Matson Inc (MATX) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Matson Fourth Quarter 2017 Financial Results Conference Call. (Operator Instructions) As a reminder, today's program is being recorded.

I would now like to introduce your host for today's program, Mr. Lee Fishman. Please go ahead, sir.

Thank you, Jonathan. 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 Investors 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 February 20, 2018, 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. Please turn to Slide 3 for my opening remarks.

Matson's operating results in the fourth quarter were in line with our expectations with favorable contribution from a higher average rate in China and higher lift volume at SSAT were offset by lower construction-related cargo to Hawaii and competitive pressure in Guam.

Our net income and diluted EPS benefited from a onetime noncash adjustment of $155 million or $3.62 per diluted share in the fourth quarter as a result of the passage of the Tax Cuts and Jobs Act which Joel will touch upon later.

In 2017, we had an exceptional year in our China service with record volume and higher average rates. We also saw a benefit related to the timing of our fuel surcharge collections and higher lift volume at SSAT led to a significant contribution from our equity investment in the joint venture.

Offsetting these favorable contributors were lower volumes in Hawaii primarily driven by weakness in construction-related cargo, lower volume in Guam as a result of competitive pressure and higher terminal handling costs. And lastly, the full year net income and diluted EPS results benefited from the onetime noncash adjustment related to the Tax Act.

On the operational front, our new vessel build program remains on track with the first vessel expected in the third quarter of this year. In August, we announced the order of 3 new gantry cranes and the upgrade of 3 existing cranes at Sand Island. These cranes along with the associated electrical and infrastructure upgrades at the site are necessary expenditures to support the new vessels to bring greater efficiency to our container operation and expect to support the growth in volume over many decades. Lastly, we recently announced that we upgraded our barge service and our Neighbor Island operation with the launch of the new Mauna Loa, which is far larger than the barge it replaces. This barge will increase our service levels and bring operating efficiency with swifter and more fuel-efficient transits.

Moving on to the outlook for 2018. For the full year 2018, we expect consolidated operating income to approximate the level achieved in 2017. We expect to face an exceptionally -- we expect to face continued competitive pressures in Guam and modestly lower volume in China coming off an exceptionally strong year offset by modest improvements in our other core businesses. For the first quarter of 2018, we expect Ocean Transportation operating income to be moderately higher than the first quarter of 2017, primarily due to the timing of fuel surcharge collections and logistics operating income to approximate the level achieved in the prior year period.

Turning to Slide 4, I'll briefly highlight the financial results for the quarter and full year. And Joel will go into more detail on the results and outlook later on in the presentation.

In the fourth quarter of 2017, we earned net income of $166.9 million or $3.90 per share compared with $20 million or $0.46 per share in the year-ago period.

Adjusting for the onetime noncash adjustment in the quarter related to the enactment of the Tax Cuts and Jobs Act, our fourth quarter net income would have been $11.9 million or $0.28 per share. We generated EBITDA of $62.5 million in the quarter versus $73.5 million in the fourth quarter last year.

For the full year, we earned net income of $232 million or $5.37 per share compared with $81.4 million or $1.87 per share in the year-ago period. Adjusting for the onetime noncash adjustment in the fourth quarter related to the enactment of the Tax Cuts and Jobs Act, our full year net income would have been $77 million or $1.78 per share. We generated EBITDA of $296 million in the year versus $290 million in the prior year.

Now onto our trade lane services. Turn to our Hawaii service on Slide 5. While the Hawaii economy continued to show modest growth in the fourth quarter 2017, Matson's container volume declined 11.1% year-over-year. A little over half of this volume decline was due to the 53rd week in 2016. The balance of the decline was primarily related to lower construction-related cargo, as the construction cycle in Oahu transitions from high-rise projects to the master-planned community developments in West Oahu. For the full year, container volume declined 6.5% year-over-year, primarily due to the lower construction-related volume, 1 less week versus 2016 and the absence of competitive volume gains we saw in the first half of 2016.

