Good day, ladies and gentlemen, and welcome to Matson First Quarter 2016 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded.

I’d now like to turn the call over to your host, Jerome Holland, Director of Investor Relations. Sir, you may begin..

Thank you, Eric. Aloha and welcome to our first quarter 2016 earnings conference call. Matt Cox, President and Chief Executive Officer; and Joel Wine, Senior Vice President and Chief Financial Officer are joining the call today. Slides from this presentation are available for download at our website, www.matson.com, under the Investor Relations tab.

Before we begin, I would like to remind you that during the course of this call, we 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 and this conference call.

These risk factors are described in our press release and are more fully detailed under the caption Risk Factors on Pages 8 to 15 of our 2015’s Form 10-K, filed on February 26, 2016, and in our subsequent filings with the SEC.

Please also note that the date of this conference call is May 4, 2016 and any forward-looking statements that we make today are based on assumptions as of this date. We undertake no obligation to update these forward-looking statements.

Also, references made to certain non-GAAP numbers in this presentation, a reconciliation to GAAP numbers and description of calculation methodologies is provided in the addendum. With that, I’ll turn the call over to Matt..

Thanks, Jerome, and thanks to those on the call. Our core businesses performed largely as expected in the first quarter of 2016 with operating results declining year-over-year in the absence of last year’s extraordinary strong demand for our China service.

Market conditions in the China trade have deteriorated further in 2016 as international ocean carriers have continued to lower rates in an attempt to attract cargo in this heavily over-supplied trade lane.

As a result, we are revising down our full-year 2016 outlook with the expectation that our ocean transportation operating income will be approximately 15% to 20% lower than the $187.8 million we earned in 2015.

While these challenging dynamics in China will weigh on our 2016 results, we continue to see solid fundamentals and performance at our other core trade lanes and also SSAT and Logistics. In Hawaii, where we recently deployed in 11th ship, we expect to benefit from continued market growth and a stronger market position.

Our integration activities in Alaska are progressing well and we remain on track for a complete integration by the end of the third quarter of this year. Slide 4 shows our financial metrics. In the first quarter of 2016, we generated EBITDA of $66.4 million and diluted earnings per share of $0.41.

The graphs on this slide show the EBITDA was roughly flat year-over-year while EPS declined by $0.16, largely due to incremental depreciation and amortization, which Joel will describe in more detail later on.

I’d also like to point out that the first quarter is historically our lowest in terms of earnings and cash flow, however, results in the first quarter of 2015 benefited from exceptional demand for our expedited China service and from the sharp decline in bunker fuel prices as fuel surcharge collections outpaced fuel expenditures.

Turning to our Hawaii Service on Slide 5; in the first quarter of 2016, the trade experienced modest market growth, and Matson maintained competitive volume gains and continued response to Pasha’s service reconfiguration.

Looking ahead, we expect the multi-year recovery in Hawaii to continue, and for the full year 2016, we expect our Hawaii container volume to be moderately higher than it was in 2015 with nearly all of that relative increase coming in the first half of 2016.

You’ll recall that we had 11 ships deployed for most of the second half of 2015, so our volume growth in the second half of this year is expected to be more challenged.

Two weeks ago, we shifted back into an 11-ship deployment in Hawaii, enhancing our service, and underscoring Matson’s enduring focus on Hawaii and our commitment to serving customers better than anyone. Slide 6 which leads to the next slide of a longer-term update on our Hawaii fleet.

Construction is now underway at the Philly Shipyard on our two new 3,600 TEU containerships, which we call the Aloha Class, and delivery is expected to be in the third quarter of 2018 and the first quarter of 2019.

These first two Aloha Class vessels will be used as replacement capacity for our oldest active vessels in Hawaii and allow us to operate 100% diesel fleet and be fully compliant with the emission regulations, which become effective in 2020.

However, our oldest diesel ships will be approaching 40 years old at that time, which we view as a threshold for replacement. So, we’re continuing to evaluate ordering two additional new vessels that would meet our fleet renewal needs in Hawaii until approximately 2030.

These additional vessels could be ordered in 2016, 2017 and be delivered in the 2019, 2020 timeframe. We expect our new ships to have among the lowest operating cost per container of any ship in the Jones Act trades and gives us the ability to deploy fewer vessels at much higher volume than in the past.

We would expect to move from our current 11-ship deployment to a 10-ship deployment with the delivery of the first two Aloha Class vessels and then to a 9-ship deployment upon the delivery of the third and fourth new ships.

In addition, lower fuel consumption, lower crew costs, and reduced maintenance and repair expenses will be important drivers to produce meaningful savings.

Slide 7 highlights some of the key metrics that support our moderate volume growth expectations for the Hawaii economy as forecast by the University of Hawaii’s Economic Research Corporation, or UHERO.

As we’ve mentioned before, much of the incremental market growth we expect to see in Hawaii will come from the continued progress in the construction cycle. Residential building, permitting and construction jobs picked up considerably in 2015, and growth is forecast to continue through 2016 and 2017.

The bulk of current construction activity is focused on the advancement of several high-rise projects in urban Honolulu and on Honolulu’s $5.2 billion rail project. However, we are beginning to see increased activity on the neighbor islands.

In addition, two long-planned master community projects have received favorable Supreme Court rulings that will allow their developers to move forward. D.R.

Horton’s Ho’opili project for nearly 12,000 homes in West Oahu looks to be moving ahead later this year, and Castle & Cooke’s Koa Ridge project is expecting to start construction of an initial phase of 3,500 homes next year.

Moving to our China service on the next slide, Matson’s container volume in the first quarter of 2016 was 18.1% lower year-over-year due to the absence of the extraordinarily high demand experienced in the first quarter of 2015 during the U.S.

