Matson Inc (MATX) 2018 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2018 financial results conference call. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to turn the conference over to Director of Strategic Development and Investor Relations, Lee Fishman. Sir, you may begin.

Thank you, Shelby. 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 13 to 21 of our 2017 Form 10-K filed on February 23, 2018, and in our subsequent filings with the SEC.

Please also note that the date of this conference call is July 31, 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 had a good quarter with Ocean Transportation's results approaching the level achieved in the second quarter of last year and Logistics coming in with strong results across all of its service lines.

Within Ocean Transportation, we saw lower revenue from Guam partly offset by lower vessel operating costs, a contribution from our new Okinawa service and strong, continued performance from SSAT.

In the quarter, we earned net income of $32.6 million or $0.76 per share compared with $24 million or $0.55 per share in the year ago period.

We generated EBITDA of $79.3 million in the quarter versus $85 million in the second quarter last year.

Moving on to the outlook for 2018.

Based on the performance in the first half of the year, we are maintaining our 2018 outlook for Ocean Transportation and raising our outlook for Logistics.

For the full year 2018, we expect Ocean Transportation operating income to be modestly higher than the $126.4 million achieved in 2017.

And in Logistics, we expect the year-over-year improvement in the second half of 2018 to approximate the year-over-year increase we saw in the first half of the year.

For the third quarter 2018, we expect Ocean Transportation operating income to be modestly lower than the $51 million achieved in the third quarter last year, and Logistics operating income to be moderately higher than the $7.3 million achieved in the prior year period.

Joel will go into more detail on the financials and outlook later on in this presentation.

Now on to our trade lane services.

Turning to our Hawaii service on Slide 4. Despite the favorable economic conditions in Hawaii, container volume for the second quarter was flat year-over-year with no meaningful year-over-year variances in the underlying product categories.

Matson's market share remained stable in the quarter.

Based on the volume results in the first half of the year, we now expect 2018 volume to approximate the level achieved in the prior year, which reflects continued economic strength in Hawaii and a stable market share environment.

Slide 5 provides an overview of some key Hawaii economic indicators forecast by UHERO for 2018 and beyond.

According to the latest forecast, UHERO continues to expect relatively strong economic condition as a result of a high level of tourism activity and favorable global economic conditions.

The economic growth trend is also well supported by relatively low inflation and low unemployment.

With respect to the construction industry, activity remains on a plateau as projects working towards completion are offset by new projects breaking ground.

UHERO's construction-related metrics continue to suggest an improvement in activity in 2018 versus the prior year, but maintain the view of flattish growth in the medium term.

Moving on to our China service on Slide 6.

Matson's volume in the second quarter 2018 was 5.9% lower year-over-year, largely due to a dry-dock return voyage in the prior year period.

Despite a modest decline in the average SCFI during the quarter, we experienced a higher quarterly eastbound average rate versus the second quarter of 2017.

For 2018, we continue to expect transpacific capacity to remain in excess of demand.

Despite this macro backdrop, we expect Matson -- demand for Matson's highly differentiated expedited service to remain relatively strong with an average freight rate that approximates the level achieved in 2017.

Volume for 2018 is expected to be modestly lower than the exceptional level achieved last year, largely due to the negative comparison for the dry-dock return voyage volume in 2017.

We expect our CLX vessels to be full for the rest of the year, as time sensitive supply chains ramp up to fulfill seasonal inventory demands.

Since our last earnings call, the U.S. and China had each implemented tariffs on selected trade items.

To-date, there's been virtually no impact on our CLX trade lane from the tariffs implemented. But this is not to suggest that the tariffs implemented or any other trade action post this earnings call cannot have an impact.

Turning to Slide 7. Matson's Guam volume in the second quarter declined 11.1% year-over-year primarily due to further competitive losses to APL.

The overall container market was essentially flat year-over-year.

Our strategy in 2018 is to continue to fight for -- to retain every single container of our customers' business.

Given our long history in Guam with strong customer ties, a shorter transit time and significantly better on-time performance record, we expect to retain an outsized market share.

Now moving on to Slide 8. In Alaska, Matson's container volume for the second quarter of 2018 was 0.6% lower year-over-year, primarily due to lower southbound volume resulting from a delay in the start of the seafood season.

We continue to see some signs of Alaska's economy beginning to stabilize but await further data to confirm that a bottom in the recession has occurred.

