Earnings Call: Q2 2015

Aug 4, 2015

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Matson Second Quarter 2015 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require operator assistance during today's conference, please press star then zero on your telephone keypad. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Mr. Jerome Holland, Director of Investor Relations. Sir, please begin. Thanks, Howard. Aloha, and welcome to our second 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 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 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 August 4, 2015, 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, reference is 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. Matson's core businesses performed well in the second quarter of 2015, led by continued demand for our expedited China service, modest yield improvements in Hawaii and Guam, improvements at SSA Terminals, and with the closing of our Alaska acquisition at the end of May, our second quarter included one month of operating results from the Alaska service. I'm pleased to report that our Alaska integration is well underway and progressing as planned. We are on track to achieve our run rate earnings and cash flow accretion expectations within 2 years. There were, however, some offsets to our positive results for this quarter. We had an additional $13.5 million of largely non-recurring costs related to the Alaska acquisition and $11.4 million of costs related to our recently announced molasses settlement, which I'll discuss in more detail shortly. We will also discuss our updated outlook towards the end of today's call. I will mention now that we are raising our full year 2015 operating income outlook to substantially exceed the level achieved in 2014, exclusive of the acquisition-related SG&A and the molasses settlement costs. Before moving on, I would like to briefly address the molasses settlement we announced last week. As most of you will have seen, on July 29, Matson reached a settlement with the state of Hawaii to resolve all of its civil, criminal, and administrative claims. Under this settlement, Matson paid $5.5 million in cash to the state as compensation for damaged coral and lost fish, as well as the state's costs. Also, we agreed to terminate Matson's molasses operations in Honolulu and committed to removing the molasses-related infrastructure, which consists of risers and tanks at our Sand Island terminal. This work is estimated to cost between $5.5 million and $9.5 million. The molasses settlement impacted operating income by $11.4 million, net income by $6.9 million, and EPS by $0.11. You will also recall that Matson had previously settled the federal criminal charges arising from the molasses release for $1 million. Turning now to slide 5, you will see our financial metrics for the second quarter 2014. We have shown the respective impacts of the acquisition-related SG&A and the molasses settlement-related costs on our financial performance in the stacked bar graph data with dotted lines. Excluding the acquisition SG&A and the molasses settlement costs, you can see that we continued to generate strong cash flow. EBITDA would have been $82.8 million, an increase of 41.5% year over year. Earnings per share, exclusive of the acquisition SG&A and molasses settlement costs, would have increased by 33% from the prior year. I should also note that earnings per share was negatively impacted by an unusually high tax rate in the quarter that Joel will discuss in a moment. Slide 6 shows the same metrics on a year-to-date basis. Absent the acquisition SG&A costs and the molasses settlement, EBITDA would have been $149.8 million, an increase of 65% over 2014. Reported EPS was $0.79 per share, up 60% year over year. Excluding the acquisition SG&A costs and the molasses settlement, EPS would have been $1.12, more than double the prior year level. All in all, a solid second quarter and first half performance. Turning now to our Hawaii service on slide 7. We saw container yield improvement and modest westbound market growth in the second quarter. However, that growth was largely offset by lower eastbound backhaul freight. Automobile volume declined by nearly 9.2%, a continuation of customer losses that do not meaningfully impact our financial performance. Looking to the balance of 2015, we continue to expect a multi-year recovery in Hawaii and anticipate modest market growth for the year. You will recall that we had expected a container ship capacity in Hawaii to increase this year with the May launch of Pasha's new vessel, the Marjorie C. However, upon delivery, Pasha slotted the Marjorie C in as a replacement for one of Horizon's steamships, thereby removing the 5%-10% capacity growth that we had previously expected. As a result, we expect our Hawaii container volume for the balance of the year to be higher than the second half of 2014. Slide 8 details some of the key metrics of the Hawaii economy with the latest forecast provided by the University of Hawaii Economic Research Organization, or UHERO. As we discussed last quarter, the residential building recovery happening in urban Honolulu is not immediately apparent in these statistics. That is because the building activity is largely focused on less labor-intensive, high-rise condominium towers that are mixed-use projects with a residential tower built atop a podium of commercial, retail, and parking space. These mixed-use projects typically follow a staged permitting approval process, with commercial and residential segments permitted separately. This results in a lag between the time a project first breaks ground and when the residential permit is issued and shows up in the statistics, as shown by the decline in permitting for new residential construction in 2014 after two years of expansion. According to UHERO, several projects that broke ground in 2014 and 2013 are still not counted in the published data. Together, these amount to more than $700 million in value, which is more than the entire value of all residential permits issued last year. That being said, UHERO is expecting mid-single-digit job growth for the next several years, and we expect construction activity to ramp up over the next two years, driving container volume growth as the high-rise projects near their final stages of completion. In addition, there are several new non-residential hotel