. 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 their 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 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 7 to 15 of our 2014 Form 10-K filed on February 27, 2015, and in our subsequent filings with the SEC. Please also note that the date of this conference call is February 23, 2016, 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. Also, references made to certain non-GAAP numbers in this presentation, a reconciliation to GAAP numbers and description of calculation methodologies is provided in the addendum. With that, I'll turn the call over to Matt. Thanks, Jerome, and thanks to those on the call. 2015 was an exceptional year for Matson, strategically and financially. We substantially grew our ocean transportation platform with the opening of our Alaska trade. We maintained our leadership position in Hawaii, and we strengthened our standing as the service leader from China. These actions led to 2015 financial results that significantly outpaced the strong results posted in 2014. In 2015, our businesses earned net income of $103 million, or $2.34 per diluted share, generated operating cash flow of $245.3 million, and free cash flow per share of $4.03. In 2016, we expect to continue to deliver strong operating results, although modestly lower than the record level achieved in 2015. Matson's core businesses are well-positioned to generate significant cash flow to pay down debt, fund growth initiatives, including our fleet renewal program, and to return capital to shareholders via both dividends and share repurchases. The integration of our Alaska operations continue to progress well and will remain a focus this year. Our investment in Alaska is supported by attractive cash flow and earnings generation and is achieving our expectations. Slide 4 shows our strong financial metrics for the fourth quarter of 2015 and 2014. Similar to last quarter, we highlighted the impact of the acquisition-related SG&A in the stacked bar graph data with red dotted lines. In the fourth quarter of 2015, we generated EBITDA of $76.4 million and diluted earnings per share of $0.60. You'll recall that the fourth quarter of 2014 benefited from exceptional demand for our expedited China service during the U.S. West Coast port disruptions and from the sharp decline in bunker prices, as well as fuel surcharges collections outpaced fuel expenditures. On slide 5, our exceptional financial metric for the full year are shown. We achieved record-high financial results in 2015, generating $302.1 million in EBITDA, up 31.3% year over year, earned $2.34 per diluted share, up 71% year over year, which led to return on invested capital of 14.1%. Turning to our Hawaii service on slide 6, the fourth quarter of 2015 turns out largely as expected, with the trade experiencing modest westbound market growth and Matson achieving meaningful volume gains as we had 11 ships deployed for most of the quarter in continued response to Pasha's service reconfiguration. Looking ahead, we expect the multi-year recovery in Hawaii to continue, and for the full year 2016, we expect our Hawaii container volume to be moderately higher than it was in 2015, with nearly all of that relative increase coming in the first half of 2016. With Pasha having largely resolved their vessel and service issues, our volume growth in the second half of 2016 is expected to be more challenged. Slide 7 highlights some of the key metrics that support our moderate volume growth expectations for the Hawaii economy, as forecast by the University of Hawaiʻi Economic Research Organization, or UHERO. As we've mentioned before, much of the incremental market growth we expect to see in Hawaii will come from the continued progress of the construction cycle. Residential building permitting and construction jobs picked up considerably in 2015, and growth is forecast to continue through both 2016 and 2017. The bulk of current construction activity is focused on the advancement of several high-rise projects in urban Honolulu and on Honolulu's $5.2 billion rail project. However, we are also beginning to see increased activity on the neighbor islands. In addition, a long-planned master plan project for nearly 12,000 homes in West Oahu, called Ho'opili, looks to be moving ahead later this year after the Hawaii State Supreme Court ruled in favor of the developer in late December. Turning to slide 8. You'll recall that in November 2013, we contracted with Philly Shipyard to construct two new 3,600 TEU container ships, which we call the Aloha Class, for a total of $418 million. This considerable investment is financially compelling and continues our tradition of introducing the most advanced container ships to our trades. Construction is now underway with the first seal cut on October 1, 2015, and delivery is now expected to be the third quarter