Matson Inc (MATX) 2012 Q3 法說會逐字稿

Good afternoon, and welcome to the Matson, Inc. Q3 2012 earnings conference call. All participants will be in listen-only mode.

(Operator Instructions)

After today's presentation, there will be an opportunity to ask questions.

(Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Mr. Peter Heilmann, Corporate Secretary. Please go ahead.

Thank you, Denise. Aloha, and welcome to our third-quarter 2012 earnings conference call. Matt Cox, President and Chief Executive Officer, is joining from Honolulu, while I am in Oakland today with Joel Wine, Senior Vice President and Chief Financial Officer. Slides from this presentation are available for download at our website, www.Matson.com under the Investor Relations tab.

Before we begin, I'd like to take this opportunity to remind you that during the course of this call, we will make forward-looking statements within the meaning of the federal securities laws regarding expectations, predictions, projections, or future events. We believe that our expectations and assumptions are reasonable. We caution you to consider the risk factors that could cause actual results to differ materially from those in the forward-looking statements in the press release and this conference call. These risk factors are described in our press release and are more fully detailed under the caption risk factors on pages 19 through 29 in the 2011 Form 10-K filed by Alexander & Baldwin, Inc on February 28, 2012, and in all of our other subsequent filings with the SEC. Please also note that the date of this conference call is November 7, 2012, and any forward-looking statements that we make today are based on assumptions as of this date. We undertake no obligation to update these forward-looking statements.

Also, references made to certain non-GAAP numbers in this presentation. A reconciliation to GAAP numbers and descriptions of calculation methodologies is provided in the addendum. With that, I will turn the call over to Matt, who will take us through the key highlights of the quarter, as well as an outlook for the fourth quarter. Matt?

Thanks, Peter, and thank you to those on the call, and for your continuing interest in and support of Matson. The third quarter was marked by steady financial and operational results, with mixed performance by unit, as I will describe throughout our presentation. As we expected, our expenses rose during the quarter, due primarily to dry docking one of our largest ships and one of our Neighbor Island barges. These dry dockings not only impacted our fleet deployment, but additionally, led to higher outside transportation costs. In place of the large vessel in dry dock, we turned to a 10-ship deployment to meet our customers' demand and our own high service standards for on-time delivery of cargo. We expect to return to an optimal fleet structure, that is a nine-ship deployment, in the fourth quarter, and that dry docking-related expenses will be reduced for the balance of the year.

During the quarter, we also noticed some encouraging but very early signs of Hawaii volume increasing. This slight uptick was outpaced by strong volume gains in Guam and rate and volume increases in China on a year-over-year basis. Just as important as our operational performance, we made good progress in paying down our debt during the quarter, a reflection of strong cash from operation generation, as well as a reduction of some cash reserves we held. All in all, a steady, satisfactory quarter for Matson.

As shown on slide 4, Matson's consolidated operating income for the quarter was $34.2 million, as compared to $30.9 million for the third quarter of 2011. I note, however, that net of all the separation expense from our former parent company, Alexander & Baldwin, and shutdown costs associated with our CLX2 service, operating income decreased marginally by $2.5 million during the third quarter on a year-over-year basis. For the first nine months of 2012 as compared to 2011, operating income rose by $9 million, accounting for the expense of separation and shutdown. These are good results driven by solid performance in our Ocean Transportation segment, offset by lower results in our Logistics group. More on that later.

Moving to slide 5, Ocean Transportation's operating income for the quarter was $32.9 million, as compared to $28.9 million for the third quarter of 2011, and operating income margin was 10.7% during the quarter. Our operating income margins continue to improve, but we are still below where we want them. As we've said before, we target a 10% to 12% annual margin on average, and while we improved during the quarter, we are below our target level. From a top-line perspective, revenues increased by over 9%, driven by mostly net volume growth and increases in freight rates in the China trade. Similarly, revenues increased by nearly 12% year-to-date for the same reasons. SSAT, our terminal operations joint venture, is included in operating income for Ocean Transportation segment, while it appears as a contra expense on our consolidated income statement.

For the third quarter, SSAT contributed $700,000, and year-to-date, that amount was $3.1 million. These levels are off by over $2 million and nearly $4 million from prior-year levels due to the loss of volume of several major customers. Net of separation shutdown expenses, operating income nominally decreased by $1.8 million during the third quarter on a year-over-year basis. For the first nine months of 2012 as compared to 2011, operating income rose by $11.7 million, net of these separation and shutdown costs. However, with SSAT down for the quarter and the year, our Ocean Transportation business was essentially flat for the quarter, and up significantly year-to-date as compared to last year.

