Matson Inc (MATX) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Matson fourth-quarter and full-year 2014 financial results conference call. At this time, all participants are in a listen-only mode. Later, we will have a question-and-answer session, and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the call over to Mr. Jerome Holland, Director of Investor Relations. Please go ahead.

Thank you, Nicholas. Aloha, and welcome to our fourth-quarter and full-year 2014 earnings conference call. Matt Cox, President and Chief Executive Officer, and Joel Wine, Senior Vice President and Chief Financial Officer, are joining the call today. Slides from this presentation are available for download at our website, www.matson.com, under the Investor Relations tab.

Before we begin, I would like to remind you that during the course of this call, we will make forward-looking statements within the meaning of the federal securities laws regarding expectations, predictions, projections or future events. We believe that our expectations and assumptions are reasonable.

We caution you to consider the risk factors that could cause actual results to differ materially from those in the forward-looking statements in the press release and this conference call. These risk factors are described in our press release and are more fully detailed under the caption Risk Factors on pages 8 to 14 of our 2013 Form 10-K filed on February 28, 2014, and in our subsequent filings with the SEC.

Please also note that the date of this conference call is February 24, 2015, and any forward-looking statements that we make today are based on assumptions as of this date. We undertake no obligation to update these forward-looking statements.

Also, reference is made to certain non-GAAP numbers in this presentation. A reconciliation to GAAP numbers and description of calculation methodologies is provided in the addendum.

With that, I'll turn the call over to Matt.

Thanks, Jerome, and thanks to those on the call.

2014 was a good year for Matson, punctuated by a strong fourth quarter. Performance improved in all our business lines, buoyed by demand for our expedited China service, modest market growth in Hawaii and Guam, and continued improvements in logistics and SSAT.

The sharp decline in bunker fuel prices also had a positive timing impact on our results, as fuel surcharge collections started to outpace fuel expenditures late in the third quarter and continued into the fourth quarter.

For the full year, we generated $165.7 million of cash flow from operation, of which $27.9 million was used for capital expenditures, and the remainder of $137.8 million provided free cash flow per share of $3.18.

Slide 4 shows EBITDA and EPS for the fourth quarters of 2014 and 2013. You'll recall that in the fourth quarter of 2013, Matson incurred a $9.95 million litigation charge, and the graphs show the year-over-year comparisons to both actual results and results before the litigation charge.

EBITDA for the quarter increased to $66.4 million, more than $20 million higher than last year, excluding the litigation charge. And EPS more than doubled, driven by the operating factors I mentioned a moment ago.

On slide 5, our financial metrics for the full year are shown. We generated $209 million in EBITDA, up 23.4% year over year and 16.6% excluding the impact of the litigation charge.

Fully-diluted earnings per share increased to $1.63, up 30.4% year over year and 17.3% excluding the impact of the litigation charge. All in all, a good year for Matson.

Turning now to our Hawaii service on slide 6, the Hawaii market showed continued growth in the fourth quarter, and our volume increased slightly, by 1.2%, as westbound gains were offset to some degree by modest competitive losses in the eastbound backhaul freight. Automobile volume declined by nearly 22%, a continuation of customer losses from earlier in the year, and these losses don't meaningfully impact our financial performance.

Looking ahead to 2015, we expect the multi-year recovery in Hawaii to continue, and anticipate modest market growth. However, we note that container ship capacity is expected to increase in the first half of 2015, as Pasha is expected to launch a new vessel into the trade. As a result, we expect our Hawaii container volume to approximate the 2014 level.

Slide 7 details some of the key metrics of the Hawaii economy as forecast by the University of Hawaii's Economic Research Corporation, or UHERO. We've highlighted several metrics for 2014 and 2015 in green. This is the same forecast as from our last quarterly call.

To recap, forecast growth in construction jobs and building permits for 2014 did not materialize to the full extent expected by the economists and consistent with our own experience. However, as we noted last year, there was a lull in volume that eased starting mid-year 2014, followed by strong market growth in the back half.

We expect some of this momentum to continue into 2015. As well, construction continues to progress on Honolulu's $5.2 billion rail project, which may add modest lift to our volume.

