Matson Inc (MATX) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Matson fourth-quarter 2016 financial earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded.

I would now like to introduce your host for today's conference, Jerome Holland, Director of Investor Relations. Sir, you may begin.

Thanks, Gene. Matt Cox, President and Chief Executive Officer; and Joel Wine, 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, the presentation slides and this conference call.

These risk factors are described in our press release, and are more fully detailed under the caption Risk Factors on pages 8 to 15 of our 2015 Form 10-K filed on February 26, 2016, and in our subsequent filings with the SEC. Please also note that the day of this conference call is February 21, 2017, and any forward-looking statements that we make today are based on assumptions as of this date. We undertake no obligation to update these forward-looking statements.

With that, I will turn the call over to Matt.

Thanks, Jerome, and thanks to those on the call. Matson's core businesses performed largely as expected in the fourth quarter. However, our results were negatively impacted by the increase in bunker fuel prices that occurred from mid-November through December. It is not uncommon for unexpected changes in fuel prices to have this kind of timing impact on our quarterly results.

We have announced three fuel surcharge increases in response, the latest of which was February 3, that will go into effect in March. But given the 30-day customary notice period, there can be timing mismatches between when our fuel costs increase and when the fuel surcharges take effect.

While our full-year 2016 financial results fell short of the expected total results we achieved in 2015 -- when we benefited from record rates in our expedited China service and volume gains in Hawaii, as our primary competitor suffered operational difficulties. We made important investments for our future in 2016. Finalizing our Hawaii fleet renewal program with our Kanaloa Class special order, and expanding our Logistics platform into Alaska with the acquisition of Span Alaska.

Both of these vessels are expected to enhance our market-leading positions and drive increased profitability and cash flow generation in the years ahead. For 2017, we expect to see modest improvements in each of our core businesses, with the exception of Guam, where we expect further competitive losses due to the launch of a competitor's second ship. As a result, we expect Matson's 2017 operating income to be lower than it was in 2016.

Turning to the next two slides, I'll touch on our high-level financial results, leaving it to Joel to provide more color later in the call. In the fourth-quarter 2016, we earned net income of $19.4 million or $0.44 per share, and generated EBITDA of $72.6 million. And for full-year 2016, Matson earned net income of $80.5 million or $1.85 per share, and generated EBITDA of $288.6 million. As a reminder, the fourth quarter of 2015 was impacted by Horizon acquisition-related SG&A, and full-year 2015 was also impacted by the Molasses Settlement-related costs, the respective effects of which are shown in the stacked bar graph data with dotted lines.

Turning to our Hawaii service on slide 6, following the market lull we experienced during the third quarter of 2016, the Hawaii trade resumed modest westbound market growth in the fourth quarter of 2016. But as expected, our Hawaii volume was lower than the fourth quarter of 2015. In 2017, we expect continued construction activity in Hawaii to provide for modest overall market growth. And from a market share perspective, we believe things have settled at current levels.

In the first quarter of 2017, we expect volumes to be challenged in comparison to the share gains we achieved in the first quarter of 2016, when Pasha was struggling with service changes issues. Those factors, combined with the fact that 2017 will not benefit from a 53rd week like 2016 did, leads us to expect our Hawaii volume to approximate the level achieved in 2016. In addition, we're expecting higher-than-normal operating expenses in 2017, as we will be undertaking the once-every-five-years drydocking of our Neighbor Islands barges.

Moving on to slide 7 for the latest economics stats forecast from UHERO, the Hawaii economy continues to perform well, with visitor arrivals up, unemployment down and construction activity remaining at a healthy pace. Which we continue to believe will be the primary driver of container volume growth.

Growth in the current construction cycle has been fueled by high-rise condominium construction in the Kakaako-Ala Moana area of Honolulu, where we see the first wave of projects reaching completion, and expect to see the second wave of projects completing over the next couple of years. So while there are indications that the luxury condo market is maturing, we see several more mid-market-priced projects in progress or planned that should provide for a healthy construction pipeline over the next few years.

As the Honolulu condo boom eventually ebbs, residential construction activity is expected to begin to shift westward to two large projects, namely Ho'opili and Koa Ridge single-family townhouse developments in suburban Oahu, where building is expected to continue for the next 10 to 12 years. Home-building on the Neighbor Islands, which has lagged well-behind Oahu, has also begun to show signs of life and is expected to show further expansion, but the pace is expected to remain well-below the mid-2000s boom.