West Coast labor disruptions and continued market softness amid a slower than normal post-Lunar New Year recovery. Our expedited service continued to realize a sizeable rate premium in the first quarter of 2016, but as expected, average freight rates were significantly lower than the first quarter 2015.

For the remainder of 2016, the company expects increasingly challenged market conditions in the transpacific trade with underlying market rates at historic lows amid chronic over-capacity in the trade. Alphaliner is projecting global container fleet capacity growth of 3.9% in 2016.

And while this may sound low, it will do little to address the massive capacity growth that has taken place over the last several years. The liners have continued to order larger and larger vessels to lower their unit cost, but with their aggressive focus on filling these large vessels, there’ve been significant erosion of freight rates.

As a result, the international liners are again expected to lose billions of dollars in 2016. There are several liner mergers in the works, and another reshuffling of alliances, which could hopefully bring some order to the market, but with regulatory approvals required, any improvement is unlikely to be until 2017 at the earliest.

In addition, there had been several recent announcements of new expedited service offerings in the transpacific that have the potential to narrow Matson’s service differential and potentially narrow our premium to market freight rates.

I should note that we’ve had many challengers over the years to attempt to match our service in the past, but their track record of execution and longevity has been poor. We’ve recently concluded our annual contracting cycle, where these challenging dynamics resulted in market contract rates being offered at the lowest levels I’ve seen in 30 years.

As a reminder, about one-half of our China business is based on annual contracts with the other half based on the spot market. With this backdrop, we’ve revised our expectations for China rates in 2016 to trend lower than the declines factored into our previous outlook.

Despite the significantly lower rate environment, we do expect to continue to earn a substantial rate premium, and given our dual-headhaul structure, we expect our China service to remain solidly profitable. Turning to Slide 9; in Guam, economic activity was stable in the first quarter, but the launch of a new competitor’s bi-weekly U.S.

flagged containership service resulted in modest competitive volume losses compared to the first quarter 2015. For the full-year of 2016, we expect to experience continued modest competitive losses to this new service.

Moving on now to our Alaska service on Slide 10, in Alaska, the company’s container volume for the first quarter of 2016 approximated the level carried by Horizon in the first quarter of 2015, primarily due to muted economic activity associated with the decline in energy prices with modestly lower northbound volume largely offset by stronger southbound volume.

In 2016, we expect the Alaska economy to face economic headwinds largely due to the sustained low oil price environment. Sustained low oil prices impact Alaska’s economy directly through cuts to the oil industry investment and employment and indirectly through state government budget deficits that lead to spending cuts.

From a container volume standpoint, the Alaska market has been relatively stable over the past 10 to 15 years across a wide range of commodity prices with the container volumes we carry largely skewed towards customers like grocery stores, big box retailers, and others.

So, while we do expect to feel some impact of the underlying macro challenges in Alaska, we expect our 2016 container volume to be only modestly lower than the 67,300 containers carried by Horizon and Matson in 2015.

Moving to Slide 11, our terminal joint venture, SSAT, contributed $2.6 million in the first quarter of 2016, compared to $3.4 million in the first quarter of 2015. This year-over-year decrease primarily reflects lower lift volume.

Looking ahead, we expect strong volume growth in Oakland to result from the closure of the Outer Harbor Terminal and the transition of nearly its entire 380,000 annual container lifts to our SSAT’s OICT terminal.

While this incremental lift volume in Oakland will clearly benefit SSAT’s 2016 results, we do not expect it to outweigh the year-over-year absence of factors related to the clearing of international cargo backlog after the resolution of the protracted labor disruptions on the U.S. West Coast last year.

So, as a result, we expect our SSAT joint venture to contribute healthy profits to our ocean transportation operating income in 2016, albeit at a modestly lower level than the $16.5 million contribution it made in 2015.

Slide 12 highlights the results of Logistics, which benefited from higher intermodal volume, warehouse operating improvements, and highway yield improvements to deliver an operating income margin of 1.8%. As we look out into 2016, we expect volume improvements together with continued expense controls should result in modestly higher earnings in 2016.

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

Thanks, Matt. As shown on Slide 13, ocean transportation operating income decreased $10.9 million, or 24.8%, during the first quarter of 2016 compared with the first quarter of 2015.

The decrease was primarily due to lower freight rates and volume in the China service, increased depreciation and amortization expense, higher vessel operating expenses related to the deployment of an additional vessel in the Hawaii service, additional SG&A related to the Alaska acquisition and higher terminal handling expenses.

Partially offsetting these unfavorable items were higher container volume and yield improvements in Hawaii and the inclusion of operating results from the company’s acquired Alaska service. SSAT contributed $2.6 million during the first quarter 2016, down from $3.4 million in the first quarter 2015, primarily due to modestly lower lift volume.

Operating income for Logistics increased in the first quarter year-over-year by $0.6 million driven by the items Matt mentioned earlier. Slide 14 highlights our consolidated results for the year.

You can see that EBITDA was almost flat year-over-year, while operating income and net income declined year-over-year due to additional depreciation and amortization related to our Alaska acquisition, the relatively heavy dry-docking schedule and higher-than-normal maintenance CapEx.

You will recall that prior to acquiring the Alaska operations, Matson’s long-term outlook for average annual spend on maintenance CapEx was roughly $35 million to $40 million. And after we closed the acquisition, we amended Matson’s long-term outlook for normal annual maintenance capital spending to a range of $40 million to $50 million annually.

However, as we mentioned on our last earnings call, we expect higher-than-normal maintenance CapEx of approximately $65 million in 2016, largely due to the completion of the scrubber installation program on our Alaska vessels and other capital projects related to what will be a relatively heavy dry-docking year for us.

2011 and 2012 were the last years to have relatively high levels of dry-docking spend on our Hawaii fleet. And given that vessels in our Hawaii fleet require dry-docking roughly every five years, we expect 2016 and 2017 to be busy dry-docking years as well.

