Good day, ladies and gentlemen and welcome to the Matson Fourth Quarter 2016 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce your host for today’s conference, Jerome Holland, Director of Investor Relations. Sir, you may begin..

Thanks, James. 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, the presentation slides and this conference call.

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

Please also note that the day of this conference call is February 21, 2017 and any forward-looking statements that we make today are based on assumptions as of this date. We undertake no obligation to update these forward-looking statements. With that, I will turn the call over to Matt..

Thanks, Jerome and thanks to those on the call. Matson’s core business has performed largely as expected in the fourth quarter. However, our results were negatively impacted by the increase in bunker fuel prices that occurred from mid-November through December.

It’s not uncommon for unexpected changes in fuel prices to have this kind of tiny impact on our quarterly results. We have announced three fuel surcharge increases in response, the latest of which was February 3 that will go into effect in March.

But given the 30-day customer notice period, there can be timing mismatches between when our fuel cost increase and when the fuel surcharges take effect.

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

Both of these investments are expected to enhance our market leading positions and drive increased profitability and cash flow generation in the years ahead.

For 2017, we expect to see modest improvements in each of our core businesses with the exception of Guam, where we expect further competitive losses due to the launch of a competitor’s second ship. As a result, we expect Matson’s 2017 operating income to be lower than it was in 2016.

Turning to the next two slides, I will touch on our high-level financial results, leaving it to Joel to provide more color later in the call. In the fourth quarter 2016, we earned net income of $19.4 million or $0.44 per share and generated EBITDA of $72.6 million.

And for the full year 2016, Matson earned net income of $80.5 million or $1.85 per share and generated EBITDA of $288.6 million.

As a reminder, the fourth quarter of 2015 was impacted by Horizon acquisition-related SG&A and full year 2015 was also impacted by the molasses settlement-related costs, the respective effects of which are shown in the stacked bar graph data with dotted lines.

Turning to our Hawaii service on Slide 6, following the market low we experienced during the third quarter of 2016, the Hawaii trade resumed modest west profound market growth in the fourth quarter of 2016. But as expected, our Hawaii volume was lower than the fourth quarter of 2015.

In 2017, we expect continued construction activity in Hawaii to provide for modest overall market growth. And from a market share perspective, we believe things have settled at current levels.

In the first quarter of 2017, we expect volumes to be challenged in comparison to the share gains we achieved in the first quarter of 2016, when Pasha was struggling with service changes and issues.

Those factors combined with the fact that 2017 will not benefit from a 53rd week, like 2016 did, lead us to expect our Hawaii volume to approximate the level achieved in 2016. In addition, we are expecting higher than normal operating expenses in 2017 as we will be undertaking the once every 5 years drydocking of our neighbor island barges.

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

Growth in the construction cycle has been fueled by high-rise condominium construction in the Kakaako-Ala Moana area of Honolulu, where we have seen the first wave of project reaching completion and expected to see the second wave of projects completing over the next couple of years.

So, while there are indications that the luxury condo market is maturing, we see several more mid-market priced projects in progress or planned that should provide for healthy construction pipeline over the next few years.

As the Honolulu condo boom eventually ebbs, residential construction activity is expected to begin to shift westward to two large projects, namely Ho’opili and Koa Ridge, single-family and townhouse developments in suburban Oahu, where building is expected to continue for the next to 10 to 12 years.

Homebuilding on the neighbor islands, which has lagged well behind Oahu, has also begun to show signs of life and is expected to show further expansion, but the pace is expected to remain well below the mid 2000s boom. Construction jobs grew at double-digit rates this year driven by strength in each of the major construction sub-sectors.

Looking ahead, UHERO expects that new projects breaking ground will replace existing projects coming to completion thereby generating smaller net gains in jobs next year followed by a gradual decline of the building cycle.