and resort projects and renovations in the works and continued progress on the Honolulu Rail Transit project, all of which should result in additional container volume growth. Before moving on to discuss our Alaska service results included in the second quarter, I wanted to provide an overview of the Alaska market and give some context to the business we have just acquired. Turning to slide 9, Alaska is a remote, non-contiguous economy dependent upon reliable container service as part of a vital supply lifeline. Over 75% of the state's population lives in three metropolitan areas connected in a narrow corridor known as the Alaska Rail Belt, stretching from the Kenai Peninsula to Anchorage to Fairbanks. The Port of Anchorage is the key point of access, with over 90% of the consumer goods for over 85% of the state's population. Today, the Alaska market is well-served, with four weekly container ships sailing to Anchorage from the Port of Tacoma. Each week, Matson offers two scheduled arrivals at Anchorage, two arrivals at Kodiak, and one arrival at Dutch Harbor. The vast majority of northbound container volume is comprised of consumables used by the region's population and businesses, with the container ships providing just-in-time inventory service for many stores and businesses. Southbound volume from Kodiak and Dutch Harbor is more seasonal and largely driven by the seafood industry. TOTE, our primary competitor in Alaska, operates two ro-ro ships, providing two weekly arrivals into Anchorage. Matson and TOTE also face competition from barge services, which have historically shipped lower-value bulk commodities such as lumber, wallboard, and other building materials that can accommodate a longer transit. The table on this slide shows Horizon's 2014 container volume by customer segment and provides a good representation of the types of cargo that underpin this relatively stable market. The customer consists primarily of freight forwarders, retailers, grocery chains, food and beverage shippers, government shippers, and building material suppliers. To give you a sense of the seasonality in container volumes in Alaska, we have provided a bar graph of 2014's volume by quarter, where you will notice that the second and third quarters, that is the spring and summer months, are the largest contributors, primarily driven by the timing of the southbound seafood trade. Moving on to slide 10. Our second quarter results essentially included one month of Alaska operations, which can be seen in our reported container volumes as 4,800 loads for the trade. The total volume for the Alaska operation in the first half of 2015 was 34,400 containers, slightly higher than the 2014 level. The longer-term historical annual volume table demonstrates the relative stability of the Alaska trade throughout the recent economic cycles and at various commodity prices. In comparison to most other states, Alaska relies on a small number of economic drivers. There are essentially three pillars of Alaska's economy. First is the oil and gas industry, second is federal and state government spending, and the third would be the rest of the industries, where fishing, tourism, and mining are the largest. As a result, the state fared much better during the Great Recession than the rest of the nation because of the demand for oil, minerals, and fish stayed relatively high, and Alaska lacked the manufacturing, housing, or financial industry jobs that declined substantially elsewhere. Further, Alaska did not experience a speculative home buying construction bubble. However, as we are seeing now, Alaska's less diverse economy also means that when one of its economic drivers is impacted negatively, it can have a more noticeable effect on the state's economic trajectory. Alaska is facing some near-term economic headwinds, the most notable of which are the low oil price environment and the recently announced proposed drawdown of 2,600 troops from the Joint Base Elmendorf-Richardson over the next two years, and the knock-on effects these may have on other sectors of the economy. As a result, for the second half of 2015, we expect Alaska container volume to approximate the 2014 level of 35,000 loads. Despite these short-term headwinds, we remain confident that Alaska is a great market for Matson, both in the short term and the long term. For additional background and recent forecasts on the Alaska economy, we would direct you to the 2015 Three-Year Economic Outlook: Anchorage, published on July 29 by AEDC, the Anchorage Economic Development Corporation. Turning now to our Guam service on slide 11, we saw a 4.8% decrease in container volume during the second quarter due to the timing of select shipments. For the second half of 2015, we anticipate steady economic activity and expect modestly improved volume compared to the second half of 2014, assuming no new competitor enters the market. Moving to the next slide, Matson continued to realize exceptionally strong freight rates in its China trade during the second quarter of 2015. The SCFI graph on the slide highlights the current state of the international spot market, which is in stark contrast to the considerable premium Matson continues to realize for our expedited service offering. In addition, Matson achieved year-over-year increases in our annual contracted rate, which makes up about one-half of our China business. With the resolution of the U.S. West Coast port disruptions, the international carriers have been able to reestablish more reliable scheduled service. However, the lingering overcapacity in the market and the delivery of even larger vessels has continued to put downward pressure on freight rates. In the current market, Matson's service advantage is approximately 5-7 days from Shanghai, attributed to the unique aspects of our service: industry-leading transit times, 24-hour availability at our dedicated terminal in Long Beach, and superior on-time performance. In the second half of 2015, international vessel overcapacity is expected to continue, with new vessel deliveries outpacing demand growth. Nonetheless, we expect to maintain our volume and average freight rates with high vessel utilization levels. Turning now to slide 13, SSA contributed $5.2 million to our second quarter ocean transportation operating income, compared to $2.1 million contribution in 2014. This year-over-year increase can be attributed to factors related to