On top of that, the vessels we acquired from Horizon added to our ongoing dry-docking requirements. So consequently for 2016, we expect dry-docking expenditures to total approximately $60 million.

Based on our outlook for capital expenditures in dry-docking, we expect depreciation and amortization for 2016 to total approximately $133 million compared to $105.8 million in 2015. This amount is inclusive of expected dry-docking amortization of approximately $35 million for 2016.

Turning to Slide 15, our balance sheet continues to be in very good shape with a net debt-to-EBITDA ratio of only 1.5 times. Our share repurchase program continued at a steady pace in the first quarter with 518,600 shares repurchased at an average price of $38.81 per share.

Since the inception of the share repurchase program in November of 2015, and as of yesterday, May 3, 2016, Matson had repurchased a total of approximately 777,000 shares at an average price of $39.75 per share.

We continue to expect a steady measured pace for the share repurchase program, which reinforces our confidence in Matson’s free cash flow generation to provide for our capital investment needs and growth opportunities while also returning capital to shareholders via both dividends and share repurchases.

Slide 16 shows the summary of our cash sources and uses over the last 12 months.

The key takeaway here is that our net borrowings increased by only $108.5 million, and that is after the inclusion of the $495 million of cash needed to close the Horizon acquisition while also funding $152 million of CapEx, dividends and share repurchases over the last 12 months, which, overall, is a testament to the strength of our internally generated cash flow from operations.

With that, let me now turn to Slide 17 to provide our updated outlook for the full-year and second quarter of 2016, which is being provided relative to the prior year’s operating income for each period.

For ocean transportation, operating income for the full-year 2016 is expected to be approximately 15% to 20% lower than the $187.8 million achieved in 2015. And in the second quarter 2016, operating income is expected to approximate the $31.4 million achieved in the second quarter of 2015.

In terms of the headwinds, we expect to have significantly lower average freight rates in China, increased depreciation and amortization expense, competitive volume losses in Guam, and a modestly lower contribution from SSAT.

As partially offsetting tailwinds, we expect to benefit from moderately higher Hawaii container volume, the inclusion of operating results from Alaska for the full-year and the absence of acquisition-related SG&A and molasses settlement costs.

For Logistics, we expect operating income for the full-year 2016 to modestly exceed the 2015 level of $8.5 million driven by volume growth and continued expense control.

Regarding items below the operating income line, we continue to expect interest expense for the full-year 2016 to be approximately $19 million and our effective tax rate for the full-year to be approximately 39%. I will now turn the call back over to Matt for final remarks..

Thanks, Joel. In summary, our first quarter results came in largely as expected. But the continued deterioration of conditions in the China market has further tempered our outlook for 2016. In Hawaii, we remain encouraged by the strength of our core Hawaii operation and expect to benefit from continued market growth and our stronger market position.

In Alaska, while low energy prices present near-term economic headwinds, I’m pleased with our integration progress and feel like we’re hitting our marks as we move towards our targeted $70 million of EBITDA run rate within two years of closing. In Guam, while the U.S.

marine relocation provides a longer-term positive for container demand, we expect some impact from the competitor that entered the trade in January.

Overall, we feel – we continue to be very confident in the strong cash flow generated from Matson’s core businesses that combined with our balance sheet will provide ample capacity to fund our fleet and equipment investments and consider growth opportunities, while continuing to return capital to shareholders.

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

[Operator Instructions] And our first question comes from the line of Kevin Sterling from BB&T Capital Markets. Your line is now open..

Thank you. Good afternoon, gentlemen..

Hi, Kevin..

Matt, let me start with the 11th ship you introduced in Hawaii. Is that permanent or temporary? And it sounds like – when you bring in your Aloha Class vessel in late 2018, you’ll go back to a 10-ship string.

So, do you plan to run this 11th vessel until you’ve introduced your new ships?.

Yeah. It’s a good question, Kevin. I think what we found in introducing the 11th ship just a couple of weeks ago is that we were not able to serve the entire market the way we wanted to. One of the primary places in our network that we were struggling to carry all the cargo that was demanded or presented to us was in the Pacific Northwest.

It’s where you’ll recall that Pasha as they reconfigured their fleet last year withdrew from that market to focus on California and in particular, Southern California. And so, what we found is we had a large ship and a small ship, and some of that cargo was flowing over to the barges.

And since we, long term, continue to believe that the construction segment is going to be the segment that grows the fastest and much of that construction-related cargo comes out of the Pacific Northwest and Canada over Seattle, we felt we were not serving the market the way we wanted to.

And so, what I would say is yes, we do expect to stay an 11-ship fleet for the foreseeable future. There may be times during some slack months that we revert to a 10-ship fleet, but for the most part, our view is that we’re an 11-ship fleet, and we’ll stay there until the delivery of the Aloha Class vessels.

In which case, our planning now suggests that we’re going to move into that potential fleet..

Got you. Okay. Thanks, Matt.

So it sounds like what you’re seeing in Hawaii is a combination of growing demand there, but also the Pasha reconfiguration, is that right?.

Yeah. When they initially reconfigured to pull out of the Northwest, and as you recall, we went from – last year from 9 ships to 10 ships to 11 ships as the cargo flows were adjusting to the reconfiguration of Pasha’s fleet. So yeah, that’s the background behind it..

Okay. Cool. And lately, we’ve seen the yen strengthen here the past couple of months. And help me – do we need to see the – when do you guys start seeing maybe some benefit of the yen strengthening with – they have more tourism in Hawaii.

How much of a lag is there before you maybe start seeing that additional kicker or if there is a kicker as we think about the yen?.

Yeah. I do think there’s an impact there. But I would say, what we have seen is that, overall, as you followed the company for many years, the tourism story continues to be very strong overall. And the Japanese tourists are an important part of the market, but certainly much, much smaller than the U.S. mainland where we derive most of our spending.