of 2018 and the first quarter of 2019. We expect these ships will have among the lowest operating cost per TEU of any ship in the Jones Act trades and will give us the ability to deploy fewer vessels at much higher volumes than in the past. In addition, lower fuel consumption, lower crew costs, and reduced maintenance and repair expenses will be important drivers to produce meaningful savings. While these first two Aloha Class vessels will be used as replacement capacity for our oldest active vessels in Hawaii and allow us to operate a 100% diesel fleet and be fully compliant with the emission regulations, which will become effective in 2020, our oldest diesel ships will be approaching 40 years old at that time. We consider 40 years old a threshold for replacement. With two new additional vessels, Matson would have met its fleet renewal obligations in Hawaii until the late 2020s. We are currently in the process of evaluating if and when to make additional vessel order for Hawaii. Moving to the next slide. Despite freight rates for international ocean container carriers are reaching historic lows, Matson's China service achieved average freight rates that approximated the strong rates we achieved in the fourth quarter of 2014. As expected, our China volume in the fourth quarter of 2015 was moderately lower due to one fewer sailing in the period, the absence of the extraordinarily high demand experienced in the fourth quarter of 2014 during the U.S. West Coast labor disruptions, and underlying market softness. Looking ahead, we expect international vessel overcapacity to persist, with vessel deliveries continuing to outpace demand growth and putting sustained pressure on international ocean carrier freight rates. For the full year 2016, we expect our expedited service to continue to realize a sizable premium and maintain high vessel utilization, but at an average freight rates that are significantly lower than the exceptional rates we achieved in 2015. Turning now to slide 10. Economic activity in Guam was stable in the fourth quarter, and we realized modest volume growth as the expected launch of APL's biweekly U.S. flag container ship service to Guam was delayed. APL did commence its service to Guam in January of this year, and despite their service being less frequent and slower, we do expect to experience some competitive volume losses in 2016. Turning now to our Alaska service on slide 11. Consistent with expectations on our last earnings call, fourth quarter 2015 volume came in lower than Horizon's Alaska volume in the fourth quarter of 2014. The year-over-year decline was primarily due to one fewer sailing in 2015, muted economic activity associated with the decline in energy prices, and Matson's decision to discontinue Horizon's practice of pursuing low-rated competitors' barge volume during the slack season. In 2016, we expect the Alaska economy to face economic headwinds, largely due to the sustained low oil price environment. Sustained low oil price impact Alaska's economy directly through cuts to oil industry investment and employment, and indirectly through state government budget deficits that lead to spending cuts. As a result, the state is expected to lose approximately 2,500 jobs, or seven-tenths of 1%, in 2016, and the population of Anchorage is expected to decline by a similar seven-tenths of 1%. These losses are expected to be concentrated in the oil and gas industry and state government, as well as in the construction industry, which will be hit hardest by reduced investment from oil companies and capital budgets. From a container volume perspective, the Alaska market has been relatively stable over the past 10-15 years across a wide range of commodity prices, with the container volume we carry largely skewed towards customers like grocery stores, big box stores, and other retailers. While we do expect to feel some impact of the underlying macro challenges in Alaska, we expect our 2016 container volume to be only modestly lower than the 67,300 containers carried by Horizon and Matson in 2015. Moving to slide 12, I am pleased to report that our integration of the Alaska operations is progressing better than initially expected. Early this year, we went live with a full systems conversion, successfully onboarding the Alaska operations onto Matson's IT platforms. You will recall that in the second half of 2015, we made several investments to improve our service and capabilities in Alaska, including a 65-ton gantry crane that replaced one half its size in Kodiak Terminal, new ground equipment, and a fleet of new dry and insulated containers. We also completed the installation of an exhaust gas scrubber on the first of three Alaska vessels, with the other two vessels to undergo similar installations by the end of 2016. We now expect our integration to be substantially complete by the end of the third