For 2018, we expect volume to be modestly higher than the level achieved in 2017, with improvement in northbound volume to be partially offset by lower southbound seafood-related volume due to a moderation from the very strong seafood harvest levels in 2017.

Turning to Slide 9. The Anchorage Economic Development Corporation or ADEC -- or AEDC, recently released its 3-year outlook. The AEDC believes that we're nearing the bottom and that by early 2019, Anchorage's economy will no longer be in recession, and this view is consistent with what we're hearing on the ground from our customers.

Turning to Slide 10. In light of the increased interest in the IMO 2020 regulations, I want to spend a few minutes outlining our strategy for these regulations.

Following the receipt of our 4 new Aloha and Kanaloa Class vessels, Matson will be 100% compliant with the IMO 2020 guidelines.

For our existing vessels, we are evaluating a number of options available to us to lower the post-2020 cost of fuel.

Some of the key risks and uncertainties we continue to evaluate include the following: based on our conversations with fuel suppliers, it's unclear how soon the 0.5% residual fuel will be available on the West Coast; prolonged use of a 0.5% distillate on some of our vessels could lead to higher maintenance of the engines; there -- also there's currently no LNG infrastructure in the major West Coast ports and it's unclear when this infrastructure may be constructed and operational. We currently operate 3 vessels with scrubbers in our Alaska service. Based on our experience with these scrubber installations and vessel performance, there's a strong business case for this technology because of its relatively short payback period.

Our current strategy is to invest in the scrubber technology on the CLX [string.]

We're committed to installing a scrubber on the first 2600 vessel while it is in dry-dock next year and we're closely evaluating scrubbers on the 2 sister 2600 ships.

For the remaining 2 vessels on the CLX [string,] we will evaluate it as they near their regularly scheduled dry-dock dates. This will allow us time to reevaluate a scrubber installation based on prevailing options and fuel spreads at the time.

As you'd expect, we want to keep our options open and evaluate the best long-term solutions that make sense for Matson and its customers.

Turning next to Slide 11. Our terminal joint venture SSAT continues to show strong performance.

For the second quarter 2018, SSAT contributed $9.1 million compared to $6.9 million in the prior year period. The increase year-over-year was attributable to higher lift volume.

For full year 2018, we continue to expect SSAT's contribution to our Ocean Transportation operating income to be higher than the level achieved in 2017.

There are a few key factors in support of this view, including the benefits to SSAT from last year's launch of the new global shipping alliances, as container flows and supply chains are adjusted between West Coast terminals.

SSAT's ongoing reputation as the best operator on the U.S. West Coast and recent strength in import and export volumes on the U.S. West Coast.

Turning now to Logistics on Slide 12.

Logistics continues its strong performance across all service lines, driving operating income to $9.5 million in the second quarter of 2018 versus $7 million in the year ago period.

Our transportation brokerage business performed well, primarily due to the well-documented tightness in the trucking market, which plays to Matson Logistics' strength in customer service.

With respect to Span Alaska, the business continued to show improvement year-over-year as the Alaska economy shows early signs of stabilizing.

Given Logistics strong performance in the first half of the year, we're raising our full year outlook for operating income in 2018.

We now expect year-over-year improvement in the operating income in the second half of 2018 to approximate the year-over-year improvement in the first half of this year of $4.8 million.

And for the third quarter 2018, we expect Logistics operating income to be moderately higher than the level achieved in third quarter of 2017.

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. Please turn to Slide 13 for our second quarter and year-to-date financial results.

Ocean Transportation operating income for the second quarter decreased by $3.5 million year-over-year to $36.5 million.

This decrease is primarily attributable to higher terminal handling costs and lower revenue in Guam.

Partially offsetting these unfavorable year-over-year comparisons were lower vessel operating costs, higher container rates in Hawaii and a higher contribution from SSAT.

Logistics operating income for the quarter was $9.5 million or $2.5 million over the results in the year ago period.

The increase was due primarily to higher contributions in highway brokerage.

EBITDA for the quarter decreased $5.7 million year-over-year due to lower consolidated operating income of $1 million and lower depreciation and amortization, including dry-docking amortization, of $6.2 million, partially offset by favorable increase in other expense of $1.5 million.

On a year-to-date basis, Ocean Transportation operating income increased by $5.7 million year-over-year to $61 million.

This increase is primarily attributable to lower vessel operating costs and higher contribution from SSAT. Partially offsetting these favorable year-over-year comparisons were higher terminal handling costs and lower revenue from Guam.