But that yen talks about could be helpful for investment in real estate and also for tourism, so I think it does provide on the margin a potential catalyst for some improvements..

Got you. Okay. Thanks, Matt. And as I think about your guidance, it sounds like it’s all related to China. And I understand what’s going on their freight rate, and we’ve heard rumblings of a new expedited service.

Are you lowering your guidance just because of China? And I’m curious, is there any offset maybe because of strengthening Hawaii, or are you not baking that into your new guidance with any Hawaii strength..

Yeah. So, I think to answer your first question, China is the catalyst here. I mean, we look at – we do have the full-year benefit of Alaska. We have the benefits of a growing Hawaii trade. Those are all factors that are partly offsetting what turns out to be a pretty nasty cycle in the China market.

And so that’s – all of that mixed together is factored into our thinking of this 10% to 15% lower than last year..

Okay. So, no kind of potential offset from maybe Hawaii getting a little bit better, anything like that.

Is that right?.

Yeah. It’s hard to know. And the biggest uncertainty, Kevin, is really in the depth and duration of the cycle in China. As we see it, that is the biggest question mark. And again, we do see an improving Hawaii market. We do see the full-year benefit of the Alaska.

We do see the benefit of these one-time costs that we incurred last year not repeating, and all of that mixed together creates our expectation..

Yeah. Got you.

Matt, how much of an impact in your thinking when you adjusted your guidance with Hanjin introducing their expedited service, I think, next month, or is it just mainly based upon what you’re seeing with just such depressed rates?.

Yeah. So, the way we think about it is like this. The overall market is in a very tough spot. And as I mentioned in my prepared comments, this is the worst market I have seen in my entire 30-year career, and perhaps it goes further back than that. So we’re in a very nasty down cycle. There are actually several expedited services on the books.

One, of course, is the Hanjin service that’s been announced. APL introduced expedited service last year that is planning on continuing this year, and the G6 alliance minus APL also has talked about introducing a service.

So, the way we think about it without – just generally is, say, 70% to 80% of our expectations of our future rates are really related to the broad macro cycle and very – have the outcome for the market on the VCL annual contracting cycle.

And there is a marginal impact, but it is certainly less than the overall market situation that’s stacked into our thinking. So, it’s a little bit of both, but much more of the market than the expedited service..

Got you. Okay. Thanks. Last question here, I’m going to go back a couple of years when you guys first started your China expedited service, we saw Horizon get in. If I’m not mistaken, correct me if I’m wrong, there are two smaller Chinese players that got in subsequently went out of business because they couldn’t make money.

And what we saw back then was that the big players come in, international carriers come in and just depressed rates, drive those guys out of business except for you guys. Where we are today, it seems to me, rates are at a floor and so the big carriers can’t come in and depress rates much more in my opinion.

I’d like to get your thoughts on that if you don’t mind comparing to maybe what we’re seeing now and introduction of these services compared to what we saw a few years ago and why those guys exited the market..

Yeah. I mean, it’s a good question. I would say, several months ago, Alphaliner had predicted the carrier, international carriers as a group, we’re going to lose something like $5 billion to $6 billion this year. Rates have gotten worst since they’ve put their forecast out.

And if they were to reforecast it, it wouldn’t surprise me to see of being $10 million to $12 million – $10 billion to $12 billion of losses for the industry. So, and in the trans-Pacific, the rates that are being quoted in the market, not Matson’s rates, are below their variable operating costs.

And so, they are pricing below their variable cost, and this is clearly not sustainable. So something has got to give. The tough part is exactly when they’re done beating each other up and who can blink first.

I will tell you these expedited ocean services, in particular the Hanjin, you’ll recall, Kevin, we had a CLX2 service a few years ago where we tried to replicate our CLX service into South China.

And if we use those numbers that apply today’s freight rates, these expedited services, which are primarily one haul don’t benefit from the back haul that we have, are probably losing just these strings $50 million to $60 million a year individually for the five-ship service. So clearly....

Wow..

These are not sustainable services. The only question is how long will they suffer before they come to their senses..

Right. Okay. Matt, thank you so much for that clarification and the comparison. Really appreciate it. Thank you, guys. Take care..

Okay, Kevin. Thanks..

And our next question comes from the line of Steve O’Hara from Sidoti & Co. Your line is now open..

Yeah. Hi. Good morning or good afternoon..

Hi, Steve..

Hi, Steve..

Hi. Just I got a question on the China service as well. Just I see the volumes are down pretty good and I think in the past, you guys were kind of running kind of at capacity or for the most part at capacity.

Has the – is it a problem of rate and volume or are we just expecting rate to be down at this point?.

Yeah. It’s a good question, Steve. I think the starting point is our longstanding premises that we can fill our ship any time we wanted. We have the fastest, most differentiated service that’s not going to change with the introduction of Hanjin or APL last year, expedited services.

The question for us in this extreme market dislocation where we find ourselves in – where we find ourselves for the customers that we have and we’ve renewed, we probably earned the largest market premium we’ve ever had albeit in a very bad market.

And so, the question is we certainly could fill our ship with cargo that is below our variable cost, but it doesn’t make a lot of sense for us to take some of these extremely low offerings if it produces a worse result for the company.

So, we may, in fact, find ourselves for the period of this year or until the market settles or at least until we get into a busier time of year, we’ve been more choosy not to price below our variable cost. So, you may see a little bit, a lighter ship.

I would say it’s 90% freight rate, but there’s a little bit of volume here as we hold our nose and stay away from some of the more volatile parts of the market..

Okay. Thank you. And then just on the ship deployments, the total ship deployments, I think it’s at 11 now.

