Matson Inc (MATX) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Matson's Second Quarter 2017 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, Mr. Lee Fishman. Sir, you may begin.

Thank you, Bruce. Joining me on the call today are Matt Cox, Chairman and Chief Executive Officer; and Joel Wine, Senior Vice President and Chief Financial Officer. Slides from this presentation are available for download at our website, www.matson.com, under the Investor Relations tab.

Before we begin, I 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 11 to 18 of our 2016 Form 10-K filed on February 21, 2017, and in our subsequent filings with the SEC. Please also note that the date of this conference call is July 31, 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.

I will now turn the call over to Matt.

Thanks, Lee, and thanks to those on the call. Before discussing our results, I wanted to welcome Lee Fishman to the Matson team. Over the coming weeks, Lee will be working closely with Jerome Holland as Jerome transitions to a new role with enhanced responsibilities at Matson. I'm excited for Jerome and the opportunities that lie ahead for him.

Onto our second quarter results. Matson's operating results outperformed our expectations, buoyed by stronger demand for our expedited China service, improved lift volume at our SSAT terminal joint venture and improved performance at Logistics. In addition, the timing impact of our fuel surcharge collections provided a year-over-year tailwind after several quarters were burdened by the impact of bunker fuel price increases that occurred in late 2016.

These stronger-than-expected trends were moderated by lower construction-related cargo to Hawaii as the boom of high-rise condominium developments in Honolulu has begun to ebb and other real estate projects have yet to advance to the stage of development that translates to meaningful container volume.

I feel good about where we are, and I'm encouraged by the strength of our second quarter results. However, looking ahead, we see some areas of uncertainty and are not prepared at this time to raise our outlook for the full year. We continue to expect modest improvement in each of our core trade lanes 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 are affirming our outlook for Matson's 2017 operating income to be lower than it was in 2016 and expect EBITDA to approximate the $288.6 million last year.

Slide 4 highlights our financial metrics, which Joel will describe in more detail later. In the second quarter 2017, we earned net income of $24 million or $0.55 per share and generated EBITDA of $85.1 million. And year-to-date 2017, Matson earned net income of $31 million or $0.72 per share and generated EBITDA of $137.4 million.

Turning to our Hawaii service on Slide 5. While the Hawaii economy continued to show modest growth in the second quarter 2017, Matson's container volume declined year-over-year. The early part of the second quarter of 2016 benefited from volume gains when Pasha was struggling with service changes and a related issue and construction-related cargo was lower as the construction cycle on Oahu transitions from high-rise projects to the master-planned community projects in West Oahu.

As a result, we're now expecting our Hawaii volume to be modestly lower than the level achieved in 2016, which also benefited from a 53rd week. In addition, we continue to expect higher-than-normal operating expenses in 2017 as we've been undertaking the once every 5 years dry-docking of our neighbor island barges.

We continue to evaluate our fleet deployment in Hawaii and look for opportunities to improve utilization and lower operating costs while maintaining our leading service. We expect to move between a 10- and 11-ship fleet over the next several months as we navigate through a heavy dry-docking schedule, retire older vessels and progress towards our long-term deployment with the most modern vessels in the trade.

Moving on to Slide 6 for the latest economic stats and forecast from UHERO or the University of Hawaii Economic Research Organization. The Hawaii economy continues to perform well with visitor arrivals up, unemployment down and hotels operating at very high levels of occupancy. While the multiyear ramp-up of construction has eased, UHERO expects enough new activity in the pipeline to maintain employment near current levels for the next several years, generating smaller net gains in job growth next year, followed by a gradual decline on the down side of the building cycle. Building on the neighbor islands, which has lagged well behind Oahu, has 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.

Turning to Slide 7. We wanted to, again, highlight our Hawaii fleet renewal program. The construction of our 4 ships remained on budget and on track for scheduled delivery. For your benefit, we've included an updated progress payment schedule by year.

Before moving on, I wanted to provide some comments on Philly Shipyard's recent speculative announcement regarding the construction of additional container ships for the Hawaii trade.

First, Philly Shipyard has not announced any firm vessel orders beyond the construction of Matson's 2 vessels. Second, while they recently announced the signing of an LOI, they have not named a counterparty.

Third, we believe that adding new or incremental vessel capacity to a market that is well served by existing capacity of incumbent operators today is uneconomic. As you may know, our primary competitor in Hawaii has announced the selection of a shipyard in Texas to build 2 new vessels that will address their fleet renewal needs.

