M&A announcement

Nov 11, 2014

Press release

Good day, ladies and gentlemen, and welcome to the Matson conference call to announce its acquisition of Horizon's Alaskan operations. At this time, all participants are in listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time. If anyone should require assistance during the program, please press star then zero on your touchtone telephone. As a reminder, today's program is being recorded. I would now like to introduce your host for today's program, Jerome Holland, Director of Investor Relations. Please go ahead. Thanks, Jonathan, and aloha. 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 their press release, the presentation slides, and this conference call. These risk factors are described in our press release and are more fully detailed under the caption risk factors on pages 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 11, 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. With that, I'll turn the call over to Matt. Thanks, Jerome, and thanks to everyone for joining our call today. As you will have seen, earlier today, we issued a press release announcing our acquisition of Horizon, which when closed, will expand our platform to Alaska. I'm very excited to announce this transaction because it represents a rare opportunity to grow our business in the U.S. domestic markets and strengthens our position as a leading Jones Act carrier with over 130 years of experience. Under the terms of our agreement, Matson will acquire the stock of Horizon following the sale of Horizon's Hawaii business to Pasha, which was announced a short while ago. Along with the sale of its Hawaii business, Horizon has also separately announced that it intends to shut down its Puerto Rico operations by the end of 2014. On slide four, you can see why we believe this transaction makes so much sense and will deliver significant value. The acquisition of Horizon represents a natural geographic expansion of our platform, allowing us to grow and enhance our revenue by approximately $330 million per year, further positioning us as the leading Jones Act ocean carrier in the Pacific. We expect to achieve synergies from multiple sources, including corporate overhead, SG&A, and in vessel and transportation management cost areas. Most importantly, we believe this transaction creates compelling value for our shareholders. We expect the business to contribute approximately $70 million in annual run rate EBITDA before the end of the second year post-closing. Excluding one-time items, we expect the transaction to be immediately accretive to Matson's EPS, providing low to mid-teens annual EPS accretion in years one and two, and approximately $0.35 to $0.45 per share annually thereafter. As you know, we are focused on cash flow generation, and in this transaction, we expect very significant cash flow per share accretion of approximately $1 annually within two years. Let me take you quickly through the transaction highlights on slide five. The deal price is $0.72 per share plus the repayment of debt at closing. This transaction is conditioned on Horizon's sale of its Hawaii business to Pasha for $141.5 million. Separately, Horizon also announced today that it plans to cease its Puerto Rico service by the end of 2014, a decision Horizon made independent of our transaction and one that they disclosed to us in our due diligence process. The boards of directors of both companies have unanimously approved this transaction. The transaction will require the approval of 50.1% of Horizon shareholders voting at their meeting, and importantly, Horizon shareholders representing 55% of the fully diluted equity or 41% of the outstanding voting stock have agreed to vote their shares in support of the transaction. Matson shareholders do not need to vote on the transaction because we're paying cash. Matson will finance the transaction through cash on hand and borrowings under our existing revolving credit facility. Subject to antitrust clearance, Horizon shareholder approval, and other customary closing conditions, we expect this transaction to close in 2015. Slide six represents an overview of the transaction from a graphical perspective, just to illustrate further the mechanics of the deal. Turning to slide seven, we're very encouraged by the steady long-term prospects of the Alaska trade, particularly given Horizon's position as a leading container shipping operator currently serving the Alaska market, a position it has held for over 50 years. The Alaska market mirrors Hawaii in many ways, despite different underlying economic drivers. Both markets depend on reliable, superior, and timely container cargo service as part of vital supply lifelines, hallmarks of the Matson brand. Also similar to Hawaii, Alaska is a market with loyal customers that values premium service. In fact, approximately 80% of the business overlaps with Matson's Hawaii customers. Overall, the Alaska containerized freight market is characterized by well-balanced supply and demand. The economy is solid, showing long-term steady growth, and Horizon's Alaska fleet operates at high utilization