Construction jobs grew at double-digit rates this year, driven by strength in each of the major construction sub-sectors. Looking ahead, UHERO expects that new projects breaking ground will replace existing projects coming to completion, thereby generating smaller net gains in jobs next year, followed by a gradual decline of the building cycle.

Moving to our China service on slide 8, Matson's volume in the fourth quarter of 2016 was 27% higher year over year, primarily due to the increased demand for our expedited service offering during the market dislocation and flight to safety that followed Hanjin's bankruptcy. And to a lesser extent, due to 2016 having a 53rd week. This year-over-year increase was further pronounced by the market softness we experienced in the fourth quarter of 2015, as underlying spot rates approached historical lows.

Matson continued to realize a sizable rate premium for our expedited service in the fourth quarter, but our average freight rates were lower than last year. Spot market rates, as shown by the chart on the SCFI, moved up post-Hanjin's bankruptcy, as international carriers put through GRIs in September and October. However, on the supply side, several carriers announced new services that effectively replaced the Hanjin capacity that had been removed from the market. In 2017, we expect our proven expedited service and strong credit profile will continue to differentiate Matson in this chronically oversupplied market, providing continued strong demand.

Our service remained highly differentiated, with a five- to 10-day advantage over the other international ocean carriers. Matson's advantage results from several factors, including our industry-leading transit time, efficient cargo offloading at our dedicated terminal in Long Beach, and superior on-time performance. Longer-term, we view the consolidation of international carriers and launch of the new alliances in April as potential sources for longer-term market improvement.

Turning to slide 9, Matson's Guam volume in the fourth quarter showed a modest decline year over year, again due to competitive losses to APL's bi-weekly US-flagged containership service that launched in early 2016. We estimate that APL's less direct service reached a market share of approximately 8% by the end of 2016. On our third-quarter call, we mentioned the possibility of APL adding a second vessel to their feeder service, which would increase their service to weekly. And in late December, that second vessel was in fact launched into service, hyping the competitive environment in Guam.

While this increased capacity and service frequency will make it reasonable to expect further volume losses, we will fight to retain every container of our customers' business. Having a long history in Guam and strong customer ties, and a five- to eight-day service advantage from Oakland and LA-Long Beach, we expect to retain well-beyond 50% share. In fact, our goal this year will be to limit any competitive volume losses, beyond a modest amount. As we expect this to be a highly competitive market situation, we will not be providing any more specific market share comments beyond our goal.

Moving now to slide 10, Matson's Alaska volume for the fourth-quarter 2016 was modestly higher year over year, benefiting from 2016 having a 53rd week. However, the impact of the continued recession on the northbound freight environment partially offset that incremental volume. Our economic outlook for Alaska remains consistent with the previous quarter, and from what we hear from our customers in the region, pointing towards a muted economic environment for 2017. As a result, for the full-year 2017, we expect modestly lower volume, as northbound freight declines are expected to be somewhat offset by improved southbound volume from a more typical seafood harvest.

However, with the installation of exhaust gas scrubbers on our three diesel vessels serving Alaska now complete, we don't expect to regularly deploy our less-efficient steamship reserve vessels in 2017. Which is expected to result in lower vessel operating and drydock release expenses, and overall, contribute to our Alaska trade, delivering modestly improved operating results for the full year.

Turning next to slide 11, our terminal joint venture SSAT contributed $6.6 million to the fourth quarter of 2016 compared to $3.4 million in the fourth quarter of 2015. The year-over-year increase was primarily due to improved lift volume. For the full-year 2017, we expect SSAT to make lower contributions to our Ocean Transportation operating income than it made in 2016. As continued industry consolidation and the launch of the new global shipping alliances may create some short-term uncertainty, as container flows and supply chains are adjusted between the West Coast terminals.

Moving on to slide 12, we grew our Logistics business meaningfully in 2016 with the acquisition of Span Alaska. Span's cultural of commitment to reliability and long-term customer relationships is a natural fit with Matson. And in the fourth quarter of 2016, we made significant strides towards essentially completing our integration of this business.

The freight-forwarding platform works well for us in Alaska, offering end-to-end logistic solutions for our customers, in line with our principal Alaska Ocean competitors. When we announced the Span acquisition, we noted that the business was facing the same economic headwinds in Alaska as our Ocean Transportation segment.

Those headwinds endure, but we remain confident that Span's strong market position and excellent operations and customer service will provide strong cash flows over the long term. This is a great business. For the full-year 2017, we expect Logistics operating income of approximately $20 million, and expect further operating margin improvement due to the nature of Span's business model, where value-added services earn commensurately higher margins.