For 2018, we expect flat-to-modest volume growth, which reflects continued economic growth in Hawaii in a stable market share environment. I'll touch on some of our thinking on the next slide.

Slide 6 provides an overview to the key economic indicators forecast by Hawaii for 2018 and beyond. According to the latest UHERO forecast, Hawaii GDP growth slowed in 2017, but it's expected to pick up slightly in 2018.

Unemployment continues to remain lower than the national average and is forecast to improve further. Visitor arrival set a record in 2017 and the forecast is for continued growth, although at a more modest pace. And hotels are expected to see further improvement in the average daily room rate and occupancy rate in 2018. So tourism is doing quite well, and the underlying economy looks good.

With respect to construction, contracting jobs peaked in mid-2016 and have declined since then, as several large-scale retail and condo projects wound down and the transition to single-family home development appears to have elongated. Job growth is forecast to continue to decline in 2018, albeit slightly.

Despite the continued contraction in jobs growth, construction activity over the next couple of years is expected to remain near current levels as projects working toward completion are offset by new projects breaking ground. With respect to these new products in late 2017, the Koa Ridge project broke ground with the timeline of the first home deliveries in mid-2019, and there are number of residential and mixed-use projects working through the planning process that will generate activity in the next several years.

Given the recent economic data and our conversations with developers, we're taking a cautious view on the trend in construction activity in 2018, which is we don't foresee any meaningful pickup in construction volumes.

On Slide 7, we have a summary of the recent industry announcements regarding the Hawaii Jones Act market. On January 26, TOTE provided an update on its entry into the market in which TOTE stated that it will put its plan on hold as a result of its Phase 1 technical review of Piers 1 and 2 in the Honolulu Harbor. TOTE conducted a preliminary study of the site's infrastructure which indicated that upgrades and improvements will be required to accommodate the new operations. Due to the scope and timing of the upgrades and improvement, TOTE did not renew the LOI with the Philadelphia Shipyard.

Following TOTE's announcement, Philly Shipyard announced on January 26 that it is placing TOTE's container ship project on hold and is considering alternative projects. Philly Shipyard is suspending substantially all construction-related activity on these vessels including design, planning and procurement work.

Moving to our China service on Slide 8. Matson's volume in the fourth quarter 2017 was 14.3% lower year-over-year. Near half of the decline was due to the 53rd week in the year-ago period.

Our year-over-year volume result was also impacted by the benefit from the Hanjin bankruptcy in the year-ago period. Despite the negative comparisons I just mentioned, China volume came in largely as expected and we experienced a higher quarterly eastbound average rate versus the fourth quarter 2016.

For the full year 2017, our China service experienced record volume and achieved a sizable rate premium as our transit advantage over the international carriers and the Transpacific resonates with customers.

Container volume for the year decreased 7.1% year-over-year. One thing to note is that we had several dry-dock return voyages in the year that favorably impacted the year-over-year comparison.

For 2018, we expect Transpacific capacity to increase in excess of demand which is likely to lead to softness in the SCFI.

Despite this macro backdrop, we expect demand for Matson's highly differentiated expedited service to maintain relatively strong with rates as favorable as 2017.

Volume is expected to be modestly lower than the exceptional level achieved in 2017 largely due to the negative comparison for the dry-dock return voyage in 2017.

Turning to Slide 9. As expected, Matson's Guam volume in the fourth quarter and full year declined year-over-year primarily due to competitive losses to APL's U.S. flag containership service that increased frequency to weekly in December 2016.

Regarding 2018, we'll continue to fight for every single container of our customers business and owning to our long history in Guam with strong customer ties, a 5- to 8-day transit advantage from Oakland and Long Beach and a dramatically better on-time performance record, we expect to retain an outsized market share. 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 fourth quarter 2017 was 10.1% lower year-over-year, primarily attributable to the negative comparison from the additional week in the prior year period.

Approximately 75% of the decline was attributable to the extra week in 2016.