Turning to our Guam service on slide 8, container volume remained steady, with a slight uptick in volume during the fourth quarter. For 2015, we anticipate steady economic activity and, therefore, expect flat to modestly improved volume compared to 2014 -- again, assuming no new competitors enter the market.

Moving to the next slide, Matson realized higher than previously expected freight rates in its China trade during the fourth quarter of 2014, reflecting the strong demand for our expedited trans-Pacific service, which was amplified by cargo availability delays experienced by other ocean carriers associated with port congestion on the US West Coast.

Recall that Matson operates from a dedicated terminal in Long Beach as part of our joint venture with SSAT. We run a smaller and simpler operation that allows us to manage port congestion more effectively while maintaining our industry-leading same-day or next-day cargo availability.

Our China volume increased 13.5% during the quarter due to an additional sailing, which fell from the third quarter into the fourth quarter.

Looking to 2015, international vessel overcapacity is expected to continue, with new vessel deliveries outpacing demand growth. However, we expect strong demand for our expedited service to continue, resulting in high vessel utilization levels and premium freight rates.

Turning now to slide 10, SSAT contributed $1.2 million to our fourth-quarter ocean transportation operating income, compared to a $1 million contribution in 2013. This slight year-over-year increase primarily reflects improved lift volumes. For 2015, modest profit is expected along with incremental volume gains.

Before turning to our logistics results, I wanted to give a brief update on the labor situation on the US West Coast. After over nine months of negotiations, the Pacific Maritime Association, PMA, and the International Longshore Warehouse Union, ILWU, reached a tentative agreement on February 20th.

In Hawaii, the employers and the ILWU will meet to determine when to conduct their negotiations. This is generally consistent with past practices and timing, and we expect to reach agreement with the ILWU in Hawaii without any service disruption.

Matson's operations were not impacted to the same extent as international carriers, mainly because domestic, military and passenger vessels were exempted from dock actions by the PMA and ILWU.

In addition, we were able to manage more effectively through the difficulties because we operate out of our own dedicated terminals with smaller ships, using less complicated wheeled operations, and have direct ownership of our chassis.

We expect it may take two to four months to work through the international cargo backlog in LA-Long Beach, and as a result, we expect that we will see minor schedule disruptions through this period.

Slide 12 highlights results at logistics. Volume growth in logistics highway business extended into the fourth quarter of 2014, and combined with highway yield improvements, drove an increase in operating income margin of 2.8%.

As we look out into 2015, we expect continued volume improvements amid a better economic environment, and we'll continue to exert expense control. Together, these should result in modestly higher earnings in 2015.

And with that, I'll turn the call over to Joel.

Thank you, Matt. As shown on slide 13, Matson's consolidated operating income for the quarter was $49.4 million, as compared to $17.9 million for the fourth quarter of 2013.

Ocean transportation operating income increased $30.3 million during the fourth quarter 2014 compared with 2013, which was primarily due to higher freight rates in our expedited China service, the timing of fuel surcharge collections and higher container yields and volume across our major trade lanes, partially offset by higher terminal handling expenses and higher general and administrative expenses, some of which were associated with our pending acquisition of Horizon's Alaska operations.

In addition, the fourth quarter 2013 was negatively impacted by the $9.95 million litigation charge.

Our SSAT JV contributed $1.2 million during the fourth quarter 2014, compared to $1.0 million in the fourth quarter 2013. The slight year-over-year improvement was primarily due to increased lift volume.

Logistics operating income for the fourth quarter increased by $1.2 million compared to the fourth quarter of 2013. The increase was primarily driven by continuing improvements in highway volumes and yields as well as warehouse operations, partially offset by lower domestic intermodal yield.

The next slide, 14, shows our full-year 2014 results. 2014 consolidated operating income was $140 million, an increase of $39.7 million from 2013. Both ocean transportation and logistics showed strong year-over-year operating income improvement, by 39% and 48%, respectively.

The increase at ocean transportation was primarily due to higher freight yields across major trade lanes, the timing of fuel surcharge collections, lower outside transportation costs and improved results at SSAT, partially offset by higher terminal handling expenses and higher general and administrative expenses. In addition, 2013 was negatively impacted by the litigation charge.