For our truck and intermodal brokerage businesses, we expect to face a challenging market environment, sluggish overall freight demand, and pressure on rates and margins.

With that, I will now turn the call over to Joel for a review of our financial performance and our 2017 outlook. Joel?

Thanks, Matt. As shown on slide 13, reported Ocean Transportation operating income decreased $11.9 million compared to last year's fourth quarter. Primarily due to the unfavorable timing of fuel surcharge collections, higher vessel operating expense, higher vessel drydocking amortization, lower container volume in Hawaii and Guam, and lower freight rates in China. Partially offsetting these unfavorable year-over-year comparisons were higher container volume in China and Alaska, and lower G&A expenses.

The Company's SSAT terminal joint venture investment contribution increased $3.2 million during the quarter compared to last year's fourth quarter, mainly due to improved lift volume. Logistics operating doubled during the quarter, primarily due to the inclusion of the freight-forwarding operating results attributable to the acquired Span Alaska business.

Moving to slide 14, reported Ocean Transportation operating income decreased $46.5 million for the year. Due primarily to lower freight rates in the Company's China service, higher vessel operating expenses related to the deployment of additional vessels in the Hawaii trade in the first half of 2016, unfavorable timing of fuel surcharge collections, higher terminal handling expenses, and higher vessel drydocking amortization. Partially offsetting these unfavorable items were the absence of G&A expenses related to the Horizon acquisition, and costs related to the Molasses Settlement, and container yield improvements in Hawaii.

For 2016, the Company's SSAT terminal joint venture investment contribution declined slightly on a year-over-year basis. Due to improved lift volumes being more than offset by the absence of benefits related to the clearing of international cargo volumes after the US West Coast labor disruptions in the first half of 2015.

And also by an increase in SSAT's allowance for cash flow accounts receivable in 2016. Logistics operating income increased $3.4 million for the year, primarily due to the inclusion of the Span Alaska business, and also higher intermodal volume, partially offset by lower intermodal yield.

Turning to slide 15, our balance sheet continues to be in very good shape, and at year end, our net debt to EBITDA ratio was 2.4 times. Near the end of the year, on December 21, we closed on our $75 million private placement of eight-year weighted average life senior unsecured notes, with the coupon of 3.37%. This financing, along with the $200 million private placement that we closed in September, fit well with our expected funding strategy for the construction of our Aloha Class and Kanaloa Class vessels.

The table at the bottom of this slide lays out our contractual progress payments through the delivery of the four new vessels. As previously mentioned, these new vessel capital expenditure cash requirements will be provided through a combination of cash flow from operations, borrowing availability under our $400 million unsecured revolving credit facility, and the issuance of new long-term debt.

Turning to slide 16, we wanted to spend more time on this call outlining some of the other cash and P&L benefits we expect upon delivery of our four new vessels in mid-2020, compared to our current run rate cost structure embedded in our 2017 outlook. Specifically, we have previously mentioned that the new vessels would allow us to reduce cash operating costs by about $25 million per year, by virtue of reducing our active fleet units in the Hawaii trade from 11 vessels down to nine vessels.

Additionally, as you can see in the second bar on this graph, we also expect approximately $10 million to $15 million in other lower-operating annual cash costs. Primarily in the areas of vessel maintenance and repair, port costs, efficiency improvements in our auto and rolling stock businesses, and smaller areas, such as consumables.

These $40 million to $45 million of cash operating cost reductions will be somewhat offset in the early years by approximately $20 million more in interest expense that will be hitting the P&L. But we do expect to de-lever within the three to four years following the new vessel deliveries, which would result in significant reduction of this additional interest expense.

The last column on this chart is depreciation and amortization, and indicates that we expect total D&A to be reduced by approximately $5 million to $8 million after the four ships are delivered. Within these amounts, we do expect higher total vessel depreciation because of the new ships, but that increase is expected to be more than offset by lower drydock amortization, which has been elevated during this new vessel construction period, given our need to keep several of our older steamships active and available for drydock release until the new ships arrive.

So overall, we estimate the pretax benefit of these combined items on a full annual run rate basis, compared to our 2017 cost structure, to be approximately $25 million to $33 million. Which, at our current estimated effective tax rate of 39% and our current diluted shares outstanding count, equates to approximately $0.35 to $0.46 of EPS benefit, before considering the potential further EPS accretion from the reduction of interest expense in the years that follow the delivery of the vessels.

