Earnings Call: Q1 2014

May 6, 2014

Good afternoon, and welcome to Matson's first quarter 2014 earnings call. For your information, all participants will be in a listen only mode during the company's presentation. There will be an opportunity for you to ask questions at the end of today's presentation. To ask a question, please press star, then the number one key on your touchtone telephone, or if you wish to remove yourself from the queue, please press the pound key. If you should need assistance during the conference, please signal me by pressing star then zero using your touchtone telephone. The conference is being recorded. I would now like to turn the call over to Jerome Holland, Director, Investor Relations. Thank you, Kate. Aloha, and welcome to our first 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 from Oakland. 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 of 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 May 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 thank you to those on the call. We had a steady and largely uneventful first quarter. Our businesses performed as expected, driven by sustained demand and freight rate strength in our core markets. We also had ongoing improvement in our warehouse operations, part of our logistics group. However, as mentioned on our last earnings call, first quarter's financial results were negatively impacted by the timing of fuel surcharge collections. The impact was significant, but because it was solely due to the timing of collection and not the level of collections, we expect to recover this offset over the balance of the year. Looking forward, we continue to see encouraging prospects in Hawaii and in a strengthening broader economy that will drive volume growth in our Jones Act trades and in logistics. We expect improvement at SSA Terminals and continued high demand for our premium expedited service offering from China. As such, we are affirming our late February outlook and expect that full year ocean transportation operating income will be near or slightly above the 2013 level, which was approximately $104 million, net of a roughly $10 million litigation charge we booked in the fourth quarter of 2013. More on that from Joel Wine later in the call. Turning to slide four, you can see that our businesses generated EBITDA of over $27 million and EPS of $0.08 in the first quarter 2014. Both measures declined on a year-over-year basis due to the negative timing impact of our fuel surcharge collections in the quarter. I'd also like to note that the first quarter is historically our lowest in terms of earnings and cash flow. Volume in the Jones Act trades and in logistics are typically stronger in the second and third quarters ahead of the fall and holiday retailing season. As well, our volume out of China is impacted in the first quarter by the traditional Lunar New Year slowdown, but essentially, we run at full utilization over the rest of the year. With all that said, we still generated a significant amount of cash this past quarter, declared a $0.16 per share dividend, and improved our liquidity and leverage ratios. Turning now to our Hawaii service on slide five. As I mentioned before, financial results were negatively impacted during the quarter by the timing of our fuel surcharge collections. Hawaii container volume decreased modestly, due primarily to lower eastbound backhaul freight. However, rate increases and cargo mix improvements in the trade fully offset the impact of lower volume. Despite the decline in container volume this past quarter, we continue to expect our Hawaii container volume for the full year to be flat or slightly above 2013 level. This outlook also takes into consideration the expected launch of Pasha's second vessel, which we now believe will be sometime in the fourth quarter. We remain confident in the Hawaii economy is in a multiyear recovery in line with forecasted state GDP growth and its increased construction activity, which I will discuss further in a moment. With the modest uptick in volume expected, we should remain in an optimal nine-ship fleet deployment throughout the year and achieve high utilization rates for our vessels. The next few slides detail some of the key metrics of the Hawaii economy, and in particular, the construction industry, as forecast by the Hawaii Department of Business, Economic Development and Tourism, otherwise known as DBEDT, and the University of Hawaii Economic Research Organization, or UHERO. You can see here that real GDP is forecast to rise significantly in the next three years as we enter the middle stages of this Hawaii recovery. A quick glance back to 2011 shows how the economy has gained strength. A lot of this has been driven by a very significant increase in visitor arrivals. While visitor arrival activity is expected to remain at a high level going forward, the rapid growth in arrivals is largely behind us. The next wave of growth is coming from construction activity as construction continues on Hawaii's Honolulu's rail project and as developers place their capital to work to meet the chronic shortage of primary residential housing. A recent study by DBEDT concluded that 5,200 housing units will be required annually from 2013 to 2020 to meet pent-up demand. Particularly noteworthy is the forecasted double-digit growth expected in construction activity for 2014 and 2015. Our Hawaii trade thrives on construction and infrastructure spending, which have yet to hit full cycle. Right now, the epicenter for construction activity is Honolulu's urban core. Within the core, which extends from Waikiki in the east to the Downtown Honolulu area, 17 condominium projects are in the midst of development, with five projects under construction, six that received permits in 2013, and an additional six projects in the planning stages. The first of the condo projects are scheduled to be completed by year-end, which is when we would expect to see some additional volume to materialize, including a 204-unit rental project and a 206-unit luxury condo tower. Another 341-unit condo project is also well underway, and three projects totaling over 900 units are expected to break ground this year. In addition, there are commercial developments underway totaling over $1.6 billion, and as these projects come online, we are poised to meet the incremental containerized freight shipping demand, whether it comes from large appliances, cabinetry, household goods, or commercial-grade products. Slide eight offers some additional