Earnings Call: Q3 2014

Nov 6, 2014

Good day, ladies and gentlemen, and welcome to the Matson third quarter 2014 financial results conference call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star then zero on your touchtone telephone to reach an operator. As a reminder, this conference call is being recorded. I'd now like to introduce your host for today's conference, Jerome Holland, Director, Investor Relations. Please go ahead. Thank you, Kate. Aloha, and welcome to our third quarter 2014 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 8 to 14 of our 2013 Form 10-K filed on February 28, 2014, and in our subsequent filings with the SEC. Please also note that the date of this conference call is November 6, 2014, 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 had a strong third quarter as the Hawaii economy is showing increased economic vitality, and we're earning our share of this growth. In the third quarter, as compared to the prior year, we carried nearly 4% more containers to and from Hawaii. We also benefited from the timing of fuel surcharge recoveries. As you may recall, our first half results were adversely impacted by the timing of lower fuel surcharge recoveries, and as expected, we have made good progress in this recent quarter catching up. We're also encouraged by higher freight rates in all of our major trades, a reflection of both improved market conditions and the unique value proposition we offer: superior on-time performance, exceptional cargo availability, and world-class customer service. We also saw higher lift volume along the West Coast at our joint venture terminal operation and continued improvements in logistics. Looking forward, a continuing strengthening economy will drive volume growth in our Jones Act trades and in logistics. In Hawaii, we expect a competitor to add new container ship capacity in early 2015, so we don't expect any impact to our Hawaii volume for the fourth quarter. We expect continued high demand for our premium expedited service offering from China and a stronger logistics. As such, we expect our operating income in the fourth quarter of 2014 to be higher than the fourth quarter of 2013 level, exclusive of a $9.95 million litigation charge incurred in the fourth quarter 2013. Before moving on, I'd like to highlight the latest development regarding the molasses incident from September 2013. In October 2014, we pled guilty to two misdemeanor violations of the Rivers and Harbors Act, and we've agreed to make a payment of $1 million, which will resolve all federal criminal charges in the matter. This settlement remains subject to the court's approval process, and a court date has been set for late January 2015. Matson has not yet resolved any potential civil claims by the U.S. Environmental Protection Agency or claims by the State of Hawaii. We continue to cooperate with the state and EPA in an effort to address the impacts from this incident. Slide 4 shows EBITDA and EPS for the third quarters of 2014 and 2013. You can see the marked increase in EBITDA for the quarter to $62.2 million, driven by operating factors already cited. EPS increased 25%, the result not only of improvements in our core operation, but also to the absence in this quarter of several unfavorable items that were incurred in 2013. Those unfavorable items totaled $6 million, or approximately one-third of the increase in EBITDA for the quarter. Slide 5 shows these same metrics on a year-to-date basis. EBITDA is up almost $9 million for the year and totals approximately $178 million for the last 12 months. EPS is lower year to date due to additional interest on the $100 million in long-term notes we borrowed in January and to a higher effective tax rate this year. Turning now to our Hawaii service on slide 6. The Hawaii market continued to grow in the third quarter while Matson's carriage rebounded and was up 3.8%. We also had higher freight rates, another sign that market dynamics have improved. Automobile volume declined by nearly 21%, a continuation of a few customer losses earlier in the year. These losses don't meaningfully impact our financial performance. Looking to the balance of the year, we expect Hawaii volume to modestly exceed fourth quarter 2013 levels. Even with the expected increase in demand, we expect to remain in an optimal nine-ship fleet deployment, maintaining very high utilization levels for our vessels. Slide 7 details some of the key metrics of the Hawaii economy as forecast by the University of Hawaii Economic Research Organization, or UHERO. We've highlighted several metrics for 2014 and 2015 in green. In this latest forecast, the forecast growth in construction jobs and building permits have been reduced for 2014 and increased for 2015. This shifting out on the calendar is consistent with our Hawaii volume for the year. As we noted earlier in the year, there was a lull in volume that eased starting mid-year, followed by strong market growth this quarter. We may very well have turned the corner in this quarter, as many of the construction projects around town are now in full swing. As they finish out these projects with appliance and housewares, more container volume is expected. The final wave in this construction