levels. Approximately three-quarters of Horizon's volume in Alaska comes from the steady northbound head haul leg, which is driven by Alaska's general economy, energy and mineral resource development, and military cargo. Whereas Horizon's southbound volume is fairly seasonal, with fisheries and the seafood industry being the key drivers. Overall, we view this to be a leading Jones Act franchise in an attractive market. On slide 8, a cornerstone of this valuable franchise is a reliable operating platform that is focused on the same principles as Matson: customer service and on-time arrivals. Horizon deploys three diesel-powered vessels that provide twice-weekly service between Tacoma, Anchorage, and Kodiak, and weekly service to and from Dutch Harbor. The three active vessels are well-maintained and well-sized for the market, with a remaining useful life of approximately 10 years. Horizon is the only Jones Act carrier serving Kodiak and Dutch Harbor, providing a critical lifeline to those communities. Horizon also has a strong terminal operations business that contributes to profitability in Alaska, providing exclusive stevedoring and slot charter services at Kodiak and Dutch Harbor to the international liners Maersk and APL. I would now like to turn it over to Joel to run through the financial highlights of the transaction. Joel? Thanks, Matt. Let me first cover our financial expectations for the transaction in a little more detail. Historically, over the last several years, the Alaska business has produced about $330 million in annual revenues and around the mid-80s in terms of millions of dollars of EBITDA before any corporate overhead allocations from the existing Horizon corporate structure. Our goal from an integration perspective will be to migrate the Alaska business over to our existing Matson operating financial and IT platforms, and we expect to complete this process sometime within 12 to 24 months post-closing. At the end of that process, we think we will need to add about $15 million in annually recurring corporate costs to support the Alaska business on our platforms. Thus, we expect approximately $70 million in annual run rate EBITDA from the business to be the result within 24 months. Some portion of the first 12 to 24 months post-closing will also likely coincide with some important capital projects for the Alaska vessels, which I will elaborate on in a minute. As detailed on slide 9, working down in an illustrated income statement for this business, we expect approximately $30 million-$35 million in new depreciation and amortization, the final amount of which will be determined shortly after closing and dictated by the finalization of GAAP purchase price allocations. Pro forma incremental interest, expense, and income taxes should total around $20 million in aggregate, which yields approximately $0.35-$0.45 per share of EPS accretion. The same numbers after subtracting maintenance CapEx produce approximately $1 of incremental cash flow per share of the company, which we think is very compelling for shareholder value. Note that both these tables exclude one-time items, which I will comment on in a moment. Turning to slide 10, the current plan for the three main Alaska vessels is to install main engine scrubbers beginning in the second half of 2015 and to be completed by the end of 2016. The estimated capital cost will be about $6 million-$8 million per vessel or $18 million-$20 million in aggregate. During the scrubber installation period, we expect a higher-cost reserve steamship will need to be deployed as a relief vessel, which will increase vessel operating costs and modestly impact operating results. During this period, in the second half of 2015 and 2016, the EBITDA generation of the business may be modestly lower than the $70 million run rate, which is one of the main reasons why we are commenting that the EPS accretion will likely be a little lower in that first 12 to 24-month period of time. Overall, the scrubber installation investment should position the vessels well to meet the future environmental control area, or ECA, requirements regarding low sulfur fuel emissions. For the long term, we view this to be a good investment for the business. In terms of regular annual maintenance CapEx needs for the business, we expect approximately $5 million-$8 million to cover normal vessel and equipment maintenance, crane maintenance, and the replenishment of containers and chassis in this market. Turning to sources and uses on slide 11, we have readily available funding sources to consummate the transaction. For our pro forma Matson balance sheet, as shown on the next slide, we believe that Matson will continue to maintain strong investment-grade metrics with debt-to-EBITDA staying in the mid-twos range with plenty of headroom on our debt covenants. It is important to also note that we do not expect this transaction to have any impact on our previously announced vessel new build program, nor is there any anticipated change to our dividend policy. We remain confident in our core business cash flow generation to fund these important items. The table on the following slide 