the clearing of the international carrier backlog we discussed last quarter. The Pacific Maritime Association and the ILWU reached a tentative agreement in February, and in May, both parties ratified the new five-year contract. Overall, we expect second half 2015 profit at SSAT to exceed the second half 2014 level, as SSAT is well-positioned in Long Beach and Oakland for increased lift volumes from major international carrier customers. Slide 14 highlights the results at logistics, which would have shown continued year-over-year improvement had it not been for a favorable litigation settlement included in the second quarter of 2014, which was the primary driver leading to the year-over-year decline of $600,000. Also, international intermodal volume was lower, partially offset by warehouse operating improvements. As we look to the remainder of 2015, we expect logistics operating income to approximate 2014 levels. I will now turn the call over to Joel for a review of our financial performance and consolidated outlook for the second half of 2015. Joel? Thanks, Matt. As shown on slide 15, ocean transportation operating income decreased to $1.4 million during the second quarter 2015 compared with the second quarter 2014. The decrease was primarily due to the incremental acquisition-related SG&A, the molasses settlement costs, and higher terminal handling expenses. However, there were several positives that largely offset those items, including higher freight rates in China, yield improvements in Hawaii and Guam, and the inclusion of a month of operating results for the Alaska trade. In the stacked bar graph on the left, you can see that excluding the two noted expense items, ocean transportation operating income would have been $56.3 million, which represents a year-over-year increase of over 70%. On the right-hand side of the page, logistics operating income decreased by $0.6 million for the reasons Matt just mentioned. The next slide shows our year-to-date results. For the first six months of 2015, Ocean Transportation operating income was $75.3 million, an increase of $33.1 million over the prior year. The increase was primarily due to higher freight rates in China, the timing of fuel surcharge collections, yield improvements in Hawaii and Guam, and the initial inclusion of operating results for the Alaska trade. Partially offsetting these favorable operating income items were the incremental acquisition SG&A expenses, the molasses settlement costs, higher terminal handling expenses, and lower Guam container volume. Absent the two noted expense items, Ocean Transportation operating income for the first half of 2015 would have more than doubled to just over $100 million. Logistics posted operating income results of $3.3 million for the first six months of the year, slightly lower than in 2014. The decrease was primarily due to the absence of the 2014 favorable litigation settlement and lower international intermodal volume, partially offset by improved results in warehousing. On slide 17, looking at our condensed income statement, total revenue increased by 2.6% on a year-over-year basis, despite a considerable decline in our fuel surcharge, while our SG&A expenses were higher due primarily to the acquisition. Excluding the acquisition-related SG&A and molasses settlement costs, our operating margin would have increased to 13.1% from 8.2%. It is also important to note that net income and EPS in the second quarter this year were adversely impacted by an effective tax rate of 66%, as compared to 42% in the second quarter of 2014. Income tax expense this quarter included a $4.8 million prior period non-cash adjustment to deferred tax assets, which increased the effective tax rate by slightly over 16% and negatively impacted earnings per share by $0.11. The second quarter of 2015 effective tax rate was further negatively impacted by changes in the value of deferred tax assets and non-deductible expenses, both of which were related to the acquisition. For the second half of 2015, we now expect the effective tax rate to be approximately 40%, which is slightly higher than our previous 38.5% normal tax rate due to higher effective state taxes going forward in Alaska. Turning to slide 18, you will see a summary of our balance sheet, which now reflects important items from the purchase accounting for the acquisition as follows. Additional fixed assets of approximately $171 million to be amortized over seven to 10 years. These assets include four Jones Act container ships and other assets, including containers, chassis, and terminal equipment. Intangible assets of $140 million related to customer relationships, which will be amortized over 21 years. Goodwill of $220 million. Net deferred tax assets of $39 million, primarily from Horizon previously existing NOLs. On the liability side, we recorded multi-employer withdrawal liabilities of $60.6 million, which is related to the Puerto Rico pension withdrawal. We expect this liability to require payments of $4.1 million annually, spread out over the next 18 years. With regard to liquidity and debt, our total debt at the end of the second quarter was $516.6 million, and our net debt to LTM EBITDA ratio increased to only 1.8 times. This ratio is especially strong when considering that our LTM EBITDA includes only one month of contribution from the Alaska trade line. Additionally, last week we announced a private placement of $75 million in 30-year senior unsecured notes at a fixed rate of 3.92% that we expect to issue in September. We also increased our revolver size to $400 million and extended it for a new five-year term, maturing in July of 2020. We continue to benefit from strong support from our credit providers in both the bank and private placement markets. Overall, post-acquisition and post these new financings, we are pleased with the status of our balance sheet as our leverage remains well within targeted levels, our debt capitalization profile contains mostly unsecured long-dated debt with relatively low coupons, and our liquidity levels and access to cash remain strong. With that, let's now turn to slide 19 and talk more specifically about the financial aspects of the acquisition. This slide is our key scorecard and references important metrics we will track relative to our original expectations at the time of deal announcement. The good news is that all key scorecard metrics are currently estimated