color on the Honolulu Rail Transit project, which I know many of you have been following. The graphic depicts the expected route of the project, which is expected to cost $5.2 billion. The initial section of the rail transit system from Kapolei to the Aloha Stadium is scheduled to open in 2017, and the entire system from Kapolei to Ala Moana Center is expected to be fully operational in 2019. According to the Honolulu Authority for Rapid Transportation, or HART, the project is progressing well with nearly 90% of the construction still ahead. While much of the construction is comprised of concrete, aggregate, and steel, which we don't carry, we do expect some container volumes related to this project. More importantly, over the course of the next decade, we expect to see volume gains associated with higher employment levels, greater consumer spending, and the development of retail and residential centers around the rail hubs. For a greater historical perspective, we wanted to show on slide nine Matson's container volumes on a TEU equivalent for the last 35 years. You will note that there have been several multi-year freight cycles at work, and we're currently near the trough of the most recent cycle. As we've mentioned before, we believe the Hawaii economy is in a multi-year recovery, led currently by construction, and this chart certainly demonstrate that past recoveries have been sustained over extended periods of time, which bodes well for our prospects in the coming years. Turning to our Guam service on slide 10, container volume increased by 3.4% in the quarter on a year-over-year basis. The modest increase was related to solar installation projects. For 2014, we expect continued steady economic activity and anticipate modestly improved volume compared to 2013, assuming no new competitors enter the market. Moving to the next slide, our China expedited service continues to perform well in the oversupplied Transpacific trade lane. During the first quarter, our container volume decreased by 3.5% due to an additional sailing falling in the quarter of last year. The chart on the upper right depicts the continued year-over-year decline in quarterly average Shanghai Containerized Freight Index spot rates in this trade, in line with our expectation. However, Matson's rates demonstrated continued stability and earned a sizable premium, supported by ongoing customer demand for our niche premium expedited service. As a reminder, about one-half our China business is based on annual contracts, with the other half based on the spot market. I am pleased to report that we recently concluded our annual contracting cycle, retaining all of our customers and achieving a small increase in our contracted rates. In contrast, the international carriers not only failed to achieve any increase in their contracted freight rates for the third consecutive year, but also experienced some rate erosion this year. That said, looking to the remainder of 2014, we expect to see flat container volume on a year-over-year basis as our ships run essentially at full capacity from China, and we expect our average rates to approximate 2013 levels. Turning now to slide 12, SSA Terminals, our terminal operations joint venture, contributed $200,000 in the first quarter, flat with last year's first quarter performance. The dedicated terminal SSA Terminals operates for Matson are a distinct competitive advantage for Matson in receiving and delivering cargo and enable our industry-leading vessel turn times. At the end of January, we moved our Oakland terminal to operations to SSA Terminals' mega terminal, and the results reflect the continuing optimization of operations, as well as some incremental gains in lift volume. We are also beginning to realize terminal efficiencies and are pleased to have expanded our value proposition to some new customers. For 2014, we are expecting modest profit at SSA Terminals. Slide 13 highlights results at logistics. In the first quarter of 2014, operating income improved by $300,000 over the prior year as severe weather impacted domestic intermodal volume, partially offsetting warehouse operating improvements, increased highway volume, and lower G&A expense. For the balance of 2014, we expect operating income to modestly exceed 2013 levels, driven by continued volume growth, ongoing expense control, and improvements in our warehousing operation. I will now turn the call over to Joel Wine for a review of our financial performance and consolidated outlook for 2014. Thank you, Matt. As shown on slide 14, Matson's consolidated operating income for the quarter was $9.9 million as compared to $18.7 million for the first quarter of 2013. Ocean transportation operating income decreased to $9.1 million during the first quarter 2014 compared with the first quarter 2013. This decrease can be attributed primarily to the timing of fuel surcharge collections. Other factors included lower Hawaii volume and lower China freight rates. Also for the quarter, the company incurred $1 million in legal expenses related to the molasses released into Honolulu Harbor in September 2013. Partially offsetting these decreases to operating income were freight rate increases and cargo mix improvements in Hawaii and lower outside transportation costs. On slide 15, looking at our condensed income statement, total revenue was essentially flat, declining by less than 1%, while our operating expenses increased by 1.5%. In the last 12 months, we generated $160.6 million of EBITDA. Lastly, our net income and EPS included a slightly higher than normal effective tax rate for the quarter of 41.4%. We still expect our annual effective tax rate for 2014 to approximate 38.5%, although we note that quarterly fluctuations above or below this percentage frequently occur. Turning to slide 16, you see a summary of our balance sheet. As mentioned on our previous earnings call, we issued $100 million of senior unsecured 30-year notes at a 4.35% fixed rate on January 28. With the new issuance, our total debt at the end of the first quarter increased to $383.6 million. However, our net debt to LTM EBITDA ratio remains very strong at less than one times. In addition to our low leverage, we have excellent liquidity with $229.7 million of cash and cash equivalents as of March 31. As we have said previously, if we do not make any strategic investments between now and when our new vessels are delivered in the third and fourth quarters of 2018, we would use this balance sheet cash, plus free cash flow