Logistics operating income for the first half of the year was $13.7 million or $4.8 million over the result in the year ago period.

The increase was due primarily to higher contributions in Highway brokerage and freight forwarding.

EBITDA for the first 6 months of the year increased $4.1 million due to higher consolidated operating income of $10.5 million and a favorable income in other income expense of $3.1 million, partially offset by lower depreciation and amortization, including dry-dock amortization, of $9.5 million.

Turning to Slide 14. For a summary of our balance sheet, you will note that our total debt at the end of the quarter was $932.5 million, and our net debt-to-LTM EBITDA ratio was 3.06x based on an LTM EBITDA of $300.1 million.

As a reminder, the EBITDA we report in our press release and in this presentation is different and lower than EBITDA calculated under our debt agreements.

Slide 15 shows a summary of the manner in which we allocated our trailing 12 months of cash flow generation.

For the LTM period, we generated cash flow from operations of $280.6 million; undertook net borrowings of $178.6 million; and received $6.9 million of other cash flows from which we used $43.4 million on maintenance Capex; $372.6 million on new vessel CapEx, including capitalized interest and owners' items, while also returning $52.6 million to shareholders via dividends and share repurchases.

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 16. For the second quarter, we had new vessel cash capital expenditures of $104.6 million and capitalized interest of $4.5 million for total capitalized vessel construction expenditures of $109.1 million.

The percent of completion on the 4 new vessels as of July 27 is noted in the chart on the slide.

We continued to make good progress on our new builds and you will note that the first vessel, the Daniel K. Inouye is nearly -- is nearing completion at 96%.

During the quarter, we had a major event as we christened the Daniel K. Inouye at the Philadelphia Shipyard on June 30 and we're looking forward to delivery of that vessel at the end of this quarter.

Turning to Slide 17 and our updated outlook. For the full year 2018, we expect operating income for Ocean Transportation to be modestly higher than the $126.4 million achieved in 2017.

For Logistics, we expect the year-over-year improvement in operating income in the second half of the year to approximate the dollar amount of the year-over-year increase in the first half of the year of $4.8 million.

We expect depreciation and amortization to approximate $132 million, inclusive of $36 million of dry-docking amortization. We expect other income expense to approximate $2.4 million in income.

We expect interest expense to be approximately $22 million. And finally, for the remaining 2 quarters in the year, we expect our effective tax rate to be approximately 28%.

For the third quarter of 2018, we expect Ocean Transportation operating income to be modestly lower than the $51 million achieved in the third quarter of 2017 due primarily to an unfavorable comparison of fuel surcharge collections versus the third quarter of last year. And also, higher total fuel costs expected this quarter versus the year ago period.

Logistics operating income is expected to be moderately higher than the $7.3 million achieved in the year ago period and other income expense to be approximately $0.6 million in income.

We want to reiterate that in the fourth quarter of 2017, we also had relatively strong fuel surcharge collections in Ocean Transportation, given the nature of the timing of fuel collections in that period. So year-over-year comparisons for the fourth quarter of 2018 should consider the timing of fuel surcharge collections in the prior year.

I would also like to remind everyone that our outlook for the China service that Matt walked through previously does not account for any additional risk and uncertainties that could arise from a trade war between China and the United States.

This comment also applies to the outlook for SSAT, given that business' direct ties to trade flows between the 2 countries.

With that, I'll turn -- I'll now turn it back over to Matt.

Okay, Joel, thanks. To conclude our prepared remarks, we had a good first half set of results from our diverse set of transportation and logistics services, and we look forward to building upon this performance into the second half of the year.

We remain intensely focused on cash flow generation and managing our leverage as we advance our new vessel build program and progress on the Sand Island crane investments this year.

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

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

So Matt, if I could kind of start with the Hawaii trade for a moment. If you could sort of kind of comment for a minute about maybe the different end markets that you're serving there and sort of where you're seeing areas of strength and maybe where you're seeing a little bit of -- just a bit more challenging backdrop? I mean, with the Hawaii economy fairly strong and flat volume growth, to sort of -- curious if you could sort of help us sort of parse it out?