Moving to our China service on Slide 8, Matson’s volume in the fourth quarter of 2016 was 27% higher year-over-year, primarily due to the increased demand for our expedited service offering during the market dislocation and flight to safety that followed Hanjin’s bankruptcy and to a lesser extent due to 2016 having a 53rd week.

This year-over-year increase was further pronounced by the market softness we experienced in the fourth quarter of 2015 as underlying spot rates approached historical lows. Matson continued to realize the sizeable rate premium for our expedited service in the fourth quarter, while our average freight rates were lower than last year.

Spot market rates, as shown by the chart on the SCFI, moved up post Hanjin’s bankruptcy as international carriers put through GRIs in September and October. However, on the supply side, several carriers announced new services that effectively replaced the Hanjin capacity that had been removed from the market.

In 2017, we expect our proven expedited service and strong credit profile will continue to differentiate Matson in this chronically oversupplied market providing continued strong demand. Our service remains highly differentiated with a 5 to 10-day advantage over the other international ocean carriers.

Matson’s advantage results from several factors, including our industry leading transit time, efficient cargo offloading in our dedicated terminal on Long Beach and superior on-time performance.

Longer term, we view the consolidation of international carriers and launch of the new alliances in April has potential sources for longer term market improvement. Turning to Slide 9, Matson’s Guam volume in the fourth quarter showed a modest decline year-over-year again due to competitive losses to the APL’s biweekly U.S.

flagged containership service that launched in early 2016. We estimate that APL’s less direct service reached a market share of approximately 8% by the end of 2016. On our third quarter call, we mentioned the possibility of APL adding a second vessel to their feeder service, which would increase their service to weekly.

And in late December, that second vessel was in fact launched into service, heightening the competitive environment in Guam. While this increased capacity and service frequency will make it reasonable to expect further volume losses, we will fight to retain every container of our customer’s business.

Having a long history in Guam with strong customer ties and a 5-day to 8-day service advantage from Oakland and L.A., Long Beach, we expect to retain well beyond a 50% share. In fact, our goal this year will be to limit any competitive volume losses beyond a modest amount.

As we expect this to be a highly competitive market situation, we will not be providing any more specific market share comments beyond our goal. Moving now to Slide 10, Matson’s Alaska volume for the fourth quarter 2016 was modestly higher year-over-year benefiting from 2016 having a 53rd week.

However, the impact of the continued recession on northbound freight environment, partially offset that incremental volume. Our economic outlook for Alaska remains consistent with the previous quarter. And with that, we hear from our customers in the region pointing towards a muted economic environment for 2017.

As a result, for the full year 2017, we expect modestly lower volume as northbound freight declines are expected to be somewhat offset by improved southbound volume from a more typical seafood harvest.

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

Turning next to Slide 11, our terminal joint venture, SSAT, contributed $6.6 million in the fourth quarter 2016 compared to $3.4 million in the fourth quarter of 2015. The year-over-year increase was primarily due to improved lift volume.

For the full year 2017, we expect SSAT to make lower contribution to our ocean transportation operating income than it made in 2016, as continued industry consolidation and the launch of the new global shipping alliances may create some short-term uncertainty as container flows and supply chains are adjusted between the West Coast terminals.

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

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

Those headwinds endure, but we remain confident that Span’s strong market position and excellent operations and customer service will provide strong cash flows over the long-term. This is a great business.

For the full year 2017, we expect logistics operating income of approximately $20 million and expect further operating margin improvement due to the nature of Span’s business model for value added services earned commensurately higher margins.

For our truck and intermodal brokerage businesses, we expect to face a challenging market environment with sluggish overall freight demand and pressure on rates and margins. And with that, I will now turn the call over to Joel for a review of our financial performance and our 2017 outlook.

Joel?.

Thanks Matt.

As shown on Slide 13, reported ocean transportation operating income decreased $11.9 million compared to last year’s fourth quarter, primarily due to the unfavorable timing of fuel surcharge collections, higher vessel operating expense, higher vessel dry-docking amortization, lower container volume in Hawaii and Guam and lower freight rates in China.

