Matson, Inc. (MATX) Q2 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and thank you for standing by. Welcome to the Matson Second Quarter 2015 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 would now like to turn the conference over to Mr. Jerome Holland, Director of Investor Relations. Sir, please begin.

Thanks Howard. Aloha and welcome to our second quarter 2015 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 of Risk Factors on pages 7 to 15 of our 2014 Form 10-K filed on February 27, 2015 and in our subsequent filings with the SEC. Please also note that the date of this conference call is August 4, 2015, 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 the 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. Matson's core business has performed well in the second quarter of 2015 led by continued demand for our expedited China service, modest yield improvements in Hawaii and Guam, improvements at SSAT, and with the closing of our Alaska acquisition at the end of May, our second quarter included one month of operating results from the Alaska service. I am pleased to report that our Alaska integration is well underway and progressing as planned. We are on track to achieve our run rate earnings and cash flow accretion expectations within two years. There were however some offsets to our positive results for this quarter. We had an additional $13.5 million of largely non-recurring costs related to the Alaska acquisition and $11.4 million of costs related to our recently announced Molasses settlement which I will discuss in more detail shortly. We will also discuss our updated outlook towards the end of today's call. But I will mention now that we are raising our full year 2015 operating income outlook to substantially exceed the level achieved in 2014 exclusive of the acquisition related SG&A and the Molasses settlement cost. Before moving on I would like to briefly address the Molasses settlement we announced last week. As most of you will have seen on July 29th Matson reached a settlement with the State of Hawaii to resolve all of its civil, criminal, and administrative claims. Under this settlement Matson paid $5.9 million in cash to the State as compensation for damaged coral and lost fish as well as the States cost. Also we agreed to terminate Matson’s Molasses operations in Honolulu and committed to removing the Molasses related infrastructure which consists of risers and tanks at our Sand Island terminal. This work is estimated to cost between $5.5 million and $9.5 million. The Molasses settlement impacted operating income by $11.4 million, net income by $6.9 million, and EPS by $0.11. You will also recall that Matson had previously settled the Federal Criminal charges arising from the Molasses release for $1 million. Turning now to slide 5, you’ll see our financial metrics for the second quarter 2014. We’ve shown the respective impacts of the acquisition related SG&A and the Molasses settlement related cost on our financial performance in the stacked bar graph data with dotted lines. Excluding the acquisition SG&A and the Molasses settlement cost you can see that we continued to generate strong cash flow. EBITDA would have been $82.8 million, an increase of 41.5% year-over-year. Earnings per share exclusive of the acquisition SG&A and Molasses settlement cost would have increased by 33% from the prior year. I should also note that earnings per share was negatively impacted by an unusually high tax rate in the quarter that Joel will discuss in a moment. Slide 6, shows the same metrics on a year-to-date basis. Absent the acquisition SG&A costs and the Molasses settlement, EBITDA would have been a $149.8 million, an increase of 65% over 2014. Reported EPS was $0.79 per share, up 60% year-over-year. Excluding the acquisition to SG&A cost and the Molasses settlement EPS would have been $1.12, more than double the prior year level. All in all a solid second quarter and first half performance. Turning now to our Hawaii service on slide 7, we saw a continued yield improvement and modest West bound market growth in the second quarter. However, that growth was largely offset by lower East bound back off rate. Automobile volume declined by nearly 9.2%, a continuation of customer losses that don’t meaningfully impact our financial performance. Looking to the balance of 2015, we continue to expect a multiyear recovery in Hawaii and anticipate modest market growth for the year. You’ll recall that we had expected a containership capacity in Hawaii to increase this year with the May launch of Pasha’s new vessel, the Marjorie C. However upon delivery, Pasha slotted the Marjorie C in as a replacement for one of Horizon’s steam ships thereby removing the 5% to 10% capacity growth that we had previously expected. As a result, we expect our Hawaii container volume for the balance of the year to be higher than the second half of 2014. Slide 8 detailed some of the key metrics of the Hawaii economy with the latest forecast provided by the University of Hawaii Economic Research Corporation or UHERO. As we discussed last quarter, the residential build and recovery happening in urban Honolulu is not immediately apparent in these statistics. That’s because the building activity is largely focused on less labor intensive high rise condominium towers that are mixed use projects with the residential tower built to top of podium of commercial, retail, and parking space. These mix use projects typically follow a staged permitting approval process with commercial and residential segments permitted separately. This results in a lag between the time of project first breaks ground and when the residential permit is issued and shows up in the statistics. As shown by the decline in permitting for new residential construction in 2014 after two years of expansion. According to UHERO several projects that broke ground in 2014 and 2013 are still not counted in the published data. Together these amount to more than $700 million in value which is more than the entire value of all residential permits issued last year. That being said UHERO is expecting mid single-digit job growth for the next several years and we expect construction activity to ramp up over the next two years driving container volume growth as the high ride projects near their final stages of completion. In addition there are several new non-residential hotel and resort projects and renovations in works and continued progress on our Honolulu rail transit project, all of which have resulted in additional container volume growth. Before moving on to discuss our Alaska service results included in the second quarter, I wanted to provide an overview of the Alaska market and give some context to the business we just acquired. Turning to slide 9, Alaska is a remote, non-contiguous economy dependent upon reliable container service as a part of vital supply lifeline. Over 75% of the State's