quarter of 2016, which is well ahead of our initial timeframe. As a result, 2016 incremental SG&A expenses related to the Alaska acquisition are not expected to materially exceed our annual incremental run rate of $15 million. Moving to slide 13. Our terminal joint venture, SSA Terminals, contributed $3.4 million in the fourth quarter of 2015, compared to $1.2 million in the fourth quarter 2014. This year-over-year increase primarily reflects improved lift volume. In January of this year, Ports America, second-largest terminal operator in Oakland, announced that it would be ceasing operations at its Outer Harbor Terminal in Oakland. According to the Port of Oakland, the Outer Harbor Terminal handled about 383,000 container lifts this per year, and the Port expects approximately 90% of that volume will transition to SSA Terminals' OICT terminal in Oakland by the end of March. While this incremental lift volume at Oakland will clearly benefit SSA Terminals' 2016 results, we do not expect it to outweigh the year-over-year app related to the clearing of the international cargo backlog after the resolution of the protracted labor disruptions on the U.S. West Coast in 2015. As a result, for the full year 2016, we expect our SSA Terminals joint venture to contribute healthy profits to our ocean transportation operating income, albeit at a modestly lower level than the $16.5 million contributed in 2015. Slide 14 highlights the results at logistics, where volume declines in logistics business extended into the fourth quarter of 2015, and we delivered an operating income margin of 2.5%. As we look out into 2016, we expect volume improvements, together with continued expense control, should result in modestly higher earnings in 2016. I will now turn the call over to Joel for a review of our financial performance and consolidated outlook. Thanks, Matt. As shown on slide 15, ocean transportation operating income for the quarter decreased to $2.7 million on a year-over-year basis. The decrease was primarily due to lower China volume, additional Horizon acquisition related SG&A, higher vessel operating expenses related to the deployment of additional vessels in the Hawaii trade, higher terminal handling expenses, and the timing of fuel surcharge collections. Partially offsetting these unfavorable items were container volume and yield improvements in Hawaii, improved results at SSA Terminals, and the inclusion of operating results for the Alaska trade. As a reminder, we had a very strong fourth quarter in 2014, with our results benefiting from exceptional demand for our China service during the U.S. West Coast labor disruptions and from the sharp decline in bunker fuel prices, which had a positive timing impact on our results. In the stacked bar graph on the left, you can see that excluding the largely non-recurring incremental acquisition SG&A, ocean transportation operating income would have been $49.7 million, which represents a year-over-year increase of 7.3%. On the right-hand side of the page, logistics operating income for the quarter decreased by $0.8 million on a year-over-year basis, primarily due to lower highway volume and yield, partially offset by improved intermodal yield. The next slide shows our full-year results. Ocean transportation operating income increased by $56.7 million year over year, primarily due to higher freight rates in China, container volume and yield improvements in Hawaii, the inclusion of operating results for the Alaska trade, and improved results at SSA Terminals. Partially offsetting these favorable operating income items were additional SG&A expenses largely related to the Horizon acquisition, higher vessel operating expenses related to the deployment of additional vessels in the Hawaii trade, higher terminal handling expenses, lower China container volume, and costs related to the company's molasses settlement with the state of Hawaii. Absent the acquisition related incremental SG&A and the molasses settlement costs, ocean transportation operating income for 2015 would have grown by 76% to $230.7 million. Logistics posted operating income results of $8.5 million in 2015 compared to $8.9 million in 2014. The decrease was primarily due to lower intermodal and highway volume, partially offset by warehouse operating improvements and improved yield. Turning to slide 17, our balance sheet continues to be strong with total year-end debt of $429.9 million and a net debt to EBITDA ratio of only 1.3 times. You will recall that on October 1, we closed a $75 million private placement of 30-year senior unsecured notes bearing interest at 3.92%, using the proceeds to pay down our revolver. Slide 18 shows a summary of our cash sources and uses in 2015. The key takeaway from this slide is that our net borrowings for the year were just over $54 million, despite the $495 million of total cash needed to close