Fourth, the severe losses experienced over time in Puerto Rico and Transpacific trade lanes provides examples of the detrimental impact that overcapacity can have in this business. And lastly, a new entrant would need to commit substantial infrastructure capital beyond the ships themselves to launch an effective service to Hawaii.

Notwithstanding our views, Philly Shipyard has a history of building vessels on a speculative basis, so we can't dismiss this announcement. Regardless of what happens, I believe Matson will be positioned better in this market than anyone else to maintain our long-standing position as the market leader in Hawaii.

Moving on to our China service. Matson's volume in the second quarter of 2017 was 15% higher year-over-year, primarily due to stronger demand for our expedited service offering and an additional voyage in the second quarter this year as we were able to load one of our vessels with eastbound cargo on its return to service from dry-docking in China.

For the balance of 2017, we continue to expect our proven service to be highly differentiated with a service advantage over the international carriers in the transpacific. 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 reformulation of the new alliances in April as potential sources for market improvement longer term in the China trade.

Turning to Slide 9. As expected, Matson's Guam volume in the second quarter declined year-over-year due to further competitive losses to APL's U.S. flagged containership service that increased its frequency to weekly in December of 2016. We continue to fight to retain every container of our customers' business and owing to our long history in Guam with strong customer ties and a 5- to 8-day service advantage from Oakland and L.A., Long Beach, we expect to retain an outsized share of the market. Our goal continues to be to limit any competitive volume losses. As we expect this to be a highly competitive market situation, we'll not be providing any more specific market share comments beyond that goal.

Moving now to Slide 10. In Alaska, Matson's container volume for the second quarter of 2017 was 1.1% lower year-over-year, primarily as the result of continued energy sector-related economic contraction, partly offset by a better seafood harvest and related southbound volume.

For the full year 2017, we continue to expect modestly lower volume based on declining northbound freight due to ongoing contraction of Alaska's energy-based economy, partially offset by improved southbound seafood volume.

In addition, with the installation of exhaust gas scrubbers on our 3 diesel vessels serving Alaska now complete, we don't expect to regularly deploy our less-efficient steamship reserve vessel in 2017, resulting in lower expected vessel operating and dry-dock relief expenses.

I'd also like to point out that last week, the Anchorage Economic Development Corporation or AEDC published its annual 2017 3-year economic outlook. Overall, their outlook is consistent with what we've been hearing from our customers in Alaska, pointing towards a muted economic environment this year and next with a return to slight growth in 2019 and 2020 as things stabilize.

Turning next to Slide 11. Our terminal joint venture, SSAT, contributed $6.9 million in the second quarter of 2017 compared to $3 million in the second quarter of 2016. The year-over-year increase was primarily due to improved lift volume.

For the full year 2017, we now expect SSAT to make a higher contribution to our Ocean Transportation operating income that it made in 2016 as lift volume is benefiting from the launch of the new global shipping alliances as container flows and supply chains are readjusted between West Coast terminals. Last quarter, we announced plans to expand our relationship with SSAT to include Matson's Tacoma terminal, where our Alaska vessels operate, before the end of this year, and those plans remain on track.

Turning now to Logistics on Slide 12. The second quarter 2017 benefited from a full quarter of freight forwarding operating results from Span Alaska. Even while facing the challenging economic headwinds, Logistics generated stronger operating results and offset some of last quarter's weakness. We are affirming our full year 2017 outlook for Logistics operating income to be approximately $20 million.

While the inclusion of Span Alaska's freight forwarding business for the full year is expected to be the main driver of the year-over-year increase, we do have other revenue and cost-savings initiatives underway to help offset the margin pressure in our brokerage business.

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

Thanks, Matt. I'd also like to take this opportunity to welcome Lee to the team and say thank you to Jerome for his many contributions. Since early 2013, Jerome has led our IR efforts at Matson, and I'm very excited about his promotion to lead strategy and corporate development for our Matson Logistics unit going forward.

As for Lee, he comes to us with over 10 years of public and private equity experience and prior to that, 7 years of investment banking experience, during which I had the pleasure of working directly with him. We're lucky to have Lee on board at Matson.