And I’m just wondering with the new ships coming in, will you be able – what kind of – based on Pasha’s current service offerings and your service offerings, I mean, can you bring that back down to nine? I thought that was kind of the original idea within carrying kind of peak volumes of the nine-ship fleet.

I’m just wondering how that changes now maybe permanently if Pasha is kind of in this type of a rotation like they are now..

Yeah. Our current thinking, Steve, is that based on the reset of market share as of last year as a result of the pull out of the Pacific Northwest, as we’ve talked about, and our results in share increase and the way we see the market growing that we’re going to be well into 11-ship fleet.

We’re in an 11-ship fleet perhaps earlier than we might have otherwise guessed a few years ago. And that vessel capacity and demand for Matson services will likely allow us to go from 11 ships at the time to a 10-ship deployment upon the introduction of both vessels.

So, our own expectations of how fast the market has recovered and grown based on the employment changes has affected our thinking on that. So, we’re thinking of going from 11 to 10. And then with the introduction of the second set of two vessels will put us back into a nine-ship deployment.

That’s kind of our current thinking, Steve, but each of those series of investments, we believe, will be accretive and continue to be accretive based on the reduction of operating costs and fewer operating ships in our network to carry the same amount of cargo. So, both remain very attractive investments for us..

Okay. Thank you very much..

Sure..

Our next question comes from the line of Jack Atkins from Stephens. Your line is now open..

Great. Thanks for the time, guys. When we think about what you’re seeing in the Guam lane, we’ve seen some competitive pressures there that you all called out in the presentation.

Is the 3.5% decline in volume mere indicative of what you would expect to see for the remainder of the year, or do you think that that’s probably going to be maybe a little bit worse, just given the timing of when that competitor came in in the first quarter?.

Yeah. Jack, I think the 3.5% over the longer term will probably accelerate. They had just gotten off. They just – as you recall, just started the first week of January, and their own internal ramping up was, I’m sure, a little bit slower than they expected.

So, we do expect volume losses to probably be greater than that as they settle into their share but as we – I will remind everyone, we do see some growth in the long-term catalyst for the marine relocation and I would also point out that the service that they offer is significantly longer transits than our own service and is only every other week.

So, we expect them to settle into a much lower market share than you might expect for a second competitor..

No. That will make a lot of sense.

And then, I’m just curious what do you think about the rate environment in Guam, given that this is really a much – the greatest service relative to your own service? Are you seeing any rate pressure at all in terms of the Guam lane or is it just sort of volume losses there?.

Yeah. I would say we’ve seen – the volume losses so far have been modest. The service differential is significant. I would say we’ve seen a little bit of tactical stuff, but at this point, we haven’t seen a significant amount of price competition yet..

Okay. Okay.

And then, when we think about your market share in Hawaii and sort of the utilization of your current 11-ship fleet, I mean, I guess, how should we think about where you stand out? Because I know there’s been a lot of changes in the marketplace over the last 12 months given the emergence of Pasha, your second competitor were also to Horizon Lines.

So if you could maybe on this and where you think market share stands and I’d be curious to know your utilization of your fleet..

Yeah. Okay. Yes. So, we were doing a little catch-up when the original deployments are placed post closing with Pasha. We went from nine ships to 10 ships to 11 ships.

We reverted back to 10 ships towards the end of last year and what we found was that we were not effectively able to carry the market in the Pacific Northwest, and some of that was flowing to barges which we wanted to correct.

The 11-ship also produces really important other network benefits, which allows us to get our vessels there more on time, allows us to end of week – when there’s a number of benefits to our fleet. The additional cargo that we’re going to attract as a result of adding these 11-ship will more than pay for that 11-ship.

Now, having said all of that, you asked a question about utilization and market share, I would say, our long-term market share has been around two-thirds of the market. We’re probably above that now. And our expectations for growth in the market are pretty good, I would say. When we were in the 10-ship fleet, we were probably around 90% utilization.

We’re in the 80% utilization now. But again, that 11-ship has been paid for by the incremental cargo we’ve been able or expect to attract associated with the additional capacity out of the Pacific Northwest. So, I think we’re feeling good. We like the 11-ship fleet. The customers like it, and it puts us in a terrific competitive position.

But we’re not at a 95% or 98% utilization going down, but we really like the operating and network benefits. And again, the 11-ship pays for itself with cargo and other cost efficiencies associated with that again..

Right. And so as we think about incremental volume from here and now that that 11-ship is in, I would think the incremental revenue should have a very high drop-down in terms of incremental EBIT.

Is that fair to say?.

Yeah. Yes. That’s the right way to look at it..

Okay. Great. Great.

And then last question for me, when we think about the impact of rising fuel to your P&L, I know that it’s typically a faster or is faster for the most part in your Jones Act lane, but does that maybe create some timing issues? Is that reflected in your guidance?.

It is not. Yeah. So, we’re – our own internal expectations are for slow increases in pricing although you know it’s been a little tricky to forecast where energy prices go, but our own internal thinking is energy prices continue to gradually rise. There may be a little bit of a lag effect. We don’t see it as significant.

It hurts us more when there are dramatic increases. When they’re slow and gradual, we tend to not have as much of a timing impact, Jack, in terms of our profitability..

Okay. Great. Thank you for the additional color..

Sure. Okay. Thanks, Jack..

And our next question comes from the line of Ben Nolan from Stifel. Your line is now open..

Yeah. Great. So following on, maybe if I could on one of Jack’s questions.

When we think about the a little over 8% increase in the Hawaii volumes in the first quarter, I’m trying to just get my head around if it’s possible to break that down between what was just the organic growth in the market versus shared gains and how you might think of that going forward? I mean what’s – maybe another way to put this is what do you think is currently the rate of organic growth in container volumes in Hawaii?.

Yeah. Okay, Ben. So the way – this 8%, the way we – this is a look back, at the end of May, Pasha closed on the Horizon Hawaii business. You’ll recall there was a fleet reconfiguration out of the North West and also some operating challenges that they went live with a new computer system caused this significant surge in Matson’s fleet.