cycle will be when new owners redesign and outfit their new homes with smaller appliances, furniture, and household goods. In addition, construction continues to progress on Honolulu’s $5.2 billion rail project. Turning to our Guam service on Slide 8, container volume remains steady with a slight uptick in volume. For the fourth quarter of 2014, we expect the stable economic activity to continue and anticipate modestly improved volume compared to the fourth quarter of 2013, assuming no new competitor enters the market. Moving to the next slide, a 7.4% decline in our China volume for the quarter stemmed from one fewer sailing, which fell into the first day of the fourth quarter. Our ships continue to sail at full capacity, and our spot rates are at or near all-time highs, the result of ongoing customer demand for our premium expedited service. Also supporting these high rates is the congestion that has mired down some of the terminals in Long Beach and Los Angeles. Recall that we have a dedicated terminal in Long Beach as part of our joint venture with SSAT, and our customers continue to have same-day or next-day cargo availability upon arrival. This further differentiates our CLX service. The graph on the upper right depicts the Shanghai Containerized Freight Index spot rates for the past five years. In the third quarter of this year, the TSA put in place general rate increases in the trade, and to a large degree, these increases have been realized, as shown in the graph. Still, you will note that spot rates in the trade are off about 24% from the highs of 2010. Looking to the remainder of 2014, we expect to continue to run our ships at essentially full capacity, and we expect to achieve average freight rates in excess of the fourth quarter of 2013 levels. Turning now to Slide 10, SSAT contributed $3.1 million to our third quarter ocean transportation operating income compared to a $2.4 million loss in 2013. This significant year-over-year increase primarily reflects the improved lift volume throughout the operation and productivity improvements in the Oakland terminal. For the fourth quarter, modest profit is expected along with incremental volume gains. Before turning to our logistics result, a brief update on the contract talks between the ILWU and the PMA. You will recall that the previous contract covering nearly 20,000 longshore workers at 29 West Coast ports expired on July 1. Although PMA and Matson's collective bargaining agreements with the ILWU have expired, the parties announced a tentative agreement on health benefits in late August. However, the industry is currently facing work slowdowns in the Pacific Northwest ports of Seattle and Tacoma. To date, Matson's operations have not been significantly impacted, but SSAT's productivity has been negatively impacted by these work slowdowns. Slide 11 highlights results of logistics. In the third quarter of 2014, operating income improved by $700,000 over the prior year. This increase was primarily due to the warehouse operating improvements and increased highway volume. For the balance of the year, we expect operating income to be slightly higher than 2013 levels, driven by continued volume growth, ongoing expense control, and improvements in our warehouse operations. I will now turn the call over to Joel for a review of our financial performance for the quarter and to provide a consolidated outlook for the fourth quarter. Thank you, Matt. As shown on slide 12, Matson's consolidated operating income for the quarter was $45 million as compared to $27 million for the third quarter of 2013. Ocean transportation operating income increased by $17.1 million during the third quarter 2014 compared with the third quarter 2013. This large increase can be attributed primarily to the timing of fuel surcharge recoveries, improved results at SSAT, higher container volume in Hawaii, and higher freight yields across all major trade lanes, partially offset by higher terminal handling expenses. For the quarter, the company also incurred $2.1 million in penalties, legal, and other expenses related to the molasses released into Honolulu Harbor in September 2013 versus $1.3 million of molasses-related expenses in the third quarter last year. Also, as a reminder, the third quarter 2013 financial results were adversely impacted by several unfavorable items, including an arbitration decision of $3.8 million and a $2.2 million tax allocation. Lastly, logistics operating income increased by $0.7 million during the third quarter 2014 compared to 2013, for the reasons Matt cited a moment ago. The next slide, 13, shows our year-to-date results. For the first nine months of 2014, consolidated operating income was $90.6 million, an increase of $8.2 million from 2013. Both ocean transportation and logistics showed year-over-year improvement by 8.3% and 41.5% respectively. The increase at Ocean Transportation can be attributed primarily to higher freight yields across all major trade lanes, lower outside transportation costs, and improved results at SSAT, which were partially offset by increased terminal handling costs. Also improving year-over-year comparisons was the $6 million in unfavorable items from the third quarter last year