The Company's SSAT joint venture contributed $6.6 million during 2014, compared to a $2.0 million loss in 2013. The increase was primarily attributable to increased lift volume and the absence of transition costs related to the Oakland terminal expansion, which occurred in 2013.

Logistics posted operating income of $8.9 million, a $2.9 million increase over 2013, primarily due to increased highway volumes and yield, warehouse operating improvements and a favorable litigation settlement, partially offset by lower intermodal yield.

Slide 15 depicts the condensed statement of income for the fourth quarter compared to the same period from last year. As you will note, total revenue increased by 7.9% on a year-over-year basis, while our operating costs decreased by 1.7%. We also saw SG&A expenses increase by approximately $7 million, some of which was due to expenses incurred in our pursuit of the Horizon transaction.

Our effective tax rate for the quarter also normalized at 38.4%, which is approximately where we expect it to be on average.

Our strong operating performance drove a more than doubling of net income and earnings per share versus the prior year, excluding the litigation charge. Also, EBITDA for the year was $209 million, a 16.6% year-over-year increase excluding the litigation charge.

Turning to slide 16, our total debt at the end of the year was $373.6 million, and our debt and net debt-to-EBITDA ratios remained very strong at only 1.8 times and 0.3 times, respectively. In addition, we continue to have excellent liquidity, with $293.4 million of cash and cash equivalents at year end. In 2014, we made net CCF contributions of $65.5 million, of which $27.5 million was in the form of cash, with the remainder being assigned accounts receivable.

Slide 17 shows a summary of how our cash flows have been deployed in the last 12 months, and excludes the additional $100 million of cash raised from the new debt issued in January of last year. This chart highlights the balanced manner in which we allocated our cash flow generation during the year.

Turning to slide 18, we wanted to spend a moment putting Matson's strong free cash flow generation into perspective. We define free cash flow very simply. It is net cash provided by operating activities as defined under US GAAP, straight from our statement of cash flows, less capital expenditures, also straight from our statement of cash flows.

For 2014, we generated free cash flow per share of $3.18, which equates to an 8.4% free cash flow yield based on our closing stock price yesterday of $37.58. When compared to the average of broader market benchmarks, such as the S&P 500, the S&P 400 midcap or the S&P transportation index, Matson's free cash flow yield is currently more than double. In addition, we have over $6.00 per share in cash at the moment.

We think Matson is a compelling long-term investment opportunity for investors focused on companies with high levels of cash flow generation and strong balance sheets.

With that, let me now turn to our outlook on slide 19. I would like to remind you that our outlook excludes any future impacts from the molasses incident or the pending acquisition of Horizon's Alaska operations, and is being provided relative to 2014 operating income.

In 2015, we expect ocean transportation operating income to be modestly higher than 2014. We expect Hawaii volume to approximate 2014 levels, as market growth will be offset by the new vessel capacity expected to enter the trade in the first half of the year.

We expect flat to modest volume growth in Guam, higher average annual freight rates in China, and modest profit at SSAT. We also expect to operate a core non-ship fleet for the year.

For the first quarter of 2015, we expect ocean transportation operating income to approach levels achieved in the fourth quarter 2014 due to higher freight rates in the China trade, the timing of fuel surcharge collections and modest volume growth in our core trade lanes. This would be a substantial increase versus the $9.4 million level achieved in the first quarter of 2014.

As we noted throughout last year, we expected 2014 to be a back-end-loaded year from a year-over-year comparison perspective, which it turned out to be. In 2015, our outlook is somewhat the opposite, with this year expected to be front-end-loaded, such that year-over-year comparisons in the latter half of the year may be less favorable.

For logistics, we expect 2015 operating income to exceed the 2014 level, driven by continued volume growth, expense control and improvements in warehouse operations.

With that, I'll turn the call back over to Matt.

Thanks, Joel. As we look to 2015, we're confident. We have bright prospects, driven by our pending acquisition of Horizon's Alaska operations, the sustained construction vitality in Hawaii and our industry-leading CLX service. Additionally, improving economic activity should drive performance higher in logistics, while SSAT offers us competitive advantages throughout our network.