Yes, I can try, Jack. I think when we look at the overall economy, clearly it's performing at a high level. Unemployment is below national averages, the state is in strong surplus. The hotel occupancy are at record levels, the visitor arrivals and spend are at record levels. So the economy is based on 3 fundamental pillars: one is tourism, one's the military and then government and then just the general industry. And I would say, military has been very steady, as has tourism. As we've noted many times, there was a significant amount of building early in this economic cycle. We continue to see projects that are likely to be advanced and in urban -- for example, in urban Honolulu, the luxury high-rise products in the Ala Moana area seem to have capped, but there are plans underway, for example, 4 -- potentially 4 new building projects that are more market-oriented pricing that are likely to get built over the next few years. We know that West Oahu and that Ko Olina area, we've talked before about the single-family home projects in central and West Oahu, we're aware of potential hotel developments. And so as we look in the medium or longer term, we continue to see projects that are likely to get built, but we find ourselves in an area where in the construction cycle it's somewhat plateaued and we see construction cranes moving around but the total count of construction cranes isn't changing. So we're at I guess a plateau level and the overall economy is not producing significant growth in containerized volume right now. So that's the best color I can give you, Jack.

Okay, no, that definitely helps. I didn't know if the construction demand was maybe a little bit softer on a year-over-year basis and that was sort of offsetting strength in the sort of the core Hawaii economic growth. And if you thought that maybe that would sort of begin to bottom out at some point in the next couple of quarters or we can maybe see the underlying growth within the Hawaii economy maybe showing up.

Yes, I mean, the other way for me to put that, Jack, is when we speak with the large general contractors in Hawaii, many of whom are our good customers, they're bidding on a lot of work. They're working on design work and we're not saying that's going to turn into freight volume in the -- right away, but they're busy bidding on new projects and continue to even in this late part of this economic cycle. So we're encouraged by that, but it's not going to turn around overnight for us unfortunately on that segment.

Okay. All right, that helps, Matt. And then shifting gears to the CLX business, you mentioned, Matt, that you're not seeing really any signs of this [protection] rhetoric showing up in terms of trade flows. I'm just curious, as you talk to your customers, is there maybe any interest on their part in terms of pulling forward inventory into the United States ahead of any changes to tariff policy? Or I guess, are they telling you about anything that would make you think that there could be some changes coming down the road, whether it's 6 months, 12 months out?

Yes, it's a good question, Jack. I think in the little world that we participate in, the airfreight alternative expedited market, we're not hearing much. People still have needs. They're still late orders. There are still people whose business is built around a very expedited ocean service. And so -- and again, in the field that we play in, we're not seeing much. But we are observing, to your point, that -- nor are we hearing much from customers about very definitive strategies around that. But nonetheless, if you look for example at June port volumes that are published widely, we've seen very large year-over-year increases and wonder out loud like you do whether there is some impact as the trade tariffs are implemented and some of the dialogue escalates on both sides. So there may be some effect to the broader market and that may affect timing of the broader market, but in our little universe, we remain very confident we're going to be full between now and the end of the year.

Okay, that definitely makes sense. Last question, then I'll turn it over. It's a follow-up question on the trade front. Is there a way to think about Hawaiian imports from China just in terms of their overall import volume? And is there an opportunity maybe with increased tariffs over time, depending if that goes -- continues to move forward, for them to maybe source more from the U.S. mainland and maybe that helps your Jones Act trade. I'm just trying to think out loud on that. Is that perhaps an opportunity if we were to see things continue to ramp up from a trade perspective?

Yes, it's a good question. And part of the question is what commodities that are moving at a -- depending on a tariff impact could change the sourcing patterns and the underlying cost of that product. Today, as you might know Jack, product makes its way from China into Hawaii 2 ways. One is that it moves directly on the ONE or ONE network, which is the previous combination of the 3 Japanese lines that emerged this year. They have a direct service that comes from Japan and China into Hawaii. And the second is on our service. We do have every week cargo that rides around effectively from Shanghai through LA Long Beach, stays on the ship and rides its way to Honolulu. So those are the 2 primary ways it gets there. It's a little hard to speculate, perhaps on the margin, none of that is really reflected in our thinking at this point, Jack.

And our next question comes from Ben Nolan of Stifel.

So thinking back to the CLX and the transpacific trade. A couple of weeks ago, there were some announcements that a few of the participants in that market were shrinking the size of their exposure there, I think in aggregate, by something like 7% of the total Transpacific trade. Does that leave you any more optimistic on maybe the volume that you might be able to pick up or potential pricing? Or is it just going to get closer to what would be a balanced market, do you think?