previously mentioned. Stripping these items out, ocean transportation operating income was essentially flat year-over-year. Logistics posted solid operating income results of $5.8 million for the first nine months of the year, driven by warehouse operating improvements, increased highway volume, and a favorable litigation settlement, partially offset by lower intermodal yield. Slide 14 depicts the condensed statement of income for the third quarter compared to the same period from last year. As you will note, total revenue increased by 6.5% on a year-over-year basis, while our operating costs increased 2.9%. Net income improved by 25%, driven by strong operating performance and the absence of unfavorable items, offset somewhat by higher interest expense and a higher effective tax rate. Recall that in the third quarter of 2013, our effective tax rate was skewed lower than normal due to the tax allocation item I mentioned earlier. Conversely, during the third quarter 2014, the company recorded a non-cash charge of $2.8 million that reduced previously recognized deferred tax assets, which increased our effective tax rate for the quarter to 47%. Due to this non-cash charge during the third quarter, we expect our annual effective tax rate for the full year 2014 to approximately 43%, which is higher than our normal rate of approximately 38%. Lastly, we also generated nearly $178 million of LTM EBITDA, which highlights the stability of our cash flow generation. With this strong operating performance, our balance sheet continues to be in very good shape. Turning to slide 15, you will note that our total debt at the end of the third quarter was $377.5 million, and our net debt to LTM EBITDA ratio remains very strong at only 0.8 times. We continue to have excellent liquidity with $230.9 million of cash and cash equivalents as of September 30. In the past quarter, we also contributed $65.5 million to the CCF fund, of which $27.5 million was in the form of cash and the remainder was in receivables. Slide 16 shows a summary of how our cash flows have been deployed in the last 12 months and excludes the additional $100 million of cash raised from the new debt issuance in January of this year. This chart demonstrates the balanced manner in which we continue to deploy the company's cash flow. With that, let me now turn to slide 17 to provide our outlook for the fourth quarter of 2014. First, I would remind you that our outlook excludes any molasses release impact because such future potential impacts are presently unknown, and that our 2014 outlook is being provided relative to 2013 operating income, excluding the litigation charge taken in the fourth quarter 2013. For the fourth quarter, we expect ocean transportation operating income to be higher than the 2013 level of $26 million, excluding the litigation charge, driven by a modest increase in Hawaii and Guam volume, higher volume and freight rates in China, and modest profit at SSAT. We expect to operate a core nine-ship fleet for the quarter and also expect to benefit from improvement in our South Pacific trade lane. For logistics, we expect the fourth quarter operating income to modestly exceed the 2013 level of $1.9 million, driven by continued volume growth, expense control, and improvements in warehouse operations. I will now turn the call back over to Matt for final comments. Okay, thanks, Joel. We had a very solid quarter and expect to build on this momentum for the fourth quarter. Our Hawaii volume rebounded in line with increased construction activity. Our Guam volume is holding steady, and our China service continues to differentiate itself through a superior service offering, resulting in heightened demand that leads to higher rates and full capacity. I'm equally pleased by the turnaround at SSAT, which was a year in the making after our investments at Oakland and other terminals. Logistics has also strengthened measurably, particularly in its own turnaround efforts in its warehouse operation. The product of all this hard work is a solid balance sheet and sustained cash generation. We'll continue to use this foundation to reach higher. We'll fund our fleet renewal program and pursue growth initiatives, all while maintaining a strong dividend. With that, I will turn the call back to the operator to ask for your questions. Thank you. Ladies and gentlemen, if you have a question at this time, please press star then the number 1 key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Our first question comes from the line of Jack Atkins with Stephens. Your line is open. Great. Good afternoon, guys, and thanks for taking my questions and congrats on a great quarter. Thanks, Jack. Thanks, Jack. I guess to start out with, and guys, I know that you choose your words very carefully in both the press release and in your prepared remarks, but I was wondering if we could maybe just kind of talk about your expectation for the fourth quarter with ocean transportation operating income. You said you expect it to be up year-over-year. I know typically you guys like to put some qualifiers around it, such as, modestly, moderately, things like that. Is there any way that you can kind of help us frame up, just so that we're all on the same