Partially offsetting these unfavorable year-over-year comparisons were higher container volume in China and Alaska and lower G&A expenses. The company’s SSAT terminal joint venture investment contribution increased $3.2 million during the quarter compared to last year’s fourth quarter, mainly due to improved lift volume.

Logistics operating income doubled during the quarter, primarily due to the inclusion of the freight forwarding operating results attributable to the acquired Span Alaska business.

Moving to Slide 14, reported ocean transportation operating income decreased $46.5 million for the year, due primarily to lower freight rates in the company’s China service, higher vessel operating expenses related to the deployment of additional vessels in the Hawaii trade in the first half of 2016, unfavorable timing of fuel surcharge collections, higher terminal handling expenses and higher vessel dry-docking amortization.

Partially offsetting these unfavorable items were the absence of G&A expenses related to the Horizon acquisition and costs related to the molasses settlement and container yield improvements in Hawaii.

For 2016, the company’s SSAT terminal joint venture investment contribution declined slightly on a year-over-year basis, due to improved lift volumes being more than offset by the absence of benefits related to the clearing of international cargo volume after the U.S.

West Coast labor disruptions in the first half of 2015 and also by an increase in SSAT’s allowance for doubtful accounts receivable in 2016. Logistics operating income increased $3.4 million for the year, primarily due to the inclusion of Span Alaska business and also higher intermodal volume, partially offset by lower intermodal yield.

Turning to Slide 15, our balance sheet continues to be in very good shape. And at year end, our net debt to EBITDA ratio was 2.4x. Near the end of the year, on December 21, we closed on our $75 million private placement of 8-year weighted average life senior unsecured notes with the coupon of 3.37%.

This financing, along with the $200 million private placement we closed in September, fit well with our expected funding strategy for the construction of Aloha Class and Kanaloa Class vessels. The table at the bottom of this slide lays out our contractual progress payments through the delivery of the four new vessels.

As previously mentioned, these new vessel capital expenditure cash requirements will be provided from a combination of cash flow from operations, borrowing availability under our $400 million unsecured revolving credit facility and the issuance of new long-term debt.

Turning to Slide 16, we wanted to spend more time on this call outlining some of the other cash and P&L benefits we expect upon delivery of our four new vessels in mid-2020 compared to our current run rate cost structure embedded in our 2017 outlook.

Specifically, we have previously mentioned that the new vessels would allow us to reduce cash operating costs by about $25 million per year by virtue of reducing our active fleet units in Hawaii trade from 11 vessels down to 9 vessels.

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

These $40 million to $45 million of cash operating cost reductions will be somewhat offset in the early years by approximately $20 million more in interest expense that will be hitting the P&L, but we do expect to de-lever within the 3 years to 4 years following the new vessel deliveries, which would result in significant reduction of this additional interest expense.

The last column on this chart is depreciation and amortization, in any case, that we expect total D&A to be reduced by approximately $5 million to $8 million after the four ships are delivered.

Within these amounts, we do expect higher total vessel depreciation because of the new ships, but that increase is expected to be more than offset by lower dry-dock amortization, which has been elevated during this new vessel construction period, given our need to keep several of our old steamships active and available for dry-dock relief until the new ships arrive.

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

Turning to Slide 17, for maintenance capital spending in 2017, we expect to be at the high end of our $40 million to $50 million annual range due to our three largest diesel vessels being in dry-dock this year.

We are also actively evaluating another capital project that would upgrade our Honolulu terminal cranes to accommodate our larger new vessels, which if we decide to pursue is likely to include the purchase of three new cranes costing about $10 million each.

The capital funding for this project will not likely be incurred until at the earliest 2018 and they also include some additional spending for upgrades to our core Sand Island, Honolulu terminal.