13 shows the buildup of the transaction value of $456 million based upon Horizon's recorded balance sheet net debt and its most recent 10-Q filing. This implies an enterprise value to EBITDA multiple of 6.5x for this transaction based upon the $70 million of expected run rate EBITDA post-integration and scrubber installation. We also expect to grow the $70 million of run rate EBITDA over time, as you would expect from both the underpinning of growth in the Alaska market, as well as successful operating execution within the business itself. There are also two important points to make regarding the $456 million transaction value. The first is that the Hawaii business sale is not expected to create any corporate-level taxes payable due to Horizon's existing NOLs, which are expected to fully shield any gain on the Hawaii business sale. Secondly, Horizon's net debt number is obviously subject to change between this September 21st, 2014 date in the most recent 10-Q and the eventual closing of this transaction. The net debt at the time of the closing is likely to be higher than the amount shown on this page and will be influenced primarily by Horizon's cash flow from operations in the interim period between signing and closing, and also the pre-tax cash shutdown costs of the Puerto Rico operations, which Horizon commented today are expected to be in the range of $85 million-$95 million. Separately, in terms of one-time items for this transaction, we expect two buckets for Matson. The first is one-time transaction cost of approximately $25 million to be incurred at or around the time of closing, the largest components of which would include required Horizon debt repayment breakage costs, financial advisory fees, and legal fees. The second bucket is integration costs of approximately $20 million-$25 million to be incurred in the first 12 months post-closing, the largest components of which are tied to eliminating operating and overhead redundancies. Both of these amounts are pre-tax figures. Turning to slide 14, let me comment on what we think this transaction does to our overall shareholder thesis over the next few years. With this transaction, we see new and meaningful value creation catalysts coming from the Alaska business, including immediate EPS and cash flow accretion, the successful integration of the business onto our operating platforms, which will lead to even greater accretion over time, and the Alaska market adding additional long-term growth prospects to our platforms. In addition, we expect our core business to continue growing through key drivers such as the Hawaii container volumes, premium rates in our China services, steady incremental volume potential in Guam, and improving performance at both SSAT and logistics. The most important of these drivers has historically tended to be Hawaii volumes, where we continue to believe we are in the early stages of the construction demand cycle for our container volumes. Finally, looking a little longer term, we remain very excited about the economic benefit coming down the road from our two new Aloha Class ships to be delivered in 2018. As you add it all up, we see multiple potential catalysts to produce greater shareholder value over the next several years. With that, let me turn the call back over to the operator to take your questions. Certainly. Ladies and gentlemen, if you have a question at this time, please press star then one on your touch-tone telephone. If your question has been answered and you'd like to remove yourself from the queue, please press the pound key. Our first question comes from the line of Jack Atkins from Stephens. Your question please. Afternoon, guys, and congratulations on this transaction. Thanks, Jack. Thanks, Jack. I guess just first off, just to walk through the math one more time on the purchase price. It is $456 million, and then with the shutdown cost in Puerto Rico, would you expect that to be additive to what you are ultimately going to pay for these assets at the time of closing? I just want to make sure I am understanding sort of the total enterprise value at the time of closing. Yeah. By nature, that's going to be a projection or expectation, obviously, Jack. The important number here is the Horizon net debt number on the table of $528.4. That's the number as of the most recent Q. So where will that be at closing? The first thing is, in terms of timing, how long will that be? We don't know. As Matt said in his comments, we expect closing to be in 2015. Sure. Could be first half, second half of the year, we don't know. But I would say, Jack, for modeling purposes, using a middle-of-the-year type number, we're fine with that for modeling purposes. In that context, in the middle of the year, what we're saying is there's two main things that would affect this net debt number. The first is, what's Horizon generally doing in terms of normal cash flow generation in their business? This year to date, in the nine months year to date, their net debt number is up about $17 million. You might see a little bit of creep in this due to their normal ordinary course operations and their increased debt