Now on to our results on Slide 13. Ocean Transportation operating income increased year-over-year in the second quarter, primarily due to higher average freight rates and container volume in China, favorable timing of fuel surcharge collections, higher contribution from SSAT and higher freight rates in Hawaii.

Partially offsetting these favorable year-over-year comparisons were higher terminal handling expenses, higher vessel dry-docking amortization expense and lower container volume in Hawaii and Guam. The company's SSAT terminal joint venture investment contribution increased by $3.9 million year-over-year due primarily to improved lift volume. Logistics' operating income increased by $4.7 million year-over-year, primarily due to the inclusion of Span Alaska's freight forwarding operations.

On Slide 14, year-to-date Ocean Transportation operating income decreased primarily due to higher terminal handling costs, higher vessel dry-docking amortization expense and lower container volume in Hawaii and Guam. Partially offsetting these unfavorable year-over-year comparisons were higher container volume and average freight rates in China and higher contribution from SSAT.

Logistics' operating income increased $5 million, primarily due to the inclusion of the acquired Span Alaska freight forwarding business and higher intermodal volume, partially offset by lower intermodal yield.

Turning to Slide 15 for a summary of our balance sheet. You will note that our total debt at the end of the quarter was $753.9 million and our net debt to LTM EBITDA ratio was 2.5x.

As previously announced on June 29, we entered into amendments to our existing unsecured revolving credit facility and long-term private note agreements. Our unsecured revolver was increased from $400 million to $650 million and extended for a new 5-year term maturing in June of 2022.

We also made a number of amendments to our existing note purchase agreements, including modifications to certain definitions and covenants, where, in particular, the consolidated leverage ratio covenant was amended to provide for additional flexibility during Matson's new vessel construction period.

Slide 16 shows a summary of the manner in which we allocate our cash flow generation. For the last 12 months ended June 30, 2017, we generated cash flow from operations of $142.4 million and undertook net borrowings of $289.9 million from which we used $195 million to close our acquisition of Span Alaska, $69.1 million on maintenance CapEx and $127 million toward deposits and progress payments on the new vessels. And lastly, we also returned nearly $40 million to shareholders via dividends and share repurchases.

As a reminder, our LTM maintenance CapEx has been higher than our normalized range of $40 million to $50 million per year. This was as expected and is primarily due to the completion of the scrubber installation program on our Alaska vessels and other capital projects related to what has been a relatively heavy dry-docking last 12 months for us.

Finally, on June 29, our Board announced the fifth consecutive annual increase to Matson's quarterly dividend, underscoring their confidence in the long-term prospects for our business and commitment to rewarding shareholders through dividends.

While we expect leverage to increase as our Hawaii fleet renewal program progresses, our healthy balance sheet, strong operating cash flows and continued access to attractive financing sources provide ample capacity to fund new vessel construction, consider growth investments and return capital to the shareholders.

With that, let me now turn to Slide 17 to discuss our full year outlook and provide our thoughts on the third quarter of 2017. As Matt indicated, we feel good about our year-to-date results, especially the strength shown in the second quarter, particularly in our SSAT business and the good performance and resiliency shown in both our Alaska and China businesses despite underlying weak market conditions.

Nevertheless, despite these strengths, there do remain other uncertainties such that, as a result, we are reaffirming our full year outlook at the previously stated levels in our last earnings call.

To start with, we continue to expect full year 2017 consolidated EBITDA to approximate the $288.6 million achieved in 2016. And based on our increased capital and dry-docking spending, we expect depreciation and amortization to increase by about $15 million this year to $150 million, inclusive of approximately $50 million of dry-docking amortization, which would lead to 2017 consolidated operating income of approximately $140 million. And of that total, as Matt mentioned earlier, we continue to expect logistics operating income to be approximately $20 million.

From those items, it follows that we expect Ocean Transportation operating income for 2017 to be lower than the $141.3 million achieved in 2016. 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%.

In the third quarter 2017, we expect Ocean Transportation operating income to be moderately higher than the $42.7 million achieved in the third quarter of 2016, and we expect Logistics operating income in the third quarter of 2017 to approximately double the $3.5 million achieved in the third quarter of 2016.

I'll now turn the call back over to Matt for his final remarks.

Thanks, Joel. 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 of our fleet renewal investments and continued value creation for our shareholders.

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

(Operator Instructions) And our first question comes from Jack Atkins from Stephens.