at or better than when we announced the deal last November. Specifically, the deal closed at a transaction value only marginally higher than the LTM number of $456 million cited at announcement. This was a good outcome given our original expectations that Horizon debt numbers had the potential to creep significantly higher between signing and closing due to the risk of ongoing losses and shutdown costs in the Puerto Rico business, as well as Horizon's very high debt burden and interest costs. With regard to our transaction and integration cost estimates and overall integration timetable, our expectations have not changed materially. Our bottom line EPS and cash flow per share estimates now are slightly better than originally projected. Also, we are pleased to say that excluding the incremental SG&A expenses, the transaction has been immediately accretive as expected, both in the month of June and expected for this first full quarter of results in the third quarter of this year. Going forward, we will be reporting back to investors on this incremental SG&A in excess of our $15 million annual run rate target. Specifically, for the second half of this year, we expect to incur approximately $25 million of these incremental SG&A costs while we are still integrating the business onto our core systems and operating platforms. This will bring the expected 2015 total to $38.5 million, and we expect that number to decline to approximately $10 million for all of next year as we work through final integration activities. Turning to slide 20, we show the more detailed calculations so investors can see how we build up to our illustrative annual EPS and cash flow per share accretion figures. It is also worth noting that we expect to be able to utilize $158 million of NOLs related to Horizon, which is expected to reduce the actual cash tax rate to approximately 20% on the Alaska operations for at least the next five years. These deferred tax assets have been recorded on an NPV basis on our balance sheet at approximately $39 million, as I previously mentioned on the balance sheet slide. Moving on to slide 21. We also want to point out to investors the change in our EBITDA definition to capture all amortization in our income statement versus our previous definition, which excluded dry docking amortization. This updated definition of EBITDA was used previously by Horizon and is the more common way to define EBITDA in our industry since it captures all amortization hitting the income statement. I also want to point out that the LTM EBITDA figure on this slide includes the $25 million of molasses settlement costs and incremental acquisition SG&A expenses incurred to date. So the LTM EBITDA figure would be $289 million, excluding these two items, which you can see in the reconciliation table in the addendum to this presentation. Lastly, it is also important to note that the $289 million LTM EBITDA figure I just quoted in the addendum is still not a fully pro forma number as it includes only one month of Alaska operations. The next slide, 22, shows a summary of our cash sources and uses over the last 12 months. The key takeaway from this slide is that we only had to borrow a net amount of $136.4 million to fund the $495 million of total cash needed to close the acquisition, while also funding $77 million of CapEx dividends and CCF contributions over the last year. This low level of required borrowings is a testament to the strength of our internally generated cash flow from operations performance over the last 12 months. With that, let me now turn to slide 23 to provide our specific updated outlook for the second half of 2015, which is being provided relative to 2014 operating income and is exclusive of the $25 million of acquisition-related SG&A in excess of our incremental run rate target expected for the remainder of this year and excludes any impact of the molasses incident. For the second half of this year, we expect ocean transportation operating income to moderately exceed the $88.9 million achieved in the second half of 2014, which is expected to lead to substantially higher results for the full fiscal year. The moderately higher second half outlook is driven by expectations for better volume in Hawaii, continued premium freight rates and high utilization in China, modest volume growth in Guam, and modest profit at SSAT. In addition, the second half 2015 will include the results of our Alaska operations, where we expect volume to approximate the level achieved by Horizon in the second half of 2014. We also wanted to point out that in the second half of this year, we expect the operating income contribution for each of the third and fourth quarters to be considerably different than in 2014. Specifically, the third quarter 2015 operating income is expected to be approximately 50% higher, and fourth quarter 2015 operating income is expected to be considerably lower than the comparable periods in 2014. For logistics, we continue to expect full year 2015 operating income to exceed the 2014 level. For CapEx in the second half, we expect to spend approximately $35 million on maintenance CapEx and make $33 million of scheduled construction progress payments on our new Aloha Class vessels. With that, I will now turn the call back over to Matt. Thanks, Joel. The second quarter was an eventful one for us, and we are confident in what lies ahead for the balance of 2015. We expect to see growing construction activity in Hawaii, continued demand for our industry-leading CLX service, and improvements in logistics and SSA Terminals in line with general economic activity. In addition, our results will be strengthened by the contribution of our Alaska operations, the integration of which will continue to be a high priority for us. We are off to a great start, and I feel comfortable that we will hit our integration targets within the 24-month timeframe we set. Looking ahead, we are confident that our businesses will continue to deliver strong operating results and generate cash flow to pay down debt, provide for our fleet and equipment investments and to support our dividend. I will turn the call back to the operator and ask for your questions. Ladies and gentlemen, if you have a question or comment at this time, please press star then one on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue, simply press the pound key. Again, if you have a question or comment at this