population lives in three metropolitan areas connected in a narrow corridor known as the Alaska real belt, stretching from the Kenai Peninsula to Anchorage, to Fairbanks. The Port of Anchorage is the key point of access with over 90% of the consumer goods for over 85% of the State's population. Today the Alaska market is well served with four weekly container ships sailing to Anchorage from the Port of Tacoma. Each week Matson offers two scheduled arrivals at Anchorage, two arrivals at Kodiak, and one arrival at Dutch Harbor. The vast majority of North bound container volume is comprised of consumables used by the region's population and businesses with the container ships arriving just in time of inventory service for many stores and businesses. South bound volume from Kodiak and Dutch Harbor is more seasonal and largely driven by the seafood industry. TOTE, our primary competitor in Alaska operates two row, row [ph] ships providing two weekly arrivals into Anchorage. Matson and TOTE also faced competition from barge services which have historically shipped lower value bulk commodities such as lumber, wallboard, and other building materials that can't accommodate a longer transit. The table on this slide shows Horizon's 2014 container volume by customer segment and provides a good representation of the types of cargo that underpinned this relatively stable market. The customer consists primarily of freight forwarders, retailers, grocery chains, food and beverage shippers, government shippers, building materials suppliers. And to give you sense of the seasonality in container volumes in Alaska, we have provided a bar graph of 2014's volume by quarter where you will notice that the second and third quarters, that is the spring and summer months are the largest contributors primarily driven by the timing of the South bound seafood trade. Moving on to slide 10, our second quarter results essentially included one month of Alaska operations which can be seen in our reported container volumes as 4800 loads for the trade. The total volume for the Alaska operation in the first half of 2015 was 34,400 containers, slightly higher than the 2014 level. The longer-term historical annual volume table demonstrates the relative stability of the Alaska trade throughout the recent economic cycles and at various commodity prices. In comparison to most other states, Alaska relies on a small number of economic drivers. There are essentially three pillars of Alaska's economy; first, is the oil and gas industry; second, is Federal and State government spending; and the third, would be the rest of the industries where fishing, tourism, and mining are the largest. As a result, the state fared much better during the great recession for the rest of the nation because of the demand for oil, minerals, and fish stayed relatively high and Alaska lacked the manufacturing, housing, or financial industry jobs that declined substantially elsewhere. Further Alaska did not experience a speculative home buying construction bubble. However, as we are seeing now, Alaska's less diverse economy also means that when one of its economic drivers is impacted negatively it can have a more noticeable effect on the State's economic trajectory. Alaska is facing some near-term economic headwinds, the most notable of which are the low oil price environment and the recently announced proposed dry down of 2,600 troops from the joint base Elmendorf-Richardson over the next two years and the not knock on effects these may have on other sectors of the economy. As a result for the second half of 2015 we expect Alaska container volume to approximate the 2014 level of 35,000 loads. Despite these short-term headwinds we remain confident that Alaska is a great market Matson, both in the short-term and the long-term. For additional background and recent forecast on the Alaska economy, we would direct you to the 2015 three year economic outlook Anchorage published on July 29th by AEDC, the Anchorage Economic Development Corporation. Turning now to our Guam service on slide 11, we saw a 4.8% decrease in container volume during the second quarter due to the timing of select shipments. For the second half of 2015 we anticipate steady economic activity and expect modestly improved volume compared to the second half of 2014 assuming no new competitor enters the market. Moving to the next slide, Matson continued to realize exceptionally strong freight rates in its China trade during the second quarter of 2015. The SCFI graph on the slide highlights the current state of the international spot market which is in stark contrast to the considerable premium Matson continues to realize for our expedited service offering. In addition, Matson achieved year-over-year increases in our annual contracted rate which makes up about 1.5 of our China business. With the resolution of U.S. West Coast port disruptions, the international carriers have been able to reestablish more reliable scheduled service. However the lingering over capacity in a market and the delivery of even larger vessels has continued to put downward pressure on the freight rates. In the current market Matson service advantage is approximately 5 to 7 days from Shanghai attributed to the unique aspects of our service. Industry leading trends at times 24 hour availability at our dedicated terminal in Long Beach and superior on time performance. In the second half of 2015, international vessel over capacity is expected to continue with new vessel deliveries outpacing demand growth. Nonetheless we expect to maintain our volume in average freight rates with high vessel utilization levels. Turning now to slide 13, SSA contributed $5.2 million to our second quarter ocean transportation operating income compared to $2.1 million contribution in 2014. This year-over-year increase can be attributed to factors related to the clearing of the international carrier backlog we discussed last quarter. The Pacific Maritime Association and the ILWU reached a tentative agreement in February and in May both parties ratified the new five year contract. Overall we expect second half 2015 profit at SSAT to exceed the second half 2014 level, as SSAT is well positioned in Long Beach in Oakland for increased lift volumes from major international carrier customers. Slide 14 highlights the results of logistics which would have shown continued year-over-year improvement had it not been for a favorable litigation settlement included in the second quarter of 2014 which was the primary driver leading to the year-over-year decline of $600,000. Also international intermodal volume was lower partially offset by warehouse operating improvements. As we look to the remainder of 2015, we expect logistics operating income to approximate 2014 levels. I will now turn the call over to Joel for a review of our financial performance and consolidated outlook for the second half of 2015. Joel?