generated over the next four years to pay for the new vessels, with any shortfall in cash being funded from our $375 million bank revolving credit facility, which has no outstanding borrowings at the moment. Under this scenario, we do not expect the need for any additional capital-raising transactions to fund the new vessel capital expenditures. Slide 17 is a recap of how our cash flows have been deployed in the last year. Over the last year, we generated $190.8 million in cash from operations, $33.8 million was used for CapEx, of which $25.4 million was maintenance CapEx, and $8.4 million was paid on our two new vessel contract signings. We also paid $27.2 million in dividends and repaid existing debt by $17.6 million. The net result was a total cash increase of $118.7 million from these sources and uses over the last year. This increase in cash amount excludes the additional $100 million of cash raised from the new debt issuance in January of this year. With that, let me now turn to slide 18, where we affirm our full-year operating income outlook for 2014 previously provided in late February. Our outlook excludes any molasses release impact because such future potential impacts are presently unknown. Our 2014 outlook is also being provided relative to 2013 operating income, excluding the litigation charge taken in the fourth quarter of that year. For the full year, we still expect ocean transportation operating income to be near or slightly above the 2013 level of $104.3 million. Given that our first quarter operating income was $9.1 million lower than last year, we do expect year-over-year improvement for the balance of the year, with the majority of this improvement to come in the second half of the year. This improvement will be driven by flat to slightly higher Hawaii volume, modestly improving volume in Guam, flat volume and freight rates in China, and modest profit at SSA Terminals. Also, we expect to operate a core nine-ship fleet throughout the year and to benefit from improvement in our South Pacific trade lane. For logistics, we expect full-year 2014 operating income to modestly exceed the 2013 level of $6 million, driven by continued volume growth, expense control, and improvements in warehouse operations. With that, I will now turn the call back over to Matt. Thanks, Joel. We continue to be optimistic about our current operations and prospects. As the construction cycle in Hawaii gears up and the broader economy improves, we expect to see new volume materialize. In Guam, stable economic activity provides us incremental opportunities for modest growth. Our China service continues to be in high demand, with customers recognizing the unique value of our expedited solution, and we expect our vessels to run essentially full throughout the balance of the year in this trade lane. Our logistics performance continues to improve through very diligent cost-cutting and a mindful eye on our warehousing operations, while at SSA Terminals, the Oakland facility expansion is starting to produce the better results we expected. Our businesses are performing well, our balance sheet's in great shape, and we continue to generate significant cash. Without a doubt, we are primed for the opportunities that are ahead. With that, I will turn the call back to the operator to ask your questions. Ladies and gentlemen, if you have a question at this time, please press star, then the number one key on your touch-tone 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. Thank you, and good afternoon, Matt and Joel and Jerome. How are you all? Good, Jack. How are you? Good. Thank you. I guess, just to start off with, firstly, going to your outlook on the ocean transportation side of the business. I think the guidance is for flat to slightly up in terms of volumes there in the core Hawaii lane. Could you maybe talk, Matt, and granted you don't give quarterly guidance, I understand that, but how you would expect conceptually, volumes to sort of trend as we move through the year on a year-over-year basis? Would you expect to see up low mid-single digits in the 2Q and 3Q and maybe flattish in the 4Q? Is that generally the right way to think about it? Yeah, the way I would answer that, Jack, is to say that, of course, we have our seasonal factors. Second and third quarters will be the strongest quarters if history repeats itself, which we expect. I think what we're also expecting is for the construction activity to be picking up as the year progresses. So, I think the trend is relatively muted now as time will continue. We'll see a little bit more strength as we get a little later into the year and into 2015. Those are the two kind of factors that impact our thinking, but I don't know that I can put a specific percentage to the trend. Okay. No, that all makes sense. On the logistics side of the business, granted the first quarter saw some difficulties because of the weather, but could you maybe just sort of highlight a couple of things that you guys are doing, just a couple of the specific items, because I do think you're seeing some nice underlying improvement in terms of profitability. Just curious if you could sort of highlight that for a moment. Yeah, I think as we mentioned, that we did see some loss of intermodal business because of severe weather. We expected that based on some estimates to be about 1,500 or 1,600 loads because of the weather in the quarter. Those intermodal volumes were down. That's probably about $250,000 in margin. Some of that we'll get through the balance of the year. These were delayed shipments, but that was kind of the impact of the quarter. I thought we saw terrific year-over-year increases in our truck brokerage segment. We're pleased by that. We saw terrific asset and turn time utilizations on our private 53-foot program that we piloted a couple of years ago. We're looking to continue to build that line of business. Then we saw some good international volumes. Beyond the intermodal volume, each of our businesses we saw improvement in and then like the direction we're headed in. Okay, fantastic. The last question, just for clarification's sake, I know you guys highlighted the timing of the fuel surcharge collections, and you referenced that on the fourth quarter call as well with regard to the first quarter. Could you just maybe sort of walk us through from a high level why there sort of seems to be a timing delay as far as recouping those costs this year, where it doesn't seem like that's really been an issue in the past. Just