We will, of course, be focused on our pending Alaska acquisition and the integration of those operations into our current configuration. And while Alaska is an important entry point for us organizationally, we will continue to drive further operational excellence throughout the rest of our businesses. By doing so, we expect to continue to generate strong earnings and cash flow while maintaining a solid balance sheet and a strong dividend. We're ready and excited for the upcoming year.

And with that, I will turn the call back to the operator and ask for your questions.

(Operator Instructions) Steve O'Hara, Sidoti & Company.

Thanks for taking my question. I guess I was curious about the outlook for the Hawaii container volumes. I mean, it seems like this Pasha ship is kind of always expected to be on its way, but continually kind of maybe pushed to the right for some reason. And I'm just wondering, based on your outlook it seems like maybe you're expecting some fairly decent growth in the Hawaii trade lane this year given that other ship coming in.

And then the other thing is in terms of energy costs -- and I know that UHERO put a piece out in terms of what that could do to the Hawaiian economy. I'm just wondering what your thoughts are there potentially and when you think there's some potential to see that impact. Thank you.

Sure. As to your first question, Steve, on Pasha, the way we're thinking about that Pasha entry or the economic backdrop is we're expecting that the Pasha vessel will add something like 5% to 10% of the deployed capacity in the Hawaii container market. We expect that capacity to be absorbed over the next few years as the market -- as we see the Hawaii market grow over the next few years, consistent with what UHERO and the other forecasts are in place.

And so what we would otherwise expect is to see some market growth, and our percentage of that market growth stripped away as it's -- as the additional capacity or growth in the market is absorbed over a couple-of-year period. So that's kind of the way we're thinking about it.

And as to the energy costs, I think your -- it's a good observation. We do expect that the lower energy costs, given the geographic remoteness of Hawaii and the dependence of Hawaii on residual fuels for their energy consumption, will have a significant benefit to the broader economy. We do expect that to further underpin and support the economic cycle, and ss driving our -- continued to drive our view that we're in a relative sweet spot in terms of market growth for the overall economy.

Okay, thank you. And then maybe just quickly on SSAT -- I mean, I would think that it would have an improved year in 2015. What's kind of going on there in terms of the expectations?

Yes, so we -- basically, for 2014, we had a good year. SSAT has been impacted by the economic disruptions caused by the contract renewal. There is a backlog. The terminals -- all the terminal operators have been operating at less than full capacity or full effectiveness given the congestion and some of those things. We expect that -- as I mentioned earlier, that backlog to clear out in the next two to four months. Some of that additional volume will be helpful.

But we do see a larger trend we think towards individual shipping lines not wanting to operate their own marine terminals anymore as these alliances get reconfigured. And in the longer term, we're quite encouraged about our prospects for SSAT. In 2015, we'll expect some of that process to occur and expect SSAT to remain in the black, but we're pretty encouraged longer term by where SSAT is positioned.

Okay, thank you very much.

Jack Atkins, Stephens.

Thanks for taking my questions, guys, and congratulations on a great fourth quarter.

Thank you, Jack.

Thank you.

So I guess just to make sure everyone's on the same page, just going to the guidance or the outlook for 2015, Joel, you talk about modestly up operating income for 2015 in ocean transportation. Does that exclude the impact of the molasses spill, or does that include the molasses spill headwinds when we're talking about the 2014 operating income that you're comping against?

The 2015 excludes any impact of the molasses.

Right. I guess, though, what I'm talking about is growth over 2014. Does that 2014 number include the negative impact of molasses, or are you backing that out?

Oh, I see, yes. No, it's with respect to our actual recorded number for 2014.

Okay. Okay, that makes sense. And then, Matt, when we think about the -- you talked about the competitive sort of losses on the eastbound Hawaii business. Could you talk about the growth rates that you're seeing or just -- I know you probably don't want to give specifics, but can you talk about conceptually the growth rates that you're seeing on your westbound traffic?

Yes, I mean, I would say the way we're thinking about it generally, Jack, is 2% to 4% is considered relatively robust by Hawaii standards, and so I think that's probably a range that the market may grow at. And of course, we've pointed out that our volumes may be flatter, and especially once the Pasha vessel is deployed, as that additional capacity is absorbed in a market that might otherwise be growing in that 2% to 4% range. That's kind of how we're thinking about it.