So most of that was really felt from June till the rest of the year, so what we see is – and they’ve corrected some of their IT and operational issues, but there had been some permanent shift associated with their change in deployment.

This 8% – back now to your question, we’re going to continue to see positive comps and volume through the end of May as we get to the full-year impact of this deployment change in the market.

But to your specific question, we think the Hawaii market is growing maybe 1% to 2% right now, and that level I think we see as sustainable or slightly increasing into the next 12, 24, 36 months as we see ourselves in this next phase of the construction cycle in light rail and some of the residential housing projects and all the factors that we cited.

The rest of it was associated with this change in deployments that are more structural. So, that’s how that 8% plays out..

Okay. That’s helpful. And that sort of leads into my next question. I know in the past, you guys have brought up what percentage of your overall Hawaii freight was construction related, and I think at the peak, it was something 17%, 18%. I’m curious where you think that number is today and how fast it’s changing..

Ben, it’s Joel. I’ll take that one. So, we said a quarter or so ago, it moved up to about 7%, 8%. So, it’s in the high-single digit right now, so not as a percent as high as it was before in the previous peak, and you’re correct, that previous number was around 17%, 18%.

But as Matthew has mentioned, so we see – one of the bigger growth drivers in the Hawaii trade is the construction volumes, and some of that is moving over into barges. So, one of the reasons, one of the compelling reasons for us to move into this 11th ship deployment was to be better positioned to capture some of that construction growth.

So, we do think that’s a major component of the market growth that Matt just mentioned, low-single digit market growth for the overall Hawaii, but the construction piece is higher, and we’re trying to position ourselves to get that..

Okay. Got you. And then as it relates maybe, Joel, to the integration side of it. Just looking at sort of where the operating expenses are. And it looks like year-over-year, they were up about $70 million or so. Obviously, I would think the vast majority of that is related to Alaska.

How much left is there in terms of being able to carve out or take some of those expenses out of the P&L at this point do you think?.

There’s a little – the answer is there’s a little bit left, but not a lot. It’s not material. We’re getting down to the final stages from an integration process perspective. What really remains is the final winding down of the legacy Horizon systems.

So there’s some IT work and IT final infrastructure, server shutdown, things of that nature, Ben, that we think will take us probably through the late summer, early fall. So, we believe we’ll be fairly complete with all of the integration by the September timeframe. And so between now and then, there will still be a little bit of incremental cost.

But by September-ish, we should be down to our normal run rate going forward. So, there’s a little bit of extra costs this year, but not that much and not material..

Okay. And then lastly for me, the way that you were – the way you guys were talking about the possibility of adding a third and fourth vessel to your newbuild fleet, it sounded as though it’s almost a foregone conclusion that something would happen this year or next.

Am I – first of all, am I misreading that? And if not, should I think that the vessel size and cost and everything else should be relatively similar to the first two?.

Yeah. So, I think the fact that we mentioned it in our earnings call at the end of the year, the fact that we’re being more prominent about it, we want to be clear to investors that we definitely are considering it.

I think one of the things that – just as additional background, after 2020, when the emissions regulations change, we will have only diesel ships on operation, and we’ll have only steam vessels in reserve.

So our decision set is do we invest money in the best of the old steamships in order to get them to comply with new emissions regulations which do not permit the exhaust gasses to be that better under the current configuration of steamships by re-engineering or installing some kind of an exhaust scrubber system or do we accelerate a decision of investing in new ships so as to avoid investing in platforms that are end-of-life is part of the decision made.

And so, I think we have not made a decision. The board has not made a decision. We’ve not gotten pricing from shipyards. We’re just in the study and evaluation phase, but we wanted to bring investors along and make them aware that at least we’re looking at it.

So I wouldn’t say it’s a foregone conclusion, but we wanted to be transparent to the investment community there..

Okay..

Yeah. And, Ben, the only thing I’d add to that for your question. You asked about – should I assume the same as ships one and two. We also mentioned that some of our garage capacity that we currently deploy right now is on our older vessels.

So a consideration for two more ships is also getting new garage capacity for the ro-ro part of our business as well. So we’re evaluating different ship types as well as part of a potential third and fourth ship order as well..

Yeah, That’s right. I remember that. But maybe the way to think about it is one way or the other, there’s going to be some capital cost associated with either it’s bringing the older vessels up to regulatory levels which would be pretty expensive or just replacing them outright. But one way or the other, something like that has to happen.

Is that fair?.

Yeah. That’s fair. And I think we’ve said many, many times and I’ll repeat it, once you get 40 years or longer in vessels, you just really don’t want to be deploying that kind of aged vessels all that long as part of a long-term planning. We got significant number of ships that hit that age in the 2023, 2024 timeframe.

So, even if we had to spend money on the even older steamships before that, we still then would have new ship replacements not that many years later..

Right. Okay. Sounds good. Thanks, guys..

Okay. Thanks, Ben..

Thanks, Ben..

And the next question comes from the line of Michael Webber from Wells Fargo. Your line is now open..

Hi. Good morning, guys.

How are you?.

Hi, Mike..

Hi, Mike..

Hey, I wanted to pick up where Ben left off just around the renewal of the fleet, which is something that is obviously going to happen. If memory serves, the initial assets, now it is 2 plus 2.

So, you have actually hold options and do additional ships with the same spec or am I mistaken there?.

You’re right that we did obtain options but those long expired..

Those expired. Okay..

Yeah. So, at the time and so those – we don’t have options, firm options in place..

Okay. So, if I think about the idea that within the larger-scale [indiscernible] dockyards of Aker, NASCO, Halter and Palmedo, the capable yards, you’re not seeing as many tanker or large-scale ATB orders right now.