And Jerome, congratulations on your new role. So Matt, if I could just start with a couple questions about Hawaii. You referenced in the press release and also in your prepared comments around some slowing construction trends in Hawaii as a high-rise boom there sort of ebbs a bit.

Could you refresh us on what your LTM or, maybe if it's more helpful this way, 2016 volumes which were tied to construction, what sort of levels were they? And sort of how should we think about future growth within that particular customer vertical? Do you think you can sort of hang onto the volume level that you have now? Or do you anticipate those maybe ebbing a bit as we look out over the next couple of years?

Yes, Jack. I'll take that and then I'll toss it over to Joel for some of the specific figures. But our feeling -- it's an interesting environment. I mean, if we -- we see the Hawaii economy continue to provide well, I mean, we talked about unemployment, state product, visitor arrivals, we can add the banks are reporting record earnings and loan growth and deposit growth. So overall, the economy feels good here. And I think we eventually will see an ebbing. I think where we are now, though, is that a lot of that high-rise construction is in its final stages. We are excited about the long-term prospects in West Oahu, single-family homes and planned development activity. The light rail system is still underway. There's a healthy amount of military construction. There's other infrastructure work that continues to need to be done to the sewer systems and other things.

So we feel okay about the economy and its prospects. It's just there are periods where we're, at least at this point, seeing a flattening out of that freight that is related to containerized volumes. And so we're -- again, we're feeling okay. We're seeing it's a little flattened out. It's likely to be somewhat flat-ish over next few years in containerized volumes but consistent with a relatively healthy economy. And that's -- so it's going to be relatively slow growth over these next few years but still growing is kind of the way we're thinking about it at this point.

And then onto specific volumes?

Yes. And Jack, on the volumes, to put it in perspective, we don't report exact volumes by subcategory, but we have commented that it's been a single-digit number, a high single-digit number over the couple of years. And to put that in perspective, the construction volumes at the previous peak, if you go back to the 2000s, was up into the teens, and then that came down to almost zero as all the construction projects ran off in 20 -- in '09, '10 and '11 and then built back up to a mid- to high single-digit type of number by the time you roll into 2014, '15, '16. So that -- and that's where we believe it will kind of stabilize, and we'll go through ebbs and flows as certain markets transition, as Matt's talked about. But that puts an order of magnitude on it for you.

Okay. That's helpful, Joel. So it sounds like volumes are certainly higher than they were during the recession but nowhere near where they peaked out at the end of -- sort of -- thinking of the mid-2000s. So that's helpful color.

Matt, I guess, for my second question, you referenced the Philly Shipyard announcement. I don't want get too into that because obviously there's some sensitivity around that, that specific topic. But I would like for you to maybe expand for a minute around some of the infrastructure issues that you referenced, which may make having a third competitor come into Hawaii more challenging.

If you could just sort of expand on that for a moment because I think that's maybe something that folks will understand. It's one thing to build a vessel but it's another thing to be able to unload cargo, for example. If you could just sort of comment on that, I think that would be helpful for folks.

Sure. There is adequate berth space in Honolulu Harbor. What their lacks are crane rails and gantry cranes that would allow for the efficient loading and unloading of these large 3,600-TEU vessels. There has been a harbor modernization project here in the state, in Hawaii, and it's focused on building a brand-new terminal across from Sand Island, where Matson's operations is, that Pasha will be moving into. And Matson will be moving in -- right now, Pasha is just next door on Sand Island. They'll be moving to a new site and Matson will get the full reach of the terminal. Matson currently is at 3 different locations in the harbor complex. Moving -- having Pasha move across to a new terminal would allow Matson to be onto a single terminal, allow us certain efficiencies and it's long overdue.

There were no other places in the state that have rail-mounted gantry cranes that would allow for the efficient unloading. So an operator here would have to use mobile harbor cranes and with these very large ships, it's not, not doable, but it's highly inefficient. And so it's just another obstacle that any operator would have to deal with.

Okay. That's helpful, Matt. Last question for me, I'll turn it over. I know that you all reiterated your 2017 outlook for the Logistics business, but it just seems like that segment has been outperforming over the last several quarters since the Span acquisition. So I'm just sort of curious, is Span outperforming your expectations relative to when you made that initial purchase? And if you could maybe comment around what's happening in the core highway and intermodal Logistics business, which I know has been relatively challenging, but it seems like it's holding up okay.

