Matson Inc (MATX) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Matson first quarter 2015 financial results conference call. At this time, all participants are in a listen-only mode.

(Operator Instructions)

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, sir.

Thank you, Jonathan. Aloha, and welcome to our first quarter 2015 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'll make forward-looking statements within 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 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 7 to 15 of our 2014 form 10K, filed on February 27, 2015 and in our subsequent filings with the SEC. Please also note that the date of this conference call is May 4, 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 made to certain non-GAAP numbers in this presentation, a reconciliation to GAAP numbers, and a description of calculation methodologies is provided in the addendum. With that, I will turn the call over the Matt.

Thanks, Jerome, and thanks to those on the call. The first quarter of 2015 unfolded largely as expected.

Strong momentum from the end of the 2014 carried over, with performance improving across all lines of business, led by continued levels of exceptional demand for our expedited China service, modest yield improvements in Hawaii and Guam, and further improvements in logistics and SSAT. In addition, lower bunker fuel prices positively impacted our results, primarily due to timing differences, as fuel surcharge collections out-paced fuel expenditures.

On a year-over-year basis, you will recall that the timing of fuel surcharge collections had a negative impact on results in the first quarter of 2014, so that timing difference is amplified in the current year period. Our businesses are performing well, and continue to generate substantial cash flow that, combined with our strong balance sheet, provides ample capacity to close our pending Alaska acquisition.

We continue to be well positioned to fund our new vessel construction commitments and comfortably sustain our dividend. Looking forward, we're encouraged by our prospects in Hawaii, and in a strengthening broader economy that will produce volume growth in our Jones Act markets, and in logistics. Overall, for the full year 2015, we expect operating results to be moderately higher than those we achieved in 2014.

Turning to slide 4, you can see that our businesses generated EBITDA of $61.5 million, and EPS of $0.57 in the first quarter of 2015. Both measures increased significantly on a year-over-year basis, due to the factors I described on the previous slide. I would also like to note that, while the first quarter is historically our lowest, in terms of earnings and cash flow, this year is expected to be front-end loaded, such that year-over-year comparisons in the latter half of the year may be less favorable.

Turning now to our Hawaii service on slide 5. We saw container yield improvement and modest westbound market growth in the first quarter. However, that growth was largely offset by lower eastbound back-haul freight.

Automobile volume declined by nearly 31.5%, a continuation of customer losses from last year. These losses don't meaningfully impact our financial performance.

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

Slide 6 details some of the key metrics of the Hawaiian economy, as forecast by the University of Hawaii's economic research corporation, or UHERO. While urban Honolulu condominium construction is driving the early stages of a residential building recovery in Hawaii, it's hard to see in these statistics, as statewide permitting for new residential construction actually declined in 2014, after two years of expansion. The decline in permitting reflects the long permitting times for residential condo projects.

Several of the high rise towers under construction are mixed use projects, with a residential tower built atop a podium of commercial, retail, and parking space. Such mixed use projects typically pull permits with commercial and residential segments separated. This results in a lag between the time a project first breaks ground and when the residential permit is issued, it shows up in the statistics.

According to UHERO, several projects that broke ground in 2014 and 2013 are still not counted in the published data. Together, these account to more than $700 million in value, which is more than the entire value of all residential permits issued last year.

You will also note that 2014 has relatively low construction job growth. In part, this may reflect that activity was centered on high rise and commercial building, which is less labor intensive than single family home construction. That being said, UHERO is expecting mid single digit job growth for the next several years. And we expect construction activity to ramp up over the next two years, driving container volume growth, as the projects near their final stage of completion. In addition, there are several new non-residential hotel and resort projects and renovations in the works that, combined with the Honolulu rail transit project, should result in additional container volume growth.

Turning to our Guam service on slide 7, we saw a modest decrease in container volume during the first quarter, due to the timing of select shipments. While for the full year of 2015, we continue to anticipate steady economic activity, and expect flat to modestly improved volume compared to 2014, assuming no new competitor enters the market.

Moving to the next slide, Matson continued to realize much higher freight rates in its China trade during the first quarter of 2015, reflecting the continued strong demand for our expedited trans-Pacific service, resulting in a 5.1% increase in container volume. The demand was amplified by cargo availability delays experienced by other ocean carriers, associated with port congestion on the US West Coast,(technical difficulty) 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 effectively, while maintaining our industry-leading same-day or next-day cargo availability.