Does it stand a reason that they’re a bit more apt to get competitive on price? And, I guess, how should we think about price dynamics today relative to when you placed your initial order?.

Yeah. First of all, I don’t – we certainly will put our project down to bid to get the most competitive pricing we can. I would note that these vessels are among the largest that they will be building. And pricing is really much more of a function of where engine and all the components are, where steel is, where their cost of labor is.

So, where all that shakes out is the idea that we’re going to get a bargain – that’s hard to know. We haven’t seen pricing yet. But we do expect that, as you pointed out in your question, there are windows opening up as a result of all the yards we’re talking to.

As a result of slots available in a low and some of the tanker manufacturing or construction activity..

Okay. All right. That’s helpful. I guess, as it pertains to that, I think you guys still have a pending application on the – for Title XI financing? I think, it’s actually pending at your request. Is that tied to these initial options, or would that need to be reworked if you guys went with another yard or another spec….

Well, the pending application we have is for the first two ships. So....

Okay. That’s for the first two..

That’s going to change..

Okay..

And then, if we do order third and fourth ship, then what we could do is have a second application for those ships. And have two applications at the same time..

kay. I would – Mike, this is Matt. I would also point out that you may know that we have, in some cases, used Title XI, in other cases, we’ve signed more competitive pricing outside of the Title XI program given our credit profile. So, we not – even though you didn’t have – we certainly are going to be looking very closely at the Title XI applications.

It is very attractive, but we’re also equally looking at other sources of long-term debt to finance this project..

Fair enough. And as you said, it pertains to the competitive dynamics in the space, and we’ve talked a lot about the different fleet configurations in the new entrant, I guess, the larger competitor as a result of the M&A from two years ago.

Do you see – are you seeing more competition for yard slots? Do you think there’s a possibility that you could see one of your competitors place a large order to kind of put a more serious threat into your kind of primary market share?.

Are you talking about the Jones Act trades, Mike?.

Yeah. Yeah. I’m talking about Jones Act container tonnage or potentially, I guess, Ro/Ro, too. But – so some of the combo or container tonnage..

Yeah. I mean, what I can say is that in Alaska, TOTE has relatively modern vessels that they’re in the process of re-engining and – or at least in planning to have re-engined. And again, those are modern capable Ro/Ro vessels that I believe are going to continue to suit their needs into the foreseeable future.

In the Hawaii trade, we know, with the guard of the dynamics there, that Pasha, as part of its acquisition of the Hawaii assets, purchased four older steamships that face the same deadline of 2020 for modifications that ours too. And so whether they choose to modify those older platforms or invest in new tonnage is really up to them.

They haven’t made any announcements with that regard. But we do know that that’s something that they face over the next few years..

Right.

And in terms of looking at yard slots and things like that, you haven’t noticed an uptick in competition for those slots? Any indication around that kind of dynamic?.

Well, we’re confident that we’ll be able to get within the yards that are capable of building projects our size, we’re not worried about something trumping up for that site..

Okay. Just, I guess, one for Joel then I’ll just hang back for more operating question, but around the buybacks, I’m not – I guess, I’m doing round numbers here. But you guys, I think you said 777,000 shares have been bought since, I want to say, November which is, I believe, it was a three-year program.

So you guys are a little bit ahead of pace, not tremendously but just curious as to whether or not the current pace would continue which would put you guys up to reauthorize at some point, in a year or two, kind of before this will actually end and whether or not when you think about just using the cash and continuing to renew the fleet.

Is there any – does the idea of renewing that buyback or buying back at a pace kind of beyond the 3-million-share allotment onto that start that – how do you think about that from a liquidity perspective, I guess? Does that sort of impact the way the Marriott will look at you for financing or your banks will look at you?.

No, I don’t think so. We’re not worried about liquidity. We’ve got a great balance sheet overall. The way we think about it is slow and steady over time, Mike. So you are correct. 777,000 is since November. That is a little bit ahead of pace, but we still – we think we’ll be generally still on pace for the 3 million shares in three years.

There may be little periods where we’re ahead of pace or a little behind pace, depending upon how things ebb and flow, but it shouldn’t be dramatic and the overall thought is slow and steady long term. So we’re not going to comment beyond this authorization.

This is an authorization after the 3 million shares and no comment beyond that, but overall thought will be one of slow and steady, measured over time and with respect to our – and we purposely sized all these and think about all these in the context of our balance sheet, where we’re at today and the investments we need to make in the future, so we’re still in comp on our overall..

I mean maybe – yeah. And around the liquidity specifically, I guess what I’m getting is like Marriott financing which you’re not using, but you still have the application for it. It’s just notoriously tricky.

And just given your prior experience to that, successful experience with that, I mean, just how does that – or are you close to a point where you would actually have to think about that relative to how they would look at the financing? It might not be an issue. I’m just curious because I know it’s notoriously much difficult..

It’s not really an issue. I mean, if you look at our balance sheet today, we got very, very little Title XI financing. We believe we’ve got very strong investment grade metrics. So, we can – we feel confident we can issue long-term unsecured debt in a private placement market..

Sure..

And so from a liquidity perspective, we’ve got strong support from our bank group. We’ve got over $400 million unsecured bank revolver. Our banks would love us to borrow more money. And our long-term private placement partners would love us to borrow more money, all of that on an unsecured basis. So...

we feel good about our access to capital irrespective of the Title XI program and....

Got you..

We feel good about our access to capital irrespective of the Title XI program and [indiscernible] to closing Title XI deals..

Okay. Just one more for Matt and I’ll turn it over. I think this has been kind of poke and prod in a number of different ways, but if I think about – I mean, obviously there’s some tough plus coming up the next couple of quarters, but 2015 went just about as well for you guys as it possibly could have.