cost. But what we are also saying is that the larger effect is likely to be the cash effect of these Puerto Rico shutdown of operations items. They announced today that those items would be about $85 million-$95 million of cash costs, Jack Atkins. For Matson, on an after-tax basis, that is a number around $70 million. Okay. Just to clarify, the fair way to just add all this up is to take the after-tax impact of the shutdown costs, a small amount of likely continuing negative cash flow from Horizon until the closing, plus the 456? Yeah, you could handle it. That would be a fair way to make Okay projected estimates going forward. Okay, that's great. Then just for my follow-up, could you comment about the utilization of Horizon's current Alaska fleet and where is the volume level in relation to prior cycles? I'm just trying to understand this as it relates to your Hawaii business, we're expecting increased volumes over time. Is the same thing happening with Alaska? Just trying to understand where we are in that particular state cycle. Sure, Jack, this is Matt. I can take a crack at it. In our due diligence process, what we understood about the seasonality of that trade is that it's more pronounced than some of Matson's other businesses, partly because of when the construction activity occurs in the summer or better weather months, and in some cases just related to getting cargo northbound into more remote areas. So it's typically the case that during the summer months, the ship is essentially full. If you were to look at it on a full year basis, we understand their northbound utilization to be something around 85%. Okay. Which effectively means they are full in the summer months, and they are obviously less full in the winter months to get to that 85%. When cargo volumes expand, they either, it moves earlier or later in the fringes of the spring or fall, or they have purchased slots on a competitor's service as well, and they have done both of those as volumes have gone up and down depending on market cycles. Southbound, we understand they are wide open, and the volumes there are more dependent on the seasonality of seafood and other kinds of things, and some years those fish move in bigger quantities than other seasons and types of fish. So, that is more seasonal and annual based on those flows. So that is the general way that the volume works in this trade. Okay, Matt. Thanks so much for that color, and once again, guys, congratulations. Thanks, Jack. Thanks, Jack. Thank you. Our next question comes from the line of Kevin Sterling from BB&T Capital Markets. Your question please. Thank you. Aloha, gentlemen. Hi, Kevin. Hi, Kevin. I would second what Jack Atkins said. Congratulations on a great acquisition. I know you're excited to do this and been wanting this for a long time. Thank you. Let me start with Horizon shutting down Puerto Rico. If I am not mistaken, they have a commitment to the multi-employer pension plan. If they pull out of Puerto Rico, there may be a liability that they might have to pay. Would that fall on you guys? Could you maybe talk a little bit about how that might work? Kevin, generally, this is a stock acquisition, so we will take their non-Hawaii business liabilities and include the ongoing liability of what you just mentioned for the multi-employer plan withdrawal. What I would tell you from a sizing perspective is, as they announced that $85 million to $95 million cash number, rough order of magnitude, approximately half of it is coming from the multi-employer plan liability. That is something we would pick up, depending on the timing of closing, that could happen before or after, but that would be an ongoing obligation that we would pick up. Okay. All right. Thank you for clarifying that. Then two, with Pasha acquiring the Horizon Hawaii assets, I assume they are acquiring the vessels and containers. Do you know what will happen with those vessels? Because, I guess one would worry with too much capacity coming in the Hawaii trade lane, but if I am not mistaken, those Hawaiian vessels of Horizon are much older than what you are getting in the Alaska trade lane. Do you know, would those vessels be scrapped? Do you have any idea what might be the intentions with that additional capacity there? Yeah, Kevin, let me answer that. First of all, we do not know. Okay. This process was very carefully set up by Horizon Lines so that we would really have no visibility to their process, to make sure that we had no visibility or influence or knowledge of what their plans are. As we are here today, we have no idea what's going to happen. I would say generally, that if you look at the market, Horizon Lines is purely a container competitor. If you look at Pasha operates one roll-on, roll-off vessel today, and as you know, they're going to be introducing a second roll-on, roll-off vessel with some limited container handling capability. The way we see those is very different markets. Neither is in the other market. Our expectation is that the competitive landscape would remain relatively unchanged. That's our best guess. Okay. All right. Thank you. One last question, if you