And with that, I'll now shift to each of our Ocean Transportation markets. Container volume in our Hawaii service was up very modestly during the third quarter as compared to last year, while automobile volume surged by nearly 13%, mostly due to timing of automobile rental fleet replacements. This slight volume gain we saw in container volume during the quarter is encouraging, but we're hesitant to say that we have reached a bottoming and that large volume gains in our forecast. As I've mentioned before, the impact of dry docking one of our largest ships triggered a 10-ship deployment, and the dry docking of a barge used in our Neighbor Island service led to some additional expenses related to outside transportation costs. Looking to the fourth quarter, we expect that Hawaii general economic activity will remain flat and therefore do not expect any significant uptick in container volume on a year-over-year basis. Our view of Hawaii volumes is influenced by some of the key economic indicators, which we'll show on the next slide.

The table on slide 7 shows some of the key metrics of the Hawaiian economy. As you can see, Hawaii has fared relatively well during this economic downturn, with strong growth in visitor arrivals and lower levels of unemployment. Nevertheless, construction in the state of Hawaii has not yet rebounded to pre-recession levels, which has in part suppressed our Hawaii volumes. We closely track construction activity, measured in jobs and building permits, because it historically has proven to be correlated to volume growth or loss. And while building permits are expected to rise very significantly for 2012, much of this permit activity is centered on energy tax credits and the installation of solar panels on existing buildings, which does not impact our volume significantly. Therefore, we remain cautious in our expectation for Hawaii volume moving forward.

Turning to our Guam service on slide 8, container volume continues to be significantly higher on a year-over-year basis, which reflects the exit of a major competitor in the market that occurred last November. While we enjoy the benefit of this additional cargo volume now, we also acknowledge that the overall volume demand in the Guam market has contracted slightly. With that said, we expect that our volume will continue to be strong until a new entrant emerges in the market, the timing of which is unknown and difficult to predict. The US military deployment activity continues to be delayed.

On slide 9, our China Expedited Service continues to perform well, driven by much higher year-over-year freight rates and continued strong volume demand for our expedited offering. As a reminder, because about 50% of our China business is under annual contract and the other 50% is spot rate, we do not get the benefit of rising freight on the full amount of the spot rate business. During the third quarter, container volume was up by 11%, due primarily to an additional sailing. We expect volume to moderate back to normal levels in the fourth quarter of 2012 and on par with last year. We also expect that seasonal weakening of freight rates will occur, and indeed, you can see from the chart in the upper right-hand slide of part of slide 9 that the first three weeks of October, spot rates dipped about $200 per container. I would also note, however, that on a year-over-year basis, freight rates in the fourth quarter of 2012 should remain much higher than last year's very low levels. As I've mentioned before, there is currently a surplus of container vessel capacity in the world international container market relative to demand. Sustaining current trans-Pacific freight rates depends upon rational industry-wide carrier management of vessel capacity and secondarily on the strength of the US economy.

Turning now to Logistics on slide 10, performance continues to lag our internal margin benchmarks for this segment, driven mostly by volume loss as the result of the shutdown of our CLX2 service and also the loss of a major ocean carrier customer. In response, we focused on organic growth in our intermodal and highway businesses. We have initiated the rollout of a domestic 53-foot container pilot program and targeted general and administrative cost reductions to improve profitability. As yet, however, these efforts have made only a modest impact on segment profitability. As a result, the Logistics segment operating income for the fourth quarter is expected to be breakeven, but our results will be dependent upon continuing improvement at our Logistics Northern California warehouse operations and ongoing expense control. Now, let me turn the call over to Joel for a review of our financial performance and outlook.

Thank you, Matt. Slide 11 presents a summary of our unaudited income statement for the quarter and year-to-date. Before commenting on the numbers, I want to make a few general comments. One, I am pleased that our first quarter as a standalone Company was very clean from an income-statement perspective, as there were no meaningful impacts from the separation with A&B or shutdown costs associated with CLX2. We now also have all the interest expense on our full debt running through our statements, which provides a good run rate for future interest expense estimates. And third, our effective tax rate has essentially normalized, although it was modestly lower this quarter than our estimated 38.5% due to a state tax refund we received.