Okay, but if the UHERO economic data that you laid out in the presentation sort of bears out in terms of GDP growth in Hawaii and construction activity, I mean, do you think we'll fall within that 2% to 4% range in terms of market growth, or do you think we could maybe go above the top end of that range?

Yes, it's hard to say. I mean, our views now are -- our views have been somewhat tempered by the fact that it has happened later than we had earlier thought, and so -- and again, within the historical context of 2% to 4%, 4% is a very robust growth pattern for Hawaii.

So we're going to fall somewhere in that range, and it may be that that growth continues to accelerate, that we'll start on the -- closer to the 2% range and then see it expand towards the end of the year and into 2016 into a more robust 4% pattern. It's a little hard to tell at this stage, but we like the fundamentals and we like what we're seeing.

But again, earlier, we've been a bit frustrated by just how this has translated into growth in containerized freight volumes.

Okay, that makes sense. And a last question from me, and I'll turn it over, but could you give us an update on when we should be thinking about the closing of the Horizon Lines transaction? I think midyear has been the way to think about it previously.

And then we've seen certainly a decline in energy prices, and I know energy is a very important component of the northbound trade to Alaska. Could you maybe give us a sense for if that changes sort of the earnings power of that Alaska business over time just given where energy investment may go in the lower 48? I'm just curious if that impacts Alaska as well.

Sure. Jack, it's Joel. From a timing perspective, no change -- we're still saying closing sometime in 2015. We don't know when. There's a process with the DOJ review. So we don't have any update with respect to anything specific, but we do expect it to close this year.

And then on your second question, on energy and the impact to the business, in the long term, as we said when we announced the transaction in November, we're very confident this is a strong trade lane. It's a really strong cash flow generating franchise, and we're confident in the long-term prospects of the Alaska economy, and we think it's going to be a good place to be.

Clearly, though, it's an economy that is subject to the ups and downs of the energy market, and with energy prices down, all else being equal, that's a negative. In the short term, there's been very important positive elements in the Alaskan economy, especially tax reform. That is a positive, both short term and longer term.

So we're still -- as we sit here today, with all that's happened in the energy markets, we're still very confident in the long-term cash flow prospects of the business that we're acquiring and feel very good about it as a long-term value creator for our company.

Okay, so just to sum that up, though, Joel, I mean, it doesn't sound like, just given all the puts and takes, that your outlook for the earnings power of that business has changed relative to when you made the announcement in November.

That's correct.

Okay. Thank you.

Michael Webber, Wells Fargo.

I just wanted to follow up on some of the transaction details, and actually wanted to touch on those energy-driven volumes in a second. But specifically around the component of the deal in which Horizon's Puerto Rican business is being shut down, I'm just curious as to whether there's an updated timeline around that.

And in terms of the costs borne by Matson, I know there was a vague range put out by Horizon, somewhere around $90 million to $95 million, whether or not that was -- there's any material change from your end [of the equation] in terms of what your overall costs could be for that.

Mike, it's Joel. No update or no change from when we announced that in November. We're still sticking to those numbers. Horizon we know is working hard in executing their plan to shut down and wind down those operations. They'll be getting regular updates as an SEC registrant company, so we don't want to say anything in advance of what they'll be saying. but continuing to work on that.

And there's no new updates or new news from us in that regard, and we're still confident in those numbers we talked about in November from a cash cost perspective.

Okay. And do you guys have visibility into those, or is this something where you're waiting for an update from them, I guess? Is it something you guys get a look at in terms of what the shutdown costs will be?

Yes, I mean, we're operating under confidentiality agreements with Horizon as we -- as any buyer is in a regular M&A transaction, so that was both before announcement and signing and after. So, yes, we do have confidential conversations with them. But in terms of public disclosure, they'll be updating that as they -- as any company would in their filings and whatnot.

So what we're saying today is we still feel good about everything we said in November, just no change to those overall numbers that we put out.

And Mike, this is Matt -- just one other context, just to be clear. At the time of our announcement, Horizon also announced that it was intending to shut the business down, which in fact it did around the end of the year. So the service itself has been discontinued, as they said they would, and they're just in wind-down mode now.