Yes, I think -- I can comment, Jack. I would say, as you know, when we did the first -- when we initially announced the acquisition of Span Alaska, we were well aware of the slowing economy in the State of Alaska. And our own internal expectations and the value in which we applied to a multiple of earnings was also lower, understanding that we'd be going into a period of lower volumes in the state. And I would say that the -- we've done a little better than our modest expectations at the time we did the acquisition. So that's positive.

The other thing I would note is, like Matson's Alaska operations, Span Alaska is more focused on the Anchorage market rather than the North Slope and some other sectors in the state that have been much more hard-hit. So both Matson's ocean volumes and Span's, each of which has focused, again, on the Anchorage economy rather than the North Slope, has allowed it to suffer a bit less than other operators and a little bit less than our own expectation there.

So with regard to other lines of business, Jack, we've seen some of the same margin pressures that other intermodal operators have reported. But we continue to perform well in each of our lines of business, rail and truck brokerage, the warehousing businesses. Each of our lines of businesses is doing well. And again, we are acknowledging that we're seeing some of the same margin weakness that others are seeing on the intermodal side, especially.

But overall, we're feeling good about and continuing to invest in the various lines in our business outside of the Span Alaska business. So things -- we're feeling okay about Logistics, Jack.

And our next question comes from Ben Nolan from Stifel.

So my first question relates to SSAT. It was a really quiet quarter on that front, it seems like. And you alluded to the changing about alliances and that sort of thing that is being helpful. Can you maybe help me? And from a longer-term perspective, do you think this is a bit of a new normal? Or was there something in the quarter that, be it seasonality or whatever, that made it exceptionally good?

Yes, Ben. This is Matt. I think we're feeling good about our position. So I think this -- we -- there was a fair bit, as we mentioned in our prepared comments, of moving around either from acquisitions or from the reformation of alliances and the use of individual terminals, and many shipping lines have their own terminals on the West Coast. But as it all settled out, it looked like SSAT, although there were some negatives and some positives, that -- terminal by terminal on the West Coast, overall, we've ended up with more freight volume.

And the SSAT business, terminal operating businesses are highly sensitive, as you know, to volume because it's largely a fixed cost business. And if you can put more volume over it, it provides a tremendous leverage from an operating perspective. So we see this as the new normal. I mean, we'll see if there are other acquisitions and other things that happen. But based on the recent formulation of these alliances, and they're all settled in, we expect this level of volume to continue.

Okay. Well, that's good news. And then sort of as it relates to, specifically, the Hawaii trade, and I know how the whole new competitor thing plays out is still very much up in the air. But I did notice that, I think, one of the Asian liner services announced that they were expanding on their Asia trade directly to Hawaii. How big of a risk is that to your overall business? Or is it just sort of on the margin and probably not very impactful?

I would say it's closer to the second of your 2 explanations, but I'll provide a little context. So what we have seen -- so Matson carries a small amount of freight from Asia on our CLX service that goes all the way from -- it will be loaded in Shanghai, Ningbo, that would go all the way around to L.A., Long Beach, stay on our vessel there and then get discharged in Hawaii. And again, because of the relatively longer transit time, we do carry some cargo but not a lot.

The primary carrier has -- NYK, a Japanese line. APL, who we compete with in Guam, has announced its intention to start a service from Asia to Hawaii in competition with NYK and which -- NYK then announced that it was increasing its frequency from every 2 weeks to every week. And so that segment, that is the Asia to Hawaii segment, totally unrelated to our West Coast to Hawaii segment, looks like it will get more competitive.

Matson, as I said, carries a very small amount of that cargo. Some of our cargo originates from neighbor islands for which the other carriers don't have connecting services. So while we might see some pressure on the margin, we don't expect it to be very significant.

Okay. And then lastly for me. I know this isn't always a (inaudible) part of the business, but it seems like once or twice a year, something is added to the South Pacific side, most recently with the Marshall Islands U.S. flag business. I'm curious how deep into the -- your footprint you are with respect to that part of the world now. I mean, is there still much more wood to be chopped? Or you're pretty close to where you think that ultimately you could be?

I think we -- as you know, we've been interested in trying to link our network in Honolulu and in Guam to increase our presence in the regions around it. I would say that we're excited about increasing our frequency and service to the Samoas and Fiji with our South Pacific Express, which again hubs off of our terminal in Honolulu. We do think there's more there. These are small markets, but I think we can compete effectively and make money as bolt-ons into these adjacencies. And so I think there is more for us to do. We'll do this over time.