I'd also like to point out that in the quarter, we had a positive contribution from an agreement with TOTE to carry volume during one of their vessel's dry-docking.

For the full year 2017, container volume decreased 1.5% year-over-year, primarily due to the impact of the 53rd week in 2016, partially offset by higher southbound volume from a stronger seafood season.

For 2018, we expect volume to approximate the level achieved in 2017.

The economic backdrop in Alaska remains challenging although improving relative to 2017 and I'll touch on that in a minute.

We expect modest improvement in northbound volume to be offset by lower southbound seafood-related volume due to a moderation from the very strong seafood harvest in 2017.

On Slide 11, we highlight recent forecasts by AEDC and the Alaska Department of Labor. The chart on the left shows the employment growth for Anchorage in Alaska and the chart on the right shows the AEDC figures with the population growth in Anchorage. Both charts illustrate the depth of the recession that has taken place in the region over the last couple of years. Employment is forecast to decline modestly in 2018, but AEDC believes that the shedding may reverse course later in the year and that 2018 will mark the bottom of this recession. From our perspective, we do think a bottoming is near but that the economic recovery trajectory is too early to tell.

Turning next to Slide 12, our terminal joint venture SSAT contributed $8.9 million in the fourth quarter 2017 compared to $6.6 million in the fourth quarter 2016. The year-over-year increase is primarily due to higher lift volume. For the full year 2017, higher lift volume drove a higher contribution from the joint venture of $28.2 million compared to $15.8 million in the year-ago period. For 2018, we expect SSAT's contribution to our Ocean Transportation operating income to approximate the 2017 level. We expect SSAT to continue to benefit from the launch of new global shipping alliances as container flows and supply chains are adjusted between West Coast terminals.

Turning now to logistics on Slide 13. Operating income in the fourth quarter of 2017 came in largely as expected with a contribution of $4.6 million or approximately equal to the results in the year-ago period. The positive contribution from higher revenue was offset by higher costs.

For the full year 2017, operating income increased $8.7 million year-over-year to $20.6 million primarily due to the inclusion of Span Alaska for the full year versus the prior year, partially offset by lower intermodal yield.

For 2018, we expect logistics operating income to modestly increase from the level achieved in 2017. And for the first quarter of 2018, we expect logistics operating income to approximate the level achieved in the first quarter 2017.

Per my earlier comments on the economic outlook in Alaska, a bottoming of the recession or relative economic improvements should be positive for our Span Alaska business.

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

Thanks, Matt. Turning to Slide 14 for our financial results. Ocean Transportation operating income decreased $11.9 million year-over-year in the fourth quarter to $20.7 million. The decrease was primarily due to lower volumes across the trade lanes as a result of one last week versus the prior year, higher terminal handling expenses, lower container volume in Guam as a result of the competitive losses and lower container volume in China due to the volume gains in the year-ago period related to the Hanjin bankruptcy. Partially offsetting these unfavorable year-over-year comparisons were the favorable timing of fuel surcharge collections, higher average freight rates in China and Hawaii and a higher contribution from SSAT. The company's SSAT terminal joint venture investment contribution increased by $2.3 million year-over-year due primarily to improved lift volume.

Logistics operating income for the quarter was equal to the result in the fourth quarter of last year as higher revenue was offset by higher costs. And EBITDA for the quarter decreased $11 million year-over-year to $62.5 million, primarily due to the decline in operating income.

For the full year 2017, Ocean Transportation operating income decreased 9.7% year-over-year to $128.8 million. The decrease was primarily due to lower volumes in Hawaii, higher terminal handling expenses and lower container volume in Guam as a result of competitive losses. Partially offsetting these unfavorable year-over-year comparisons were higher average freight rates in China and higher contribution from SSAT and the favorable timing of fuel surcharge collections. The company's SSAT terminal joint venture investment contribution increased by $12.4 million year-over-year due primarily to improved lift volume.

Logistics operating income for the year was $8.7 million higher than the full year 2016 result primarily due to the full year of Span Alaska. Lastly, EBITDA increased 2.1% year-over-year to $296 million as the year-over-year decline in operating income was more than offset by an increase in depreciation and amortization.