Okay, fair enough. I know -- I think it was earlier this year Horizon settled, I guess, some litigation around the merger. And I believe the termination payment due to you all under certain events was trimmed, it looks like, by about $8 million. I'm just wondering whether there's any color around that and whether there was any other aspect of the merger agreement that would've been changed by the litigation settlement.

No, no more color on that. I mean, it was part of the negotiations, the settlement of some of the litigating firms that tend to litigate these kinds of transactions. So we settled on that amount. We feel like that's a good place to settle. Nothing else materially has changed in the contract, so -- as far as the process.

Yes, and this is Matt. I would just say that we personally did not feel -- agree with the assertions in the suit about our amounts, we paid too little money or the breakup fee was too high. But as a matter of not holding up the transaction, we felt it was prudent to just move ahead and agree to those amounts.

Okay, fair enough. One more from me just around the deal in Alaska before I want to touch on Hawaii. It actually kind of goes -- I think it was Jack's question earlier around the Alaskan volumes and the relationship to the energy space. And, Joel, you kind of talked to the fact that you still like the fundamentals of the trade lane, kind of aside from what's happening within the energy patch.

Have you guys looked at -- or kind of can you give any color in terms of kind of any sort of sensitivity on an historical basis to those volumes related to the energy space and how they've kind of trended into something you guys have kind of looked at? Just maybe a bit more detail I guess around the idea that those fundamentals of those trade lanes are, I guess, well insulated.

Yes, Mike, this is Matt. Let me take a crack at it, and then I'll turn it over to Joel to answer part of it.

Sure.

But if you look at Horizon's business, it is really in two or three segments. One is -- and the largest is -- the broader economy supporting the economy and the residents that live there for lifeline supplies, much like Hawaii -- food stuffs and hardware items and building materials and those kinds of things.

Right. Right.

And those tend to be less in the short run subject to large swings. Secondly, the other segment of the economy is the Department of Defense, and the Department of Defense is really not directly related to energy prices. And then the third driver southbound is the seafood industry and the catch.

And so if you look at in those contexts, each of them will move somewhat independently. If we were -- or if Horizon was somebody that was moving large pieces of oil exploration equipment up to the North Slope, which they're not, then certainly there's more -- there would probably be more volatility in that segment.

But it's also true, as Joel earlier said, that we don't believe that they'll be completely immune, because the state's finances are dependent on royalty revenues and there's a refund to residents and so on and so forth. So there will be some impact, but in some ways, it's moderated by the segment of the market that Horizon Lines participates in.

But, Joel, I don't know if there's any other context.

Yes, the only thing I'd add is, I mean, there is correlation with energy investing and activity with respect to the volumes that Horizon would see, or we would see if we owned the business. So I don't want to be saying that there's not going to be an impact. But the key I think and you touched upon, Mike, in your question there was -- what's the long-term trend? The long-term trend has actually been trending down for a number of years as the energy investment in Alaska itself has definitely trended down and the amount of energy coming from Alaska has trended down for quite a long time.

So I guess what we want to articulate is that our investment in this company was not predicated upon some hockey-stick return of significant higher investment in Alaska. So if that happens, that's (inaudible), but that wasn't -- that doesn't need to happen for us to -- for this to pencil out from a cash flow/ROIC/shareholder-value perspective.

So it's not like there was some big resurgence of lined-up energy investing for 2015, 2016, et cetera, right around the corner that now has been pulled off the table. That wasn't the case. And so that's what we mean to be saying, is the long-term fundamentals are really in line with what our expectations were.

Okay, yes. And again, I don't want to belabor the point here, but if I just think about, Matt and Joel, just both of your comments within the context of the initial guidance around kind of growth in the first two years post-closing, closing, then $0.35 to $0.45 of accretion thereafter, you guys would contend that that guidance is still accurate relative to what you're seeing and what you're expecting from Alaskan volumes?

Yes, that -- you're right, Mike, that continues to be our thinking.