the Horizon acquisition, while also funding $103.5 million of CapEx, dividends, and share repurchases over the last 12 months. This low level of borrowed funds is a testament to the strength of our internally generated cash flow from operations. Moving on to slide 19. In November, we announced the authorization of a share repurchase program for up to 3 million common shares over the next three years, representing about 7% of our current shares outstanding. As of yesterday, February 22, we have repurchased a total of 460,500 shares of common stock at an average price of $40.90 per share. We continue to view share repurchases as an important tool to use towards capital efficiency, and we would expect our repurchases to occur at a relatively steady, measured pace. As we have said before, our focus remains on cash flow generation and creating long-term shareholder value, and this share repurchase program reinforces our confidence in Matson's free cash flow generation to provide for our capital investment needs and growth opportunities, while also returning capital to shareholders via both dividends and share repurchases. On the next two slides, I would like to discuss our capital spending and vessel drydocking requirements for 2016 in greater depth. First, on slide 20, you will note that in the previous five years, Matson's annual maintenance CapEx had a low of $27 million, a high of $47 million, and an average of $37 million per year. As a point of clarification, to us, maintenance CapEx means all capital expenditures except vessel new builds and M&A-related transactions. This five-year period was in line with our previous outlook range of approximately $35 million to $40 million of annual maintenance CapEx. After we closed the Horizon acquisition, we commented that we expect incremental maintenance CapEx in Alaska of approximately $8 million per year. Therefore, we increased our outlook on total company annual maintenance CapEx to a range of approximately $40 million to $50 million. However, for 2016, we expect higher than normal maintenance CapEx of approximately $65 million, largely due to the completion of the scrubber installation program on our Alaska vessels and other capital projects related to what will be a relatively heavy drydocking year for us. I will have more to say on that in a minute. Also of note, in 2016, we expect to make payments of approximately $67 million to the shipyard for our two new Aloha Class vessels under construction. Turning next to vessel drydocking on slide 21. Here, we have shown the last five years of drydocking expenditures and amortization. You will note that in 2011 and 2012, we had relatively high levels of drydock expenditures on our Hawaii fleet. Given that our vessels in our Hawaii fleet require drydocking every five years, we again expect 2016 and 2017 to be busy drydocking years. In addition, the vessels we acquired from Horizon added to our ongoing drydocking requirements. Unlike Matson's Hawaii fleet, our active vessels in Alaska do not benefit from inclusion in the HUILE program, so those vessels require drydocking roughly every 2.5 years. This year, when they are out of service for their scrubber installations, both the Tacoma and the Anchorage will also undergo their upcoming drydocking work. Also, due to the significant increases in Hawaii volumes we experienced in the second half of 2015, we decided to drydock two of the inactive vessels acquired from Horizon Lines, which were the Producer and the Navigator, in order to ensure those two vessels would be in class and available for deployment as reserve vessels anywhere in our fleet if needed. Given all of that, for 2016, we expect drydocking expenditures to total approximately $60 million. Based on this outlook for capital expenditures and drydocking, we expect total depreciation and amortization, including drydocking amortization for 2017, to increase approximately $27 million to $133 million compared to $105.8 million in 2015. Now let me turn to slide 22 to provide the outlook for the full year and first quarter of 2016. We are providing our outlook relative to the prior year's reported operating income. For ocean transportation, operating income for the full year 2016 is expected to be modestly lower than the $187.8 million achieved in 2015. In the first quarter 2016, operating income is expected to be approximately 25% lower than the $43.9 million achieved in the first quarter 2015. For the full year 2016, in terms of headwinds, we expect to experience significantly lower average freight rates in China, increased depreciation and amortization expense of approximately $27 million, which I just mentioned in detail on the previous slide. Some competitive losses in Guam and a modestly lower contribution from SSA Terminals. However, during the upcoming year, we do expect to benefit from moderately higher Hawaii