time, please press star then one on your telephone keypad. Our first question or comment comes from the line of Steve O'Hara from Sidoti & Company. Your line is open. Hi. Good- Hi, Steve. Hi. In terms of the changes in Pasha's service, I'm just wondering if that impacts your, let's say, core nine-ship deployment excluding the Alaska operations. I'm just wondering, I had heard that they had kind of changed some of the service offerings for the, I think, Seattle to Tacoma, and I'm just wondering kind of your outlook there. Also just on the Alaska side, what type of economic growth are you kind of baking into your model to kind of get to your run rate assumptions on free cash flow and EBITDA? I'm just kind of curious what you're looking for there. Thank you. Sure, Steve. This is Matt. I will answer the question on the Hawaii deployment issue question, and then I'll ask Joel to cover the Alaska growth or assumption question. With respect to the, and I'll start by making a comment I made earlier, which was, as we had been thinking about this new capacity that was entering the market, this new vessel, the Marjorie C, we had assumed that it was going to be additive to the total amount of capacity in the trade. Pasha elected to lay up one of its older steam vessels and put it in the slot into one of their existing four vessels that Horizon Lines Hawaii operated beforehand. So we see no net capacity add this year. That's the first point we made. You're right also in saying that Pasha has elected to amend its deployment, and it has elected, we've seen, to no longer call the Pacific Northwest, but instead focus on putting a second call into Southern California, the largest market on the West Coast. In addition to seeing one fewer vessel than we might have otherwise seen, we have seen those deployments change. In this interim period, we have elected to operate one extra vessel just during this period, and that vessel is now in service as the market settles out in the new deployments. That's why we believe we will carry more volume in the second half of 2015 than we carried in the second half of 2014. Joel, I don't know if you could comment on the Alaska question. Sure. Steve, on the Alaska question, your question was around what kind of growth are we assuming in the economy to hit our $70 million run rate EBITDA and achieve financial targets, et cetera. The answer is no growth. That is the run rate today. It is a very interesting observation. If you look at slide 10 in our deck, you can see the 10 years of history of volumes that we are showing for Alaska, and the obvious observation is that they are very steady, pretty flat volumes. Some years slightly up, some years slightly down, but overall, very steady. So we are not banking on any kind of significant volume growth over time. Where profitability growth comes in this business is through measured rate increases over time and through cost efficiencies and in other parts of the business, including terminal service operations in Dutch Harbor. It does not necessarily come from core volume growth, as you can see from that graph. In terms of the Alaskan economy, we are not expecting huge growth. We are expecting it to be steady to slightly up. We are not expecting a recessionary or declining kind of environment. If that did happen for a longer period of time, obviously, that could put pressure to the historical volumes that you have seen on slide 10. But we are not banking on any of those things occurring one way or the other for us to achieve the $70 million run rate target we have talked about. Okay. Thank you very much. Okay. Thanks, Stephen. Thank you. Our next question or comment comes from the line of Jack Atkins from Stephens. Your line is open. Thanks for the time, and congrats on another really strong quarter here. Thanks, Jack. So I guess just to kind of dig into the guidance for a moment, guys, it looks like a fairly substantial increase to the guidance range. I was wondering if you could maybe walk us through the different elements to that between the incremental earnings from the acquisition and also, it sounds like you have a 10th ship in the rotation now, at least temporarily, and fuel has come in as well, so I am guessing that is probably a tailwind too. So help us kind of think through the different puts and takes there as we look out to the second half of the year. Sure. The biggest drivers are the inclusion of the new Alaska operations, Jack, the China rates being strong, and Hawaii volumes. We have changed from a less increasing or flat kind of Hawaii volume environment to slightly up, and that has a pretty important impact to our bottom-line results. Those three components have led to the year-over-year third quarter and fourth quarter expectations of being higher than last year in total. Although we did note, Jack, of skewness this year of a lot more loaded in the third quarter versus the fourth quarter, and the primary reason for that is the timing of fuel surcharge collections this year versus last year. That will lead to some skewness in those two quarters, but the overall drivers are the first three I mentioned. Okay. That makes a lot of sense, Joel. Thank you. When we think about that tenth ship, do you think that is more of a permanent addition? Or Matt, as you said, it sounds like it may be more temporary. What do you think needs to happen in terms of the freight flows, westbound, to make you feel comfortable putting a tenth ship into the rotation permanently? Yeah, that is a good question, Jack. I think what is first and most important to us, just by way of context, the utilization of our nine-vessel fleet, before this change, was operating at a very high level. We talked about 95% capacity. So we were very full on a nine-ship deployment, and we have always said we would break into a tenth ship if the market warranted it. We have elected to take that tenth ship, put it in service now. It allows for our overall network utilization to flow a little smoother, including positioning of empties, and there are certain network benefits. We are just going to watch that closely. If the market settles out that we need to continue to operate it, we will. If the market settles out where we can revert back to a nine-ship deployment, we will do that as well. At this point, we are going to leave it in place until we see how the market settles out. Okay. Makes sense. Then last question from