Okay. Okay, fair. Just one more from me, and then I'll turn it over. And Matt, you kind of already touched on it a bit, but I was just curious with -- the Pasha ship add has been, it seems like, on the horizon for quite a while. And I'm just curious how -- in terms of your thought process around what that could mean from a utilization and from a volume perspective.

How does that change as their footprint gets bigger kind of post-deal? I mean, does it kind of blunt the impact of the individual [ship]? I'm just curious as to whether there's been any change in the way you guys think about that ship specifically entering the trade kind of in the pre- and post-deal eras.

Mike, it really hasn't changed our thinking. The way we're thinking about it is Matson itself is operating its nine-vessel fleet. We're at about 95% utilization, and this capacity will be absorbed over the next few years in a period of a relatively healthy Hawaii growth period. And that's really the way we're thinking about the market. I mean, we're not -- that's kind of the way it begins and ends for us, and that's the way we think it's going to play out.

Okay, great. Thanks for the time, guys.

Okay. Thanks, Mike.

(Operator Instructions) Kevin Sterling, BB&T Capital Markets.

Hey, guys, it's actually William Horner on for Kevin. Joel, if you could go back to the guidance you were talking about being with 2015 being more back-end loaded. Are the two primary drivers to think about for that -- is it a more moderate kind of growth assumption for China in the back half of the year, and is the second part of it with the potential Pasha vessel and challenges to your volume in Hawaii?

William, this is Matt. I'll take a crack, and then I'll ask Joel to pick up the pieces when I go off stride here. Basically, it's a combination of the things we talked about. So, clearly, in the Hawaii trade, the Pasha volume -- Pasha vessel, when it's introduced, we do expect will flatten out our volume.

As Joel mentioned, we had seen energy prices and the fall of energy prices that helped us out in the second half of 2014 are going to -- we lowered our fuel surcharge, and we did get behind in early 2014 and caught up at the end of 2014 in terms of our expectations. We have since lowered our fuel surcharges four times since we've seen this dramatic reduction in bunker prices.

I think if you look at China, we've just seen an extraordinary expansion of our premium relative to the market. Obviously, it's been a great multiyear story for us, but some of the congestion that we saw around the contract renewal allowed a very strong rate environment.

But having said that, we do expect, as we go to 2015, for us to sustain those average freight rates moving and volume in China. So there's a lot of things that are moving around, a lot of factors, which really result in us thinking our year 2015 is going to be more front-loaded than rear-loaded.

And, I don't know, did I miss anything, Joel?

No, that's exactly right. I mean, if you just look at the third and fourth quarter of last year on the operating income level, it was $88.9 million out of $131.1 million for the whole year, so you had half of the year that produced over two-thirds. And all we're saying is you won't -- we don't expect to see that much in the back end of this year. And we did talk about this first quarter being up substantially from last year, so it just means that that back-end year might be less favorable.

Right. So, I mean, I know you can't get too much more granular with it, but you said during Q3 and Q4 the second half of 2014, $88.9 million, roughly two-thirds profitability. Somewhere in that kind of ball park maybe for the first half, and then trailing into the second half of 2015?

Well, we weren't really breaking it down. I mean, we said for the year we expected to be up modestly, and for the first quarter, it should, we said, approach the levels we just achieved in the fourth quarter, so we havn't really broken it down by half.

Right.

So we've given you updated outlook for this quarter and for the year. The rest you'll have to extrapolate.

Okay, fair enough. I appreciate it. And going back to the West Coast port issues for a second, if you can maybe talk about how over the past six months or so, your customer concentration has shifted, if it has at all. And then, secondly, looking forward now that normal operations are trying to resume and the debottlenecking is occurring, what's your outlook for the service in the medium to long term in terms of balancing the new customer interests with your legacy relationships?

Yes, it's a great question. And I would say that we did not see a dramatic shift in our customer base. Historically, what we've tried to do is to balance annual contracted freight with participating in the freight-forward or spot market. And historically we have tried to seek a balance between those two submarkets or subsegments of the trans-Pacific market.

On the margin, we did see spot rates were very high, and so what we saw is probably a little bit of migration towards the spot market. But we did protect all of our existing customers who we've had, in many cases, multiyear relationships with that needed protection during this period of significant disruption.