container volume, the inclusion of operating results from Alaska for the full year, and the absence of the $42.9 million of acquisition-related incremental SG&A and molasses settlement costs, such that our overall ocean transportation operating income is expected to only be modestly lower than the $187.8 million recorded in 2015. For logistics, we expect operating income for full year 2016 to modestly exceed the 2015 level of $8.5 million, driven by volume growth and continued expense control. Regarding items below the operating income line, we expect interest expense for the full year 2016 to be approximately $19 million and our effective tax rate for the full year 2016 to be approximately 39%. With that, I'll turn the call back over to Matt for closing remarks. Thanks, Joel. 2015 was an exceptional year for Matson. Looking ahead, we are encouraged by the strength of our core Hawaii operations, where we expect to benefit from continued market growth and a strong market position. In Alaska, while low energy prices are creating near-term economic headwinds, I am pleased with our integration progress, and I feel like we are hitting our marks as we move towards our targeted $70 million of EBITDA run rate within a year and a half of closing. In China, we have lapped very strong results achieved in late 2014 and most of 2015. While we will remain very pleased with the overall contribution of the service, we will have some tougher year-over-year comparisons. In Guam, while the U.S. Marines relocation provides a longer-term positive for container demand, we do expect some volume losses from the competitor that entered the trade in January 2016. Overall, I continue to be very confident in the strong cash flow generated by Matson's core businesses that, combined with our balance sheet, will provide ample capacity to fund our fleet renewal program, pay down our debt, consider growth investments while continuing to return capital to shareholders. With that, I will turn the call back to the operator and ask for your questions. Ladies and gentlemen, if you have a question for the speakers at this time, you may dial star then the number one key on your keypad. That is star, then one. If your question has been answered or if you wish to remove yourself from the queue, you may press the pound key. Our first question comes from the line of Kevin Sterling from BB&T Capital Markets. Your line is open. Thank you. Good afternoon, gentlemen. Hi, Kevin. Hi, Kevin. Matt and Joel, in Hawaii, it looks like you expect higher volumes in the first half of 2016, but growth, I think, to be challenged in the second half of 2016. What are some of the assumptions behind this? Is it mainly Pasha coming back online in the back half of 2016 that might impact your volumes? How should we think about that? Yeah, I think you're on the right track there, Kevin. I think from our perspective, we closed on the acquisition at the end of May of 2015, and immediately after early June, we did see some significant volume shifts as they had some difficulties with their startup and transition and had some vessel problems that saw a relatively large amount of cargo shift. So what we see up until the end of May is sort of the normal growth pattern. Although we did note that we do expect to see some small benefit associated with Pasha's configuration or reconfiguration of its fleet in that they're no longer calling the Pacific Northwest and only calling indirectly in Oakland in favor of a second L.A. call. So there is a net benefit associated with that. In the first half of the year, it is largely going to be macro growth in the state and some trailing effect of that reconfiguration. Then in the second half of 2016, we see that Pasha has largely recovered from its initial service difficulties, and so we will see some volume growth, but it will be lapped by the significant volume increases we saw post-closing. Okay. Yeah, that makes sense on a year-over-year basis. But going forward, the next couple of years is, I think I have heard you talk about as you look at the construction volumes, the construction data, and permitting and what have you, that looks to be pretty strong. If I am not mistaken, that is probably a good indicator for future volume growth for Hawaii. Am I thinking about that right? You are, yes. What we see is this configuration or transition associated with the Pasha largely behind us as we have just described. But we do feel confident that there is a continued growth story as evidenced by UHERO, what we are hearing from our customers, projects that are being planned or permitted. So we continue to feel good about our growth prospects over the next few years in Hawaii. Okay, great. Then moving to Alaska, obviously, we understand what is going on with oil and the impact to that state and that economy. But I do believe more of your Alaska volumes seem to