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 $857.1 million and our net debt to LTM EBITDA ratio was 2.8x.

Slide 16 shows a summary of the manner in which we allocated our cash flow generation. For the year, we generated cash flow from operations of $224.9 million, undertook net borrowings of $118.2 million and withdrew $30.3 million from the capital construction fund, from which we used $307 million on maintenance and new vessel CapEx and $7.4 million on other cash flow items while also returning $53.1 million to shareholders via dividends and share repurchases.

As we mentioned on our prior earnings calls, we experienced a heavier than normal dry-docking period in 2017 and 2016 which resulted in maintenance CapEx coming in higher than our normalized range of $40 million to $50 million per year. 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 shareholders.

Turning to Slide 17 for a review of our new vessel payments. For the fourth quarter, we had new vessel capital expenditures of $76.8 million and capitalized interest of $3 million for total capitalized vessel construction expenditures of $79.8 million.

Currently, the 2 Aloha Class vessels at Philly Shipyard are 83% and 38% complete, respectively.

For the year, we had new vessel capital expenditures of $244.5 million and $7.5 million and capitalized interest for total capitalized vessel construction expenditures of $252 million. For the full year 2018, we estimate new vessel progress payments of $389 million which excludes owners' items and capitalized interest. Based on current interest rates, we currently project capitalized interest in 2018 to be approximately $17 million.

Moving to Slide 18. We wanted to provide an update on the fleet deployment in Hawaii and the associated financial benefit for the new vessels including the approximate timing of the benefits. Given the expected cost of the existing vessels, exiting the fleet as currently scheduled through 2020 we are reaffirming that we expect $40 million to $45 million in full year run rate operational cost benefits from the new vessels when comparing to an 11-ship deployment. In the fourth quarter of 2017, we shifted to an 11-ship deployment as a result of the lower volume level in Hawaii. We expect to remain in a 10-ship deployment for the rest of 2018 and until the first Kanaloa Class ship is placed in service in late in the fourth quarter in 2019, at which time we expect to reduce to a 9-ship deployment.

The table on this slide shows the various financial benefits of the new vessels. I'll walk through the line items but before I want to underscore that the magnitude and timing of benefits is subject to change based upon fleet configuration and in-service timing, and that this analysis excludes the net effects of fuel and any changes in volume.

With that said, on annual basis, we expect the following net reductions to cash operating costs: lower vessel operating cost of $8 million to $9 million, improved auto and rolling stock efficiencies of $7 million to $9 million, and the impact of one less vessel of approximately $13 million as a result of moving from a 10-ship deployment to a 9-ship deployment. These 3 items total to an annual net operating cash cost benefit of $28 million to $31 million. We currently expect that the bulk of these benefits will begin to be realized following the in-service date of the first ConRo Kanaloa Class ship late in the fourth quarter of 2019, which is when we currently project shifting to a 9-ship deployment.

Moving down the table, we show the annual cash cost benefit of reducing the fleet from potential 11 ships to the current 10-ship deployment of $12 million to $14 million. Note that this additional benefit would only be applicable if our Hawaii volume was at a level that otherwise would've required an 11-ship deployment.

In addition to these financial benefits, we expect the first dry-dockings of the new vessels to be approximately 5 years after the in-service dates resulting in lower dry-dock payments and amortization expense in the initial years beyond 2020. We also expect to have lower initial vessel maintenance expense in CapEx on the new vessels versus the nearly 40-year-old steamships they will be replacing.

We expect a reduction in annual depreciation and amortization to be approximately $5 million to $8 million, which reflects the difference and depreciation and amortization between the 4 new vessels in-service versus the existing 7 steamships that will be scrapped.

Now turning to Slide 19. We wanted to provide an initial view on the financial impact of the Tax Cuts and Jobs Act. The bottom line is that we expect the Tax Act to be a meaningful net economic benefit to Matson and its shareholders.