Thanks Matt. As shown on slide 15, Ocean transportation operating income decreased 1.4 million during the second quarter 2015 compared with the second quarter 2014. The decrease was primarily due to the incremental acquisition related SG&A, the Molasses settlement costs, and higher terminal handling expenses. However, there were several positives that largely offset those items including higher freight rates in China, yield improvements in Hawaii and Guam, and the inclusion of a month of operating results for the Alaska trade. In the stack bar graph on the left you can see that excluding the two noted expense items, ocean transportation operating income would have been 56.3 million which represents a year-over-year increase of over 70%. On the right hand side of the page, logistics operating income decreased by 0.6 million for the reasons Matt just mentioned. The next slide shows our year-to-date results. For the first six months of 2015, ocean transportation operating income was 75.3 million, an increase of 33.1 million over the prior year. The increase was primarily due to higher freight rates in China, the timing of fuel surcharge collections, yield improvements in Hawaii and Guam, and the initial inclusion of operating results for the Alaska trade. Partially offsetting these favorable operating income items were the incremental acquisition SG&A expenses and Molasses settlement costs, higher terminal handling expenses, and lower Guam container volume. Absent the two noted expense items, ocean transportation operating income for the first half of 2015 would have more than doubled to just over $100 million. Logistics posted operating income results of 3.3 million for the first six months of the year, slightly lower than in 2014. The decrease was primarily due to the absence of the 2014 favorable litigation settlement and lower international intermodal volume, partially offset by improved results in warehousing. On slide 17, looking at our condensed income statement, total revenue increased by 2.6% on a year-over-year basis despite a considerable decline in our fuel surcharge. While our SG&A expenses were higher due primarily to the acquisition. Excluding the acquisition related SG&A and Molasses settlement costs, our operating margin would have increased to 13.1% from 8.2%. It is also important to note that net income and EPS in the second quarter this year were adversely impacted by an effective tax rate of 66% as compared to 42% in the second quarter 2014. Income tax expense this quarter included a 4.8 million prior period non-cash adjustment to deferred tax assets which increased the effective tax rate by slightly over 16% and negatively impacted earnings per share by $0.11. The second quarter 2015 effective tax rate was further negatively impacted by changes in the value of deferred tax assets and non-deductible expenses both of which were related to the acquisition. For the second half of 2015 we now expect the effective tax rate to be approximately 40%, which is slightly higher than our previous 38.5% normal tax rate due to higher effective State taxes going forward in Alaska. Turning to slide 18, you will see a summary of our balance sheet which now reflects important items from the purchase accounting for the acquisition as follows. Additional fixed assets of approximately 171 million to be amortized over 7 to 10 years. These assets include four Jones Act container ships and other assets including containers, chassis, and terminal equipment. Intangible assets of 140 million related to customer relationships which will be amortized over 21 years. Goodwill of 220 million, net deferred tax assets of 39 million primarily from Horizon's previously existing NOLs, and on the liability side we recorded multiemployer withdrawal liabilities of 60.6 million which is related to the Puerto Rico pension withdrawal. We expect this liability to require payments of 4.1 million annually spread out over the next 18 years. With regard to liquidity and debt, our total debt at the end of the second quarter was 516.6 million and our net debt to LTM EBITDA ratio increased to only 1.8 times. This ratio is especially strong when considering that our LTM EBITDA includes only one month of contribution from the Alaska trade line. Additionally last week we announced a private placement of 75 million in 30 year senior unsecured notes at a fixed rate of 3.92% that we expect to issue in September. We also increased our revolver size to 400 million and extended it for a new five year term maturing in July of 2020. We continue to benefit from strong support from our credit providers in both the bank and private placement markets. So overall, post acquisition and post these new financings we are pleased with the status of our balance sheet as our leverage remains well within targeted levels. Our debt capitalization profile contains mostly unsecured long dated debt with relatively low coupons, and our liquidity levels and access to cash remains strong. So with that let's now turn to slide 19 and talk more specifically about the financial aspects of the acquisition. This slide is our key score card and references important metrics we will track relative to our original expectations at the time of deal announcement. The good news is that all key score card metrics are currently