Turning to slide 17, for maintenance capital spending in 2017, we expect to be at the high end of our $40 million to $50 million annual range, due to our three largest diesel vessels being in drydock this year. We're also actively evaluating another capital project that would upgrade our Honolulu terminal cranes to accommodate our larger new vessels. Which, if we decide to pursue, is likely to include the purchase of three new cranes, costing about $10 million each.

The capital funding for this project would not likely be incurred until, at the earliest, 2018. And may also includes some additional spending for upgrades to our core [Saint Island] Honolulu terminal. From an overall maintenance CapEx perspective, after the new vessels are delivered in 2020, we do expect maintenance capital to remain within our normal level of $40 million to $50 million annually.

With regard to annual drydock spending and amortization shown in the bar chart at the bottom of this page, 2017, like 2016, is expected to be a relatively heavy high drydocking year for us. With our three largest diesel ships and also three neighbor island barges all scheduled to undergo drydocking this year. And as I alluded to on the previous page, we do expect a substantial reduction in both drydock expense and amortization by the end of 2020, due mainly to the retirement and scrapping of our old steamships. The overall pretax income statement benefit of these G&A items by the end of 2020 was the $5 million to $8 million I mentioned on the previous page.

Slide 18 shows a summary of the manner in which we allocated our cash flow generation and capital over the last 12 months. For the full-year 2016, we generated cash flow from operations of $157.8 million, and undertook net borrowings of $307.8 million. From which we used $194.5 million to close our acquisition of Span Alaska, made net CCF deposits of $31.2 million, spent $84.9 million on maintenance CapEx, and put $94.5 million toward the progress payments on the Aloha Class vessels, and initial deposits on the Kanaloa Class vessels. And also, we returned over $60 million to shareholders in the form of quarterly dividends and share repurchases.

As expected, our maintenance CapEx for the year was higher than our normal range of $40 million to $50 million, primarily due to completion of the scrubber installation program on our three primary Alaska vessels, and other capital projects related to what was relatively a heavy drydocking year for us. In addition, we took advantage of highly attractive container prices to accelerate purchases of container equipment during the year at near-record low levels.

With that, let me now turn to slide 19 to provide our outlook for the year and our first-quarter 2017. To start with, we expect full-year 2017 consolidated EBITDA to approximate to the $288.6 million achieved in 2016. And based upon our increased CapEx and drydock spending, we expect depreciation and amortization to increase by about $15 million this year, to be approximately $150 million for the whole year, inclusive of approximately $50 million of drydocking amortization. The net of those two numbers would lead to 2017 consolidated operating income of approximately $140 million.

And of that total, as Matt mentioned earlier, we expect Logistics operating income to be approximately $20 million. Which makes it clear that Ocean Transportation operating income for 2017 is expected to be lower than the $141.3 million achieved in 2016, primarily due to the additional competitive volume losses in Guam and the noted higher D&A amounts. We expect interest expense for the full-year 2017 to be approximately $25 million, and our effective tax rate for the full year to be approximately 39%.

For the first-quarter 2017, we expect Ocean Transportation operating income to be less than half the $33 million achieved in the first quarter of 2016. Primarily due to the timing of fuel surcharge collections, higher vessel operating expenses related to the deployment of an additional vessel in Hawaii, and lower volume in Hawaii, Alaska in Guam. Logistics operating income for the first quarter of 2017 is expected to approximately double the $1.6 million achieved in the first quarter of 2016.

With that, I will now turn the call back over to Matt for final remarks.

Thanks, Joel. In 2016, Matson was named the number one ocean carrier in the world for an unprecedented third year in a row, testament to our singular focus on moving freight better than anyone. Over the last five years, our environment has been characterized by exceptional growth, both via large strategic acquisitions and smaller organic expansions from our Pacific network.

We entered the Alaska trade via acquisition, bolted on a South Pacific operator, and acquired a freight forwarder. We ordered the construction of four new ships to renew our Hawaii fleet, invested in our vessels and shoreside assets to bolster operational efficiencies, and made improvements to our industry-leading China service.

Looking ahead, I remain confident in the long-term prospects and strong cash flow generation of Matson's core businesses, which will provide the foundation for our vessel fleet renewal investments, and continued value creation for our shareholders.

With that, I'll turn the call back to the operator and ask for your questions.

Thank you.

(Operator Instructions)

Jack Atkins, Stephens.

Hey, guys. Good afternoon and thanks for the time.