As a reminder, about half of our China business is based on annual contracts, with the other half based on the spot market. We recently concluded our annual contracting cycle, and as expected, I'm pleased to report we achieved healthy increases in our contracted rates.

For the full year of 2015, international vessel over-capacity is expected to continue, with new vessel deliveries outpacing demand growth. Nonetheless, we expect strong demand for our expedited service to continue, resulting in high vessel utilization levels and average freight rates that are modestly higher than the good rates we achieved in 2014.

Turning now to slide 9. SSAT contributed $3.4 million to our first-quarter ocean transportation operating income, compared to a $200,000 contribution in 2014. This year-over-year increase primarily reflects improved lift volume.

As I discussed on our last earnings call, the Pacific Maritime Association and the ILWU reached a tentative agreement on February 20, and the ports began the process of working through the international carrier cargo backlog. As a result, we expect to see some incremental volumes in the short term. Overall, we continue to expect to expect modest profit at SSAT for the full year 2015.

Slide 10 highlights the results at logistics. Warehouse operating improvements, and yield improvements in highway and intermodal services, were partially offset by lower international intermodal volume related to port congestion on the US West Coast and lower fuel surcharge revenue. The net result was an operating income margin of 1.1% for the quarter, more than double the margin from the first quarter of last year. As we look to the remainder of 2015, we expect volume improvements amid a better economic environment, combined with continued expense control, should result in modestly higher earnings.

Turning to slide 11, I would like to provide an update on our pending Alaska acquisition. As a reminder, Matson's acquisition of Horizon's asset, Alaska Operation, is conditioned on the sale of Horizon's Hawaii business to Pasha. Regarding that transaction, effective April 21, the United States Federal Trade Commission has cleared Pasha's acquisition of Horizon's Hawaii business from a antitrust perspective.

And while there are still other closing conditions that need to be satisfied, in order to complete the Pasha/Horizon transaction, this is an important regulatory milestone in the transaction process. Both Pasha and Horizon anticipate the closing of their transaction by the end of the second quarter. For Matson, this is a positive development for our acquisition of Horizon's Alaska service, and we expect to close our acquisition immediately after the Pasha/Horizon transaction has closed.

Our integration planning is progressing well. And if we're able to close the transaction by the end of the second quarter, Horizon's net debt will be significantly lower than it would have been, had the transaction not closed until the end of 2015.

And with that, I'll turn things over to Joel for an update on the transaction financials, a review of our financial performance, and our consolidated outlook for the balance of 2015. Joel?

Thank you, Matt.

The table at the top of slide 12 provides updates to the estimated transaction value for the Alaska acquisition. Based upon Horizon's most recent 10-Q, filed last Friday, the transaction value would be almost identical to the amount at the time of the announcement, which was based upon Horizon's most recent 10-Q financial information available at that time. However, looking at the third column of this table, you will note that we expect the transaction value at closing to be approximately $32 million higher, for a total amount of approximately $488 million. This expected increase is due primarily to normal seasonal working capital borrowings, as well as the anticipated final Horizon transaction-related costs.

From a financing point of view, we're well positioned to fund the acquisition from cash on hand and available borrowings under our revolving credit facility. However, we may choose to fund a portion of the transaction with long-term financing proceeds, at closing or shortly thereafter.

In addition, our financial expectations for the acquisition have not changed, and the items listed on this page are the same as when we announced the deal last November 11. Also, as a reminder, the Alaska business is more seasonal than the Hawaii trade, such that the second and third quarters each year are typically the most profitable. So accretion measures for those quarters should be expected to be more meaningful than in the first and fourth quarters in any given calendar year.

After the deal closes, we expect to provide updates to our 2015 outlook for the transaction on our August call. Moving to slide 13, Matson's consolidated operating income for the quarter was $44.9 million, as compared to $9.9 million for the first quarter of 2014. Ocean transportation operating income increased $34.5 million during the first quarter of 2015, compared with the first quarter of 2014.

The increase was primarily due to the timing of fuel surcharge collections, higher freight rates in China, and container yield improvements in Hawaii and Guam, partially offset by higher general and administrative expenses, higher outside transportation costs, and higher terminal handling expenses.

The Company's SSAT joint venture investment contributed $3.4 million during the first quarter of 2015, compared with $200,000 contribution in the first quarter of 2014. The increase was partially attributable to increased lift volume. Logistics operating income increased by $500,000 during the first quarter of 2015, compared with the first quarter of 2014, primarily due to warehouse operating improvements and yield improvements in highway and intermodal services.