From an overall maintenance CapEx perspective, after the new vessels are delivered in 2020, we do expect maintenance capital to remain within our normal level of $40 million to $50 million annually.

With regard to annul dry-dock spending and amortization shown in the bar chart at the bottom of this page, 2017, like 2016, is expected to be a relatively heavy dry-docking year for us, with our three largest diesel ships and also three neighbor island barges all scheduled to undergo dry-dockings this year.

And as I alluded to on the previous page, we do expect a substantial reduction in both dry-dock expense and amortization by the end of 2020, due to mainly to the retirement and scrapping of our old steamships.

The overall pretax income statement benefit of these D&A items by the end of 2020 was this $5 million to $8 billion I mentioned on the previous page. Slide 18 shows the summary of the manner in which we allocated our cash flow generation and capital over the last 12 months.

For the full year 2016, we generated cash flow from operations of $157.8 million and undertook net borrowings of $307.8 million, from which we used $194.5 million to close our acquisition of Span Alaska, made net CCF deposits of $31.2 million, spent $84.9 million on maintenance CapEx and put $94.5 million toward the progress payments on the Aloha Class vessels and initial deposits on the Kanaloa Class vessels.

And also we returned over $60 million to shareholders in the form of quarterly dividends and share repurchase.

As expected, our maintenance CapEx for the year was higher than our normal range of $40 million to $50 million, primarily due to the completion of the scrubber installation program on our three primary Alaska vessels and other capital projects related to what was a relatively heavy dry-docking year for us.

In addition, we took advantage of highly attractive container prices to accelerate purchases of container equipment during the year and year record low levels. With that, let me now turn to Slide 19 to provide our outlook for the year and our first quarter 2017.

To start with, we expect full year 2017 consolidated EBITDA to approximate the $288.6 million achieved in 2016.

And based upon our increased CapEx and dry-dock spending, we expect depreciation and amortization to increase by about $15 million this year to be approximately $150 million for the whole year, inclusive of approximately $50 million of dry-docking amortization.

The net of those two numbers would lead to 2017 consolidated operating income of approximately $140 million.

And of that total, as Matt mentioned earlier, we expect logistics operating income to be approximately $20 million, which makes it clear that ocean transportation operating income for 2017 is expected to be lower than the $141.3 million achieved in 2016, primarily due to the additional competitive volume losses in Guam and the noted higher D&A amounts.

We expect interest expense for the full year 2017 to be approximately $25 million and our effective tax rate for the full year to be approximately 39%.

For the first quarter 2017, we expect ocean transportation operating income to be less than half of the $33 million achieved in the first quarter of 2016, primarily due to the timing of fuel surcharge collections, higher vessel operating expenses related to the deployment of an additional vessel in Hawaii and lower volume in Hawaii, Alaska and Guam.

Logistics operating income for the first quarter 2017 is expected to approximately double the $1.6 million achieved in the first quarter of 2016. With that, I will now turn the call back over to Matt for final remarks..

Thanks, Joel. In 2016, Matson was named the number one ocean carrier in the world for an unprecedented third year in a row, testament to our singular focus on moving freight better than anyone.

Over the last 5 years, our environment has been characterized by exceptional growth both via large strategic acquisitions and smaller organic expansions of our Pacific network. We ended the Alaska trade via acquisition bolted on the South Pacific operator and acquired a freight forwarder.

We ordered the construction of four new ships to renew our Hawaii fleet, invested in our vessels and shore-side assets to bolster operational efficiencies and made improvements to our industry-leading China service.

Looking ahead, I remain confident in the long-term prospects and strong cash flow generation of Matson’s core businesses, which will provide the foundation for our vessel fleet renewal investments and continued value creation for our shareholders. And with that, I will turn the call back to the operator and ask for your questions..

Thank you. [Operator Instructions] Our first question comes from Jack Atkins with Stephens, your question please..