page, to what degree you expect ocean transportation operating income to increase year-over-year? Well, Jack, we just said we didn't put any qualifiers or anything around it. We just expect it to be up this year versus last year. We do have good momentum in some of the items Matt mentioned about our Hawaii business and volumes increase. But overall, we just expect it to be higher than the $26 million last year, and we're not commenting further. Okay. I got you. Can't fault me for asking, I guess. There's a couple other questions and I'll turn it over. But on the Hawaii volumes, nice growth there. Did you guys see much at all the benefit from the storms that hit Hawaii in the quarter in terms of additional both eastbound and westbound volume? Jack, this is Matt. We did month-over-month, but within the quarter, we didn't see an impact. We saw some stocking of basic supplies in advance of the storms advance to the islands. We saw a little bit of a lull, but between those two that fell into this quarter, we saw no measurable impact either direction. As you know, the damage was relatively limited to the Big Island, and so we didn't see a significant amount of supply into the island as a result. Okay. Thank you, Matt. Then as far as the SSAT joint venture contribution, glad to see that take a nice step up sequentially and year-over-year. Do you feel like, granted we've got some near-term issues with the labor issues on the West Coast ports, but do you feel like that joint venture has turned a corner in terms of its profit contribution, that we should get back to sort of historical levels, which is sort of on that $3 million a quarter type run rate? Is that the right way to think about that normalized going forward? Yeah, we'll comment more, Jack, in the year-end call about our view about the results for next year on the January year-end call. But I would say that we do expect continued improvements in this unit. To what extent? Well, I think we'll be able to better handicap when we give our year-end call. But we are encouraged by the momentum of that unit. Okay, great. Last question from me. You referenced how you guys aren't seeing the same type of congestion at your terminals in L.A. and Long Beach because of your dedicated terminal capacity. Do you think that is, I guess, going to help you guys maybe get an even better premium to the transpacific rate in the fourth quarter, just given that you're not seeing the same type of congestion issues there? Yes, very much so, Jack. We don't get specific for competitive reasons, but the premium grew in a very healthy fashion and has over the last couple of years, including this year. Despite an overall flattish freight rate environment in general, we're saying we're seeing higher rates year-over-year and expect that to continue the fourth quarter. So the premium has grown, given the fact that we continue to do well and the rest of the service options continue to be mediocre or get worse. Okay, guys. Thanks again for the time. You bet. Sure. Our next question comes from the line of Ben Nolan with Stifel. Your line is open. Thank you, and would also like to say it seems like you knocked the cover off the ball this quarter, so congratulations on that. I guess my first question relates to something that has been pretty topical in the past month and a half or so. We have seen oil prices come off a lot, including bunkering prices. Bunker fuel prices are way down. Obviously, you guys have the fuel surcharges, but can you maybe walk me through some of the different facets that are maybe impacted as a function of the lower fuel prices and how we should think about how that might impact you guys going forward? Sure. Yeah, and Ben, you rightly point out that we have a fuel surcharge mechanism. Matson did announce recently the reduction of its fuel surcharge. As you know, our objective is to recover 100% of our fuel in both the Hawaii and Guam trades. On an annual basis, we have been fairly successful. We have been successful in doing it. Although you will note there are times when we get a little bit ahead and behind in one quarter or other. On an annual basis, we have been very effective in being able to recover that. The benefit, of course, to lower fuel surcharges in the Hawaii and Guam trades is it gives our customers a break, and so that is terrific from that perspective. But again, it is not a mover of our profit. Now in the China trade, in some of the Micronesia trades, in the Guam trade, I am sorry, in the South Pacific trade, some of our smaller trades, some of the fuel surcharges are not as effective. So on the margin, we do benefit a little bit. Frankly, the cargo volumes are relatively small, so it is not a huge needle mover, but it is welcome nonetheless. That is the way I would answer that question. Okay, so maybe mildly positive, but generally a non-issue is sort of how you'd structure that, I suppose, right? Yeah. Yes. Okay. I guess my next question is it seems like every quarter, the logistics gross margins are getting better. Can you maybe break down for me how much of that you would sort of attribute to your own efforts in terms of cost controls and everything else, as opposed to from an industry-wide perspective, are we starting