be consumer staples and more non-discretionary items, if you will. Is that right? I know you are forecasting for some lower volume growth, I think some population shift, but there is a core stable volume component to Alaska. Is that right? That is right, Kevin. When we did our due diligence on the acquisition of Horizon Lines Alaska business, we noted that the container volumes in the market were relatively stable over very low and very high ranges of energy prices. We are serving basically the population. So for example, one indicator might be the total population in the state of the total population in Anchorage in some of our key markets there. We did note in that economic forecast that volume decline was expected to be less than 1%. So I think you're on the right track there. Okay, great. On the SG&A expenses related to Alaska, I think you said are not expected to exceed the incremental run rate target of $15 million. As you fully integrate Horizon, could we see this run rate fall in 2017? How should we think about those incremental costs even beyond 2016? Kevin, it's Joel. I'll take that one. I would put it in the bucket of all the other costs of the company. Division by division, process by process, we'll look at every opportunity to reduce those costs. So there is a chance that in some categories, the cost can go down. But overall, we're approaching that run rate target. So what we're saying about our 2016 outlook, Kevin, is that it's not going to be a materially different number than our run rate target. So that's what we expect in 2016. Like I said, in certain categories, there could be cost potential reductions going forward, but I would characterize that similar to the other SG&A we have within the company. Okay, great. Thanks, Joel. Last question, Matt, this is kind of a bigger picture question. We got the potential implementation of the new container weight rules. Maybe talk a little bit how you view the potential impact on the industry, and maybe more importantly, Matson, is that an opportunity for you guys to maybe help your customers verify those container weights if that rule is implemented July 1st? Yeah, it's a good question, Kevin. One that is still very much up in the air, some of the details of it. What we do know is that the U.S. Coast Guard is planning on not delaying the implementation of this SOLAS IMO regulation for July 1st. We do have certain advantages in Matson's businesses in that we do have scales at all of our marine terminals. This is largely a requirement of our customers to report something called Verified Gross Mass. My suspicion is that for some customers, they will be working on developing their own internal metrics for being able to report this new bit of information. In other cases, they'll be looking at scales, nearby scales, or our scales, or other methods by which they will be required to comply with these requirements. My guess is that there'll be lots of different answers and solutions for our customers as they meet this new requirement. But to the premise of the other part of your question, this is just another way we think in which Matson can differentiate itself and its service given our knowledge of our customers and the capabilities we have that may set us apart from our competitors. Got you. Great, Matt. Thank you. And gentlemen, thanks for your time this afternoon. I really appreciate it. Thanks. Thank you. Our next question comes from the line of Jack Atkins from Stephens Inc.. Your line is open. Hey, guys. Good afternoon. Hi, Jack. Hi, Jack. So if I could look at the, or just discuss the China Long Beach lane for a moment. You talked about your expectation for rates to be down significantly in 2016 year-over-year. Matt, when you think about the contractual piece of that business, which I think historically has been around 50% or so, I guess what sort of visibility do you have into those rates at this point? I think May 1st is historically when those contracts start. Yeah. You're right, Jack. Most of our contracts, in fact, nearly all of our contracts are a May 1 to April 30 cycle, so obviously we're a few months away from getting a sense. It's a little early, Jack, to feel where the market is going to sort out. Although, of course, we're not very encouraged by the macro. A lot of the fourth quarter and international ocean carriers are reporting significant losses. We're not hearing about significant reductions of capacity in terms of taking capacity out or reducing the numbers of service lines in coordination with their alliance partners. It's tough to know, but it's also at this point tough to be optimistic that the carriers are going to withdraw enough capacity to create a more stable environment. I think we're buckling in for a pretty tough year, is the gut feel at this point. Okay. That's what I would assume. I just want to double check that. When we think