Slide 14 depicts the condensed statement of income for the first quarter, compared to the same period from last year. Our total revenue increased by 1.5% on a year-over-year basis, while our operating costs decreased 8.5%, which led to operating margin expansion, from 2.5% last year to 11.3% this year, for the quarter.

Our strong operating performance drove net income and earnings per share to significantly higher levels than the prior-year amounts, with EBITDA generation of $61.5 million for the quarter, a 125% year-over-year increase. With this strong operating performance, our balance sheet continues to be in very good shape.

Turning to slide 15, you will note that our total debt at the end of the quarter was $371.2 million, and our debt and net debt-to-EBITDA ratio has remained strong, at only 1.5 times and 0.1 times respectively. In addition, we continue to have excellent liquidity, with $325.8 million of cash and cash equivalents at quarter end, plus $27.5 million of cash investments in our CCF.

Slide 16 shows the summary of the balance manner in which we allocated our cash flow generation over the last 12 months. Over this period, we generated cash flow from operations of $181.9 million, of which we spent $26.3 million on maintenance CapEx, returned $29.3 million to shareholders via dividends, and made deposits of $27.5 million to our capital construction fund.

With that, let me now turn to slide 17 to provide our updated full-year outlook for 2015. First, I would like to remind you that our outlook excludes any future impact of the molasses incident, the pending transaction with Horizon, and is being provided relative to 2014 operating income.

In 2015, we expect ocean transportation operating income to be moderately 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 later this month. We expect flat to modest volume growth in Guam, higher average annual freight rates in China and modest profit at SSAT.

As we noted in our last earnings call, we also expect 2015 to be more of a front end-loaded year for our ocean transportation segment, 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 volume growth, expense control, and improvements in warehouse operations.

I will now turn the call back over to Matt.

Thanks, Joel. We continue to see bright prospects for the rest of 2015, driven by our pending acquisition of the Alaska Operation, construction activity ramping up in Hawaii, and our industry-leading CLX service. Additionally, improving economic activity should drive performance higher in both logistics and SSAT.

While closing the pending Alaska acquisition and integrating those operations onto our platform will be a key focus for us, we will also continue to drive further operational excellence throughout the rest of our businesses. And by doing so, we'll generate strong earnings and cash flow, while maintaining a solid balance sheet and dividend yield. We're looking forward to the coming months.

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

Certainly.

(Operator Instructions)

The first question comes from the line of Jack Atkins from Stephens.

Thanks for taking my questions, guys, and congrats on a good quarter.

So I guess just to start off with, if I could maybe touch on the guidance for a moment. If I go back to the fourth-quarter call, I think you guys were calling for modest improvement in ocean transportation operating income. Your new guidance calls for moderate improvement.

Could you maybe walk us through the puts and takes, in terms of what's -- I guess what's changed and what's improved, versus your last call, in terms of your outlook for the business, going forward?

Sure, Jack. This is Matt. I will make the first pass at that, and then I will ask Joel to comment on anything I might have missed.

I think from our perspective, this slight uptick in our earnings expectation for the full year is really driven by a couple of things. The first and foremost was the better than expected performance in our China service. We saw just tremendous demand for that service, in the face of ongoing difficulties, creating a very -- a terrific environment for us in which to improve and sustain the rate structure going into the new year.

And then, I think we saw better than expected performance at SSAT. We were more cautious about the performance of SSAT, our terminal operating joint venture, given all the difficulties. But owing to the terrific operating performance there, and their ability to continue to make money in a challenging environment, was something which was a pleasant surprise for us.

So those are the two things, I think, that allowed us to feel slightly more confident about the year. And Joel, I don't know if there was anything you'd want to add to that?

No. Those were the big ones. We had some other areas, slightly better, as we head into April/May, and other areas slightly worse than expectations. But the big -- the two items Matt mentioned were the bigger drivers allowing us to increase our outlook a little bit, in the manner you described, Jack.

That makes sense.

And if I could follow up on SSA for a moment. That was a very nice equity contribution, or income contribution, there in the quarter. If I go back and look at the business now in the LTM period, I think it's generated almost $10 million in contribution to your P&L, which is a significant improvement from a couple of years ago.

So is that business back on track there? And is that the right annual run rate to be thinking about? Or would you expect some fluctuations in that SSA business, going forward, from a profitability perspective?