Moving to the numbers, total consolidated revenue for the quarter was $401.4 million, a 5.5% increase over last year, due mostly to net freight rate and volume gains in our Ocean Transportation segment. Net income was $19.1 million during the quarter, or $0.45 per diluted share. This compares with $0.21 per diluted share last year, or $0.44 per diluted share from continuing operations last year, which removes the impact of A&B and CLX2 discontinued operations.

Turning to the next slide, we are presenting for the first time our EBITDA for the quarter and the full year-to-date. We believe EBITDA provides information that is useful for our investors, as it is a measure used by our management team to evaluate performance and make day-to-day operating decisions. In the third quarter of 2012, our EBITDA was $52.5 million, and for the first nine months of the year, EBITDA was $128.5 million. Net of separation/shutdown expenses, EBITDA decreased modestly in the third quarter and increased by $11.7 million year-to-date.

Slide 13 provides a breakdown of capital expenditures by quarter for the first nine months of the year. Our capital expenditures are expected to be $10 million to $15 million for the balance of the year, heavily weighted towards Ocean Transportation, which would bring our total CapEx spend for the year to be approximately $40 million to $45 million. This amount is in the lower end of the $40 million to $50 million range we mentioned on our last quarterly earnings call and is right in line with our historical annual maintenance capital expenditures, excluding new ship builds. I'm also pleased to note that on October 25, our Board authorized a quarterly dividend of $0.15 per share. Matson has an outstanding history of paying dividends, and the authorization reflects the solid financial foundation of our Company. With our financial strength, we also have ample capacity for further investments in our businesses and new growth opportunities.

Turning now to the balance sheet and credit metrics, we ended the quarter with total debt of $328.6 million. During the quarter, we paid down debt by $44 million through a combination of cash from operations and reductions in excess cash balances we held at the end of last quarter at the time of separation. This is consistent with one of our post-separation goals, which is to reduce debt levels. At the end of the third quarter, I'm pleased that our net-debt-to-EBITDA coverage ratio has been reduced down to 2.0 times.

Slide 15 captures our outlook for the fourth quarter of 2012. Given the traditional seasonality of ocean shipping, the Company expects its volume in the fourth quarter of 2012 to be lower than third-quarter levels. However, owing to the strong freight rate environment in the China trade, and continued expected increased volume in the Guam trade, the Company expects its Ocean Transportation segment operating income for the fourth quarter of 2012 to be significantly higher than the $13 million achieved in the fourth quarter of 2011, perhaps even a doubling of operating income in the fourth quarter. The Logistics segment operating income for the fourth quarter is expected to be breakeven, but will be dependent upon continuing improvement at our Northern California warehouse operations, continued expense control, improvement in the US mainland economy, and competitive dynamics in the industry. And with that, I will now turn the call back to Matt for closing remarks.

Thanks, Joel. We had another steady quarter, both operationally and financially. Our Ocean Transportation segment performed well and showed a modest improvement in margins, but on a year-to-date basis, we're below our target range of 10% to 12%. I think we can do better, and in order to do better, we will need to see a more meaningful increase in Hawaii construction activity. On the Logistics side, we continue to focus on organic growth in each of our lines of business. You have heard some of our efforts that are underway and are starting to take root, and we expect this business to product operating profit levels of 2% to 4% in the longer term.

We did make good progress in paying down our debt during the quarter, and our balance sheet is in great shape. Coupled with our cash flow generation capabilities, we are well-positioned to capture gains in the future, whether through organic growth associated with Hawaii and the US economic recoveries or through new growth opportunities. We are ready. And with that, I will turn the call back over to the operator and open the call up to questions.

Thank you, Mr. Cox. Ladies and gentlemen, we will now begin the question-and-answer session.

(Operator Instructions)

Jack Atkins, Stephens.

Good afternoon, guys, and thanks for taking my questions. First off, Joel can we go back to one of the last things you said there on the outlook for the fourth quarter? You mentioned a potential doubling in operating income in the fourth quarter on a year-over-year basis. Could you give us -- just to make sure we're all working from the right number, what is the 4Q 2011 operating income number that you're working off of? Because I know that there's corporate expense included in that now that wasn't in the comparable period last year.

Thanks, Jack. We're working off the $13 million number that I mentioned and that we put on the slide. The reported operating income for that segment last year was $13 million.