about the rotation in Hawaii, I think you guys exited the year, if I'm not mistaken, with 10 ships in the rotation. I think you put the 11th ship back in reserve. Is that still the plan to operate in a 10-ship rotation in 2015, or does the dry docking plan sort of change that somewhat? Yeah, those are good questions, and I think where we are now is at in a 10-ship deployment. Okay. As we go through the dry docks, especially as we go through with the larger vessels, the C9, it's often the case that those can't carry the same cargo package. We have to break out an additional vessel and go into an 11th ship during those periods. Some of those are in 2016, and some will be in 2017. We're also looking at it and watching the market growth and the dynamics back and forth, and we'll break into an 11th ship as and when the market needs it. We're at this point in a 10-ship deployment, but as you know, we're in our slower time of the year as well, and we'll have a vessel ready to be broken out when the market requires it. That's kind of the best way to think about it. Okay. That makes sense. Just when you think about your current utilization rates, I know you guys are hesitant to give that statistic, but I guess what sort of market growth would we need to see out of Hawaii to warrant putting that 11th ship in? Is it something that if we have a normal market growth of 2%, 3%, 4%, that would necessitate an 11th vessel, all things being equal from a market share perspective? Yeah, it's a good question. The way we're thinking about it is this: we're in our 90-plus utilization of our fleet here in the Hawaii service, that we both have a market growth going on. We also have a seasonality going on. So it's very likely that we'll see ourselves going from 10 ships to 11 ship deployments in each of the next few years, but with a generally increasing overall market volume. So I don't see it as completely in or out, but I do see it as more likely so that if I look three years from now, we would be mostly in an 11-ship deployment before the delivery of our two new Aloha Class vessels. Okay. Just a couple more questions and I'll hand it over. On the dry dock amortization, Joel, you did a good job laying all that out and what's happening on a year-over-year basis there. Would you expect that $35 million level for 2016 to be the new run rate going forward? Or is that abnormally high this year? Maybe it'll step back down going forward. Just help us think through how we should expect that over the next couple of years. Yeah. I expect it to come down a little bit, Jack. So it's going to trend higher than the previous five years. Yeah as we showed on that chart. There's a lot going on this year, especially with some of these vessels that are near end of life that are being dry docked. Then you have to amortize the entire dry docking costs and expenses over 2 and a half years. I think that number should trend down over time. Okay. Last question, I'll hand it over. With the U.S. military project that's going on in Guam, it'll be going on for the next decade or so. At what point do you expect to start seeing incremental volumes from that? Is that really more of a later 2016 event into 2017? Just curious when you think maybe that'll help offset some of these competitive losses potentially from the APL service. Yeah, Jack, our gut feel is we're going to start to see volume growth in the second half of 2016. I think it'll start at a slow pace and grow from there. We may actually see some market growth in 2016, and we see that pace more into 2017. We are going to see some market growth. Of course, we're likely to take net-net a step back as the market grows more slowly, perhaps in 2016, but does grow offset by the competitive losses we expect because of APL service. We should start seeing some this year, a small amount and a little bit more measured pace in 2017 is our guess at this point. Okay, that's great, guys. Thanks for the time and congratulations on a great 2015. Thanks, Jack. Thanks, Jack. Ladies and gentlemen, as a brief reminder, you can queue up for a question with star then one on your keypad. That's star then one. If your question has been answered or if you wish to remove yourself from the queue, you may press the pound key. Our next question comes from the line of Steve Ouimette from Sidoti. Your line is open. Hi, good afternoon. Hi, Steve. Hi, Steve. I was on the call late, so I apologize, if you covered this, but it seems like the guidance for 2016 implies maybe stronger Hawaii, then full year of Alaska kind of offset by the fuel surcharge in 2015, then maybe weaker China and weaker Guam. Is that about right? Those are the main moving pieces. Yeah, I would say so, but I would say the fuel part is only a small part of the story. Of course, you know, Steve, from a macro perspective, when prices are falling, we can lag a bit. We don't