Yes, I think you framed the question right. We see this last 12 months of performance that you indicated as really a return to a more historic pre-recession level of earnings.

We continue -- as we've said, over time -- continue to be very high on this segment of performance, and see this as very positive. And again, a return in the right direction. Much like Matson Logistics went through a difficult cycle, and we're climbing our way through the other side of it.

Now, having said that, exactly that shipping lines are under significant stress, alliances are changing, causing various shipping lines to move terminals. And this business, as you know, is very sensitive to volume changes. But we continue to believe that this business is well positioned, both long term and for the balance of this year.

Okay. Makes sense. One last question, and I will jump back in queue.

Joel, when you talk about low- to mid-teens earnings accretion, year one and two, from the Alaska acquisition, are you basing that off of 2014? Is that off of 2015? What is the baseline that we looking for, in terms of accretion, just so we can frame it up a little better? If that makes sense.

No, that does make sense, Jack. And we're basing that essentially off the run rate we see today, 2015.

Okay.

And so -- but it is a very steady business. There are fluctuations one year to the next, but it has tended to be a very steady business. So I would tell you, 2014 and 2016 shouldn't be that different. You will have some pluses and minuses.

But when we looked at the transaction and made the announcement in November, we were making most of those comments based upon what we expect for the next 12 to 18 months, which is 2015 and into 2016 type of results.

Okay. That make a lot of sense. Thanks again for the time.

Okay.

Thank you. Our next question comes from the line of Steven Tittsworth from Stifel. Your question, please.

Yes, actually, this is Ben. Had a couple of questions.

So, number one, I wanted to come back around to the acquisition economics that you guys were talking about. And correct me if I'm wrong, but I think originally, you're talking about additional costs associated with the Horizon shutdown of Puerto Rico, and the assumption of liabilities associated with that, of about $90 million over and above the headline cost of the acquisition.

Our -- at this point, we've seen a little bit -- or I suppose they've closed it all the way. Are you still thinking that that's the right number? Or has that thinking changed at all?

Ben, it's Joel. Thanks for the question.

No, things have improved a little bit. So the -- as you probably noted and saw, Horizon announced, when they were shutting down Puerto Rico on November 11, that they expected $85 million to $95 million of total costs.

And then on our call, we reiterated those numbers. But on the after-tax basis, talked a number of about $70 million for Matson. And that number has not significantly changed. Just from a timing perspective, however, though, Ben, a lot -- a significant portion of those costs have already been incurred by Horizon.

So they will be essentially embedded into the debt balance and the balance sheet that we inherit when we close the transaction. So we won't necessarily expend those dollars after we own the company, because they've already been [expent].

But the biggest number is the pension withdrawal liability, which Horizon has disclosed in their SEC reports as $53.8 million. And so that's the biggest one. That's a gross number that will be paid out, on an annual basis, over 13 or 14 years. So it's not an [NPV] number; it's a gross number.

But that's the largest dollar amount of the overall cost. And that number has not changed. In a couple of other areas, the numbers have gotten better somewhat, but not dramatically. The picture is not significantly different than what we talked about on November 11.

Okay. That's helpful.

And then, staying with the Horizon side of it just for a moment, obviously, they have some pretty expensive debt. What's the thinking about, in terms of the process, or how you guys -- and when you would imagine refinancing that, relative to the closing date?

We should do it immediate at closing, and simultaneous to the closing, Ben. So we've already -- a number of those instruments require a 30-day advance notice. When the HSR early termination was received, we immediately gave that 30-day advance notice. So we should be in position to refinance and pay off all of that, simultaneous with closing.

Okay. Perfect.

And then my last question, I guess, is related to that, but also related to you guys and the legacy Hawaii business. I know that you talked about installing scrubbers on the Alaska vessels, and curious what we should think about on the timing of that?

And then also, if that is something that you also intend to undertake on the Matson side of the fleet? And if we should be including any numbers into our CapEx associated with potential scrubbers on your own fleet?

Hi, Ben. This is Matt. I will answer the second question, and then I'll turn it over to Joel to answer the first one.

The significant economic driver for Horizon, and now Matson, upon closing in the Alaska business, is that because of the deployment, these three vessels in operation spend virtually their entire route inside the eco zone, requiring the burning of these fuels. And it makes it essential for these scrubbers to work, and be installed, in order for them to meet their base deployment schedule, on a three-ship turnaround service. That contrasts with Matson's existing services, where we will spend time, as we approach the West Coast and in Hawaii.