Okay. Okay, great. Wanted to make sure I had that correct. When we think about the Hawaii service, I know that you guys are encouraged, and so are we, to see a modest amount of growth there on a year-over-year basis. But when you think about the strong visitor arrivals, or visitor dollars, being spent in Hawaii this year on a year-over-year basis being back to peak levels, trying to think about the lag between the amount of money being spent in Hawaii by visitors and when that's going to start showing up in construction dollars spent, which would impact you guys? Any sort of color that you could give there I think would be helpful.

Yes, Jack. Why don't I take a crack at that? I think we have said for the last couple of quarters that I think it's been a good sign for the state to see such strong tourism activity, and the reports from UHERO and [DVAT] point to some of the indicators there in terms of visitor arrivals, visitor spend, hotel occupancies, and so on. And as a tactical matter, that doesn't translate into a lot of freight. The amount of containerized cargo consumed by those visitors is quite narrow, but we do think it does provide, longer term, a catalyst for hotel owners to look at major refurbishments. The broader improvement in the state's economy I think will lead to more underlying demand for primary housing. We're already seeing the beginnings of at least the planning stages for some new high-rise towers in Oahu. We're seeing relative improvement in sales volume and prices, at least in many of the islands. I think we see it heading in the right direction, but it just hasn't translated quite into where it turns into freight for us.

Sure, sure. That makes sense. That definitely makes sense. I know it's going to be hard to predict that until it begins showing up in the volumes. And a couple other quick items, and I'll jump back in queue. Matt, I was wondering if you could give us an update on the rollout is going of the 53-foot [Manukai] box program? Any color there on the progress you guys are making?

Sure, I can do that. Again, it's a pilot of only 200 53-foot boxes, which we took delivery of in this quarter and are essentially all but a small handful fully deployed and are now moving. The initial turns, the margins per container, are all very encouraging. It wasn't significant driver to our operating results for the quarter, but we certainly like what we've seen so far.

At what point would you guys consider expanding that from a pilot program to a full-on business line? Going from 200 boxes to several thousand? Is that something that could happen in 2013, or is that later than that?

It's a good question, Jack. I think in part, it will depend on the underlying demand. I think the way we're approaching now is that we will grow as the demand for it picks up. I think at some point you will see us, once we get done with the pilot and look like we're ready to expand it, we'll probably continue to grow it in a very steady fashion. But of course to the extent that we can now have a conversation with our customers and other customers about how many boxes do you want and we'll put them into contract, that changes the nature of the conversation with customers. I see it really at the end as very demand-driven. If the market wants it, we're going to produce them and put them into service.

Okay, that all makes sense. Last thing for me. Both of you guys called out the one-time expenses in the Ocean Transportation business due to dry docking. Curious if you guys would be able to quantify that so we can have an idea of what the underlying operating margin level of the Ocean Transportation business was in the third quarter?

Jack, we don't disclose that, the specific amounts. So that's something we cannot answer. When we talk about our quarter, we mention big drivers and year-over-year comparisons, but we don't break out the specifics.

Okay. That makes sense. Thanks again for the time, guys, and a great quarter.

Michael Webber, Wells Fargo.

Matt, I wanted to jump back to the conversation around your vessel deployment. You mentioned in your prepared remarks that you guys have moved to 10 vessels, and you're moving back to nine in Q4. Can you talk to when you're doing it within the quarter? And how should we think about that from a cost breakdown perspective in the fourth quarter? Maybe a little bit of color about what that means for the numbers in the fourth quarter?

I can do that, Mike. What I would say is that -- to put this into a little context, we have a number of vessels, and dry docking is a relatively normal occurrence. What happened in this case is that one of our largest vessels -- we have three vessels that are what we call our C9 class, which are our largest vessels. And when these large vessels go into dry dock, we have to replace them with two smaller vessels in order to carry the cargo package and keep our service level demands up. The specifics on -- they're going to be delivered, I would say, between the middle and the end of the quarter. The reason -- if you listen to Joel's comments about our improvement in operating results that we expect in the Ocean Transportation segment in the fourth quarter, you'll notice that Joel did not mention dry-docking costs as being a major driver for the quarter year-over-year. As we look at it, there will be a step-down in costs. It was a call-out in this quarter, less so in the next quarter. But it's really going to be improvements in the freight rate environment in China and of course, the remaining quarter, the benefit of Guam volume, driving that are driving more of the year-over-year results for the fourth quarter, just to provide additional context.