Hi guys. Good afternoon and thanks for the time. So I guess, just to start off with and I just want to say, I appreciate, I think most folks do the additional disclosure around the vessel accretion for 2020, I think that’s really helpful as we sort of think about the contribution from that.

But kind of shifting gears back to the business for a moment and kind of taking about where things stand sort of entering 2017, can you give us a sense Matt, for your expectation around transpacific rate renewals in 2017 and sort of Joel is going to build on to that, what sort of puts and takes are you putting into the guidance in terms of conservatism for that renewal season just given how volatile that can be at times?.

Okay. Sure Jack, I will be glad to comment on that and our expectations and then if Joel wants to add on something else, he can feel free to do that.

So our thinking about the Transpacific Jack, is that while we have seen the bankruptcy, we have seen mergers, we have seen combinations of companies coming together, we have seen the announcement of four alliances go into three.

Those – we see those as encouraging, but we continue to believe that there will be a overhang of capacity that will remain in the market.

And so, our expectation is that we will see improved rates – this means spot rates, I will comment on that since rates indirectly in a moment, but we clearly see the environment improving from the all-time lows that we saw last year at $800 spot rates and contract rates in the market, not ours in 2016, going up from there.

So I think we will see improvement in the market. Matson, as you know, it earned substantially above those rates given our highly differentiated product. And so clearly, we are not immune, but our rate dynamics are vastly different.

Our own expectation is that we will see modest improvement in half of our business at the May 1 contract renewal, but our remaining muted from calling this a bottom we are going to go straight up from here.

So our own expectations and embedded in our commentary about the earnings prospects is to see a somewhat improved, but not complete turnaround in the Transpacific market. We want to wait until we see it. We do expect to grow over the next few years as the surplus of capacity was up. But I think it’s too early to call a market turn in our estimation..

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

Okay, great.

And then there are a couple of follow-up questions, if I could on Hawaii, can you help us think through the impact that the timing of the fuel surcharges had, on the fourth quarter and then the expectation that that would have in the first quarter and I know in the past, you guys have been able to recoup those losses later on during the year, is that the expectation for this year as well that that will be unusual to full year is just going to the back half of the year before you can recoup what you are maybe loosing on fuel surcharges in the first quarter?.

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

There is also a second factor Jack, that our first and fourth quarter volumes are lower than our average with the second and third quarters being higher. So our goal is on an annual basis to recover those fuel surcharges. We remain confident in our ability to do so.

But during our lowest fourth and first quarters, especially in a rising environment, those earnings can be impacted. But again, we remain highly confident in our ability to recover fuel..

Okay. Matt, thank you. And last question and I will turn it over.

But when we think about 2018, obviously want you guys to give guidance for 2018, I am just trying to think through the setup going into next year, with the dry-dock amortization, obviously you have had two big years in ‘16 and ‘17, I think you are expecting that to moderate going into ‘18 just with the ship rotation, but would you expect the, I guess what you are incurring and sort of dry-dock expense going into the P&L or you have been showing up in sort of dry-dock amortization, would you expect that to be lower in 2018 than what you saw in 2017 – what do you expect to see in 2017?.

Yes. Let me comment on that and again I will ask Joel to comment more fully, but I can say Jack, the way we think – we are thinking about it is we are in a bit of a transition. We have seven steam ships that are nearing the end of their economic lives.

Our decision is for those to remain in class and but would be slowly transitioned out of our fleet as we get into ‘18, ‘19 and ‘20 and take delivery of those four new ships that will effectively allow us to retire these seven old steamships.

And all of the benefits around dry-dock and maintenance and all of the things that Joel outlined in his summary of what do we expect. But during this transition, we are dry-docking and amortizing dry-docks over a relatively short timeframe. So I think we do expect high levels of amortization and depreciation of these vessels through 2018 and 2019.

And I do think we are going to be slightly up on depreciation during this period, but I will ask Joel to be more specific about that..