don't mind. Horizon has an older vessel in reserve in Alaska, I think, which was built in 1973, and it's steam-powered. What will you do with that vessel? I think you said you would run it kind of when you're retrofitting some of the other equipment. Long term, what's your plan with that older vessel, and how much capital would be required if you were to reinvest in that vessel to kind of bring it up to meet all the eco requirements? Kevin, we're not commenting on any of the specific vessel plans. What we did call out in our slides were the three core active vessels that they use, the diesel vessels that were built in 1987, which are the core vessels that operate the Alaska business. In total, there's nine vessels that would come with us in the transaction. There's six others that are steam, and we're not commenting on the specifics of any of those six other vessels. Okay. You could still operate, even though there's steam, you could still operate those for a couple more years until the sulfur requirement kicks in. Is that right? That is correct. This is Matt. We have until 2020 when the ECA phases out steam vessels. We have until that time to look at these surplus vessels. As you know, Matson has some steam vessels, and we are going to be going through a determination of what are the reserve requirements and dry dock rotations, and all that work will be done over the next few years. Joel is right, we are not in a position to comment on that at this point. Got you. Okay, gentlemen, thanks so much for your time, and congratulations on a great deal. Thank you, Kevin. Thanks, Kevin. Thank you. Our next question comes from the line, Michael Webber from Wells Fargo. Your question, please. Hey, good afternoon, guys. How are you? Hi, Mike. Good. Hi, Mike. Hey. Joel, I wanted to dig into the run rate EBITDA you guys are using for the transaction. You kind of touched on in your prepared remarks a bit, but I was hoping to maybe dig into, I guess, what kind of margins, and I guess slot utilization is kind of embedded in that $70 million number. Maybe if you can't get into specifics, where those fall relative to what we're used to seeing out of your Hawaiian business and what sort of room for improvement you think you could see there. Well, I would just make the first observation on margin, Michael, which is we're saying $70 million of run rate off of, and we said revenues are approximately $330 million. That quick math tells you 21%. Sure. That's higher than our current ocean transportation EBITDA margin. Yep. Not dramatically higher. But that's the result of two things. One is good utilization in this market. We've commented that these vessels have good utilization, high utilization rates. The second piece is that this is really a bolt-on deal for us. It's a division within Horizon today, and we're going to bolt it on to our platforms. We're going to have $15 million more of corporate costs like we talked about, but there's some efficiency there as well. The net result is that a little bit higher margin than you see today in our ocean trans business. Does that make sense? Yeah. No, that does. Matt, I wanted to touch on, I guess, the earlier question around Pasha. I guess maybe coming at that a different way with them kind of, I guess, building a bit more of a presence there. In your experience around that trade, if you can, on an aggregate basis, how close would they be to, I guess, an inflection point, right, that they would need to go in and really, I guess, kind of invest to get up to a certain string that would make more sense, if you kind of follow what I'm saying, right? There are certain tonnage points that make more sense than others. When you look at this, just in your experience, does this push them to the point where you think they would become more active in that market or not? Yeah, I don't know. It would be pure speculation. The best way to answer that is the same way I answered the last one, is that we don't expect a significant competitive change in landscape as a result of this. Okay. All right, fair enough. Thanks for your time, guys. Okay. Thanks, Mike. Thanks, Mike. Thank you. Our next question comes from the line, Ben Nolan from Stifel. Your question, please. Hey, guys. Congratulations. I've been waiting a long time for this call. Thanks, Ben. Yeah. I had a couple of questions. My first one sort of relates to the Puerto Rico business. Joel, you did a good job sort of outlining where the costs lie in addition to sort of what you are showing here. I was curious, are those costs of that $85 million-$90 million, is that net of some of the assets that you inherit there? Obviously, there is the ships. I do not know if there would be any remaining NOLs that you would be able to get. Are there other things that we should include into that calculation on the asset side rather than just the liability? No, those are just the liabilities. Those are the cash costs of the liabilities that they would incur to shut it down. That does not include any assets or future activity on those assets. Those are shutdown costs. Okay. Other than the ships themselves, what other assets should