But outside of those areas, we can operate on more conventional fuels, as permitted under the emission control area rules. And so it is unlikely, at this point, that Matson would install scrubbers on its fleet -- its Hawaii and Guam and China fleet.

Although I would note that the two ships we have on order, that will delivered in 2018, for example, are designed to burn LNG, and LNG burns cleaner, and can operate at full speed in the eco zone. So I would imagine over long time, a very long time, in connection with ship replacement programs, that we would continue to look for ways to expand the use of LNG. And then I will turn it over to Joel to answer the specific Alaska timing CapEx question.

Yes, so on the three vessels, Ben, the first of the three are expected to install the scrubbers here this year, in the third quarter, and bleeding over into the fourth quarter, and then the other two will be events in 2016. Each of these are approximately 90 days, in terms of duration, possibly a little bit longer. And from a cost CapEx perspective, about $8 million per vessel, total of $24 million.

So when we talked about the normal maintenance CapEx of this business, between $5 million and $8 million a year, that excluded these three individual discrete projects.

Sure. Sounds good. Sounds like that's a little bit expedited over what was originally laid out. But I guess the closing is also, so that's good. And congratulations on both fronts, guys.

Thanks, Ben.

Our next question comes from the line of Kevin Sterling from BB&T Capital Markets. Your question, please.

Good morning, guys. It's actually William Horner on for Kevin.

Hi, William.

Hi, William.

Appreciate the color you all have given so far on the Horizon transaction.

But shifting gears and going back to the China business, it sounds like you've made pretty good headway, in the past couple of weeks, with your contract renewals. And so is it fair to say that, even with the West Coast congestion easing, that shippers have been pretty willing in accepting rate increases?

I think the -- it is true that the backlog of vessels -- international [issued] vessels has been largely reduced or eliminated. I think last week, as you probably saw in the trade press, the Port of LA and Long Beach are saying that the backlog is essentially completed. And -- but I would say that a return to normal, or a new normal, still puts Matson's advantage between 5 and 14 days. And so there continues to be a service advantage.

And so we'll wait to see whether the extraordinary premiums we got during the peak of the disruption, in the spot market, will be repeated. Perhaps the spot rates won't get quite as high as they were, but we were able to take a rate increase on the annual contracted freight. So on an average basis, we were guiding to just slightly better than the good level rates we achieved for the full year of 2014. So that was some of the ins and outs that went behind our thinking there.

Okay. Matt, that's good color.

But sticking on that issue for a second, have you seen a mix shift, from spotter contract business, given some of these congestion issues? I would assume that maybe some shippers might be looking for more contract-oriented business? Or is just the nature of your customers, is it going to be a pretty steady mix between contract and spot, going forward?

Yes, I think we very much like to take the portfolio approach in our own model, between the spot business and the annual contract freight. And I think what we've said is half-and-half. and sometimes it goes to 40/60, sometimes 60/40, over the last period of time.

And what we have found is -- and as you know, we continue to have the ability, we're routinely turning away cargo every week, and are really limiting our customer bookings, and trying to find the balance between achieving the best rate we can in this environment and filling the ship. And that's a process that goes on tactically all year round, and that goes into some of the thinking. But I think it's in our best interest, and then our approach is to continue to have both sets of types of cargo on the Matson vessel.

Okay. That's helpful. Thank you. And one more, and I will turn it over.

Obviously, with lower bunker prices, I know you all have had a little bit of a benefit, even as you've adjusted your surcharge down. But given where bunker prices settled in the past couple of weeks, is it -- with all else being equal, is it fair to assume that some of the -- maybe a near-term impact, or a positive impact, would be relatively meted, going forward?

Yes, I think what our thinking is, is that we -- one year ago, the first quarter of 2014, we fell significantly behind in our fuel collections, as we were chasing the fuel prices up. And then we had the opposite effect, as we got into the fourth quarter and first quarter of this year. We were chasing down -- as you pointed out, we lowered our fuel surcharges like four times since the first of the year.

We think most of that has played out, and we should see fuel being less of a factor, unless we saw a dramatic increase or decrease from these levels. So if bunker rates stay in a relatively narrow range, then there really is not much of a story in oil for the second half of the year, or for the rest of the year.

Right. Okay. That helps. Thanks, guys.

Sure. Thank you, William.