And again, I would just remind investors, these are relatively small markets. So there is earnings potential, but I think most understood or should be viewed within the context of a bolt-on that provides relatively modest enhancements, but again, links -- it leverages up our network and allows us to grow organically. So it's definitely desirable from our perspective.

And our next question comes from Steve O'Hara from Sidoti & Company.

A question on the areas it sounded like you were unsure about in terms -- relative to your guidance and kind of sticking with the current guidance. Are we talking about Guam and maybe Alaska and China rates? Or was there something else in there that -- or maybe one of those, wasn't it?

Well, it's a combination of things. I mean, I think as we or Joel mentioned in the call, we continue to do better than our expectation in China, and our service remains highly attractive and highly differentiated. We -- and so that was an area of strength, SSAT was an area of strength. We've had a bit of concerns about the growth in the Hawaii market, at least where it is at this point in time, that's a question for us. And as you pointed out, Guam remains a dynamic situation and highly competitive. So a little hard to predict on those areas. So we have some things that we think are strong and will continue to be strong. And Alaska, we've done well in a weaker economy than we expected.

So we've got some things that are a little on the positive side, a couple of things that we're watching closely, which has provided us a balance of not wanting, at this time, to change our full year outlook despite a second quarter pretty good performance.

Okay. And then just on the Philly Shipyard news, I guess, if they go ahead and build them on spec as, I guess, you said they've done past. What ends up happening with those ships? Does somebody decide to kind of take them and use them anyway even if they weren't maybe planning on entering the market? It seems like a bit of a -- it doesn't seem too logical, but just wondering what you're feeling might be there. And then I mean, could these ships be used in other Jones Act trades where, if somebody doesn't decide to use them in Hawaii, they could use them elsewhere?

Yes. I mean, it's really unclear where the pathway forward for these ships are and their operator. Whether they get built at all. If they get built, where do they get deployed? I mean, clearly, the shipyard has focused on Hawaii, so if they're a stakeholder in it, then presumably that's where they'd go. If you look at the other primary Jones Act trades, Puerto Rico, they have -- as I understand it, at least 4 new container vessels and a barge operator there, so that market is relatively well covered. Alaska, as we know, is well covered with the existing incumbents, as is Hawaii.

So exactly, while they've announced their intention to look at this as a business, it remains unclear given that the market is adequately tonnaged with existing or incumbent competitors. So it's a real big question mark for us, Stephen, difficult to speculate on exactly how this all shakes out.

Okay. And then I mean, does that news change your plans on retirements? Or has it changed your plans on retirements or keeping vessels on longer than maybe you had expected? Or is that kind of a hurdle you intend to cross later on?

Yes, we don't intend to have any changes. With again, with our 4 new ships, we're going to be able to retire 7 of our near end-of-life steamships and have a fully modern and compliant fleet. And so we're going to continue on. Our plans are not changed at all by this speculative order.

And our next question comes from Michael Webber from Wells Fargo.

Matt, I wanted to follow up with a couple of questions on Philly. In your prepared remarks, you comped a worst case scenario, which I would have to imagine is a worst case scenario, [since it's] Puerto Rico. It seems relatively appropriate, but you also mentioned that regardless, you'd be positioned as the strongest player, which seems like a pretty rational statement.

I guess, my question is, do you view being the strongest player in a market that comes to resemble Puerto Rico as being an acceptable outcome to the current situation, being that you guys have a cost of capital advantage over everyone in the space? Do you think that -- would that be an acceptable outcome in your mind?

Well, I don't know if I'd use acceptable or not acceptable. I would say, if it happens, we will be prepared to react to it. Of course, it's unwelcome and unwise, so -- but owing to our scale efficiencies and our other sources of income and the long-standing position we have in this market, we expect to be here and remain here. Exactly how this dynamic happens, we do note that another more capacity entering the market is something which will likely not produce an acceptable economic return to the person coming into the trade. Certainly, we don't -- we would also expect to be negatively impacted. But beyond that, it's hard to say exactly how it shakes out.

Right. And you mentioned, I mean, this is not a new trade for them, right? This has happened once or twice before, most recently with some tankers. So I'm just curious, are there -- is there a point in time or a benchmark that you guys look at, at which point, you'd get more aggressive and/or creative around either taking those ships out or trying to find some sort of solution to keep that Puerto Rico scenario from happening? Are we there yet? Is there a milestone that you look at and say, "Okay, now we've really got to get serious about dealing with this"?