estimated at or better than when we announced the deal last November. Specifically the deal closed at a transaction value only marginally higher than the LTM number of 456 million sided that announcement. This was a good outcome given our original expectations that Horizon’s debt numbers have the potential to creep significantly higher between signing and closing due to the risk of ongoing losses and shutdown cost in the Puerto Rico business as well as Horizon’s very high debt burden and interest costs. With regard to our transaction and integration cost estimates and overall integration time table, our expectations have not changed materially. Our bottom line EPS and cash flow per share estimates now are slightly better than originally projected. Also we are pleased to say that excluding the incremental SG&A expenses, the transaction has been immediately accretive as expected both in the month of June and expected for this first full quarter of results in the third quarter of this year. Going forward we will be reporting back to investors on this incremental SG&A in excess of our $15 million annual run rate target. And specifically for the second half of this year we expect to incur approximately 25 million of these incremental SG&A cost while we are still integrating the business on to our core systems and operating platforms. This will bring the expected 2015, total to 38.5 million and we expect that number to decline to approximately 10 million for all of next year as we work through the final integration activities. Turning to slide 20, we showed the more detailed calculations so investors can see how we build up to our illustrative annual EPS and cash flow per share accretion figures. It’s also worth noting that we expect to be able to utilize 158 million of NOLs related to Horizon, which is expected to reduce the actual cash tax rate to approximately 20% on the Alaska operations for at least the next 5 years. These deferred tax assets have been recorded on an MPB [ph] basis on our balance sheet at approximately 39 million as I previously mentioned on the balance sheet slide. Moving on to slide 21, we also want to point out to investors the change in our EBITDA definition to capture all amortization in our income statement versus our previous definition which excluded dry-docking amortization. This updated definition of EBITDA was used previously by Horizon and is the more common way to define EBITDA in our industry since it captures all amortization hitting the income statement. I also want to point that the LTM EBITDA figure on this slide includes the 25 million of Molasses settlement cost and incremental acquisition SG&A expenses incurred to date. So the LTM figure, the LTM EBITDA figure would be 289 million excluding these two items which you can see in the reconciliation table in the addendum to this presentation. Lastly it is also important to note that the 289 million LTM EBITDA figure I just quoted in the addendum is still not fully pro forma or still not a fully pro forma number as it includes only one month of Alaska operations. The next slide 22 shows a summary of our cash sources and uses over the last 12 months. The key take away from this slide is that we only had to borrow a net amount of 136.4 million to fund the 495 million of total cash needed to close the acquisition by also funding $77 million of CAPEX, dividends, and CCF contributions over the last year. This low level of required borrowings is a testament to the strength of our internally generated cash flow from operations performance over the last 12 months. With that let me now turn to slide 23 to provide our specific updated outlook for the second half of 2015 which is being provided relative to 2014 operating income and is exclusive of the 25 million of acquisition related SG&A in excess of our incremental run rate target expected for the remainder of this year and excludes any impact of the Molasses incident. For the second half of this year, we expect ocean transportation operating income to moderately exceed the 88.9 million achieved in the second half of 2014 which is expected to lead to substantially higher results for the full fiscal year. The moderately higher second half outlook is driven by expectations for a better volume in Hawaii, continued premium freight rates and high utilization in China, modest volume growth in Guam, and modest profit at SSAT. In addition the second half 2015 will include the results of our Alaska operations where we expect volume to approximate the level achieved by Horizon in the second half of 2014. We also wanted to point out that in the second half of this year we expect the operating income contribution for each of the third and fourth quarters to be considerably different than in 2014. Specifically the third quarter 2015 operating income is expected to be approximately 50% higher and fourth quarter 2015 operating income is expected to be considerably lower than the comparable periods in 2014. For logistics, we continue to expect full year 2015 operating income to exceed the 2014 level. And for CAPEX in the second half, we expect to spend approximately 35 million on maintenance CAPEX and make 33 million of scheduled construction progress payments on our new Aloha class vessels. With that I will now turn the call back over to Matt.