we think about are part of that Puerto Rico business that would be inherited by you guys? Generally, normal equipment. Chassis, gen sets, containers, those sorts of things. Normal ocean carrier equipment. Okay. You would not envision any issues incorporating those into your existing platform, I would assume, right? That is pretty fungible type equipment. Yeah. Those are by definition, transportation, highly movable assets. Yeah. Puerto Rico is a long way away. But yeah, those assets can be moved anywhere. It is just a matter of cost and trying to integrate them into your network. Okay, that is helpful. What about NOLs? I know you mentioned that, and I know that they did have some related to that business, but do you think that any of them will make their way all the way through the process? Yeah, good question, Ben. The answer is yes, small amount, modest amount, and we will receive some incremental benefit from that. The vast majority of which will be consumed in the upfront Hawaii business sale. There is not enough post-closing ongoing for Matson where it is going to make any kind of material change, we believe, to our effective tax rate going forward, pro forma for the combined company. Okay, good. Then more broadly speaking, when you think about integrating the Alaska business into your existing West Coast operation, can you maybe walk me through some of the things that you think maybe are low-hanging fruit? Where are areas where putting it in, bolting it on, as you say, to what you already have, could you consolidate terminals? Could you, I don't know, use fewer spares for the combined fleets? Any idea how I should think about the synergistic benefit? Sure. This is Matt. I will take a crack at that. There are three or four buckets, and you have outlined several of them already. The first one is to leverage Matson's back office accounting customer service infrastructure. What that would mean is we would, when we are ready, and we are comfortable that the systems are going to allow that, would be to move all those transactions through our system, which would allow us to eliminate a significant amount of SG&A and overhead and infrastructure that Horizon has in place, and put it onto our existing system. That is part of the economics that Joel mentioned when he talked about his $70 million run rate, which is $85 million of gross EBITDA out of the business and $15 million in overhead. So it is going to cost us a smaller amount of incremental SG&A to bolt that onto our existing back office platform. The second area, as you point out, are in equipment, in maintenance, in the use of reserve vessels and the numbers of reserve vessels we will need in class for dry dock relief. There may be opportunities for some terminal consolidation. There may be opportunities for some small amounts of logistics and inland transportation. There is a whole basket of potential synergies, and most of those are baked into the kinds of EBITDA run rate that Joel had mentioned. Then over time, we will be looking for more, but I think the significant ones, I think, are incorporated into our thinking at this point. Okay. That is very helpful, Matt. The last one for me is, do you think that there is, and maybe my geography just needs a little work, but do you think that there would be any potential to sort of extend the expedited service, including Alaska? Obviously, the far reaches of Alaska, the Dutch harbors, not too far away from Japan, for instance. Is that something that even makes sense logistically that might be a potential for some point down the line? Yeah. The way I would answer that is to say that that is certainly something to look at. An important part of this Horizon Alaska's revenue source is servicing Maersk and APL at Dutch Harbor that are carrying cargo from those areas in Kodiak and Dutch to Asia, and doing the stevedoring services for them as they pass by. We do not envision, to answer a part of a question you asked, any change to our existing CLX expedited service. It is too far out of the way, and we are chock-a-block full on our existing service in both directions. Is there an opportunity over time to look at other potential ways to link our services with Asia? Sure, we will look at it, but I certainly would not put any kind of near-term benefit in thinking about that. That is certainly something we might look at post-closing. Okay. Perfect. Again, guys, this is a real marquee event for you guys, and I am happy for you, so congratulations. Thanks very much. Thanks, Ben. Thank you. Our next question comes from the line of John Mims from FBR Capital Markets. Your question, please. Yeah, thanks. Good evening, guys. Again, congratulations. I guess some of us thought this might not happen for some time. Most of my questions have been answered. It's been picked apart pretty well by the guys before me. Let me ask on the Horizon port facilities in Hawaii. If I recall, those are owned by you, but leased to them, right? Is there any opportunity to reprice that contract or any sort of movement there as it moves from Horizon into Pasha's hands? Yes, John, the marine terminal arrangements for