No, that makes sense. And along those lines, and forgive me if you guys have it in your deck and I missed it. Did you guys put out a special survey and/or dry dock schedule for 2013?

We have not done that, Mike. And we will approach that as we go into the year-end call and provide what we think is going to be meaningful to investors in terms of the earnings path for next year at that time.

Got you. That's helpful. We'll look for that. You mentioned Guam, just back up and talk big picture and your market share there. It's obviously something that's difficult to quantify. But how long do you guys think you guys can continue to trend along with this kind of market share in the Guam market? From what you're seeing from your competitors, at what point do you think you start to see some natural erosion there?

It's really difficult to tell, Mike. I would say operationally, it's very straightforward for us to handle all this additional volume, that we have that extra capacity on that vessel that calls into Guam, and the operating part of that is working very smoothly. In some ways, it's very difficult to predict when another carrier comes in. I can say tactically, right at this minute, we're hearing of no one who has announced plans to come into the market. But that could happen. That could change relatively quickly. So it's really difficult for us to know when another competitor would come into the market, and it's difficult to speculate.

Got you. That's fair. If we move to trans-Pac and your [old backhaul], can you talk a little bit about the pricing premium and how that's trended this quarter, in Q3 and then Q4 to date? Been hearing a lot about Ocean Trans grabbing some incremental share from air freight. And you guys would obviously be the next choice along that value prop. Has that premium expanded to any meaningful degree over the last several weeks or months, or a little bit of color about how that's trended?

Yes, I can do that. On the trans-Pac, I think what we saw was a -- and of course, we've been at this now for six years. We have seen, through various market cycles, our premium relative to the average rates in the market expand and contract as we go through the market cycles. But I would also say there has been a steady improvement in our margins as we have become a more and more credible player in the expedited niche segment that we've carved out for ourselves. So I think we saw a very strong level of demand for our expedited product, owing to people downgrading from their air freight market. It was a very, very good year for us in the quarter. But we're now getting into the -- peak ended three, four weeks ago. We're starting to see shipment volume begin to trend down along the line of normal practices. But I would say without giving a number, it's been a good year as far as the premium, and we have -- and it's been a good year from that perspective.

Got you. All right. That's helpful. And I think in one of your earlier answers, Matt, you mentioned the fact that a significant amount of that [CLSI] business is on an annual contract. Can you remind us about when the bulk of the contracts reset?

For the trade and total, May 1 is the big contract date. In reality, contracts begin to get signed as early as January, and some even go through June 30. But I would say the very largest bulk, maybe 70% or 75% of the contracts on a volume basis, are a May 1 to April 30 cycle.

Got you. All right. That's helpful. A couple more for me, and I'll turn it over. From a high level, from a volume perspective, and you guys have already touched this. Obviously, volumes were a bit better sequentially, a little better than we had anticipated. Can you give a little bit of color about how that's trended quarter-to-date on a relative basis?

In the fourth quarter? No, not other than the earnings guidance or the outlook comments that Joel had made. I think that's really all we'd like to comment on at this point.

Got you. All right. Fair enough. Finally, from a replacement CapEx perspective, you guys have been pretty clear about your plans there. Any commentary around timing of placing some of those orders? And are you seeing any pressure for slots specifically in San Diego in terms of being able to get in and place an order when you want to?

Our plans have not -- I can give you a little bit of color on timing. I would say that there are two or three yards that are likely to bid on our project. One, as you point out, is San Diego. There's a yard in Philadelphia, and several Gulf yards potentially that could bid on the project. Our view at this point is that we're probably -- sometime in calendar '13 we'd hope to finalize our planning and structure and size for those vessels. And we certainly will be soliciting all the main yards, and we'll have more to say about that as we get into 2013. But I would guess sometime during calendar 2013 we would want to firm up our plans. And as we've said earlier, those plans are for two vessels that would be delivered in the next three to five years of about $200 million a piece. That's for our planning purposes the approach we're taking.

Got you. All right. No, that's helpful. That's all I've got, guys. Thanks for the time.

Kevin Sterling, BB&T Capital Markets.

Thank you, Good afternoon, gentlemen. Looks like you guys recaptured some of the volume I think you lost in Q2. What was driving the better demand trends? Was it less competitive pressure that you experienced in the second quarter, or typical peak-season trends?

Are you talking overall, Kevin, or are you talking about in one particular market? Just so I understand the question.