Thanks Joel. The second quarter was an eventful one for us and we are confident of what lies ahead for the balance of 2015. We expect to see growing construction activity at Hawaii, continued demand for our industry leading CLX service, and improvements in logistics and SSAT in line with general economic activity. In addition, our results will be strengthened by the contribution of our Alaska operations, the integration of which will continue to be a high priority for us. We are off to a great start and I feel comfortable that we will hit our integration targets within the 24 month timeframe we set. Looking ahead, we are confident that our businesses will continue to deliver strong operating results and generate cash flow to pay down debt, provide for our fleet and equipment investments, and to support our dividend. And with that I will turn the call back to the operator and ask for your questions.

[Operator Instructions]. Our first question or comment comes from the line of Steve O'Hara from Sidoti and Company. Your line is open.

Hi, in terms of the changes in Pasha service, I am just wondering if that impacts your let's say core nine ship deployment excluding the Alaska operations and I am just wondering, I had heard that they had kind of changed some of the service offerings for the I think CLX [ph] I am just wondering kind of your outlook there? And then also just on the Alaska side, what type of economic growth are you kind of baking into your model to kind of get to your run rate assumptions on free cash flow and EBITDA, I am just kind of curious what you are looking for there, thank you?

Sure Steve, this is Matt. I will answer the question on the Hawaii deployment question and I will ask Joel to cover the Alaska growth assumption question. So, with respect to the -- and I will start by making a comment I made earlier which was as we had been thinking about this new capacity that was entering the market, this new vessel the Marjorie C, we had assumed that it was going to be additive to the total amount of capacity and the trade. And Pasha elected to lay off one of its older steam vessels and put it in the slot into one of their existing four vessels that Horizon alliance Hawaii operated beforehand. So, we see no net capacity add this year. And so that is the first point we made, and you are right also in saying that Pasha has elected to amend its deployment and it is elected -- we have seen to no longer call the Pacific Northwest but instead focus on putting a second call into Southern California, one of the largest market on the West Coast. And so, in addition to seeing one fewer vessel than we might have otherwise seen, we have seen those deployments change and in this interim period we have elected to operate one extra vessel just during this period and that vessel is now in service as the market settles out in the new deployments. And that is why we believe we will carry more volume in the second half of 2015 than we carried in the second half of 2014. And then Joel I don’t know if you could comment on the Alaska part.