me. Joel, you talked about, I think in the prepared comments, the additional, or just the $33 million in scheduled new vessel contract payments. Could you give us an update on how much you guys have left in terms of capital to continue to allocate towards the new vessels and sort of how those payments sort of play out over the course of the next couple of years before you take delivery of those two new ships in 2018? Yeah. Sure, Jack. The answer is we've got still a substantial way to go on funding the vessels. We only have $27.5 million at this moment in our CCF fund. The overall cost of the vessels is $419 million, and in terms of what's been delivered to the shipyard, only the upfront payment of $8 million. So we still owe the shipyards over $410 million, and we've only put $27.5 million into the CCF fund so far. The net result of that is basically around $380 million more of cash that will first go into the CCF fund and then go to the shipyards, per the contract schedule payment. So think of $380 million of cash being spent through the fund between now and the fourth quarter of 2018. From a timing perspective, you'll see that we've got a little bit more in 2016, but over 75% of the overall payments for the vessels will be in 2017 and 2018. So we've still got about another year and a half to kind of pre-fund through the CCF before the very big payments to the shipyards kick in in 2017 and 2018. Okay. That makes a lot of sense. Thanks again for the time. Sure. Thank you. Our next question or comment comes from the line of Kevin Sterling from BB&T Capital Markets. Your line is open. Thank you. Aloha, gentlemen, and congrats on a nice quarter and outlook. Thanks, Kevin. Thanks. Hey, Joel, I just want to understand your higher Alaska EPS accretion that you're thinking for on an annual basis. Looks like you bumped it up a little bit. Is that mainly lower SG&A? No, our fundamental $70 million EBITDA number, which has the SG&A expectations baked into it, has not changed. What's making it go up a little bit is slightly better outcomes on the final purchase price accounting and the depreciation numbers Okay and a little bit better on the interest cost lines. But the fundamental cash flow generation of the business, we haven't changed our outlook on that. Okay. Got you. You talked about Hawaii and it looks like you're upping your growth there because of Pasha swapping out vessels. But as you think about that, and Matt, you did a great job talking about the University of Hawaii Economic Research Organization forecast. Are you baking any kind of organic growth in there as well since maybe you initially thought about this six, nine months ago? I think we continue to feel optimistic, Kevin, that there still is an economy that is growing that will provide growth in container volumes over the next few years. So we remain optimistic that we're going to see flow and steady growth based on these underlying economic drivers that you hear always talked about. But as we pointed out, it's been pushed out into the future, and as we said earlier in the cycle, we've been a little frustrated by the lack of it showing up early, but we remain confident that it's going to show up. On the demand side, we continue to feel good. On the supply side is where we saw the biggest change, where that extra capacity was not deployed in the market, but Pasha elected to slot this more efficient vessel and replace a less efficient steam vessel. Therefore, that extra capacity won't wait to be absorbed, and we were suggesting that our growth rates were going to be more moderate while this extra capacity was otherwise going to be deployed. We don't believe that'll be a factor moving forward. Okay. Got you. Thank you. Last quarter, you talked about the success of your rebid season with regards to your contract business as it relates to China. I assume you're still having pretty good success there as you think about your China business? Yeah, we have. Most of those contracts were renegotiated in the May 1 to April 30 cycle. There are a few contracts that are outside of that, but the vast majority are in that cycle. We did actually realize for that half of the business that moves under annual contract, we did see a rather significant increase year-on-year and are seeing the benefits of that, both in the second quarter and in the remaining half of the year relative to the prior year. So it's been a great story, given how difficult the overall market especially has been on the international ocean carrier trade. Oh, yeah. Absolutely. Kudos to you guys. Last question, Matt, you talked about Horizon Alaska volumes, I think, staying relatively stable. You have a chart in your presentation kind of showing some of that stability in Alaska. But you did cite some headwinds from the lower oil price environment, I think, and the military pulling out. Help me remember here, how did Horizon container volumes hold up? Maybe during the last time we saw oil prices collapse like this. I'm trying to think back to when I used to cover Horizon, but I don't remember any big swings. Maybe you could share some light on that, and I'd love to hear your thoughts. Well, Kevin, Horizon did not disclose their trade lane volumes. The numbers that we just published today here on slide 10 are the first time those numbers have ever been made public. And we only put those out through 2006. The bigger observation is how did this business behave during the Great Recession of 2008, 2009. And it was down a little bit, but not dramatically. But we don't have the data, and we're not publishing the data when you go back and look at the bigger oil spikes that occurred earlier in the 2000s and prior to that. Okay. Got you. All right. Thanks for your time today, and congrats once again. Thanks, Kevin. Thank you. Our next question or comment comes from the line of Ben Nolan from Stifel. Your line is open. Thanks. Nice quarter, guys. It seems like everything is coming together even better than you would have thought. My first question, I guess, has to do with getting back to something that, Matt, you talked about. Specifically, we have seen this sharp decline in international carrier freight rates. It appears as though it has had no impact at all on your expedited China service. Is it really completely disconnected? Are you legitimately only competing with air freight? Is that how to think of it? Well, we're in a little bit of uncharted