Overall, and then if you could break down the markets, too, would be helpful.

Okay. Yes, I think in the China market, we were building into the peak season. The volume there was actually I think a little better, because the previous year had had an unusually weak pre-lunar new year, post-lunar new year build. So I think that market held up pretty well. Guam, of course, year-over-year was up dramatically because of the absence of our primary competitor, and so that was pretty clear. Hawaii was the weakest of our markets on the ocean side. And there, I think it was due to two or three factors. There was some competitive pressure. The market was pretty soft. A lot of our customers were noting that they had lower shipment volumes compared to the previous year. And there was some cargo that moved that had previously moved from Asia into the West Coast and then was carried by either us or Horizon lines, with some of that was now we saw being carried direct into Asia. Those were some of the factors in the second quarter in the Hawaii service, and we've seen some flattening and a small improvement in third quarter in Hawaii.

Okay. Great, Matt. Thank you. With the auto business, you saw a nice pick-up, and you mentioned timing of the rental replacement cycle. Could you give us more color on the cycle? Was it mostly a Q3 event, or should we see some benefit into Q4 as well?

I would say that if you look at our year-to-date volumes in auto, they're still down somewhat. There are two segments. One is the retail segment in Hawaii, which is the smaller of the segments. I think there, we did see improvement along the lines of the Hawaiian economy generally. But of course, the big needle mover for us is the timing of the rental fleet replacements. Part of it is the fact that the rental car companies delayed the shipment from the second quarter into the third quarter because of the strong demand and high tourism volumes, that they kept their fleets a little longer and only started to replenish in earnest in the third quarter once they'd hit the peak. Every year, there's just a little bit variability around the timing of that, but on an overall segment basis year-to-date, we don't see any noticeable change in the pattern of car volumes.

Okay. Thanks, Matt. With the SSAT joint venture, can you talk about the decline in these results due to loss of volume from several major customers? Any chance you can recoup some of that business in Q4? Could you comment on what you think about that business for 2013?

We'll comment on our views on 2013 in the year-end call. So we'll provide color in that context then. But what I can say is we did suffer the loss of two major services. There was the loss of the Grand Alliance service in our Seattle terminal. The Grand Alliance had been a long customer of our T18 facility, and they decided to shift their volume to a terminal in Tacoma. And that began in the beginning of the quarter, we had talked about that in a previous call. That was the most significant driver. Then we did have a second customer in our Southern California, Long Beach terminal where a company shifted one of their strings from our terminal to another terminal in the port of Los Angeles. As to your question about whether other volume comes back, yes, there are cost-savings measures that we can do. We're also looking to solicit, potentially, other cargo through our terminals, as we have some surplus terminal capacity. So that work continues.

Okay. Thanks, Matt. I know you don't want to talk about 2013. But directionally, can you talk about your CapEx plans for 2013? And in particular, I'm thinking about maintenance CapEx. Should it be similar to 2012 levels?

I think the way -- first of all, we haven't finalized our capital planning for the year. But I would say our view is, independent of new vessel construction, which we have talked about trying to figure out our planning for, that we've said between $40 million and $50 million a year of maintenance CapEx is a good number to use for planning purposes. We're not going to be far off that range if you use that from a planning perspective.

Okay. And one last question here. Joel, you talked about you got your debt paid down and you've got a nice leverage ratio there. On the M&A front, what are you seeing in terms of M&A activity that's out there, particularly for you guys as it relates to logistics?

It's a good question, Kevin. I think there has been an uptick of some transactions across some of the various components, freight brokerage in particular. We're keeping an active awareness of what's out there. We're obviously mostly focused right now on our internal organic business and improving some of the areas we've talked about on this call, particularly warehousing and intermodal and focus on our trucking business. So, we're watching what's happening in the market. It's not the highest priority in the moment, but we do have fire power to move forward on transactions as they make sense for us.

Okay. Great. Thanks so much for your time this evening.

Steve O'Hara, Sidoti & Company.

In terms of your CapEx, you've been pretty clear about your plans in the near term, or with the two ships you're planning on buying over the next let's say several years. Is there -- do you guys look at that from a timing standpoint where you make an outlook as to what you think the economy is going to be like? Or is that something that's so far out in terms of planning and capital budgeting that you have to make decisions to do it and see what happens with the economy after that?