expect that to be a part of the story in 2016. But we strive over time to break even in our largest market in Hawaii. So it's a smaller part of the story. I wouldn't overplay that piece of it. I think the only other piece is that we see a very small increase in logistics and a small lower result in SSA Terminals. But I think you've got the pieces right there. Okay. On the China trade, it seemed like you guys had gotten, I guess, an increasing premium over the last few years or maybe your premiums in markets increased. I am just wondering, that seems to have changed a little bit. Is that due to the issues on the West Coast port, and is there anything else at play there in terms of, other than the overcapacity in the market, which it seems to have been a problem for some time, and maybe it is just kind of reached a tipping point? Yeah. I think the way you framed the question on the premium is right. We have been at this for 10 years. We have seen our premium increase every year in the last 10 years. We saw it spike up dramatically in 2015 because of the broader labor disruption issues around the ILWU contract renewal. We expect, in 2016, our premium to probably be, without naming numbers, the second biggest premium we have ever seen behind 2015. So it follows the pattern of a normal increasing premium, except for the anomaly of 2015, is the way to think about that. Okay. So the utilization rate is coming down, but maybe off of historically high, extremely strong levels rather than going to maybe normalized levels or something like that. Yeah, we expect strong volumes in 2016, much like volumes that we have seen in the 2012 to 2014 levels, but not at the 2015 exceedingly strong demand that we saw, again, because of the labor disruption. Okay. All right. Thank you very much. Thanks. Thank you. Our next question comes from the line of Kevin Sterling from BB&T Capital Markets. Your line is open. Thank you. Thanks for the follow-up. Sure. Joel and Matt, you talked about possibly ordering two more new vessels for Hawaii in addition to ones you are going to build for 2018, 2019. What is the thought process behind that? Would you scrap any of your older equipment, or would you just keep those in reserve? Just maybe help us think about the fleet growth, say into 2020 and beyond, because it looks like you are contemplating ordering two more new vessels. Sure, Kevin, I'll take that and I'll ask Joel to comment if there's an element you'd want to add on. Just taking one step back, the two Aloha Class vessels that we have ordered that are going to be delivered in late 2018 and the first quarter of 2019 will allow us to have 10 diesel vessels. At that point, we will be fully compliant with the ECA regulations. We will, at that point, have approximately seven steam vessels in reserve. In 2020, the steam vessels, as they're currently configured, do not meet the ECA requirements. There is a steamship exemption. We would need, at that point, we would like to have reserve vessels, as we've had, for two reasons. One is because of normal dry docks, we would need to find another vessel to put in its place. The second is for service disruptions or if there's a mechanical event, we want to have a vessel to put in its place. We'll either need to do some vessel configurations of these old steam vessels by re-engineering or making other modifications to keep them as reserve, or replace them with two additional new vessels that would allow us to take our oldest vessels, that is the C-9, which will be approaching 40 years of age. They were built in 1982 and 1983. We're just looking ahead so that sometime either as early as 2019 or 2020, have two additional vessels put in place or perhaps at a later date, but we're just acknowledging that there are three vessels that'll be approaching 40 years of age in 2022, 2023. Of course, that's separate from the Alaska fleet replacement, which when we announced the acquisition, we said we believe that those D7 vessels had 10 years of life left. We very much still continue to believe that to be the case. As we give a little visibility to what our vessel replacement needs are after these first two Aloha Class vessels, we wanted to just give investors some visibility to our longer term capital needs. No, that's great. Thank you. That's all I had. Thank you for the follow-up. Okay, Kevin. Thank you very much. Thank you. That's all the questions that we have in the queue at this time, so I'd like to turn the call back over to Matt Cox for closing remarks. Okay. Well, thank you so much for attending this call. We look forward to catching up with everyone on the first quarter earnings call. Thank you very much. Ladies and gentlemen, thank you again for your participation in today's conference. This now concludes the program, and you may all disconnect your telephone lines at this time. Everyone, have a great day.