so we can understand the mechanics of how that works. Okay. Yeah, let me answer another part of the question, which is Matson's goal is to seek to recover 100% of the fuel in our Jones Act trades in Hawaii and Guam. Over time, that is year-over-year, we have been very consistent in our ability to do that. Now, there are times when we get ahead and behind in a quarter. Generally, we don't highlight it because we don't think it adds meaningfully to our story. That is, there may be some quarterly fluctuations, but because it doesn't impact our annual valuation or our value premise, we generally don't talk about them. Of course, this is a big one. To your specific question about the timing, we're making assumptions about where fuel prices are going and when volumes are coming in. There's a number of other factors which allow. We don't have a set timing or date in which we reset our fuel surcharge. We do it when we think it's appropriate, and in this case, our expectations about where fuel pricing is going turned out to not be correct, and we got a little bit behind. But again, we're still confident that we're going to be able to collect it, and it really isn't a big needle mover from an investor standpoint. Okay, that's helpful. Thanks again for the time. You bet. Our next question comes from the line of Kevin Sterling with BB&T Capital Markets. Your line is open. Thank you. Aloha, gentlemen. Hi, Kevin. How are you? Yeah. Matt, when I look at what you laid out for ocean transportation, your operating income expectations for 2014, you did a great job giving us your expectations. What's the biggest lever there for maybe potential upside? Is it Hawaii volumes, which ultimately is tied to the Hawaiian construction cycle? Is that how we should think about the biggest needle mover there? Yeah, I think that's the biggest needle mover over time. I think the question for us, at least over the last quarters, Kevin Sterling, has been when do we get the traction on a lot of these projects in the pipeline? We continue to be relatively upbeat over the next 24, 36, 48 months that we're going to see a growth in the market, and we're well-poised to capture our share of that growth. So I would say that is probably the single biggest factor over time as it relates to the balance of the year, just within the last three quarters, that may be a less of a factor because we do see the thing really kicking in the second half, late 2014 and beyond. I would say that's probably the biggest needle mover, but I think we like what we're seeing in the economy more broadly, and absent some kind of an external shock, we're feeling pretty good about the volumes. Okay, great. Thanks. Kind of following up on that, and this is looking a little bit further out, but you talked about Pasha introducing the capacity and the Hawaii construction cycle picking up. How should we think about maybe 2015 potential with that additional capacity coming on? Will the construction demand, in your opinion, you think be strong enough to absorb that additional capacity? Yeah, it's a good question. I think in part it depends on when the vessel is deployed, how successful it is in getting full. Part of that vessel will be dedicated to roll-on, roll-off, and automobiles. Part of it will be used for general construction equipment and also containerized cargo. Certainly, we think the growth in construction volumes and where we are with the economy more broadly will be helpful in terms of absorbing that additional capacity. Whether it absorbs the full capacity is unclear. In fact, we are probably expecting somewhat of a disruption, at least but to the extent that we see larger growth, that certainly would moderate that impact. Got you. Okay. Switching to your China service, obviously that's running full utilize. You've got a great service there, but rates are volatile. What can you do as an operator to maybe push pricing or grow the top and bottom line? Is it really improved efficiencies? Well, from our perspective, we have seen, as I mentioned, the overall trade. We see market rates going down. We see our rates staying stable, so our premium continues to expand. That's the inference from our data points. The thing we can do most importantly is to maintain our service levels. The international ocean carriers businesses have continued to become commoditized and are being even more so with the formation of these mega alliances. Their service levels reliability continues to slip. We continue to stick to our knitting. On the margin, we're always looking to find putting the last two or three containers on a ship and trying to be as full as we can. That's a process that every week we're looking for ways to try to fill that ship because candidly, we have every week more demand than we have the ability to fill for space. Okay, great. That's a good problem to have. Switching to logistics, how should we think about logistics long term margins, maybe in the 2%-4% range? If that's the case, how do we get there? Yeah, I think 2%-4% is good. I think the goal for ourselves is first to get ourselves back into double-digit levels of operating profit over the next few years, which I think is realistic. I think our view is that each of the lines of business we see improving over the next few years. We have, I think, strategies for organic growth in each of our lines of business. We think it is not a stretch to think over the next two or three years we will be at the $10 million range. Of course, our goal long term will be to get that back where it was before the economic cycle hit, understanding some of the parts of that business are not going to come back, some of the rail incentives and other things which are no longer in place that were present before. But we are quite bullish over the long term on our logistics business. Right. Great. And the last question here, keeping with logistics. Do you think you just need additional scale there to kind of help improve profitability? If so, are you seeing acquisitions in the pipeline that could maybe help you get there? Yeah, I think certainly we want to keep an acquisition awareness. I think, Kevin Sterling, from our perspective, we have a terrific organic growth strategy. We are seeing some of the multiples that people are willing to pay for some of these brokerage and other assets. For us, it is awfully hard to see how you make those things work over the long run. We tend to be sort of disciplined in our underwriting and are not going to overpay for revenue or volume growth. That