Yes. Jack, the first vessel – the benefits will come and the reduction in dry-dock amortization and other costs will come as the vessels are delivered. So the first vessels delivered in the third quarter of ‘18 and then there is two delivered in ‘19, one in Q1 and one in Q4. The last vessel delivery will be in – is expected to be in Q2 of 2020.

So the benefit that I spoke about on the slide that you mentioned, you can think of those benefits phasing in as each of those four ships are delivered, so they really won’t start to the end of 2018 and then the 18 month phase until the middle of 2020 to get those sizes..

Okay, okay. Thanks again for the time guys..

Thanks, Jack..

Thank you. Our next question comes from Steve O’Hara with Sidoti & Company. Your question please..

Yes. Hi good afternoon..

Hi Steve..

Hi.

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

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

Okay.

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

Well, the way I would answer – this is Matt. I would say Steve, our full year commentary or Joel’s reflects that we will be consistent with our approach of being able to collect all of our fuel on an annual basis – so over time.

So if, as John mentioned we will fall a little further behind compared to the previous year, we do expect to recover that in the remaining the balance of the year consistent with the annual guidelines that Joel laid out..

Right. And as Matt mentioned, the most recent fuel surcharge increase that we announced will go effect March 6. So that’s all embedded into the expectation of the amount that we increased that will effective at that date..

Okay.

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

Yes. We don’t. No. Even if fuel changes, we don’t need a flat fuel to be able to recover over time as fuel has changed, we have been able to recover. So that continues to be our expectation..

Okay.

And then just I mean so – I guess I was just trying to come up with the difference in ocean shipping, so it looks like to be – looks like your operating income was down about $10 million outside or maybe $9 million outside of the increase in dry-dock, does that make sense?.

We don’t – we didn’t disclose all the specific elements of that. But the increase in dry-docking amortization is one of the bigger items in the quarter on a year-over-year basis..

Okay, right.

For the full year, I guess I am talking about 2017 versus ‘16?.

Okay. For the full year, that difference will be less, $15 million..

Okay, alright.

And then just on the – I know you don’t comment on various markets and your profitability there, I guess the outlook for China seems maybe better than it did in the past, it would seem some sort of the rhetoric out of Washington would imply the Jones Act seems pretty secure, but any concerns on – maybe some of the issues with terrorists or maybe kind of a trade policy, the current trade policy, etcetera?.

Yes. Steve, this is Matt. I think you are right. We feel – we remain confident in the Jones Act and the Jones Act both the administration and Congress remains firmly committed to the Jones Act. So we don’t see any changes coming out of that.

With regard to trade policy and order adjustments and other things that are being floated, I think it’s a little too early to tell.

I mean our customers clearly would be negatively impacted by that element, but how that changes with expected to changes in, in exchange rates in tax rates and all of that, it’s just a little speculative at this point until we get a clear picture of what’s included in tax reform for us to make much of a statement about it..

Okay, alright. Thank you very much..

Thank you. Our next question comes from Michael Webber with Wells Fargo, your question please..

Hi, good morning..

Hi Mike.

Hi.

So a lot of this is kind of have been passed over, but I wanted to try to isolate the underlying businesses, as you guys keeps adding businesses, it’s get harder and harder to kind of parse that where kind of core trends are, but if I just look at – if I just isolate kind of ocean trends and I just look at if I kind of strip out any noise from fuel and even maybe kind of strip out the expedited service in the backhaul, I just look at kind of front haul Hawaii versus Alaska, on a forward-looking basis, I guess where do you see the most weakness and may be if you can kind of compare and contrast those underlying markets, there is a lot of noise that kind of that can impact that blended ocean trends number, but if we look at the underlying health of those markets, I am just curious which one you see being slightly weaker in 2017 and I guess what kind of piece lying just in that, as I guess the bottom of that comment of the guidance page there were Q1 weakness is also driven by lower volumes in Hawaii, which is a bit surprising for Q1, so I just – just curious around that Matt, if you can kind of isolate those front haul markets?.