waters here, Ben, because this really is unique, I think, in any container trade anywhere in the world. I think it is fair to say that our customers really see the Matson service as almost like a deferred air product rather than an ocean carrier product. We rely on 1% or 2% of the whole market who needs or demands this expedited service. We can't say that we will never be impacted, but what we've seen is in a rather severe rate cycle. You could see spot rates at or below the level they were in 2008 and 2007-2008. Meanwhile, our product remains. Now, I can't say that this will happen forever, but I will say if we continue to provide the service that we have, and we continue to find new customers, there are other customers that we've worked with for a long time that elect to move some of their product on a slower conventional container cargo and reserve some for ours. Some of it is conversion from air freight. So there's lots of factors, and the market moves around, but it has been your observation. It's been very enduring over even some pretty tough cycles now, so we feel good about it. Okay. Another thing that seems to be working exceptionally well is the SSA Terminals side. I understand there's some seasonality to that. Is this the new normal where you can legitimately make whatever, $15 million a year from that business, just sort of on a go-forward basis? Well, you will recall, Ben, that before the Great Recession, those were levels of earnings that we had seen in this business unit before things turned. It is hard to say if it is the new normal. I would say the West Coast is in a significant transition with the move towards larger and larger vessels, with more congestion, lots of moving around between carrier alliances, underlying ocean carriers deciding they no longer want to be in the terminal business. I would say it is a period of relative instability, lots of things moving on, but it does prove that, and we have said many times and continue to believe that SSA Terminals and Carrix, our partner, is the best operator on the U.S. West Coast. If you have large vessels that want to come to the West Coast, you want to have your vessels stevedored at SSA Terminals, and we are seeing some of the benefit of that and producing pretty good earnings in a period of relative dislocation. So we feel great about that. Okay. My last question relates to what is going on so far with respect to the synergistic benefits of the Alaska acquisition. You said things are going well. Is there anything anecdotally that you can point to where you are finding cost savings? Has there been any consideration to consolidating the Pacific Northwest terminals or anything of that sort? Sure, Ben, I will take that one. The primary driver to the cost savings and the synergies in the deal really were on the corporate overhead side. Remember, this was a three-way deal too, so you had a carve-out of a whole business unit, and that Hawaii unit was sold to Pasha. We essentially were just looking for and achieved the outcome of just getting the Alaska operations, which is what we wanted. Horizon did all the heavy lifting really before closing and shutting down the Puerto Rico operations. Most of the final synergies, we are still working on them, but it is really taking the Alaska business and putting it on our systems and platforms, which will take us several quarters to do. That is where most of the savings, and what we baked into the transaction per our expectations are all coming from. Now over time, there might be some operational areas of benefit, or like you mentioned, the Tacoma operations, equipment sharing, equipment efficiencies, dry docking efficiencies. There might be a number of other areas where we can get at one, two, 3% kind of, efficiency savings over time, just like we do with our other trade lanes. But those are just part of running a good business in an integrated way that really weren't baked into our upfront expectations. Got you. Okay. Does that make sense? Yeah. No, it's very helpful. Thanks, Joel. Again, it's fantastic. The stars are aligning for you guys. Congratulations. Okay. Thanks, Ben. Thank you. Our next question or comment comes from the line of Michael Webber from Wells Fargo. Your line is open. Hey, good morning, guys. How are you? Hi, Mike. Hi, Mike. I do not say good quarter, but I will start by saying congrats on the molasses settlement. I am pretty sure I asked you about that for 12 quarters in a row, so congrats on getting that behind you. Yeah, we are pleased. A couple of questions here. I want to start with, Matt, you already talked about kind of run through the synergies of Alaska. I guess from a mechanism standpoint, I guess, does your fuel charge mechanism with Alaska, is that similar to what you have got in place with Hawaii? And should we expect any differences there in terms of how that plays out through the results, or modeling anything else? I am just curious. Yeah. The fuel surcharge mechanism for Alaska is unique to the Alaska trade, and we are not envisioning any significant changes to that. Our thinking about the fuel surcharge is further embedded in the $70 million in net results that Joel had mentioned, and we have been talking about it since announcement. Okay. I can dig into that later. I guess, Matt, sticking with you, Ben brought up Transpac, and how there seems like there has been a bit of a decoupling there, and hopefully that lasts. I guess if we just look at that broader trade, we have seen weakness there, we have seen weakness in Asia to Europe, and we have actually seen a couple, I think three strings have been pulled from Asia to Europe already. Do you think we could start to see that in the Transpac lanes, and do you think that could eventually give any sort of reprieve in terms of some of the pressure that, I guess, your competitors are seeing, and that it could potentially weigh down, eventually the Matson kind of back all results? Yeah, it is hard to know. I think just in listening to other international ocean carriers talk about their results and prospects for the year, you have got some international ocean carriers saying they think the market conditions that are difficult now will remain difficult. Others expressing some hope that things could get better. My own sense is that there continues to be a significant lack of pricing discipline caused by chronic overcapacity in the Transpacific trade. So I