is not part of our story. Candidly, I think we got a pretty credible organic growth strategy with a lot less risk. Well, great. I really do appreciate all your time this afternoon. Thank you. Okay, Kevin. Thank you. Our next question comes from the line of Ben Nolan with Stifel. Your line is open. Hey, guys. I have a few questions. First, it relates to sort of maybe how you would expect things to play out over the next few months as it relates to potential of the possibility of a labor strike on the West Coast and how you guys might, well, first of all, if you could handicap the likelihood of that, if you have any comment there at all. And then secondly, how something like that would impact you guys. Yeah, I can try to answer the question. As you know or as many of the listeners know, the six-year contract is ending on June 30th of 2014. The contract negotiations are set to begin on May 12th. The PMA, who is the employer group that is negotiating with the ILWU, will begin on May 12th. Their own internal expectations are that they don't expect an agreement will be reached prior to the termination of the contract signing. More likely, they expect at this point, an agreement will be reached a week or two after the July deadline. The PMA believes that they'll be able to do it without an employer lockout or work stoppage. That's their take on it. Of course, some of this is unpredictable. Of course, there's a number of issues on the table, but the PMA's expectations is that they'll be able to renew a contract without an employer lockout or a work stoppage. Okay. I assume that you would have a similar view that disruption is probably unlikely. But worse comes to worst, how big of a deal could it be for you guys? Well, I think if past disruptions and events would take place, I think the ability of the state of Hawaii to tolerate a work stoppage is very small given the very limited amount of warehouse space in Hawaii. My expectation is if there were a work stoppage, which we don't expect, that it would be very short in duration before Congress would invoke a back-to-work strategy. Now that's not to say it wouldn't be disruptive financially or that it wouldn't take quite a bit of time to get the network right, but I think the actual stoppage would be relatively short. Okay, so it is certainly not keeping you up at night, I guess, is the answer. No, it is not. Yeah, good. My next question has to do with, it is sort of following up on what Kevin Sterling was asking with respect to the potential for acquisitions on the logistics side. But I thought I might broaden it out a bit with respect to sort of your deployment of capital and looking for opportunities to put money to work away from your new building program. Are there any areas that you could say appear to be, call it low-hanging fruit in terms of outside acquisitions or obvious tangential opportunities? Do you think that the market is pretty fully priced at the moment and the best opportunity is probably exclusively organic across your platforms? Ben Nolan, it is Joel Wine. I will take a crack at that. We obviously think about those opportunities, ocean transportation on one hand, logistics on the other. Ocean transportation is a much bigger business for us. There, we look at different Jones Act opportunities, and we also look for niche opportunities as we talked about. We think our history of servicing remote islands and being a very high-quality service operator in markets where service and reliability are at a premium and of importance, we think we can do well in those kind of markets, whether they are Jones Act or not. Those are the kind of opportunities, I would call them niche opportunities that we will continue to look for. There are some that we are tracking, and it is just hard to predict when they hit and when they are available and how big they might be. But I think leveraging off those skills and capabilities on the ocean transportation side is our focus. On the logistics side, when you talk about capital deployment and investment, we do believe we've got a very good organic story, as Matt talked about. There are pretty heady multiples being paid for businesses these days in the M&A market in that space. The one thing we're not shy about doing is investing in talent acquisition. So we're in the marketplace every day, every month, looking for talent to join our company that bring expertise in their own brokerage businesses. And we haven't been bashful about trying to go out and compete for that kind of talent. We think that's very sensible and can add to our platform and our growth opportunities. So just because we may not be doing big M&A that's leading to press releases and those sorts of things, doesn't mean we're not looking every day for investment opportunities in assets or people to grow our core franchises. Okay. That's helpful. But I guess along with that, I think that there was certainly the possibility of potentially expanding the new building program beyond the initial two vessels. Has there been any movements in that regard, or is that further down the line, something that doesn't need to be addressed anytime in the near future? Yeah, this is Matt. I think our view at this point is that the two-vessel program is going to meet our needs for the intermediate term. We will, a few years down the line, potentially be looking to place some additional, potentially a two-vessel order, but that may be for three to five years down the road. We think that the two vessels we ordered is all that we need for the time being and are not expecting to exercise our option for additional vessels at this time. Okay, great. I just have one more if it is okay, and this is something that is coming up. I am hearing among some of the international carriers, a lot more noise as it relates to MARPOL Annex VI and the sulfur emissions regulations and the potential impact on fuel costs specifically in some of those emission control zones. Is that something that you guys have done much work on or feel is going to have much of an impact on your operation? Obviously, the West Coast would be impacted by that regulation, come the first of the year. I was curious if you have done anything in that regard, or we view it simply as a pass-through at the end of the day. Yeah, it is a combination of both. I think we have done a lot of work within our fleet on preparing ourselves. The actual fuel itself has a different viscosity, and we have been doing a lot of testing to make sure that operationally that we can