Hi, Jack.

I guess just to start off with, I appreciate -- I think most folks do -- the additional disclosure around the vessel accretion for 2020. I think that is really helpful as we think about the contribution from that. But shifting gears back to the business for a moment, and thinking about where things stand entering 2017, can you give us a sense, Matt, for your expectations around Trans-Pacific rate renewals in 2017? And what sort of puts and takes are you putting into the guidance in terms of conservatism for that renewal season, just given how volatile that can be at times?

Okay, sure, Jack, I will be glad to comment on that and our expectations, and then if Joel wants to add on something else, he can feel free to do that. Our thinking about the Trans-Pacific, Jack, is that, while we have seen the bankruptcy, we've seen mergers, we've seen combinations of companies coming together, we've seen the announcement of four alliances going to three, we see those as encouraging. But we continue to believe that there will be an overhang of capacity that will remain in the market.

So our expectation is we will see improved rates -- these are spot rates. I will comment on Matson's rates indirectly in a moment. But we clearly see the environment improving from the all-time lows that we saw last year, at $800 spot rates and contract rates in the market in 2016, going up from there. So I think we will see improvement in the market.

Matson, as you know, earns substantially above those rates, given our highly differentiated product. So clearly we are not immune, but our rate dynamics are vastly different. Our own expectation is that we will see modest improvement in half of our business at the May 1 contract renewal, but are remaining muted from calling this the bottom, and we are going to go straight up from here.

So our own expectations, and embedded in our commentary about the earnings prospect, is to see a somewhat improved but not complete turnaround in the Trans-Pacific market. We want to wait until we see it. We do expect that to occur over the next few years as the surplus of capacity wears out. But I think it's too early to call a market turn, in our estimation.

And Jack, all that, as Matt just said, is what we embedded in our outlook that we just outlined, in the 2017 numbers.

Okay, great. And then a couple follow-up questions, if I could, on Hawaii. Can you help us think through the impact that the timing of the fuel surcharge has had on the fourth quarter? And that the expectation that, that would have on the first quarter?

And I know in the past, you guys have been able to recoup those losses later on during the year. Is that the expectation for this year as well, that, that will be a neutral to the full year, it's just going to be the back half of the year before you can recoup what you are maybe losing on fuel surcharges in the first quarter?

Yes, I think you got it right, Jack. We continue to be highly confident in our ability to recover fuel in the Hawaii service through our market surcharge mechanism. There are times when, as we commented in the fourth quarter, that if fuel sneaks up on us or increases rather significantly, we can fall behind, given the 30-day notice period.

There's also a second factor, Jack, that our first and fourth quarter volumes are lower than our average, with the second and third quarters being higher. Our goal is, on an annual basis, to recover those fuel surcharges. We remain confident in our ability to do so, but during our lowest fourth and first quarters, especially in a rising environment, those earnings can be impacted. But again, we remain highly confident in our ability to recover fuel.

Okay, Matt, thank you. Last question and I will turn it over. When we think about 2018 -- obviously don't want you guys to give guidance on 2018, but I'm just trying to think through the set-up going into next year. With the drydock amortization, obviously you've had two big years in 2016 and 2017. I think you're expecting that to moderate going into 2018, just with the ship rotation.

But would you expect what you are incurring in drydock expense going to the P&L? Or if that's showing up in drydock amortization, would you expect that to be lower in 2018 than what you saw in 2017 -- or what you expect to see in 2017?

Yes, let me comment on that, and again, I will ask Joel to comment more fully. I can say, Jack, the way we're thinking about it is, we're in a bit of a transition. We have seven steamships that are nearing the end of their economic lives. Our decision is for those to remain in class, but be slowly transition out of our fleet as we get into 2018, 2019 and 2020 and take delivery of those four new ships. That will effectively allow us to retire these seven full steamships, and all of the benefits around drydock and maintenance and all the things that Joel outlined in his summary of what we expect.

But during this transition, we are drydocking and amortizing drydocks over a relatively short timeframe. So I think we do expect high levels of amortization and depreciation of these vessels through 2018, 2019. And I do think we're going to be slightly up on depreciation during this period. But I will ask Joel to be more specific about that.

Yes, Jack, the first vessel, the benefits will come in the reduction in drydock amortization, and other costs will come as the vessels are delivered. So the first vessel is delivered in the third-quarter of 2018. And then there is two delivered in 2019, one in Q1 and one in Q4. The last vessel delivery will be -- is expected to be in Q2 of 2020.