to see a little bit more profit being dropped to the bottom line industry-wide? Yeah, let me take a crack at that. The way we think about it, there are really three primary segments within logistics. We don't report on the point specifics. It's our warehouse business, it's our truck brokerage business, and then our rail brokerage business. I think our experience has been that we have seen strong growth and expansion in our truck business, both the truck brokerage, both volume and margin. We've seen improvements. We've seen terrific improvements in our warehouse operations as we've continued to match the underlying warehouse demand with the capacity and to implement various profit improvements and specific customer-targeted improvements. We would say that we've seen increases despite the overhang in the domestic rail, where we've seen margins continue to be under pressure, and you see a lot of the other names in this space report difficult comps who are primarily focused on the intermodal brokerage segment. I would say, though, just on that point, that we have seen just recently, a little bit more traction, which we're encouraged about. We're not ready to call it a market turn, but we've seen just anecdotal evidence of customers sending out RFPs. Let's say an existing customer sends out an RFP, we're not awarded because somebody undercuts, and we find that customer coming back to us because the lower bidder was unable to provide equipment. So we're starting to see a slowdown in some of the RFP activity, which we see as good, and that could ease the margin pressure, although it's unclear whether we're just at a seasonal busy period, but at least we're seeing some slowdown in that activity. So the way I would characterize it is we've seen improvements in two of our segments and overall improvements despite a weaker intermodal rail segment. Okay. That's very helpful. Thanks for that. I suppose, lastly, when thinking of just sort of where you guys are from a cash basis, and yeah, I know you still have the new building commitments, but still generating a lot of cash flow. Has there been any changes in how you're thinking of the deployment of your capital going forward? Broadly speaking, any new initiatives that you're beginning to consider or anything of that sort? Well, the one thing we said, Ben, it's Joel, on cash deployment, we do think over time, we're open-minded to share buyback activity. So we said from a corporate finance point of view, that's one thing that we could add to our toolkit. No expectation for any kind of immediate or timetable to do that. We'll look at our cash flows and our overall investment needs over the long haul, but that's something we're certainly open-minded to as a company that we have not done in the past. But we're not making any announcements or not saying anything new about that today. But that is something that we would consider as part of our corporate finance shareholder value toolkit. Right. Okay. That's great. Thanks, Bill and Matt, and those are for my questions. Appreciate it. Thanks, Ben. Our next question comes from the line of Steve O'Hara with Sidoti & Company. Your line is open. Hi, good afternoon. Hi, Steve. I was just curious about the commentary on construction and demand improving. I was curious if you were saying that the improvement in demand was due to current construction, or you are starting to maybe see a little bit. It seemed like the UHERO piece a little more like 2015. I think you said it is kind of pushed to the right. Are you starting to see that impact now? Then maybe you would expect to see an even bigger impact when things really start to ramp up with the interior build-out? Yeah, I think we were a little surprised by the lull in the first half of the year, and you had heard us say that. We saw the market growth begin with our second quarter results, and it has been strengthened in the third quarter. We are encouraged by that. That is what we expected to see, and now we are seeing it. That is positive. Without looking at the trajectory of whether it further escalates from here, I think what it says is we believe we are in a period of sustained growth. I think, again, we will have a better view of where we think 2015 is going to take us, but we are firing on more cylinders now. I think what you are going to see are projects that are finishing off. You will see new projects that are underway that have broken ground in various stages. You will see ongoing construction of the light rail. I think all of that creates an environment where we will see market growth. We expect that to occur certainly through this year and probably consistent with the data that UHERO is projecting. It is a little of both, Steve. Okay. Then I guess most of the construction, at least on the residential side or on the residential side, is I think supposed to be more of the high-rise variety. Do you maybe have an estimate of when the single-family home development could begin, because I think that would be a much bigger driver of volume than the high-rise. Is that correct? I am just curious what your thoughts there are. Yeah. I think you are right about that. I think we certainly, if you look at the projects that are in front of us that