So it’s not a horrible problem to have, all things considered. But if I think about that China expedited service – and, Matt, I think in your prepared remarks, you mentioned about half being on spot and half being kind of longer term business, and I can’t recall if you put one-year term on it or not.

I’m just curious as to if we’re – are we going to be through any sort of kind of legacy re-pricing by the end of 2016, right? I guess, would you be fully mark-to-market on that business for the softer environment by kind of the middle of this year or end of this year or whether any of that would bleed into 2017?.

Yeah. So, Mike, the traditional cycle for the annual contracting is typically May 1 to April 30. So, the contracts we’ve just renewed at lower rates will extend through April of – April 30, 2017. And of course, the NVO or the spot pricing gets reset every month, every week, every quarter, so at different frequencies.

But for the annual contracting cycle, which is about half of our business, it runs in that cycle. So....

Great. Okay..

Yeah. That’s the way....

So, you’ve been – say, if it’s any help, so you should be fully mark-to-market by that point.

So it shouldn’t be any legacy overhang in 2017 from some previous business, okay?.

So, through April 30. Through April 30, that half the business in the annual contracting cycle will trail through April 30..

Sure. Okay. Yes, I think that’s all I got. I appreciate the time, guys. Thanks..

Sure..

Thanks, Mike..

And our next question comes from the line of Dan Natoli from Oppenheimer. Your line is now open..

Hi. Thanks for taking the questions. Just in terms of getting back to the Alaska operation, and I realized it was touched upon a bit.

Do you have a projection or maybe that’s not to be a point estimate but an oil price range where you feel that business could reach its potential and be fully integrated?.

I think, Dan, the – when we did our due diligence on the acquisition, we looked at the correlation between the market oil price and the amount of cargo or containers in the entire market. And what we found was that across a broad range of low and high prices that there was a very steady base of cargo that Horizon had developed.

And again, it’s the grocery store business. It’s that which supports the population base.

And so while clearly the lower energy prices is minimizing investment and is hurting the state’s finances, what we find is as important a correlation is the population of the state in terms of Horizon was never really involved in the specialty North Slope delivery, and a lot of those projects, they were more of a supplier.

And what we find is the population base in the state is expected to remain relatively stable. And so that’s kind of what we’re seeing. It’s a little muted, but no dramatic changes.

So, the question about where energy prices need to go for the oil majors and others to make significant reinvestment in the economy that could be a catalyst, I am less familiar with, but I’m sure it’s got to be much, much more than in the 60s and 70s before it starts to become a catalyst again. But I don’t know that specific number..

Okay. Thank you. That was very helpful. Thank you..

Thank you. Our next question comes from the line of Kevin Sterling from BB&T Capital Markets. Your line is now open..

Thank you. I just had a follow-up question. Going back to the China service, Matt, these carriers that are introduced in the expedited service, would their sailings be a little bit different than you guys? I imagine it might be.

And is it going to be a little bit slower in their service offering, if you know?.

Yeah, I do, Kevin. What we have found – and not to pick on Hanjin. Hanjin is a great carrier. I mean, there’s a lot of – these are all reputable carriers. This is not a disparagement of anyone.

But if I were to just spare the time then I would say that currently in receiver ship or in a form bankruptcy, but I won’t disparage any great care that we can deal with. But when we look at their specific service profile and their port pairs and their service, we find Matson service is a day faster at origin.

It’s one to one and a half days faster on water and probably two days faster on the marine terminal on the West Coast. So while they can advertise – it’s a day behind, the reality is that it’s four days plus behind the Matson Service.

We also know all the carriers who advertise these fast services rarely achieve the pro forma that they advertise in comparison to Matson who has a 10-year track record in our customers’ minds of being able to deliver. So that’s why when the question was asked earlier about how big of a deal is this over our lower year-over-year rates.

We’re not saying it’s nothing. It is a part of the answer, but it is a smaller part of the answer because at the end of the day, we don’t think these services are going to be able to provide the kind of level of service that we’ve proven we can make..

Got you. Okay. Well, thanks for letting me have a follow-up. I appreciate it..

Sure, Kevin. Thanks..

And our next question comes from the line of Jack Atkins from Stephens. Your line is now open..

Hey, guys. Thanks. I had a couple of quick follow-ups as well.

So first, Joel, when we think about the first quarter, were there any integration expenses or sort of one-time items that we should be thinking about there that may have negatively impacted profitability in the quarter?.

Yeah. Jack, as I mentioned earlier on the question on where’s the Alaska integration, there is a little bit of additional costs as we wind down our final integration activity. It’s not material..

Okay..

But there’s a little bit in there. That’ll run through some of the finalized new projects through the August, September time frames our current planning..

Okay. Okay. And then we think about – when we think about the cadence of the Ocean Transportation operating income, we have the first quarter in the bag. You kind of gave us a pretty good idea what to think about for the second quarter. But that would imply a decent ramp in the 3Q and the 4Q.

Is there anything we should be thinking about from a timing perspective that would explain that, or is that – I know there’s some seasonality impact there, but just can you help us think through the cadence of earnings as we move through the year?.

Yeah, Jack. I think you’ve framed the question correctly. I think we gave you our best thinking on the second quarter. There’s no reason to believe that the traditional third quarter being the strongest of the year, followed by the fourth quarter, would be slightly lower, falling back to our traditional second and third quarters being the best.

That certainly was amplified a little bit by the Alaska acquisition where, in the summertime, that’s when the tourism and construction activity peaked. So, clearly, we think second and third quarter tends to be our strongest quarter, traditionally..

Okay. Okay, Matt. Thank you very much for the time..

Sure..

Okay. Thanks, Jack..

And I’m showing no further questions at this time. I would like to turn the call back to Matt Cox for any closing remarks..

Okay. Well, thank you, everyone, for your participation today. We look forward to catching up with you on the next quarterly call. Aloha..