personally am not very optimistic that we are going to see a market turnaround, or if we see it will only be for very short periods of time. So I personally am not very optimistic. Having said that, I continue to believe in this environment or that environment which we expect, we continue to have confidence in our own marketing positioning, and those are embedded in our own thinking and built into our outlook. Got you. Okay. Just a couple of questions actually around the deck. If I just really quickly look at kind of slide 8, and you guys do have some macroeconomic indicators, and we look at some of these, maybe not all five of them, on a continuing basis. It looks like 2015 tends to look like the peak year for a number of these, with the exception of residential building permits, which obviously you guys are levered to. I am just curious, this is something you guys track, I am sure, on a regular basis. How much of that do you think is kind of natural backwardation in some of the data points, and how much of that is more of a lead indicator that the things might plateau? Yeah. It is a good question. I think from our perspective, if you look at other pillars of the Hawaiian economy, if you look at, let us say, the visitor arrivals or the gross domestic product, you see it beginning to flatten out. Those are a function, I think, of the sectors that have continued to do well early in the cycle, like tourism, and broader service-related industries have done well early in the cycle. What we have not seen are the ones that we track, the final three that are more near and dear to our hearts, which are construction jobs, and as I mentioned, residential and non-residential building permits. Those drive volume growth in the trade. There is some volatility around non-residential permits, but we continue to believe that the container volume growth is showing up later in this cycle, and we believe that there are still legs, and is built into our thinking about how we see the rest of this year and perhaps next year to continue to be in a growth mode. Gotcha. No, that makes sense. Just one more from me, and I will turn it over, and maybe for Joel on slide 19, when you guys went through the metrics on the deal, you have adjusted the cost basis to reflect, I guess, a bit the movement in Horizon debt, which I think you guys were pretty upfront about in the beginning, saying that that could move considerably, and it has moved less than you thought. I am just curious with the $469, is that completely inclusive of all the Puerto Rico shutdown costs? Yeah. You will see a schedule. No, sorry. The $469 million is transaction value, Mike, and so when you think of more akin to enterprise value. So when you look at deals and look at deal multiples, you look at debt plus equity. So that is debt plus equity. That is it. In our 10-Q, which will be filed overnight, you can look at from an accounting perspective, there is a number of other items that you look at and you book on your financial statements on the transaction, include working capital and deferred tax assets and debt breakage costs and all these other things. In there, you will see a bunch of different line items, including the legacy liabilities on the Puerto Rico side, as an example. But that is not in that $469 million number. Right. But if I look at what Horizon was putting out in terms of the shutdown, the cash shutdown costs there, I think they came in a bit from kind of $85 million to $95 million. I want to say they were sub $90 million. But the kind of a long-lived cash shutdown cost, I believe something that was pension related, et cetera, that would not be reflected in that number there? That is not reflected in that number. That is correct. That number is debt plus equity at the time of closing. Right. Okay. All right. So that complete shutdown, the cash cost to shut down Puerto Rico, where did that come in on a final firm basis at close? It was pretty much done by this point in time. By the time of May 29, from an operational perspective, it was done. All that was left was a little bit of equipment sales and then ongoing severance for some of the employees, which is done over the course of their severance, which is, in most cases, 12 months. There is some more severance payments to make. Then the other item is just the withdrawal liability, which we talked about today, which we are booking as a $61 million number, which will be $4.1 million paid over 18 years. Basically, all the real business costs, except for a little bit of remaining severance and the pension withdrawal, is already baked into that 469 number because they would have already paid it and took care of it as they shut the business down before May 29 when we closed the transaction. Does that make sense? Yeah. I am just going to hone in on the total cash costs that are not reflected in that number associated with shutting down Horizon, be they long-lived pension obligations or severance or what have you. Yeah. The total cash cost, you would be better off to look at of all the ins and outs, including debt breakage costs and other items on our cash flow slide, which was the waterfall slide, Mike, slide number 22. That number was $495 million. Yeah. No, that is it. So okay. We can go through this a bit later, but that is a bump of. You are talking a bump of about a third of what was referenced in the Horizon release from terms of cash flow. I am curious as to where the remainder went. No, I am not following you. A bump of a third of what? I am not following your comment. The $85 million-$95 million referenced in the Horizon release. Yeah. The biggest component of that, which we said at the time of announcement, was the withdrawal liabilities. I just told you that was $61 million. Okay. That is actually discounted, so the actual amount was $73 million. Perfect. Thank you very much. What is excluding from this also are assets like the NOLs. The NOLs are not included in that number either. Gotcha. I believe you break those out. Okay. Thank you. Okay. Thank you. Thank you. Thank you. Showing no additional questions at this time, I would like to turn the conference back over to management for any closing remarks. Okay. Well, thanks. I know we had quite a bit going on in the quarter. We appreciate your interest in the company, and we look forward to catching up with everyone on the next call. Aloha. Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.