continue to maintain our fleet in terms of service speeds and in terms of maintenance on this different fuel. We have done a lot of work there. Of course, the new vessels that run on LNG that we will have delivered will obviously be able to, as a clean-burning fuel, allow us to continue to leverage. At this point, we do not see any operational constraints with the new standards, and to the extent that those fuel consumption relates to ECA areas which are serving the Hawaii and Guam marketplaces, we would likely seek to recover that through a fuel surcharge mechanism for the more expensive fuels. Okay, perfect. All right. Well, that does it for me. I appreciate the time, guys. Okay, Dan. Thanks. Our next question comes from the line of Steve O'Hara with Sidoti & Company. Your line is open. Hi, good afternoon. Hi, Steve. I am just wondering if you could talk a little bit more about the expected improvement in construction. I think a lot of the improvement now is, like you said, I think downtown Honolulu and more multi-family high-rise in that respect. Talking to people in the Hawaiian economy, it sounds like they expect more of the single-family home construction kind of follow on after that. Does that have a similar impact in terms of, is a single-family home like a multiplier effect on a multi-dwelling unit in terms of the need for transportation? It should have the same impact on jobs, and I guess that would have a better impact on the economy and need for ocean transport. Can you talk about that dynamic a little bit? Sure, I can. What we wanted to do was to take a little bit of time to show as an example of the types of projects that are going on to give a little bit more color on what we see in the pipeline. We also do see single-family home construction on Oahu, in West Oahu and Kapolei. There are a number of projects that are in the pipeline for approval. We also see resort residential on the neighbor islands starting to show some life again, although, I didn't call them out because they're in small numbers. Back to your question about single-family home versus high-rise or higher density units. The single-family home construction does move the needle in percentage term in terms of number of units relative to high-rise for two reasons. One, because the multi-story structures are steel and concrete and aggregate, those generally move in bulk. Generally, those houses or the condominium type apartment projects are smaller in size than typically a single-family home. So definitely when the single-family home market returns, that certainly will be a catalyst for growth beyond the high density, although the multi-story units do provide a good bump for us as well. Okay. Then maybe just as a follow-up, in terms of the Pasha ships, I think originally you were expecting to see the impact, I think late 2013 or mid-2013, and it kind of keeps getting pushed out. That certainly doesn't seem like a bad thing, but I guess I'm just kind of wondering, is it just kind of limited visibility on your part, or are they kind of slowing it down? I'm just kind of wondering about maybe any insight you have there. Thank you. Sure, Steve. I would say we have merely been using the schedule as we understand they have been providing it to their customers. So our market intelligence isn't by observing the shipyard, but rather by statements that Pasha's sales folks are making to the end customers in Hawaii. So our movement there is just in line with what they're telling the customers. Secondly, it's not unusual for projects on the U.S. build side to slip a bit. It's not our understanding that they're purposely slowing it down or there's any problems with the delivery as far as we know, and these are sort of normal delays as far as we understand. Our next question comes from the line of Michael Webber with Wells Fargo Securities. Your line is open. Hey, good afternoon, guys. How are you? Good, Mike, how are you? Hey, good. Most of my questions have been asked, but I did want to touch on a couple of things. One on the economy and some of the construction data, but first on the molasses liability. I know it hasn't come up yet. In the Q&A or in the deck. It has been a while. There has been obviously some press out there around it recently. I think Barron's pegged a potential liability associated with the spill at somewhere between $80 million and $400 million. Obviously, that is speculative, right? But in the absence of any factual update or any guidance, that is really all there is to go on. Can you guys provide any degree of an update in terms of either what policy this may or may not fall under from an insurance perspective, an update in terms of timing and when you could provide some guidance and total impact and just some update from here? It has been a couple of quarters now, and there is really not a lot to go on. Sure. Basically, Mike, where we are in this phase of the project is a number of state and federal agencies have initiated investigations. We have been cooperating with the various state and federal agencies. A grand jury has been formed also to look into the matter. Again, our primary focus is on providing those regulatory bodies with the information they need in order to conduct their findings. The timing of those investigation and work is not up to us. It is up to the various agencies involved to provide the timing. So we are at a point where other than continuing to provide information, there is not a lot of new information. You pointed out that we did note that we submitted this claim to two of our insurance carriers. At this point, it is not clear whether our policies cover this, and that will be determined at some future point in time. Again, all I can say is that, you mentioned the Barron's article, we just see that as highly speculative. Sure. Beyond that, since we do not know, it is very difficult for us to be guessing about what the outcome here is. Sure. Can you give us, I guess, which policies you filed it under and what sort of coverage you have on either of those policies? Yeah. We won't get into coverage details, Mike, but the two policies are protection indemnity, P&I coverage, as well as our marine general liability. Okay. You guys won't get into the coverage levels. When do you think you could be able to put some more color on that so we can either put the potential liability behind the story or bring it front and center? Yeah, it's difficult to know, Mike. The timing is not in our hands. It's up to the various agencies to conclude their