In the fourth quarter, we recorded $155 million in total adjustments as a result of the Tax Act which primarily consisted of a revaluation of net deferred tax liabilities.

Going forward, we expect to have a lower effective tax rate in 2018 of approximately 28% versus prior accruals of 38% to 39%.

And lastly, we expect to pay no federal cash taxes until at least 2023 versus prior expectations of up to approximately $25 million per annum in federal cash taxes paid.

We view this -- this view is a result of our tax planning work, which consist of maximizing the use of the capital construction fund to pay for the new vessel expenditures and offsetting any remaining taxable income with our AMT credits, NOLs and other tax attributes allowable under the Tax Act.

With that, let me now turn to Slide 20 to discuss our full year outlook. For 2018, we expect Ocean Transportation operating income to approximate the levels achieved in 2017, and logistics operating income to increase modestly compared to the level achieved in 2017.

We expect depreciation and amortization to decline to approximately $135 million which is inclusive of approximately $36 million in dry-docking amortization.

Consequently, EBITDA is expected to decline versus the 2017 result. The company expects interest expense in -- on the P&L to be approximately $22 million. And as I mentioned earlier, we expect an effective tax rate of approximately 28% for the year.

For the first quarter of 2018, we expect Ocean Transportation operating income to be moderately higher than the year-ago period, primarily due to the timing of fuel surcharge collections. And for logistics, we expect the operating income to approximate the level achieved in the first quarter last year.

Lastly, we wanted to point out that in 2017, we had relatively strong fuel surcharge collections in the third and fourth quarters and we under collected in the first quarter. So quarterly year-over-year comparisons in 2018 should consider the timing of fuel surcharge collections versus the prior year.

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

Thanks, Joel. 2018 is an important year for Matson, the beginning of a new chapter in our company's long history.

In the third quarter of this year, we expect the arrival of our first of our 4 new vessels in the Hawaii trade lane and throughout the year, we will be progressing on the new Sand Island cranes.

By the end of 2020, we will have invested nearly $1 billion in new vessels in related infrastructure, a measure of our commitment to bring the most reliable and efficient operations to the Hawaii islands communities for many decades to come.

I remain confident in our long-term prospects and cash flow generation in each of our core businesses and I undoubtedly believe we are on good course to create value for our shareholders.

And with that, I'll turn the call back to the operator and ask for your questions. Operator?

(Operator Instructions) Our first question comes from the line of Jack Atkins from Stephens.

So I guess, for my first question and I guess this is for Joel, when I look at the update on the fleet deployment, Joel, that you guys provided and I appreciate you doing that. When we think about that $28 million to $31 million that you guys were talking about, now that range and, I think, in the past you guys have talked about a pretax savings of $25 million to $33 million. Obviously, that assumed 11 ships. I think there was an interest -- there was going to be some incremental interest expense so just sort of curious if you can sort of bridge us from the $28 million to $31 million? If I'm reading it right, looks like that's an EBITDA number to the way we should be thinking about this on a pretax basis? If that makes sense, I know that was a rambling question.

No, I understood the question, Jack, thank you. These cash operating cost benefit numbers that you see on Slide 18, they would equate dollar-for-dollar we expect to EBITDA. So what we're showing you here is on a similar metric as what we showed you before and there has really been no change. What we wanted to do today is really reaffirm the overall $40 million to $45 million number, Jack, but really stress the point that that's when comparing the new -- 4 new ships as a nonship deployment to what we said last year, which was comparing it to 2017's deployment of an 11-ship deployment. So 11 ships to 9 ships, it's still that $40 million to $45 million number. What we're stressing today on this call is that we're not an 11-ship deployment currently, we're in a 10-ship deployment, so when you compare it with a 10-ship deployment, it's less by that 1 fleet unit, which is the new -- the range -- subcomponent range of $28 million to $31 million. So this meant no real change to what we said in the past. We're just slicing it more finely and letting you see the difference between 11 and 10 and 10 to 9, does that make sense?