Yes. You make some good points, Ben. There are at least 2 alliances that have announced reductions in capacity going into this year's peak. I think -- let me just differentiate the market comments from Matson's and just divide them into 2 and I'll start with the market and then I'll circle back to Matson. So we've seen at least 2 alliances reduce capacity. We saw 1 APL introduce some capacity but your point is a good one, there was a net reduction of capacity in the Transpacific. But it is also true that deployed capacity even after those net reductions remains above last year. But I think what we've seen in the broader market, spot markets, which is one way to measure it is through this SCFI that we mentioned earlier, we have seen increases in the spot market, in part we think as a result of carriers withdrawing their capacity. So I think a stronger market in terms of spot freight rates is always healthy for Matson and I'll transition over to Matson. Effectively, that may help our spot rates as we go into the market cycle and -- but as I said earlier, regardless of that rate, which could be impacted by this, we -- we're going to be full for the rest of the year. So our volume is limited. On the margin, it could be helpful. And then of course, where does the -- where does this trade war go? Hopefully, it will get de-escalated but really nobody knows at this point what's going to play out there. So there is a number of factors that in the broader market have yet to play out. And on the margin could impact Matson's economics.

Okay. So then just to sort of go full-circle there, when thinking through the rate assumptions that you're using for your guidance for the Marine transportation side of it in general, are you assuming effectively flat rates or -- from the CLX service year-over-year or how should we think about?

Yes. So we noted last year -- I'm sorry, in the second quarter that while the market rates were down year-over-year, Matson's freight rates were up over the previous year. So we actually were able to obtain higher rates and given our mix and our expedited product, for the second half of the year, I think we're guiding to...

The same or approximately...

Approximately the same rate as last year. And again, last year was a pretty good year for us as well, so these rates are satisfactory to us.

Okay. That's helpful. And then just following on some of Jack's questions, when you look at your product mix of what is coming from China as it relates to tariffs, is there anything explicitly that -- I appreciate that it is so far so good, right? But are there any things that you guys specialize in that appear to be especially vulnerable? Or the inverse of that, when you look at your list of things that you're normally moving, it doesn't -- nothing's made the list thus far?

Yes. I mean -- I think there are -- in that first list of U.S. tariffs, a lot of the key commodities that we move, garments and other things, were not included; they were subsequently included. But it's not as easy for customers in the short run to change their sourcing. And the thing about the China market and the Shanghai market are in general, it's a network of suppliers. It's not just a single supplier in commodities. There's -- for example, in the garment trade, there's the fabric, there's the dyes, there's the zippers, there's the buttons, there's the skill assemblers, there's a whole bunch of things that can't be replicated easily or overnight in these models. So again, we've seen little impact but again, we don't know exactly how this is going to play out but are hopeful both sides can come to a resolution of the matter.

Okay. That's helpful. And then lastly just really quick from me, Joel, your tax rate looks like it came in a bit below where we had been thinking and below where you kind of guided for the back half of the year. Any color there?

There were some items that were relatively immaterial in size that were adjustments in this quarter, Ben, that really drove that below our expected level of about 28%. So it's just tax adjustments that hit at this quarter is what produced the 21% for this quarter.

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

Matt and Joel, just touch on logistics, obviously, very nice upside. Where is some of that coming from? Is it truck, brokerage, intermodal, both? I mean, I know that the truck market is extremely tight but maybe just kind of breaking down kind of really what's driving a lot of that strength there?

Yes, the way I would answer that, Kevin, is to say that each of our lines of business was better than the previous year. So it's -- in our warehousing business, our rail and truck brokerage business, our relatively newly acquired Span Alaska business, our Asian freight forwarding NVO business. So we were firing on all cylinders in the Logistics business. Of course, as you know, the biggest part of our business is in rail and truck brokerage. And so that's where the -- just by weighting, I haven't done the percentages relative to each of the lines of business but clearly, the truck and rail brokerage businesses were the most, by dollar amount, significant increase year-over-year because they're the most significant lines of our existing business.

Got you. I'm just glad you didn't say Jerome Holland, I don't want him taking all of the credit for all of your success. Jerome, I know, he has good timing, doesn't he?

He's doing a great job there.

I know he is. I know he is. I couldn't resist. In CLX, if we back out your multiple dry-dock return volumes, what would your China volumes have been like in 2018? Would they have been up?