work, and then obviously we'd like to get the matter behind us as quickly as is practical. Beyond that, it's really not known at this time when that might be. Right. They need to get their work done before you guys can provide us with how much coverage you have on the policies? It's more of a sequencing of process and review, Mike. We know what kind of coverage we have. We haven't disclosed that. It's not part of our normal coverage, but whether it applies or not is not clear. What needs to happen is the different regulatory bodies need to work through their investigative findings. We need to review that, review that with the insurance companies then, and then we'll have information that's worthy of that's been reviewed and vetted and can be disclosed. But we're not near that at this point in time. It's really more of a process point. Okay. All right. No, I appreciate the update. I guess one more around the broader Hawaiian economy, and it certainly seems like with some data, things are getting a bit better, and it's obviously been kind of a gradual recovery. Then there's some conflicting data, I guess, around same-store sales, which certainly seem weaker in the space and then in the area. Then if you look at permitting data from a construction perspective, I know your volumes have historically been tied to construction, which has had high correlation with it. But if you break that down, the correlation with new permitting data or new permits from a housing perspective has been about 0.7, and total permits has been much lower. I guess new permits around construction are off about 30% over the last six months, while total permits are actually up. I guess the data is a bit misleading with new permits actually being a lot lower. I guess, Matt, you've seen a number of cycles now, I guess, within this specific economy. When you're looking at all the construction data that, I guess, you guys put in your deck and all these different projects, and it certainly seems like nominally that there's quite a bit going on. Does that seem more speculative this cycle? Does it seem like it's a bit different? I'm just trying to drive up the total amount of construction projects that are out there and that we've certainly read about as well versus some of this data, which implies that new permitting is off and things might be a bit softer. I'm just trying to drive the two. Yeah. Mike, with regard to your question, from my perspective, we mentioned these 17 projects. We understand there may be more projects we didn't talk about. There's some hotels that have also. The OUTRIGGER Waikiki Beach Resort has announced an addition of a new tower in Waikiki. There's lots of very positive indications that things are moving. If you look at the number of construction cranes at work in Honolulu, it's more than I have seen in a very long time. We're encouraged by all of that. Does every single project that gets announced ultimately get built? It's unclear. But we do feel a lot of momentum, and this does feel very real to us. We wanted to take a little bit of an extra dive because we continue to say we're encouraged by the prospect, and we wanted to provide just a little bit more data point to give some additional credibility to our view that the economy should get better over the next few years. Got you. But it doesn't feel that much different, I guess, than past cycles where you have that super cycle chart in your deck, but this doesn't feel any different than the last couple of cycles you've seen? I'm not ready to go there yet. I would just like to see a normal cycle, which we expect to get. I'll take that. Fair enough. All right, guys. I appreciate the time. Thanks. Okay, Mike. Our next question comes from the line of John Vins with FBR Capital Markets. Your line is open. Hey, guys. This is Chris Carey, actually on for John. Hi, Chris. Hi, Chris. Hi, how are you? A lot of my questions have actually already been answered, but I was just hoping to ask a couple quick ones here. Drilling down a little bit deeper on the logistics business, I know you saw additional year-over-year improvement in your operating margin in the quarter there. But seeing the acceleration of the fundamentals in that market in the quarter, largely due to weather, I am just kind of curious how your pricing trend is given the increase in carrier costs, or if that was margin improvement on the operational side from the pricing standpoint, or was that much more on the efficiency improvements associated with warehousing and other improvements you made within the organization? Yeah. I would say we have seen improvements in volume. We have seen improvements in our warehousing operation. Margins have been pretty flat. But in some of our lines of business, we have seen improved margins. What we haven't seen is any degradation in margins, to speak of. So what we're seeing is flat to improving margin and volume improvements that are driving the core results. This really is a result of a lot of work that's gone on the G&A side and on warehousing improvement and blocking and tackling and other kinds of things. I can't put my finger on any one thing. It's been a lot of heavy lifting that our logistics team has done just a terrific job in getting this pointed in the right direction. Yeah. No, that's great. That really is great. But going forward, do you see the improvement in the logistics margin? You said you want to hit double-digit operating profit and hopefully, just keep on grinding that operating margin up. Do you see additional leverage to be squeezed out of that business on the cost improvement side from the warehousing perspective, or do you start to see some margin improvement just by virtue of running additional volumes through the system as we go forward? Just trying to get some additional color on how you think about the margin progression in that business and the levers that you can pull there. Yeah. I think it's fair to say that the margin improvements going through improvements in operating cost reductions and G&A reductions are limited. We've worked really hard to squeeze as much of those as we can without hurting the core underlying business. I think our expectations are that we'll continue to see volume growth. I'm not ready to call margin expansion because of box shortages, and clearly, this has been a buyer's market. All the brokerage and logistics companies have seen margins under pressure. But we hope with a little traction in the economy, and our customers understanding that we can get into