Sure. I think – I will start with your comment last about the Hawaii market. I will talk about weakness a bit. But why we feel good about, I mean I think we would like our position in Hawaii market. We like our fleet renewal strategy. I think we have got a great plan.

And we do have our neighbor island barges in once every 5 year dry-docks, so that’s where we are going to be paying a little bit more during the periods under which those barges are out as we do every 5 years. But the core of the market is good.

I think included in the Q1 commentary, I will just remind you that we were still benefiting from this larger than normal market share associated with Asia startup that extended through the first quarter.

So while we do see overall market growth in Hawaii, there is still a bit of overhang that would take us through the first quarter and then we would lap the more normalized position or share in the market after that. So that’s starting Q2 through the rest of the year. So our thinking in Hawaii is pretty good.

And again, fuel is noise, but we don’t see that as fundamentally changing. So in Alaska, the state is in recession.

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

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

So, Alaska is a little soft, but overall, we feel – and again, we feel great about our position there. We feel great about the asset that we purchased. We feel we are doing everything right to position ourselves for success in the long-term. So that’s great. Of course, Guam is a bit of an axe fight. APL has added a second vessel.

They have upgraded to a weekly service. They have an inferior service offering and we intend to contest and to fight for every container in the market.

So if we look at where our year-over-year we are going to see the market, the market itself is flat to modestly up overall, but clearly that will be the story and the element of our business that remains most challenged in 2017. And I know you just passed over to China. I think we have hit the bottom.

We are expecting small improvements, not calling a huge turnaround as some of the international ocean carriers. That’s a little premature, I would think from our perspective to call..

Okay.

I wanted to come back to that and to Guam, but just to stay on Alaska for a second and Joel, I think there is enough play in the numbers where this might be nothing, but if I think about the fact that, maybe there is a bit of sequential year-on-year weakness in the Alaskan trade, but if I look at kind of the logistics guidance and annualized kind of where you are at for Q4, that more or less gets me to the $20 million you guys were talking to in 2017, so I guess what I am asking, if I think about the Span impact, is that moving in tandem with maybe how we think about volumes in and out of Alaska or were they able to kind of expand the footprint there to where maybe that logistics impact is a bit more isolated or kind of protective relative to say that the front haul freight, Matt was talking about?.

No. Span, it’s got a great market position, but they are tied to the economy. And the overall freight volume, just like our approach in businesses. So I think the general trend is going to be impacted in Span as well. But Mike as we have said, the Alaska business was softening a little bit, early part of 2016.

So when we announced that transaction, we did expect the business to not achieve in the going forward 12 months, exactly what it achieved in the last 12 months. We saw some slowing time. So it is impacted by those general trends in Alaska and we have baked that into the outlook this year..

Okay, that’s helpful.

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

Yes. There are several ways to look at that. I mean I do acknowledge that going from every other week service to go into weekly service is clearly an upgrade for them.

Given their transit differences, clearly they are focused on the last time-sensitive element of the market that don’t – that [indiscernible] aren’t grocery store items, that aren’t refrigerated, things that can withstand a longer transit.

And knowing that APL is on the phone listening, I am going to limit my comments as to speculating about where they end up, rather than to say our intention is to give them a hard time. The market wants a second entrant and participant in the market, but we are – this is our freight and we are going to hang on to it.

So that’s – without being too flippant, that’s – those are as much as I really want to say at this point..

Okay, alright, that’s helpful.

One more and I will turn it over and this is just around the expedited service, around the I guess the premium service offering there, as rates rolled over into the previous cycle we saw that, that premium expand to a degree that, at least to my knowledge was unprecedented in the business, it seems like that’s naturally contracted a bit, but it’s tough to get a real read into – to the mechanism behind that just given how much those underlying freight rates have moved, as we think about kind of Transpac freight rates now kind of being back up to where they were at the – around kind of start of the fourth quarter, how should we think about the premium you guys were able to command in the market for that expedited service relative to say, where we were in kind of early Q4?.