So the benefits that I spoke about on the slide that you mentioned, you can think of those benefits phasing in as each of the four ships are delivered. So they really won't start until the end of 2018. And then it will be an 18-month phase-in until the middle of 2022, to get those vessels.

Okay, thanks again for the time, guys.

Thanks, Jack.

Steve O'Hara, Sidoti & Company.

Yes, hi, good afternoon.

Hi, Steve.

Just going back to the fuel surcharge, can you just talk about the impact on 1Q? And relative to last year, is most of that differential the fuel surcharge for ocean shipping, or no?

Yes, Steve, it's Joe. We do expect on a year-over-year basis, that will actually be the largest negative for us, is the fuel surcharge, and timing of fuel surcharge collections last year Q1 versus this year Q1. So the answer is, yes.

Okay. And then just following up on Jack's question for the rest of the year. Assuming fuel, let's say, stays the same, at the same level it is right now, based on the fuel surcharge, you wouldn't make up any benefit on that, you would just be neutral for the balance of the year -- is that correct?

Well, the way I would answer -- this is Matt. I would say, Steve, our full-year commentary on our goals reflects that we will be consistent with our approach of being able to collect all of our fuel on an annual basis, over time. So that if, as Joe mentioned, we fall a little further behind compared to the previous year, we do expect to recover that in the remaining balance of the year, consistent with the annual guidelines that Joel laid out.

Right. And as Matt mentioned, the most recent surcharge increase that we announced will go in effect March 6. That is all embedded in the expectation of the amount that we increased, that will be effective at that date.

Okay. So it affects the first quarter. You don't expect, at this point, fuel to be a negative for the full year or a positive?

We don't. Even if fuel changes, we don't need a flat fuel to be able to recover it over time. As fuel has changed, we have been able to recover it. So that continues to be our expectation.

Okay. And then, I was just trying to come up with the difference in ocean shipping. So it looks like the, let's say, operating income is down about $10 million outside of -- or maybe $9 million, outside of the increase in drydock. Does that makes sense?

We didn't disclose all the specific elements of that. But the increase in drydock amortization is one of the bigger items in the quarter on a year-over-year basis.

Okay, right, for the full year. I guess I'm talking about 2017 versus 2016.

Okay, for the full year, that difference will be about $15 million.

Okay, all right. And then just on the -- I know you don't comment on various markets and your profitability there. The outlook for China seems to be better than it did in the past. I mean, it would seem some of the rhetoric out of Washington would imply The Jones Act seems pretty secure. But, any concerns on maybe some of the issues with terrorists, or the current trade policy, et cetera.

Yes, Steve, this is Matt. I think you're right, we remain confident in the Jones Act and the approach of the Jones Act. Both the Administration and Congress remain firmly committed to the Jones Act, so we don't see any changes coming out of that.

With regard to trade policy and border adjustments and other things that are being floated, I think it's a little too early to tell. I mean, our customers clearly would be negatively impacted by that element. But how that changes, with expected changes in exchange rates and tax rates and all that -- it is just a little speculative at this point, until we get a clearer picture of what is included in tax reform, for us to make much of a statement about it.

Okay, all right. Thank you very much.

Michael Webber, Wells Fargo.

Hey, good morning, guys. How are you?

Hi, Mike.

A lot of this has been parsed over, but I did want to try to isolate the underlying businesses. As you guys keep adding businesses, it keeps getting harder and harder to parse where the core trends are. But if I just look at -- if I just isolate kind of ocean trans and I just look at -- strip out any noise from fuel, and even maybe strip out the expedited service and the back-haul, and I just look at kind of front-haul Hawaii versus Alaska, on a forward-looking basis, where do you see the most weakness?

And maybe if you can compare and contrast those underlying [mark-to-]markets? There's a lot of noise that can impact that blended ocean transit number. But if you just look at the underlying health of those markets, I'm just curious which one you see being slightly weaker in 2017?

And I guess, what peaks my interest in that is the bottom of that comment on the guidance page there, where Q1 weakness is also driven by lower volumes into Hawaii, which is a bit surprising for Q1. So just curious around that, Matt, and if you can isolate those two for haul markets?

Sure. I think I'll start with your comment last about the Hawaii market. I will talk about weakness in a bit. But Hawaii we feel good about. I think we like our position in the Hawaii market, we like our fleet renewal strategy. I think we've got a great plan. And we do have our neighbor island barges in the once-every-five-year drydock, so we will be paying a little bit more during the periods under which those barges are out, as we do every five years. But the core of the market is good.