Thank you. Our next question comes from the line of Michael Webber from Wells Fargo. Your question, please.

Hey, guys. This is Donald McLee on for Michael.

Hi, how are you?

Doing good.

Looking at fundamentals of the container ship level, it looks like freight rates have remained soft during Q1, despite relatively solid trade volumes. How should we think about the impact of that weak rate environment for the container ships at Matson, and on the ocean transportation business?

Yes, I think that may be the case for the international ocean carriers. But in Matson's business, we saw improved yields, both in our Jones Act trades in Hawaii and Guam, and improved yields, year over year -- strongly approved yields, year over year, in our China trade. So we're a little bit of an exception to the rule. We've seen no re-trading, and continue to see a very strong underlying rate environment in the markets in which we operate.

Got you. That's actually pretty helpful. And just one more, and I will turn it over.

While the port congestion has helped support rates in -- to begin 2015, have you noticed any change in customer port preferences within the US, just given all the operational and logical volatility at Long Beach and LA?

I think what we've seen are customers that have previously, in our own customer conversations, for those customers that had an East Coast DC and a West Coast DC, for example, I think they've routed more. They've favored the East Coast distribution centers in their model.

They are, in some cases, waiting until the congestion clears before routing cargo back over the West Coast. So I do think that, while there may be some permanent migration of freight from the West Coast to the East Coast, I do think that a lot of it will begin to come back, as the congestion eases, and as we get into this year's peak.

All right. Thanks, guys, for taking my questions. And that's all I have.

Okay. Thank you.

Thank you.

Thank you. Our next question comes from the line of Steve O'Hara from Sidoti. Your question, please.

Hi, good afternoon.

Hi, Steve.

I'm sorry, I got disconnected, so I don't know if this has been asked. But in terms of the slide that you used to update on the Horizon Alaska asset acquisition, when you said substantially less debt, was that included in that slide? Or could you talk about that a little bit?

It is included in the slide. And what we're saying is that, if the deal closed, let's say, at six months from now, we would have expected there to be substantially more debt on the Company's balance sheet when we closed. Just because it's very expensive debt, a significant portion of it is picking and non-cash pay, and so the balance continues to go higher.

So what we're saying, Stephen, the punch line of all of that is that the quicker the deal closes, the better, from an overall economic perspective. And that is all baked into the numbers we put on the slide.

Okay. And then just on the construction update, are you seeing the beginning of the recovery in single family home? Or is that still a couple of years off, in this [cycle]?

I think it's the second of the two. I still think we -- there certainly are projects in the pipeline being discussed, but we still see them as a bit far off. And I don't think we see that imminent, or baked into UHERO's numbers, in any meaningful way, or in our own thinking about that.

Okay. All right. Thank you very much.

Okay, Steve, thank you.

Thank you. Our next question comes from the line of John Mims from FBR Capital Markets.

Congrats on a good quarter.

So Matt, let me ask you, on the Pasha ship, looking at the Hawaii business, and that's slated to come online in May. Have you all seen that ship in the waters there? Do you know more about it, in terms of call schedule, the markets it plans to serve? Or any more details into where exactly that would be a competitive threat, in that business?

I think we do know it's on the way. The both -- we see Pasha's sailing schedule, which is published online and available. We do note that it is either in progress, or has already transited or about to transit to Panama Canal. So we know it's on its way, and into the market. And so as to -- so we know it's coming.

As to its final deployment, where it plans to go, how it's going to be deployed, we don't yet know. They've made no announcements yet about how they're planning on deploying that vessel. And as -- we'll learn, as they announce, when that occurs. So we don't have a lot of information at this point.

Okay. But the May launch timeframe is pretty firm, just based on where the ship is now?

Yes, that's our understanding, yes.

(multiple speakers) been pushed back, right.

It's on its way. Yes, it's on its way. So yes, we think that's pretty firm.

Okay. And then you commented on volumes being soft as a result, or at least flat. Is there any impact to pricing, do you expect? Or is there more resiliency, from a contract standpoint, in the Hawaii pricing?

Yes, so in Hawaii, we've seen a relatively strong rate environment. We've seen yields increase in the first quarter, and so we've seen a relatively strong environment.

The weakness in eastbound freight doesn't really impact our westbound head haul, in terms of pricing. And as you might know, this is more of a tariff trade, and so we don't really do contracting in the environment.

But again, overall, we're pleased with the improvements in the rate environment in the first quarter. It's above last year's level. And at this point, relatively steady.