[No]. It does, it does, Joel, I just wanted to make sure I was thinking about that correctly. So thank you for that and that definitely makes sense. Okay, shifting gears here for a couple of other questions. Matt, if you can sort of think through the back drop in Hawaii, it's been a tough 6 quarters or so from a volume perspective. Obviously, a tough comp in the fourth quarter because of the extra week last year. But when you think about the outlook for your Hawaii business, can you help us think through how you see the next couple of years playing out? Because it does sound like there's some residential construction in the planning process but if I'm hearing what you're saying correctly in your prepared comments, it may be some time before that starts showing up in volumes for Matson. I'm just trying to think through the longer-term growth rate we should be thinking about for that Hawaii business?

Yes, Jack, it's a good question and I think you framed the question correctly. The way we're seeing it is the macro backdrop in Hawaii remains very favorable and it's forecast to continue to remain favorable. I think what we're also seeing for example we didn't mention in West Oahu, they're talking about breaking ground this year on a $1-billion-plus investment in a new Atlantis hotel in the Ko Olina area, so we continue to hear whether it's West of Oahu, single-family homes, whether it's a consistent amount of military construction spending, other residential or hotel developments. The macro seems quite good. What we're saying is though that as projects are winding down, these other projects are expecting to take their place. We're also observing just a little bit of caution in the transition that we may see a flattish -- more flattish to very low growth environment as we transition to where we are today over growth in the next say 2 to 5 years. But we remain very bullish on where we are in Hawaii. We remain bullish on Matson's position in the market. We continue to believe these infrastructures investments we're making are going to pay strong dividends in the future but merely observing, there's a little bit of a flattish transition, and we don't expect -- one of the economists commented that we may be reverting from sort of a boom/bust type growth scenario to more flattish growth environment which has characterized some of the previous building cycles. So again, showing some caution but overall, we remain pretty confident in Hawaii.

Okay. Okay. And then last question for me and I'll jump back in queue. Joel, if you can just sort of talk about the trajectory of your operating cash flow this year? Because, obviously, you have a significant amount of capital investment that's planned to be made this year and you helped us think through sort of the impacts with your guidance to EBITDA and operating income but with lower drydock activity this year and a -- lower levels of -- obviously you're not going to be paying any cash taxes this year. Would you expect your cash flow from operations to increase in 2018?

Well, if you look at this year, Jack, 2017 we had $296 million of EBITDA and we had $225 million of cash flow from operations. That was a pretty good pull-through rate. And I think that that general -- I mean there is nothing changing from our EBITDA flow through to cash flow from operations going forward except for the impact of the Tax Act, which is going to be favorable like we said. We don't expect any cash taxes. So the other elements in the cash flow from operations really shouldn't be changing significantly. We're working hard as a company like always to tighten our working capital. So you could see improvements in some areas like that. But nothing dramatically is changing as you look at our conversion from EBITDA to cash flow from operations or net income conversion to cash flow from operations, so the trend should be similar to what we've had in the past except for the big change from the cash taxes and the Tax Act.

Our next question comes from the line of Kevin Sterling from Seaport Global.

Let me start with the channel service, as I think about demand today and as I think about that market today, it seems like it's an almost an ideal market for you. We've got airfreight that's really robust. This global synchronized demand, if you will, that we're seeing out there. I know expediters this morning talked about it being better than last year. How are you thinking about that market? I know you've got some difficult comps but outside of that, it seems like this market is much more favorable than maybe just a few years ago in terms of not only volume but also pricing. Am I thinking about it right, at least from your perspective? How you're looking at it.