And so we're obviously going to participate in these markets for the long haul, but at the same time, we're going to take advantage on the margin of the market that we find ourselves in. So I would expect that what we would see in China in 2015 is that the annual contracted freight rates for our customers to go up as we go through our May 1 renewals. And what we probably expect to see is peak rates for the spot market to not achieve the same levels that we saw in the third and fourth quarters of 2014. But on balance, the average rates should approximate. That's kind of the way we're thinking about it.

Okay, that's helpful. I appreciate that, Matt.

Sure.

And the last one, and I'll turn it over. I know you touched on this in your prepared remarks and last quarter, but in terms of the decline in auto volumes and the customer loss, can you refresh us on the drivers behind that? I think it was a piece of low-margin business that you all walked away from, and I just want to make sure that I'm understanding that correctly.

You are, yes. So we had -- we participate in several submarkets for the autos. They're military vehicles, we have privately owned vehicles, and we have manufactured cars. In the manufactured car segments, the auto manufacturers have done a good job of leveraging Matson and our other competitors during the renewal process over the years to a point where there was not a lot of profit left in those cars for us. And we took the difficult but necessary decision to separate ways with some of the manufactured car business.

And what happens for Matson is, as you may know, we move some of the cars in roll-on, roll-off platforms, and those are the most cost-effective way for us to do it. We also move cars in specially designed auto frames, which are more expensive to use.

And so what we were able to do was to part ways with some manufactured car business, which is the lowest-yielding revenue, and eliminate some of our highest costs that move in some of the highest-cost ways. And so at the end of the day, there was not a lot of margin loss. And that's what we were trying to point out.

Okay, great. Thanks, Matt. I appreciate that.

Sure.

Jack Atkins, Stephens.

Great. Thanks, guys. Just a couple of quick follow-up questions here. So in the press release, you called out expenses in the fourth quarter related to the Horizon transaction. Could you -- or would you be willing to quantify that for us, just so we sort of know what underlying operating performance was in the quarter?

No, we're -- it's below our thresholds for commenting on specifically, Jack, so we're not quoting a number.

Okay. Okay, that's fine. And then, Joel, as far as the tax rate we should be assuming for 2015, do you have something we can plug into our models there?

Yes, 38.5% is what we think our average should be over time, so that's still our -- the number that we think is best to use.

Okay. Okay, and then last question is sort of just going back to this -- I don't mean to belabor the issue, but sort of the Long Beach-LA congestion. I know part of that in 2014 was tied to labor unrest, but the other part was tied to a lack of chassis assets out there. And so I know you guys own your own chasses. You pointed that out in your prepared comments.

It seems like we're getting some resolution on the labor side, but when do you think we're going to see some resolution to the chassis issue, and does that give you guys a competitive advantage because you own your own equipment out there?

I think to answer your questions, I would say -- your last one first -- we do think that Matson's operation and owning our own chasses allows us to have more control. And the other thing, it, of course, allows us to do as part of that is we operate a wheeled operation -- that is, all of our loads are discharged directly onto wheels as opposed to discharging to bomb carts and then put on the ground, where there's a second flip. So we continue to believe that we will continue to enjoy a service advantage.

We do think that eventually the chassis pools -- most of the international container lines in Southern California have divested of their chassis fleets and sold them into leasing pools. The hope, at least as we understand it, from the international ocean carriers is that they've applied to the Federal Maritime Commission to allow for some cooperation between the pools so that there are fewer chassis in the wrong place, if you will, or that further interchanges are allowed to have those international terminals operate more effectively, acknowledging that they continue to be grounded operations and will never be as free flowing as Matson's terminal.

But I expect the congestion, the lack of the arrangement for chassis pooling, to take a number of months. I think eventually it will get better, but it's going to take a while. And the fact that they've divested from their chassis in the long run, while it may save them money, will further differentiate Matson's good service relative to the more commodity-like service offerings that everyone else offers in Southern California.

Okay, great. Matt, thanks again for the time.

You bet.

Thank you. That's all the time we have for questions for today. I would like to turn the call back over to Matt Cox for closing remarks.

Okay. Well, thanks, everybody, for your interest, and we look forward to catching up with you at the first-quarter call. Aloha.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Have a good day, everyone.