It's more the former, Stephen. The whole vessel-design process and then working with shipyards to get the design quoted and make a decision, buying it, et cetera, that's a lengthy process. It could take a year or two. We think it will be 12 to 18 months for ourselves from where we sit today. As you go through that process, make your final decisions, you then have to have all your financing plans in place. And then it takes a year to 18 months to build and have the ship delivered. So that's why we -- we're in the midst of that in a very, very active way right now internally. When you add up all the time segments, that's why we say three to five years from now in terms of actual delivery. But we're moving forward with that. That's a key focus of ours. It's not -- you never say never with the economy and things like that. But generally, we would expect to move forward on that timetable.

Okay. Lastly, moving to the auto volumes, the rental car companies have been holding their cars significantly longer than they used to, on average. Is that something that is going to be a permanent headway, or do you see that normalizing over time? And possibly see them cut that time as residual values for autos decline? Is that something you guys look at and forecast at all, or no?

We don't directly. We're more reacting to the rental car companies' own internal economics, as you point out and some of the factors that go into that. The other factor that went into it from our perspective, at least in this last cycle, was that there was a significant amount of excess manufacturing capacity. And the surplus capacity was being -- those extra cars were being sold to the rental car fleets at a very significant discount. Based on that discount, rental car companies were responding by shortening their replacement time frames. We've seen that widen out as the excess capacity in North America for auto manufacturing has been absorbed, and it's our view that it is the way it is absent some other major changing catalyst. What we see now, we're expecting to remain in place for the foreseeable future.

Okay. I'm sorry, but in terms of the operating income almost doubling or in that neighborhood. That was just for Ocean Transportation. If you could -- I don't know if you said the main driver of that, or is there one that stands out? I think you said China and Guam, but is that correct?

Yes, that's correct. And that comment of perhaps doubling was with respect to the Ocean Transportation. For Logistics, we said breakeven.

Okay. All right. Thank you.

(Operator Instructions)

Ian Zaffino, Oppenheimer.

Hi, thank you. Question on the rerouting. I know you had mentioned that, but I think you said that -- you said things stabilized. I didn't know if you were talking about the rerouting has stabilized, or all the factors combined have stabilized?

Ian, when you're talking about rerouting, are your talking about our fleet deployment?

No, no, about the goods from China going --

Oh, I see. Okay, great. I would say that that has stabilized. It was more of a driver year-over-year. What had happened, as additional context, is there was a large international steamship line that had decided -- that had carried cargo for a long time over the US West Coast and had decided to pull out of the Hawaii market, taking that Asian-origin cargo and putting it up for grabs. The second thing that happened was there was a Japanese carrier that had served for a long time in the Hawaii market, and they themselves had restructured their service about at the same time. So what had happened was a lot of cargo that had moved in a relatively stable fashion had been -- had to find new ways move to Hawaii. And that was some of the dislocation that we saw, and that has largely stabilized at this point.

Okay. The second question, I'm trying to understanding the Guam market a little bit better and the concerns surrounding another competitor coming in. It seems that you're able to as you said, aptly handle it, or whatever your wording was, plus your volumes are down there. What would be so attractive for someone to really come in as opposed to let you have it alone?

Right, yes. For the last 30 years that I've been involved in this business, there's always been two primary competitors. The thinking is is that that's the natural state of things. Now, it could be -- and as I've said, we've been pretty clear that eventually we think somebody may come into the trade. When is difficult to ascertain. Your point about a declining market is a good one. We've also talked about in past calls the long-term impact of a potential relocation of Marines from Okinawa into Guam, which would require additional military spending to accommodate those Marines, if it occurs. That appears to be pushed out to some unknown point in the future, but some additional construction and potentially cargo volume may increase at some point in the future. It is difficult to know, but our reaction is mostly owing to the fact that it's been a two-carrier trade for many decades.

Right. But the fundamentals right now don't warrant any near-term entrants?

Yes, but I'd hate to be on the wrong side of lulling investors into believing no one's ever going to come, and then someone will come, because that will certainly impact our operating results. So, it's difficult to know, and we want to be cautious in our approach.

All right. Thank you very much.

(Operator Instructions)

And ladies and gentlemen, this will conclude our question-and-answer session. I would like to turn the conference back over to Mr. Matthew Cox for his concluding remarks. Please go ahead, sir.

Thanks very much, everybody. We'll look forward to catching up after the holidays on our year-end call.

Ladies and gentlemen, the conference has now concluded. We thank you for attending today's presentation. You may now disconnect your lines.