I think, included in the Q1 commentary, I'll just remind you that we were still benefiting from this larger-than-normal market share associated with Pasha's start-up issues that extended through the first quarter. So while we do see overall market growth in Hawaii, there is still a little bit of overhang that could take us through the first quarter, and then we would lap the more normalized position or share in the market after that. So that is starting Q2 through the rest of the year. So our thinking in Hawaii is, pretty good. And again, fuel is noise, but we don't see that as fundamentally changing.

In Alaska, the state is in recession. And because of the low energy prices and their extraction economy, we have said that the segment that we play in -- which is more the supply into the base population for grocery and standard items -- has been more stable historically. And it proves that in this case.

And we're in a situation where, even though the state is in recession and our volumes northbound are expected to decline, we do expect a more normalized seafood season, which will increase our southbound volumes. And we had a less efficient fleet unit operating one of our old steamships, while the D7s and the three diesels were undergoing their conversions and emission scrubbers.

So Alaska is a little soft, but overall, we feel -- and again, we feel great about our position there. We feel great about the asset that we purchased. We feel we're doing everything right to position ourselves for success in the long term, so that's great. Of course, Guam is a bit of an axe fight. APL has its second vessel; they've upgraded to a weekly service. They have an inferior service offering, and we intend to test and to fight for every container in the market.

So if you look at where year over year we're going to see the market, the market itself is flat to modestly up overall. But clearly, that will be the story and the element to our business that remains most challenged in 2017. And I know you just passed over for China. I think we've hit the bottom, and we're expecting small improvements. Not calling any huge turnaround, as some of the international ocean carriers. That's a little premature, I think, from our perspective, to call.

Okay. I wanted to come back to that and to Guam. But just to stay on Alaska for a second -- and Joel, I think there is enough play in the numbers where this might be nothing. But if I think about the fact that maybe there's a bit of sequential year-on-year weakness in the Alaskan trade but if I look at the logistics guidance and annualize where you're at for Q4, that more or less gets me to the $20 million you were talking to in 2017.

So I guess what I'm asking -- if I think about the Span impact, is that moving in tandem with how we think about volumes in and out of Alaska? Or are they are able to expand the footprint there to where that logistics impact is a bit more isolated or protected, relative to, say, that front-haul freight that Matt and I were just talking about?

Span has a great market position, but they are tied to the economy and the overall freight volumes, just like our for-oceans business is. I think that the general trend is going to be impacted at Span as well. But Mike, as we said, the Alaska business was softening a little bit through the earlier part of 2016, so when we announced that transaction, we did expect the business to not achieve going forward 12 months exactly what it achieved in the last 12 months. We saw some point in the time. So it is impacted by those general trends in Alaska, and we've baked that into the outlook this year.

Okay, that's helpful. Matt, back to Guam, it's smaller, but you mentioned its probably the most contested market you guys are dealing with now. I want to say, you referenced kind of an 8% market share, so the competitors come in and they have added a second vessel. Can you help me put some context around that 8%, I think that's the right number, in terms of, if we start stacking up additional vessels there, have to start doubling that 8%? You know, what is the right way to think about that number within the context of where that market share should drift going forward?

Yes, there are several ways to look at that. I do acknowledge that going from every-other-week service to going to weekly service is clearly an upgrade for them. Given their transit differences, clearly they are focused on the less time-sensitive element of the market. Those that aren't co-dated aren't grocery store items, aren't refrigerated, things that can withstand a longer transit.

And knowing that APL is on the phone listening, I'm going to limit my comments as to speculating about where they end up, other than to say, our intention is to give them our time. And the market wants a second entrant and participant in the market, but this is our freight and we are going to hang onto it. So that's -- without being too flippant, that is as much as I really want to say at this point.

Okay, all right. That's helpful. One more, and I will turn it over. And this is just around the expedited service and around the premium service offering there. As rates rolled over into the previous cycle, we saw that premium expand to a degree that, at least to my knowledge, was unprecedented, at least in the business. And it seems like that's naturally contracted a bit. But it's tough to get a real read into the mechanisms behind that, just given how much those underlying freight rates have moved.

As we think about Trans-Pac freight rates now being back up to where they were in around the start of the fourth quarter, how should we think about the premium you guys were able to command in the market for that expedited service, relative to, say, where we were in early Q4?