Sure, Steve on the Alaska question, the first -- your question was around what kind of growth are we assuming in the economy to hit our $70 million run rate EBITDA and achieve financial targets, etc. And the answer is no growth. That’s the run rate today and it’s a very interesting observation if you look at slide 10 in our deck you can see the 10 years of history of volumes that we are showing for Alaska and the obvious observation is that they are very, very steady pretty flat volumes. Some year slightly out, some year slightly down but overall a very, very steady. So we are not banking on any kind of significant volume growth overtime where profitability growth comes in this businesses through measured rate increases overtime and through cost efficiencies and in other parts of the business including terminal service operations in Dutch harbor. And so it doesn’t necessarily come from core volume growth as you can see it from that graph. In terms of the Alaskan economy, we are not expecting huge growth. We are expecting to be steady to slightly up. We are not expecting a recession or declining kind of environment and if that did happen for a longer period of time obviously that could put pressure to the historical volumes that you had seen on slide 10. But we are not banking on any of those things occurring one way or other for us to achieve the $70 million run rate target we’ve talked about.

Okay, thank you very much.

Okay, thanks Stephen.

Thank you. Our next question or comment comes from the line of Jack Atkins from Stephens. Your line is open.

Thanks for the time and congrats on another really strong quarter here. So I was just talking -- just to kind of dig into the guidance for a moment guys it looks likes fairly substantial increase for the guidance range and I was wondering if you could maybe walk us through the different elements to that between the incremental earnings from the acquisition and also it sounds like you have a 10th ship in rotation out at least temporarily and fuel has come in as well, so I am guessing that’s probably a tailwind too. So, help us kind of think through the different puts and takes there as we look out for the second half of the year?

Sure the biggest drivers are the inclusion of the new Alaska operations Jack. The China rates being strong and Hawaii volumes we’ve changed from a more or less increasing or flat kind of Hawaii volume environment to slightly up. And so that has a pretty important impact to our bottom line results. So, those three components have led to the year-over-year third quarter and fourth quarter expectations of being higher than last year in total. Although we did note Jack, a skewness this year are a lot more loaded in the third quarter versus the fourth quarter and the primary reason for that is the timing of fuel surcharge collections this year versus last year. So that will lead to some skewness in those two quarters but the overall drivers of the first three I mentioned.

Okay, that makes a lot of sense Joel, thank you. And then when we think about that 10th ship, I mean do you think that’s more of a permanent addition or Matt as you said it sounds like it maybe more temporary, what do you think needs to happen in terms of the freight flows West bound to make you feel comfortable putting a 10th ship in to the rotation permanently?

That’s a good question Jack. I think what’s first and most important to us, just by way of context the utilization of our 9 vessel fleet before this change was operating at a very high level. We talked about 95% capacity so, we were very full on a 9 ship deployment and we’ve always said we would break into a 10th ship if the market warranted it. We have elected to take that 10th ship, put it in service now. It allows for our overall network utilization to flow a little smoother including positioning of MTs and their certain network benefits and we are just going to watch that closely. If the market settles out then we need to continue to operate it, we will. If the market settles out where we can revert back to 9 ship deployment we’ll do that as well but at this point we are going to leave it in place until we see how the market settles out.

Okay, makes sense and then last question from me, Joel you talked about I think in the prepared comments the additional or just $33 million in scheduled new vessel contract payments, could you give us an update on how much you guys have left in terms of capital to continue to allocate towards the new vessels and to sort of how those payments sort of play out over the course of the next couple of years before you take delivery of those two new ships in 2018?

Yes, sure Jack. The answer is we got still a substantial way to go on funding the vessels. We only have $27.5 million at this moment in our CCF fund. And the overall cost of vessels is 419 million and in terms of what has been delivered at the shipyard only the upfront payment of $8 million. So we still owe the shipyards over 410 million and we have only put 27.5 into the CCF fund so far. So, the net result of that is basically around 380 million more dollars of cash that will first go into the CCF fund and then go to the shipyards for the contracts scheduled payments. So, think of $380 million of cash being spent through the fund between now and the fourth quarter of 2018. And from a timing perspective, you will see that we have got a little bit more in 2016 but over 75% of the overall payments for the vessels will be in 2017 and 2018. So, we still got about another year and half to kind of prefund the CCF before the very big payments to shipyards kick in, in 2017 and 2018.

Okay, that makes a lot of sense. Thanks again for the time.

Sure.

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

Thank you, Aloha gentlemen and congrats on a nice quarter and outlook.

Thanks Kevin, thanks.

Hey Joel, I just wanted to understand your higher Alaska EPS accretion that you are thinking for on an annual basis, looks like you bumped it up a little bit, is that mainly lower SG&A?