Right. But with the launch of the Pasha ship, you would expect volumes to fall ahead of price? Or just, the tariff would tick down, as well? Or the -- I guess the discount to tariff?

Yes, it's tough to know. We're expecting, as we said, a relatively flat rate environment -- I'm sorry, a volume environment, excuse me, for the rest of this year. We -- our thinking about it, more broadly, is that this extra capacity, as you've heard us say, adds between 5% and 10% of the capacity of the deployed trade at the present moment.

That if that extra capacity grows along with our market expectations of growth, that capacity could be absorbed in the first year or two, as the market grows, and that would limit our westbound head haul growth for that period of time. We really haven't commented about pricing, and it's really too early to know, and too hard to speculate about.

Sure. No, that's fair.

Let me ask one more pricing question on the CLX business. I know you've had a -- you said you had a successful bid season, which is great, but remind me of the structure of those contracts? Truckers are notorious for putting fixed pricing out there, with no volume commitments.

If you do see broader, international-flagged spot rates crater, is there a -- like how protected are you, in this contractual business, from people running to more attractive market rates?

Yes, I think that -- so first of all, the -- it's an annual cycle that goes from May 1 until April 30. So it's a full-year contract. Often, the minimum quantities that exist in those contracts are lower than the amount that a customer would typically provide to us.

And so we -- you shouldn't think of them as being tied in for the year. So for example, if there is a dip in demand for Matson's product -- or sailing, which we do not expect, then we're free to reengage and adjust those rates. Or we could -- and the spot market moves much more frequently than that, weekly or quarterly or monthly.

And so I don't think we think half of our book of business is locked in for the year. But what we've said is, just because if rates moved against us, for example, the amounts that carriers are obligated to ship are less than the amount stated in the contract. And so it's -- that's a custom in the trade. But having said that, at this moment, we still have -- and the overall environment is, we have demand for significantly more freight, week in and week out, then we have capacity to fill that.

Okay. No, that's really helpful. And then just one last one, and I will turn it back.

When you look at the logistics business, and the eventual closing of Horizon, is there opportunities for growth? Any kind of overlap where you could provide that Alaska business with additional logistic services?

I think when we announced the transaction in November, we said that there could be some minor synergies between those two businesses, that we were not counting on it. One of the things that Matson logistics does for Matson's ocean business is, it handles all the inland logistics, and the empty equipment positioning that's required.

And we expect that Matson Logistics would perform that same task for our Alaska business, post closing and post integration. And there could be savings, both in terms of rail contracts or trucking cost changes, tapping into our network. But we don't envision those as being significant, in our own thinking, as to get to our $70 million of recurring EBITDA within the first 24 months. And if there are some, that would be an upside. But at this point, we're not thinking there's going to be a huge amount of them.

Right. Actually, I do have one extra, and then I'll turn it back.

On the logistics side, did you have any impact from the [various] driver strikes recently in the LA Basin?

We did not.

Okay. Cool. All right, thanks so much for the time.

Okay, thank you.

Our next question is a follow-up from the line of Steve O'Hara from Sidoti.

Thank you for taking the follow-up.

I know it's pretty far out still. But the (technical difficulty) coming in, I'm just curious what the -- would this allow you to add excess -- or more capacity into the CLX business? I know you're limited, because you have to have another five ships to replicate this service. But are you going to be able to ship larger ships than potentially at capacity that way, with the delivery of the ships in 2018? Thank you.

Steve, yes, we understand the question. And certainly, if we had a larger ship, or five larger ships -- because you need five ships in order to make that weekly service -- we certainly believe we could fill them. In order to meet the deployment that we have in mind, we would need five new ships, in order to make that capacity. That certainly is one option.

But we think the better of the options is to deploy these two new container ships, that are going to be delivered in 2018, into the Hawaii service, which we think, on the margin, would allow us to operate fewer Jones Act services in the turnaround Hawaii service, as the market grows, and provide a better opportunity on the margin. We continue to look for ways for growing that CLX service, but none appears viable, right in front of us, at the moment. So I think we -- you should think of us continuing to be capacity-constrained on that service.

Okay. Thank you very much.

Sure.

Thank you. This does conclude the question-and-answer session of today's program. I would like to hand the program back to Matt Cox. Please go ahead.

Okay. Aloha, and thank you for your participation in the call. We'll look forward to catching up with everyone in August. Thank you.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.