Horizon in Hawaii are completely separate. They maintain their own marine terminal, and they stevedore using their own stevedores, so they're quite separate. They have their own lease with the State of Hawaii Department of Transportation. We don't see any change. We're not a party to their current deal and wouldn't envision any change to those arrangements. Okay. For some reason, I thought there was some overlap there. So it is. You may have said this before, but the kind of organic, I know there's a lot of seasonality there, but the organic growth rate in Alaska for the last couple of years and as far as growth and just the container trade there. In Hawaii, there is the GDP plus the construction growth. Is there a similar type of catalyst that can drive above GDP growth in Alaska? Yeah, I would say, John, from a trend perspective, it's tended to have similar trends, although different ups and downs in cycle to it, but very similar behaving over the long term as Hawaii. But Hawaii moves to tourism and things like that. Alaska is more sensitive to energy investment. So that's an important, just like tourism is an important long-term driver to always watch in Hawaii, energy investing is an important long-term driver to watch in Alaska. So if you have a bullish view on that, and it actually happens, you're going to see containerized demand grow more rapidly, and it can work the other way. So that's an important driver. Another important driver that's very similar is military. There's large military presence as a percentage of GDP in Alaska, similar to Hawaii. So those would be two pieces of GDP to keep an eye on to look at over trend or under trend type of performance. Right. Horizon never, in their reporting, they never really broke out each market. But did you see, as the shale revolution in the domestic U.S. has picked up and some of that's been to the detriment of the Alaska North Slope production, have you seen some weakness on the energy-related front there, or have volumes stayed pretty steady over the last year or so as you were doing your work there? Yeah. It's been steady, but I'd say if you talk to Alaskans and people know, the bigger trend really has been on the tax side. There's been changing tax law under Governor Palin that incrementally disadvantaged energy investment relative to where it was before. That tax law just was reversed in the last year. That's going to, on the margin, help energy investment. So that's an important thing to be aware of as well. But in general, it's been steady performance, and as we diligence the business, we're comfortable that the overall volume demand is in a good place right now, and we're optimistic about the future demand. Fair. All right. Well, that's all I've got right now. But again, congratulations. Glad to see this one get done. Great. Thanks, John. Thanks, John. Thank you. Our next question comes from the line of Steve O'Hare from Sidoti & Company. Your question, please? Yeah. Hi, good afternoon. Hi, Steve. Hi, Steve. I'm just curious, in terms of the number of ships that Horizon has, and I know steamships have to be out of the Jones Act fleet by 2020. It sounds like you need three ships to serve this trade lane. Does that mean you have to replace a steamship with a new build by 2020? Yeah, Steve. As Joel Wine pointed out in his presentation, of course, the three vessels that serve Alaska are diesel ships, so we're in good shape there. So our coverage there is anticipated to be during dry dock relief. So what we need to be in a position to do is post-2020 to have a dry dock relief vessel that's available to serve those markets. You'll know we have two Aloha Class vessels that will give us surplus diesel vessels in our core Hawaii fleet that may allow us to deploy a reserve vessel. We're also evaluating whether or not it's appropriate for us to convert one of the best surplus vessels, re-engine it, or make it otherwise available for dry dock relief. We're not in a position to specifically comment on that, and that's work we're going to be doing between now and 2020 to ready ourselves for that. Okay. In terms of Horizon's market share, what is the market share today? Can you just talk about how fractured the market is or isn't? Yeah. There's two pieces of primary market share in terms of vessels that go to the ocean, barge and container, and the larger piece is on the container side. In there's one primary competitor, Steve. It's a company called Totem Ocean Trailer Express. The split between Totem Ocean Trailer Express and Horizon Lines is roughly 50/50 on the ocean container side. Okay. I guess just quickly, in terms of the, I think you maybe touched on it, but I think there was 85% overlap with customers. Would this be a big benefit to the logistics business that you have, or is that kind of already baked in? I thought you said that was kind of already baked into that $70 million, but I was just kind of curious if maybe that would seem to be a little bit not as aggressive as maybe it should be. Yeah. I would say the Alaska trade has grown up around the Tacoma area, so much of the sourcing for the Alaska business is in and around