equipment shortages, and you really need to work with reliable brokers and logistics providers. The customers have really benefited from a surplus of capacity. I think we don't need to get very much further into this cycle when that dynamic changes. When it does, I think we're going to see margins recover to where they were pre-recession. I'm just not ready to call that yet, but I don't think we're very far from that if we do see some increase in momentum in our core markets. Yeah. Okay. Yeah, fair enough. I was just hoping to ask a question about kind of broader shipping dynamics here. We're seeing a larger portion of the order book going forward is going to be these larger vessels, plus 10,000, plus 13,000 TEU vessels. How do you guys think about terminal capacity on the West Coast and those larger vessels impacting operational efficiencies at the terminals? Just in addition to that, does having a dedicated terminal kind of provide you a little bit of shelter there if those larger ships do indeed kind of disrupt the networks? Yeah, I think our view is that these big ships are coming and are here and will only get bigger. What happens to us is really a couple of things. If you look at it from an SSA Terminals or terminal joint venture perspective, our terminal joint venture partner, Carrix or SSA, we believe are the best operators of marine terminals on the West Coast by far. The joint venture has been looking forward. We've been, over the years, looking at improving our facilities and buying the very large cranes that are going to be required, and operating terminals to be able to handle those very large ships. I think as a result, our joint venture is very well prepared to benefit from the advent of these new large ships. As it relates to Matson's little premium expedited niche service, unfortunately, the bigger ships will come with more alliances, with slower and slower cargo availability and turn times, and just continues to reinforce the value of a small niche product, we're going to continue to deliver what we've promised. The other services will get worse, further expanding our service differential. Those are just a couple of thoughts about how the market's going to play out over the next few years. Right. No, thanks. That's really helpful. Just now that you mentioned it, so longer term, are you expecting these dynamics to only improve the pricing potential of that China expedited service? Or perhaps maybe grow the premium over the market rates? Yep. If we're looking on a longer term perspective in the pricing of that particular service. Yeah, that is what we have seen. We have seen an expansion of our premium over the last year or two. It is not unreasonable to expect that to continue. I also think that further pricing gains in the Transpacific line of business are really not going to be available to us until the overhang of vessel capacity is absorbed. With these carriers continuing to order these large ships and in amounts that exceed the end growth market and market demand, it is hard to predict when that is going to occur. But when it does occur, and it will, I am not sure whether that is 2016, 2015, 2017, I really do not know. There should be a further boost in our earnings. But while we do not disclose the operating profits of our lines of business, this business together with the Guam service has been a really nice line of business for us over the last few years. Yeah. That makes sense. Last quick question here, then I will turn it back over. The May 1st GRIs we saw on the Transpacific lanes, hearing how the stickiness of those GRIs is fading pretty quickly here. Did you guys see any benefit from those? Did your premium track the GRI? Was it a bit stickier on the downside of the pricing adjustments? Or did you not really see any benefit there? Yeah. Well, as I mentioned in my prepared remarks, we did see an increase in our freight rates, modest, year-over-year. Part of it is a function of the significant demand for our services, and we were able to achieve a nominal increase in year-over-year rates on the contracted part of our business. So we were encouraged by that. Okay. Thanks so much for the time. All right. Thanks, Chris. Our next question comes from the line of Ian Zaffino with Oppenheimer. Your line is open. Hi, it's actually Tom for Ian. Just real quick on the timing of the collection reversal, is that something that happens like all in one quarter potentially like you did in this quarter? I know it's probably not that big of a deal, but, or is it something that, you just mentioned it would be in the balance of the year. How do we think about that, like impacting a specific quarter? Would you guys kind of give us a heads up ahead of that? I think what you should assume is that we collected between the second, third, and fourth quarters. Our goal is to recover it by the end of the year. Of course, we're going to be shipping more containers in the second and third quarters if we follow our historic patterns, therefore, we'll get more of it because it's expressed on a per container basis. We don't expect it to be a significant driver between now and the end of the year. We do, at this point, expect to get it gradually over the balance of the year. Okay. Then just understanding the Hawaii container guidance as it relates to your comments on the overall multi-year recovery. Is the kind of modest rate of growth, the flat to slightly up, based on historical experience that you guys have had? Why not a more robust growth guidance for 2014? Or is that just consistent with how you've seen it happen in the past? Well, I think it's more around looking at the market today, looking at the specific projects that are underway, and understanding at what phase of the projects the container volume will be injected into the demand will be required. Of course, we've seen relatively flattish volumes so far, so that's coloring our view. Again, we continue to be optimistic about the next 24, 36, 48 months. But our expectation is we may see just a little bit of it and is really one of the reasons why we're calling for a relatively flattish year-over-year volume growth. All right. Thanks a lot. All right. Thanks, Tom. I'm not showing any further questions in the queue at this time. I'd like to turn the call back over to management for closing remarks. Okay. Well, thanks for your interest in the company, and aloha. Look forward to catching up with you in the next quarterly call. Well, 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.