Yes, so I think what I would say is that in 2016, our premium expanded to the largest we've ever seen. So as freight rates crashed last year, we definitely were pulled down a little bit by it. But in an absolute sense, that premium is an amazing level that we couldn't have scarcely dreamed of when we started this 11 years ago, and was the highest that we've seen in our 11 years of service.

So as market rates improved which we see as -- are helpful, I think part of that was, our premium expanded so dramatically to absorb a significant amount of that low although we think it really was the biggest driver year over year in our results, as Joel mentioned in his full-year commentary. So a recovery in the TP market, we think, is going to be helpful. We just remain somewhat skeptical of the behavior of the ocean carriers while they have suffered significantly, if there remains an overhang of supply and demand, and there's some newer entrants that are entering the Trans-Pacific trade.

I think it's probably likely to be true that, both we will see rates improve from the all-time lows of last year, but not yet see ourselves in a robust recovery in the Trans-Pacific trade. Somewhere in between, I guess, is the way we're thinking about it.

Okay, that's helpful. And Joel, when we think about 2017 guidance, how should we think about the premium that is reflected there? Is that something flat line basically, and we're just kind of following the path of freight rates? Or are you guys baking any kind of movement within that relatively, actually not relatively -- resilient premium for 2017? Just where are expectations baked in right now for that guidance?

Well, we're not as volatile as the underlying rate. So as Matt said, if the spot rates are going up, it's not like we meet dollar-for-dollar increase our rate there either. So we are less volatile on the way down, and [less] volatile on the way up. The fundamental market we expect to be more solid, and spot rates is part of that.

So our premium -- we expect our annual contract rates to still be strong and healthy, and we expect our spot rates to be strong and healthy too, relative to 2016. So that's what we baked into the overall expectation for the year.

Right. So if I were to look at the average expectation for premium for 2017 relative to where we stand today, it basically would it be in line, right?

It would be, yes. We don't expect that significant change in the overall premium.

Okay.

But I wanted to be clear. Matt said this before. It's not like we price our business as a margin off the underlying spot rates. I mean, we're deep [helpful], but not immune. So even if the spot rates move around a few hundred dollars on any given month's GRI, it's not like our rates are moving exactly in tandem with that. So I want to make sure that you get that point as well.

Right, yes. That's also a relatively new phenomenon, right? Your ability to have that resilient premium really came about when you guys were able to command that premium throughout the last trough, right? So that if we look back two or three, four years ago, there was a bit of a tighter correlation with spot pricing. Is that the right way to think about it though?

Yes, I would say that the premium has generally expanded every year. It's been more expanding than tightening. But clearly, as Joel said, in a significantly down market, it's going to expand. In a rapidly increasing market, it will probably curtail.

Because the relationships we have with our customers are more give-and-take, where in a dramatic down cycle, they will give us higher rates. And then [in our bunker], we're not going to strand them like many of the other international ocean carriers, to stick it to them and hold the freight hostage. Ours is really built on a more long-term relationship that gives and takes.

Right, okay. That's all. Thanks, guys. I appreciate the time.

Okay, thanks, Mike.

Ian Zaffino, Oppenheimer.

Hey, guys. This is Mark [Yangon] for Ian. Thank you for taking my question. A lot of them have been covered. But I just wanted to quickly ask, in terms of the China services, I know that it's to bring down freight rates. But I want to see expectations -- I'm not sure how much you guys could comment on it, but your expectations for volume and for pricing? And have you guys seen any material response from a competitor sense? Has that changed the market space materially? Thanks.

Okay, sure, Mark. Let me make a crack at that. I think our expectation about the China market is, we were waiting to see how the three principal lines are deploying tonnage. And it remains not crystal clear about how much new deployed capacity is going to be put in place in the Trans-Pacific next year, and whether it will be well-matched to demand that is expected. So we're watching that one closely.

But as I've said, we do expect some improvement year over year in the Trans-Pacific, in terms of the rate environment. And implicit in that is the better capacity management by the alliances. We don't think it's sufficient, though, to have a complete market turnaround, at least in the Trans-Pacific trade, that will lead to dramatically improved results for the international ocean carriers. In a nutshell, that is how we're seeing the market.

Okay, got it. Thank you, guys.

Sure, Mark.

Thank you. I'm showing no further questions at this time. I would now like to turn the call back over to Mr. Cox for closing remarks.

Okay. Hey, thanks, everyone, for your participation on our call today. Look forward to catching up with you next quarter. Aloha.

Ladies and gentlemen, that does conclude today's conference. Thank you for your participation. You may now disconnect. Have a great day.