are announced, you will see much of it is high-rise condominium units. Kaka'ako, the area in urban Honolulu core, is one where we have seen relatively sizable numbers of announcements for construction. I think in this phase of the cycle, most of our volume growth is going to be on condominium building and on the light rail. I do think further out in the cycle, we will see single-family home construction on Oahu, primary home construction on Oahu take off next, then probably lastly in the cycle is neighbor island sort of luxury residential homes. That will be the last in the cycle. Hopefully it is a multi-year kind of play, but we have not seen significant single-family home announcements at this point in the cycle. Okay. That is fairly typical, though, right? I guess, the high rise comes first, then the Oahu or single family, and then it kind of spreads to the outer islands. Yeah. That is how traditional the historic cycles have worked. But what we are primarily focused on is the stuff that we are commenting on is the stuff that is right in front of us. Right which is the condominium in Honolulu at this point. Absolutely. Okay. Thank you. Our next question comes from the line of Kevin Sterling with BB&T Capital Markets. Your line is open. Thank you. Aloha, gentlemen. Aloha, Kevin. Great quarter. Thanks. Thank you. Let me expand. I think Jack was touching on this, about the congestion issues in the West Coast, and you highlighted your premium service and how you are getting pricing. Maybe from the volume side, I want to look at that angle. Are you picking up new business, maybe expanding business with existing customers? Customers coming to you and being like, "Look, we are fed up with the service we are getting." Just coming to you for some new business opportunities? Well, I guess as you know, Kevin, we have been capacity constrained. Aside from maybe 2 or 3 weeks a year, our ship is essentially full. What we have done over time, as I mentioned earlier, our premium relative to spot rates in the market has continued to expand. What we find is every week have more customers who would like to take a booking and ride on the Matson vessel than we have slots for. We go through a process of looking at trade-offs between customers that will give us year-round support. Ideally, those are customers who are willing to pay more, whose option perhaps is to air freight, and reflect that in trying to optimize and get the highest freight rates that we possibly can, understanding the value of long-term relationships and customers that give us cargo all year round. If there is a customer that comes to us who has never used us before and will likely only use us for the peak period, we may put that customer further down the list than a customer who would be willing to book essentially all year round or mostly all year round. Those are the trade-offs that we go through. That has resulted in an expansion of our average freight rates and in the margin relative to the rest of the market. Of course. Thanks, Matt. Are you seeing maybe this time of year, more inquiries than you have in years past? I think probably the answer is yes. In fact, what often happens is customers who give us 5 containers a week, let's say, during the slack season, are looking to move 25 containers a week during the peak. Often what we'll do is say, "Well, if you book with 5 in the slack season, we're only going to give you 5 slots, or we might give you 6 or 7 slots in the peak." So it can be new customers. We're getting more inquiries, but often it's our existing customers that are looking for more capacity than we can give them, and they're forced to use other carriers or alternate means to get their product to their end markets. Okay. I know I asked you this question last quarter. When does it get to a point where you consider a second string? We're probably not there yet, but if you continue to get these customer inquiries, does it get to a point where it becomes maybe a little bit more into consideration than it had been in years past? Yeah, we evaluate that. You might remember we took a stab at that using non-U.S. flag vessels into Southern China, our CLX2 service, and the market timing was poor, and we discontinued that service. Part of the difficulty is, in order to do it the way we've done it today, we'd need to acquire 5 Jones Act ships that would allow us to carry cargo full from the West Coast to Hawaii and Guam and then load up in the other direction. If you just start a service with non-U.S. flag vessels and fill up in one direction, let's say, from China back to the U.S., you can't make money doing that because there's essentially no cargo from the West Coast to Asia. That's why many of the international carriers are losing money because it's a one-way trade. So it would require a substantial investment in 5 new Jones Act ships in order to replicate our service. Okay. All right. Thank you. You're welcome. Keeping on kind of the eastbound trade for a moment, I was hoping to get your thoughts regarding the TSA's recommendation for its carriers to move away from GRIs and into more contractual rate minimums, with certain bunker surcharges next year. I guess, one, how has the reception been for shippers? Two, if