distribution centers in the Tacoma area. So there isn't a significant amount of cross-country movement to support the Alaska trade. Although there will be, just like we see in Hawaii, there will be items that will be moving from inland Midwest, other manufacturing points for specialty manufacturing items. We'll be looking at those kinds of opportunities to bolt on. But we see them as small, certainly beneficial, but not huge needle movers in terms of the opportunity there. But certainly we'll be going after them. Okay. I'm sorry, if you could just clarify the thing about the pension cost. Did you say that the pension exposure was included in that $85 million-$95 million? Yes. Okay. Thank you. Thanks, Steve. Thank you. Our next question comes from the line as a follow-up from Kevin Sterling from BB&T Capital Markets. Your question, please. Thank you. Thanks, Matt and Joel, for letting me follow up. I am going to dig into my memory bank a little here, but at one time, Horizon had a logistics division. Are you guys picking up anything in logistics, or had they already sold off that division? I cannot remember. Kevin, that business unit was discontinued, and so it is not part of the sale. Okay. In Alaska, you talked about overlap of existing customers. What percent of your Hawaii customers traffic in Alaska now? We would have to get back to you on that number. We do not have a reverse number. Yeah. We do not. Okay. Lastly, there's been a lot of talk about with the union and congestion issues in the West Coast ports. I know Tacoma has felt some congestion issues. Is Horizon's Alaska service that comes in and out of Tacoma, are they seeing any impact from the slowdown in congestion? Ultimately, is Horizon covering the same union contract? Yeah. To answer the second question is, yes, they are a party to the multi-employer agreement, as is Matson, as are all the other companies that employ labor with the ILWU on the West Coast. So they're subject to the same agreement. Everyone in the PNW has been moderately impacted. It hasn't come up as a significant due diligence item, although we're hoping that this matter will get resolved in the very near future and not be a long-term drag on the earnings or somehow fundamentally lower the prospects that we're buying. Okay. All right. Thanks again for letting me hop back in queue. I appreciate it. Okay. Kevin, you bet. Thanks, Kevin. Thank you. Our next question is a follow-up from the line of Michael Webber from Wells Fargo. Your question, please. Hey, guys. Thanks for letting me follow up. I kind of left off a valuation question, but it didn't get asked. Just curious as to how you guys arrived at the offer. If I tack on the one-time pre-tax items, which I would imagine would be included in EV, I guess it pushes the multiple to about 7.2, and you guys are trading at about 6.9 times, I guess, 20 year consensus 2015 EBITDA. So I'm curious as to, A, whether there's something off there, and you guys are obviously excluding those one-time items here. But just how you kind of arrived at the purchase price and how that's kind of oscillated since, I know you guys have been looking at this for a while. Yeah, Michael, it's Joel. I'll take that. I think you know us quite well. We're very focused on cash flow. Long-term cash flow in particular, but short-term cash flow matters, too. So we look for investments that are going to enhance our cash flow accretion and also be long-term valuable and additive to DCF-type values. So that's how we come up with the overall valuation here, and we believe this is going to be shareholder value enhancing at the level that we're paying right here. This core business that we're buying is a very steady business, a very strong franchise. It's one of the best franchises out there in the Jones Act business, and it throws off a lot of cash flow. So it really fits all the financial criteria that we like to see, and then, of course, it's our bread and butter core shipping business. We also think in that regard, it's risk that we understand. You're looking at very strong cash flow generation and risk that we understand and think we can operate under. Those are the parameters that we use to value businesses. Got you. But that 7.2x, I guess, inclusive of the transaction and restructuring charges is about what we should be using? Well, I don't want to tell you what to use. You have to decide what adjustments to make. We have our own one-time costs, the transaction costs and the integration costs, which we mentioned, and then we're calling out these additional costs that Horizon has announced that they're likely to have on their Puerto Rico business. It's up to you which of those you pick and choose to do calculations off of. But we just wanted to get all that information out to you so you can make that decision. Okay, great. Thanks, guys. Okay. Thank you. Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Matt Cox for any further remarks. Okay. Well, thanks everybody for your attention to this matter, and we'll look forward to catching up with everybody in the near future. Aloha. Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.