Yes. I think we agree with some of the fundamentals that you just observed. And I think there'd be other factor I observed in 2017 was one of the initiatives of the Chinese government was to reduce pollution and were closing down or suspending operations in some of the most polluting facilities and some of those were reopened and some of them were not reopened after environmental remediation. And so, there was some uncertainty about production capacity which also played into our expedited model. So we continue to believe that a lot of the fundamentals that drove the model in '17 should remain in place in '18 and like we've been at this for 12 years now, this vessel -- this service has been full for 10 years and we expect it to remain full this year. We continue to look for every year, ways in which we can further leverage this, what we think is a relatively unique model, to find additional cargo that would be perhaps otherwise an air freight or third air freight that we can bring on at a substantial savings to a deferred air product so we continue to cull through the market to determine which customers that we've not been in touch with that we could expand our offering to. But that process continues every year. And so, we see it as -- 2018 as a very normal year, filling the ship virtually every week and continuing to look for ways to high-grade our cargo mix to the extent possible. So that strategy will continue in 2018.

Thanks Matt, that's very good. I guess touching on airfreight, we're seeing rates that are at levels I haven't seen in 15 years or so. You having some success targeting traditional air customers, kind of with your deferred -- since they're your services, a deferred air product? But you having some success may be getting new customers to come aboard your ships, given where airfreight rates are today?

Yes. I think I would really frame it, Kevin, as a process that has continued that especially maybe the last 5 or 6 years as we're continuing to look for ways in which to increase our yield on that service. And that process was very much in place in '17 and we think some of the fundamentals, as you pointed out, will continue into this year and beyond and that plays right into our sweet spot. So yes, and perhaps if our margin over the ocean market gets too large, we'll depart ways with some customers who can't sustain that large of a premium and say hello to some new customers from new modes that are looking to downgrade from airfreight. So again, that process continues.

Can you tell if you're picking up any traditional kind of like e-commerce customers with this service? Or is too hard to tell?

It's -- I would say we don't have -- we do some -- I want to be somewhat circumspect because of some of the competitive dynamics with some of those customers we're talking about. But I would say that we definitely are moving some product with important expedited customers. We're looking for ways in which to continue to grow that. A lot of that is done through our Chinese freight forwarders and others that are handling other aspects of that expedited cargo, that we do business with them. And so, we're working with customers both directly and indirectly through their forwarder and 3PL channels.

Got you. Kind of switching gears here, your Logistics business -- obviously you're projecting that to be a little bit better in 2018 but as we think about that business, are you're getting squeezed at all by some of the transportation -- rise in transportation costs we're seeing, whether it's intermodal or truck brokerage? Are you able to successfully pass along those rate increases to your customers?

Yes. It's an interesting market, Kevin. I think what we are seeing is the main focus now which is interesting is in getting the capacity. It's almost -- the second conversation is in price and margin right now. And so, what we are finding is that -- we have long-standing relationships with truck and other providers. The rail service has not been terrific as you know and because of the electronic logging and other activities, we're seeing a scarcity of truck capacity. So this is not the year to be looking for new capacity if you don't already have very long-standing relationships with these truck vendors. Our view is that you will have a hard time in being able to find the tonnage to be able to move the orders. So we're very cautious. We're seeing increases in truck rates. We're very disciplined in making sure that we're able to pass on those increases. There may be a little bit of margin but -- compression but we're not really worried about it or if it happens, it won't happen for very long. And so, I think it's going to wind up being a very interesting year in the domestic logistics market. But having said all that, we continue to feel well positioned. We have great relationships with our trucking and rail vendors and feel like we're not going to fall behind as a result of some of the pricing dynamics in the trade.

Great. Are you seeing any M&A opportunities in the logistics business? Is your pipeline a bit more robust?

Yes. I mean I'll make an observation and I'll ask Joel to weigh in. But yes, I think the market continues to be highly fragmented. We understand there are companies that are actively looking for acquisition. Matson for its own accord is primarily focused given our large $1 billion capital program primarily on organic growth. But that's not to say if we find a nice tuck-in acquisition that we would be interested in looking at it. I don't know, Joel, if you would add to that.