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

And was the highest that we have seen in our 11 years in service. So as market rates improve, which we see as are helpful, I think part of that was our premium expanded so dramatically to absorb a significant amount of that – it really was the biggest driver year-over-year in our results, as Joel mentioned in his full year commentary.

So a recovery in the market we think is going to be helpful.

We just remain somewhat skeptical of the behavior of the ocean carriers, while they suffered significantly if there remains an overhang of supply and demand, there are some newer entrants that are entering the Transpacific trade, I think it’s probably likely to be true that both we will see rates improve from the all-time lows of last year, but not yet see ourselves in a robust recovery in the Transpacific trade, somewhere in between, I guess the way we are thinking about it..

Okay, that’s helpful.

And Joel, when we think about 2017 guidance, how should we think about the premium that’s reflective there, is that something flat line basically and then we are just kind of following the path of freight rates or are you guys making any sort of kind of movement within that relatively – actually, Brazilian premium for 2017, just where are expectations baked in right now for that guidance?.

We are not as volatile as the underlying rates. So as Matt said, as the spot rates are going up, it sounds like dollar for dollar increase our rate there, either. So we are less – we are less volatile on the way down, less volatile in the way out. So the fundamental market, we expect to be more solid spot rate is part of that.

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

Right.

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

We wouldn’t – we don’t expect a significant change in the overall premium. But I want to be clear, as Matt said this before. It’s not like we price our business as a margin off the underlying spot rates. I mean we were decoupled, but not immune.

So even those spot rates move around a few hundred dollars on any given month GRI, it sounds like our rates are moving exactly in tandem with that. So we want to make sure that’s – that you get that point as well..

Right, yes.

No, but that’s also relatively new phenomenon, right, I mean that’s when – that your ability to have that resilient premium really came about when you guys were able to command that premium throughout the last trough, right, so that when – if we look back 2 years or 3 years, 4 years ago, there was a bit of a tighter correlation with spot pricing, is that the right way to think about it?.

Yes. I would say the premium has generally expanded every year.

It’s been more expanding and tightened, but clearly as Joel said in a significantly down market, it’s going to expand in a rapidly increasing market, it will probably curtail because the relationships we have with our customers are more give-and-take were in a dramatic down cycle, they will give us higher rate.

And then – we are not going to strand them like many of the other international ocean carriers do stick it to them and hold the freight hostage. Ours is really built on more long-term relationship that gives and takes..

Okay, that’s all. Thanks, guys. Appreciate the time..

Okay, thanks..

Thank you. Our next question is from Ian Zaffino with Oppenheimer. Your question please..

Hey, guys. This is Mark [indiscernible] on for Ian. Thank you for taking my question. A lot of that has been covered.

But I just wanted to quickly ask, so in terms of the China services, I know that it’s been bringing down fright rates, but I just want to see expectations, I am not sure how much you guys could comment on them, but expectations for volume from pricing and just – have you guys seen any material response from competitor sense? Has that changed, I guess, like the market space materially? Thanks..

Okay. Sure, Mark. Let me make a crack at that.

I think our expectation about the China market and we were waiting to see how the three principal alliances are deploying tonnage and it remains not crystal clear about how much new deployed capacity is going to be put in place in the transpacific next year and whether it would be well matched to the demand that’s expected.

So we are watching that one closely. But as I have said, we do expect some improvement year-over-year in the transpacific in terms of the rate environment and implicit in that is the better capacity management by the alliances.

We don’t think it’s sufficient though to have a complete market turnaround at least in the transpacific trade that will lead to dramatically improved results for the international ocean carriers. That in a nutshell that’s kind of how we are seeing the market..

Okay, got it. Thank you, guys..

Sure, Mark. Thank you..

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

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