the TSA is successful in achieving this, do you think it will bring some stability to the eastbound China trade, or given the current capacity situation, do you think we'll continue to see more volatility until the trade lane normalizes? Yeah, those are good questions. I think ultimately, the TSA has struggled with their historic approach, so trying a different approach is not a bad idea. But I think fundamentally, it's going to come down to supply and demand. If we see supply growth that exceeds demand growth or at an absolute level, I think the TSA carriers are going to find themselves continuing to struggle with getting any kind of an increase. So with all this new capacity coming online and the reshuffling of alliances, we'll see if the carriers, as they reformulate themselves, can be more disciplined in their deployment of capacity. I think that will be the answer to the question on whether they'll be able to get the rates up rather than one particular TSA strategy or another. Okay. If there is a change in strategy, what are your views as to how it impacts you guys? Or are you kind of neutral? Well, I think generally, we'd like to see higher rates in the market. We generally see ourselves as earning a premium to the market, whatever the market is. We're not immune from the market cycles. So I would say we would generally welcome a more orderly market and with freight rates that are higher. Now, having said that, in some ways, as our margin expands on our line of business, we become less subject to the freight rates. But the underlying freight rates in the market are still a driver to our profitability, and we would welcome more capacity management and higher freight rates. We would benefit from that. Got you. Okay. Yep. One last question here, and this is probably for Joel. Joel, I know you touched on the tax rate being high last quarter and high again this quarter, and you explained that. Any impact to the tax rate going forward, or should we see it normalize in Q4? We would expect it to normalize. Okay. There's nothing in our outlook calling it to be different. For the whole year, when you look at the 47% for this quarter, the whole year, we expect to come in at 43%. If you just look at going forward, it should be back to our normal rate. Okay, great. Well, that's all I had. Thanks for your time. Thanks, Kevin. Our next question comes from the line of John Nance with FBR Capital Markets. Your line is open. Great. Thank you. Good evening. Hi, John. So guys, can you break out, and I know there's only so many numbers you can throw out, but what the revenue growth would have been without the recovery of fuel surcharge? No, we don't comment on that, John. Where I'm trying to go with this is as a percent of revenue, operating costs were down 300 basis points or so. I want to try to figure out what the incremental decline in automobiles has had on the negative side on an incremental cost basis, right? Because the ships are running anyway, but you have 20% fewer cars on there. But your operating expense as a percentage of revenue was down because the revenue was up because of fuel. From a modeling standpoint, is there any direction you can give as far as what to think in terms of run rate there, like where that should normalize out? Yeah, John, I can address part of that question as it relates to the automobiles and the movements. Basically, we noted we saw a reduction in auto volume. You'll also note that we said that it didn't impact our operating profit materially for the quarter. The reason for that is, just by way of background, Matson carries cars in effectively two ways. One is for those vessels which have fixed garages, we roll them on and roll them off the vessel on scheduled deployments. The other way we move cars are in specially designed auto frames, where cars are driven onto a frame structure and then lifted on and put into a container slot, and then unstuffed from that auto frame. When you look at where auto manufacturer prices are, so it's cheaper for us to move it in roll-on, roll-off than to put them in auto frames. Sure. If you look at the types of customers we have, we have auto manufacturers, we have military vehicles, we have privately owned vehicles, so we have an array of different types of customers. But the lowest freight rate cars are those from the manufacturers, and the highest method of carrying them is in auto frames. So when we lose cars, in this case, we did from auto manufacturers, and we are able to avoid putting cars in frames, then what it means is there's virtually no reduction in our operating profit associated with losing those cars, if you follow the logic there. So that's why we can say these are, we won't quite call them profitless cars, but they're very low margin cars. Sure. We made a conscious decision to, it was time to change. Try to seek a meaningful increase or to part ways with some of those auto manufacturers, and that is in fact what we did. Yeah. No, that is really helpful. Then, so those frames are going in the container slots, right? So that is freeing up more container space? That is correct. Yeah. That allows us to stay in a nine-ship fleet longer. without having to deploy a 10th ship. So there is a second