I'd still think in the first half of the year, we saw 2 things. We saw, of course, the dry-dock, which was an extraordinary amount of volume in 2017 and as you know, Kevin, those follow our dry-dock cycles of our Jones Act [on other] ships that allow us once we dry-dock in Asia to carry that incremental volume. But I did -- I would also note that we had a somewhat slower post Lunar New Year period in 2018 than we had in 2017. As you know, traditionally, post-Lunar New Year, the factories -- or Lunar New Year, the factories close and the workers typically, many of them go home to the western provinces and come back a few weeks later. In 2017, not only did we have extra volume but we had a relatively short post-Lunar New Year period. So I would say 2018 was a more traditional slowdown post-Lunar New Year. And so despite the noise or the fewer dry-dock voyages, we had a more traditional Lunar New Year in '18 compared to '17, which also accounts for some of that difference.

Okay. Maybe could you touch base on the competitive landscape in Hawaii? It seems to have [died down] about a third competitor coming in. Is there anything new to add there?

Kevin, no. There is no new information we're aware of. Things seem to have gone quiet there and I think we're back to a more traditional, stable, 2 carrier market. Of course, we continue to compete with the barge operators, of which there are 2 coming out of the Pacific Northwest. They primarily carry construction materials that can survive a longer and rougher transit and those volumes we know have been down because they primarily focus on construction material. But beyond that, there's really nothing to note in the competitive landscape.

Got you. And you guys, you mentioned your -- all your new vessels will be compliant with IMO 2020 and you're installing scrubbers. How about, as you look at some of the competition, do you know where they stand? Are they kind of behind the eight ball? Or is everyone pretty much compliant like you are?

Well, our understanding in the Alaska market, I'll start, our primary Ocean competitor there, TOTE or Totem Ocean Express, is currently burning NGO, which is diesel, on their 2 vessels. They have a strategy, we understand, to convert their vessels to LNG and are working through trying to obtain LNG on the West Coast in order to fulfill that. So their near-term strategy allows them to be compliant and with an idea of potentially longer term conversion to LNG. That's our understanding of the Alaska market. In Hawaii, our understanding is that for our primary competitor, Pasha, they have 2 vessels, which are under construction and they are said to be LNG ready on day 1. And again, those are under construction. The remaining vessels, I don't think Pasha has made any explicit announcements about 2 of the older vessels but we understand they're evaluating doing a conversion of those engines to allow them to burn compliant fuel. So that's what we understand the market to be and the market will -- as we understand it, be -- there'll be no disruption to market service post 2020. At least, that's our understanding at this point in time.

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

Just wanted a question on just the logistics performance. I wasn't sure if the improvement versus your expectations was due to maybe some issues that the market's having right now? Or is it more due to the fact that the business is performing better than expected? So I guess I'm asking, is this a sustainable level that you think it's operating at? I mean, it would seem that there should be upside if Alaska comes back. Can you talk about that a little more?

Sure. Yes, I can. I think when we saw the trend emerging into the first quarter or really into the end of last year as the electronic logging devices were effectively withdrawing some of the capacity in the market, the strong U.S. economy, the raising prices of diesel, all were creating -- some of the congestion on the rails were all creating a disrupted market, causing a reset of pricing across lots of modal sectors. At the end of the first quarter and as we looked into the year, we saw the beginning of that trend. We were not confident enough at the time to say we see this as a trend but now that we've seen it for 1/2 a year, we're relatively confident in our ability to expect the trends we're seeing now will remain in place, especially as we move into the traditional peak season that happens in the second half of the year. So as to how long the duration is, Steve, it's a little harder to say whether it has legs past 2018. Some of the factors that were originally put in place will remain. So the electronic logging, the shortage of people willing to operate in the trucking industry. Again, given the economy and where those people might otherwise work in a relatively low unemployment rate. So as long as the economy remains strong, which we have no indication that it won't, those elements will remain. Where fuel goes is anybody's guess but to the extent fuel prices remain at current levels or higher, that will continue to be a significant factor for pricing in the environment. So it's a little -- we're not really making any 2019 calls but -- a 2019 call but we are expecting some of these dynamics to remain in the market for some time.

Okay. And then just moving to Ocean Transportation, I mean, it looks, I think, like it came in a little bit below your expectations and I know you talked about the Hawaiian economy and seems to be performing well. Maybe construction is not -- is good but not maybe great. But was it basically Guam that was the differential between the results and the expectations originally?