Yes. That's correct, I mean, Kevin. We're seeing -- it's called a steady diet, a pretty healthy M&A market. So there's buyers and sellers. Transactions are happening. That's indicative of the strong economy that we're in. So I wouldn't say we are seeing some sea change where's there this massive increase or decrease. It's a steady healthy diet of M&A and our focus is what Matt obviously just said. We're mainly focused on organic opportunities but if there's something that is important and strategic, we'll still look at M&A. But over the next bit of time, we're mainly focused on organic.

(Operator Instructions) Our next question comes from the line of Steve O'Hara with Sidoti & Company.

If you could just remind me, I thought you had said that overall Hawaii volumes were up, I guess, in terms of what the market did for the full year. I think at the end of last year, you guys were looking for roughly flat volumes in 2017. And I'm just wondering I know construction was down but was the overall market down? And then if you guys underperformed relative to your competitor there, is it due to business mix, change in behavior or if you just could go through that a little bit?

Yes. Steve, from our point of view, the reduction in volume from our original expectation in the Hawaii market was entirely due to the market. We didn't see any share shift of the market share. The market environment was stable. And so, there were not significant categories up or down. The overall market share was stable. And again, a lot of what we saw was -- we did see some lesser volumes across a number of categories in a small way. The largest what we observed was in construction-related. There were some freight forwarder reductions in the size of the market but many freight forwarders carry some construction materials as well. So it was thought to us to be primarily related to the construction cycle and then, of course, we had 1 fewer week in the year which added a couple of percent reduction as well. So those were the main factors. We feel good again about our market position and our share in the market and again, mostly focused on the market itself.

Okay. And then in terms of the single-family home development, I mean typically -- I've been thinking in the past, the commentary was that that should be more beneficial than high-rise development because a lot more, I guess, of the innards have to go in by container rather than barge, et cetera. I mean is that still the thinking? And when does that -- assuming the economy continues to be strong, what's the expectation on when that starts to be more impactful to the volumes?

Yes. So the premise of your question I agree with. We have seen historically, Steve, as you know that single-family homes do provide more containerizable cargo then the high-rise construction. More of that moves by container, so we do believe there is a better multiplier for that type of cargo. And I think what we're seeing really in [Pillar Ridge] and Ho'opili are 2 of the bigger projects in Western Central Oahu that we've been talking about. Our continuing -- they've received most of the entitlements that were required. We understand the financing is in place with the 2 developers that are under both of those projects. Primarily, what's different is the pace of construction is a little slower than we originally envisioned. We see these projects as 5 and 10-year projects that are going to produce a steady amount of home construction in multiphase developments. So these are long drivers over the next 2 to 10 years and we'll see steady growth in these, primarily in these 2 projects but perhaps others as well. So it's more that we are seeing it flatter and longer than we are seeing it disappear or fundamentally be less than we originally envisioned, is kind of the way you're looking at it.

Okay. And then lastly, just on -- I remember -- or I think one of the reasons that APL got involved with Guam was because there was a potential military build-out or maybe that's not right. But can you just remind us where that is relative to future growth in Guam? Or is that maybe pushed out a little bit?

Yes. So the -- we think one of the motivations for APL reentering the Guam market was to position itself for the eventual relocation of Marines, independents from Japan and primarily Okinawa into Guam. That is still taking place although I would say the original expectation was for 8,000 Marines and their dependents to move from Okinawa to Guam. That has now changed to approximately 5,000 Marines from Okinawa to Guam and it is going to be spread out over a longer period of time rather than a relatively short timeframe. So we don't see much of that happening in 2018, and that gives our views of the market implicit in our guidance for 2018 around Guam was that we see the market as relatively stable. We do expect it to come. We meet regularly with the U.S. Military and trying to understand their plans and I think we do continue to expect it to come. But again, it will be happening over probably 2018 to 2022 or 2023 before the relocation occurs, so it's flatter. It's going to happen but it's going to be less than was originally envisioned.

(Operator Instructions) And this does conclude the question-and-answer session of today's program. I'd like to hand the program back to Matt Cox for any further remarks.

Yes, thank you, operator. Appreciate everyone on the call today. We look forward to catching up with everyone on next quarter's call. Aloha.

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