benefit there. Right. So where is utilization trending now, and what would it need to hit before you'd pull out the 10th ship? Yeah. We're about 95% utilization, I would say. Maybe a little higher. We did say we expect to stay in a nine-ship fleet for the rest of the year. Typically, we see as we get into the fourth quarter, volumes begin to slacken. The third quarter is our busiest, then things slacken a bit. Of course, we are seeing some market growth, which is very welcome. That's, we think, going to be sustained into the fourth quarter, as Joel mentioned in his comments. So we're going to be watching it closely. We'll have a better view of that when we do our year-end earnings call as to with respect to what our views for 2015 will be. We will note also that one of our competitors is deploying an additional ship at some time in early 2015, and we're going to just have to look at what impact that will be, when it will be deployed, how fast the market is growing, and then determine whether a 10th ship is necessary. So that's all going to be factored into our discussion around the year-end call. Right. No, that makes a lot of sense. Let me ask just on that, on just the seasonality of rates and as it applies to your premium and the CLX business. How fluid is that? Because you've given dollar ranges, we get X $400-$800, I think, if I recall it, maybe a little wide, but a premium over this SCFI rates. If, just making up numbers here, let's say current rates are $2,000, and when you hit the seasonally slow period, say it drops to $900. If your premium was $500, so you were making $2,500. If that index rate drops $100, do you see more stability in your rates, so your premium would go to $600? Or would the premium stay intact and you, in that example, make $2,400? Yeah, I think what I would say is we see far less volatility than the Shanghai Containerized Freight Index. I would also say that it's true that the premium within a year tends to expand as well. So during the peak season, we will see the premium drift up as the market will allow for that to occur, and then alternatively, when we get into slack season, and especially when we get into those few weeks post-Lunar New Year, the premium itself can narrow substantially. But in general, our base rates are a lot less volatile, acknowledging that there is a seasonality to the premium as well. Okay. That's helpful. Just one last one, and I'll turn it back over. The yen versus the dollar is now at probably six-year lows. What impact does that have on, I guess two things, Hawaiian tourism from the Japanese community, but also the flow through to container demand if you have a reduction in buying power of the Japanese tourists? Yeah, I think clearly we see a link between the yen and the Japanese visitors. That's clear that's there. If you were to look at the hotel industries and the visitor counts, you would definitely see an impact. The tourist in general is not a significant driver to Matson's container volumes. If you look at what a typical consumer or a vacationer would use, it just doesn't turn into a lot of volume. That's why early in the economic cycle in Hawaii, we saw terrific increases in visitor arrivals and visitor spend and hotel occupancies, and many of the businesses in Hawaii were doing really well in the economy, but we weren't seeing the volume growth. So it is not a significant driver. For us, it's really construction that moves the needle for us, and so the yen is not a significant driver to Matson's business. Sure. Fair enough. All right. Thanks so much. All right. Thanks, John. Sure, Joel. Our next question comes from the line of Steve O'Hara with Sidoti & Company. Your line is open. Thank you. I just had one last question, just about the taxes. In terms of the cash taxes, you do not really pay much cash taxes, right? Is that correct? No, we do. I think last year we paid over $20 million in cash taxes. Okay. But I thought there was some benefit from making the deposit into the CCF. Yes. Should we expect to see that this year as well? It won't be as large. Last year we had much larger, as we initiated the program, much larger effect on a cash flow from operations perspective that we called out. But there will continue to be a benefit this year and in future years when we deposit into the CCF because we get a tax shield for those deposits. And Steve, what we've talked about there is effectively our strategy is to deposit into that CCF and produce tax shields to get us down to where the level is of alternative minimum payment tax. After that, we're going to be subject to the AMT, and so it doesn't make sense to do additional deposits in the CCF. Okay. We're essentially going to be an AMT payer, which means you're paying cash taxes, you're just not paying at the full 38%, and that's why the deferred tax liabilities on our balance sheet grow during this part of the cycle. Okay. All right. Thank you. Okay, thanks. I am not showing any further questions at this time. I would like to turn the call back over to Matt Cox for closing remarks. Okay, thanks very much for your interest. We look forward to catching up with you after the year-end. Aloha. Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a good day.