Yes. It's -- what we've said is what we know. It's really had to speculate beyond that, Mike.

Okay, fair enough. Joel, just one more for me. You went through the details on bumping the revolver. I think that got announced, I think, in June. Can you remind us what your firepower is right now beyond the capital that's required to deliver the existing order book?

Well, just reminding on the revolver, so we had a $400 million revolver, it's up to $650 million. If you look at our available borrowings under that, it would be in the magnitude of $250 million of available capacity, if you look at where our covenants are struck. And we've got some flexibility to go above that, but we're the low end of the covenants are. So we've got firepower there, we've got ready access to additional capital should we seek to do that or need to do that in the next 2 years.

And then in addition, Mike, we've got the cash flow coming from the business, the cash flow from operations less the maintenance CapEx, over the next 2 years as well. So through all those items, we'll have plenty of capital to fund the remaining payments on the vessels, but it will be a combination of those different factors, not just from the revolver availability.

Right now, I'm just thinking about excess capital to deploy maybe elsewhere beyond what you've already got allocated for the vessels.

Yes. I mean, we don't -- only to say, we don't feel capital constrained. I mean, as investment opportunities come up, we believe we'll be able to pursue those. We are very mindful of where that leverage ratio is going. It's important for us to maintain investment-grade statistics, and that was reflected in the amendments that we worked on with our lending group. So we are very mindful of where that's at. But in general, we don't feel capital constrained to pursue opportunities as they come our way.

Fair enough. Actually one more from me before I turn it over. And Matt, this is just a quick detail question. The new orders at Philly, I think they're being classified as Aloha Class-like. Is that -- do you guys actually have IP at Philly with the Aloha Class? Would those actually be Aloha Class vessels that are getting built? Are they just built to similar specs?

We don't have IP. These -- in today's world, a lot of these vessel sizings are electronic. There are some proprietary features of the vessels, which they are not able to replicate, which are unique to the Hawaii trade without going into specifics about what those are. The vessel is a generally generic vessel. I mean, I'd say generic, it's dual fuel, it's high spec and high capability. I don't mean to suggest otherwise, but it is not -- it doesn't have a ton of IP in it that they can't replicate using their Korean technical partners.

And our next question comes from Kevin Sterling from Seaport Global.

This is actually Will on for Kevin. Just wanted to really quickly double check some numbers I think I heard. I was trying to scribble them all down. Operating income forecast for 2017 of $140 million with $20 million of that going to Logistics. Is that correct?

Correct.

And operating income for the Ocean in Q3, moderately higher year-over-year?

Correct.

So that kind of implies Q4, we're going to be down from the levels seen in Q4 last year. Can you kind of talk about the Q4 dynamics? Is that a larger top line step down, more expenses? What's kind of going on in Q4 there?

Will, this is Matt. I will comment and then I'll ask Joel to comment. One of the items year-over-year was that we saw -- with the Hanjin bankruptcy, we saw a very, very high China demand post the Hanjin bankruptcy as there was a lot of stranded freight in the market.

We expect the fourth -- as you know, the fourth quarter, a lot of the seasonal holiday shipments are moving in the third quarter and early in the fourth quarter but are mostly shipped for the quarter in order to make the holiday sales patterns. And so we don't expect quite as strong a fourth quarter in our China service as we did last year.

And then I'll turn it over to Joel to comment on other factors that might be noteworthy.

Yes, that's a factor. The other one is remember, we had a 53rd week. So this year, with the 52 week, there's a little bit of impact from that as well. And the last -- then just the last factor is in Guam. So in Guam, you've got a whole year -- APL deployed their second vessel to have a weekly arrival towards the end of December of last year. So we have a whole nother year of APL in Guam with a weekly arrival versus last year's fourth quarter, it was only every other week and with a big time transit differential. So that's a year-over-year impact when you look at the fourth quarter as well.

And at this time, I'm showing no further questions.

Okay. Operator, thank you. I will -- thanks to everyone for listening today. We look forward to catching up with everyone on our third quarter call. Aloha.

Ladies and gentlemen, thank you for your participation in today's conference. And this does conclude the program and you may all disconnect. Everyone, have a great day.