Yes, Steve, I think when we set our expectations for the full year and the first quarter, we expected Ocean Transportation to -- I think we said to approach last year's level. And that's about where we came out. So I think our feeling is at a high-level, we came in about where we expected and we expected the Hawaii economy to be flattish and that's kind of what we've seen. We expected continued highly competitive and contested environment in Guam and that's shaping up, unfortunately, just as we expected. It's an [axe-fight] there. But what we were pleased about was strong performance out of SSAT, a good, strong China market, knowing that we have less capacity to carry because of fewer dry-dock volumes and the Alaska economy has been plugging along. It's been okay. So I think it's shaping up a little bit about where we came up on the Ocean Transport side and the big step up is really as we said earlier on the logistics side, which has performed beyond our expectation.

Okay. And then maybe lastly, on the -- you ran through the options you're considering for compliance. Can you just talk about the cost ranges for those options? Is there a -- or is it too early to kind of talk about that?

Yes, the cost options that we can talk about are the cost of converting the vessels that we had talked about being in the $8 million to $10 million per ship. And it's not just buying the scrubber but it's in all the engineering and piping and other things that happen to the vessel in connection with the installation of the scrubber. With regard to other pricing, it's really difficult for us to understand the spreads that will exist. We can look at today's spread between, let's say, compliant fuel and fuel that needs to be scrubbed before it can be emitted. And so it's hard to know whether those spreads between those various fuels will get wider. That is the cost of differentials, partly it will be a result of how much refined product of various types are out in the marketplace. But we do know that if you just use today's spreads, that there is a strong economic case for -- and a relatively short payback, and we know how to -- we know how to run the scrubber systems, we've got good experience operating them in Alaska. They work, they're economic and we're certainly going to be taking a closer look at it. So while you look at $8 million to $10 million, I would just also add there is a relatively short payback period on that investment. That's the way we're looking at it.

(Operator Instructions) And our next question comes from Michael Webber from Wells Fargo Securities.

This is actually Sahm on for Mike. On the other end of Ben's question with regards to the SSAT JV and basically the majors reporting on the Transpac reductions. How should we be thinking about the rest of the year relative to 2017? Your presentation talks about how the full year should be higher than 2017 levels but with -- net out the kind of exceptional Q1, how should we be thinking about the rest of the year trending against 2017?

Yes. I mean, I guess without being specific, I can make some general comments. Some of the year-over-year increase in the SSAT volume was a result of last year's reformation of the alliances and their reduction from going to 4 to 3 alliances. And so we see that business and the elements in the increase in volumes resulted from that dynamic, we see as relatively stable. The other thing from an SSAT perspective is that the volume could come from multiple locations. So for example in China, if there is a tariff item that renders one product uneconomic to source from China, that volume can be sourced, let's say, from another Asian country and that still turns into a container that goes through SSAT's joint venture. So while China is still a 600-pound gorilla, there's no question about it, some of the differences could over time, be sourced in other countries, which would be less impactful for SSAT.

Got it. That's helpful. And then when we think about the Guam trade, just recognize the competitive dynamics there and you guys have acknowledged that for a long time and you're going to continue to fight for every piece of business. But when do you expect the sort of steady state of market share to kind of settle in? Just looking at the last 2 quarters, it almost looks like we're there. Or do you kind of -- where do you kind of see that market share going?

Yes, it's really hard for us to know. It will be when our primary competitor decides it's done trying to acquire share by lowering its freight rates. And so it's really hard to predict but -- so that's really up to them. So it's a little hard to try to determine when that will be but this is a 9-round bout and so we're in it to the end.

Sure. And then I guess just last really quickly with regards to IMO 2020. Those 2 CLX vessels that you guys plan on evaluating once they're dry-docking. Can you just remind us what those dates are?

Well, the 2 that we said we'd look at as the sister ships to the first one we already committed to would be 2019. What we're saying is the other 2 vessels, that would add to a total of 3 scrubbers, there's 2 remaining. Those 2 remaining have dry-docking in 2021 timeframe. So we'll be looking at 2019, 2020 timeframe potentially either earlier or in conjunction with the 2021 dry-dockings of those remaining 2 vessels. So that's about 24 plus months away but that's why we're saying we're continuing to evaluate it and look at our options over that period of time.

And I would now like to turn the call back to Matt Cox for any further remarks.

Okay. Well, thanks, everybody, for listening in. We look forward to catching up with everybody on our third quarter call. Aloha.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.