No, our fundamental $70 million EBITDA number which is -- has the SG&A expectations baked into it has not changed. What's making it go up a little bit is slightly better outcomes on the final purchase price accounting and the depreciation numbers. A little bit better on the interest cost lines. But the fundamental cash flow generation of business we haven’t changed our outlook on that.

Okay, got you. And you talked about Hawaii and it looks like you are up on your growth there because of Pasha swapping out vessels, but is there, I mean as you think about that and Matt you did a great job talking about your versus Hawaii forecast, I mean are you baking any kind of organic growth in there as well since maybe initially you thought about this six to nine months ago?

I think we continued to feel optimistic Kevin that we -- there still is an economy that is growing, that will provide growth in container volumes over the next few years. So, we remain optimistic that we are going to see slow and steady growth based on these underlying economic drivers that UHERO has talked about but as we pointed out it has been pushed out into the future. And as we said earlier in the cycle it would have been a little fresher, in fact the lack of it showing up early but we remain confident that it is going to show up. And so on the demand side we continue to feel good. On the supply side is where we saw the biggest change, where that extra capacity was not deployed in the market but Pasha liked to swap this more efficient vessel and replace the less efficient steam vessel and therefore that extra capacity won't wait to be absorbed and we were suggesting that our growth rates were going to be more moderate while this extra capacity was otherwise going to be deployed and we don’t believe that will be factor moving forward.

Okay, got you. Thank you. And last quarter you talked about the success of your re-bid season with regards to your contract business as it relates to China. I assume you still have some pretty good success there as you think about your China business?

Yes, we have and most of those contracts were renegotiated in the May 01 to April 30 cycle. So, there are a few contracts that are outside of that but the vast majority are in that cycle and so we did actually realize for that half of the business that moves under annual contract, we did see a rather significant increase year-on-year. And are seeing the benefits of that both in the second quarter and in the remaining half of the year relative to prior year. So, it has been a great story given how difficulty overall market especially has been on the international ocean carrier trade.

Oh yeah, absolutely, kudos to you guys. And last question Matt, you talked about Horizons Alaska volumes I think staying relatively stable, you had to chart, your presentation kind of showing some of that stability in Alaska but you did decide some headwinds from the lower oil price environment, I think and the military pulling out, help me remember here, how did Horizon's container volumes hold up maybe during the last time we saw oil prices collapse like this. I am trying to think back to when I used to cover Horizon, but I don’t remember any big swings. So, maybe you could share some light on that and I’d love to hear your thoughts? Unidentified Company Representative: Kevin Horizon did not disclose their trade lane volumes so the numbers that we just published today on slide 10 are the first times those numbers have ever have been made public and we only put those out through 2006. So the bigger observation is how did this business behave during the great recession of 2008, 2009 and it was down a little bit but not dramatically. But there weren’t -- we don’t have the data and we are not publishing the data when you go back and look at the bigger oil spikes that occurred in the early 2000s and prior to that.

Okay, got you. Alright, thanks for your time and congratulate once again.

Thanks Kevin.

Thank you. Our next question or comment comes from the line of Ben Nolan from Stifel. Your line is open.

Thanks and nice quarter guys. It seems like everything is coming together even better than your thought. My first question I guess has to do with getting back to something that Matt you talked about and then while specifically we have seen the sharp decline in international carrier freight rate if it appears though it has had no impact at all on your expedite China service is it really completely disconnected I mean are you legitimately only competing with air freight, is that how to think of this?

Well we are in a little bit of uncharted waters here Ben because this really is unique I think in any container trade anywhere in the world. I think it is fair to say that our customers really see the math’s in service as almost like a deferred air product rather than an ocean carrier product and we rely on our 1% or 2% of the whole market who needs or demands this expedited service. And so we can’t say that we will never be impacted but what we have seen is in the rather severe rate cycle and you could see spot rates at or below the level they were in 2008 and 2007 and 2008 and meanwhile our product remains. Now I can’t say that this will happen forever but I will say if we continue to provide the service that we have and we continue to find new customers there are other customers that we work with for a long time that elect to move some of their product on slower conventional container cargo and reserve some for ours. Some of it is conversion from air freight so there is a lot of factors and the market moves around but it has been -- your observation has been very enduring over even some pretty tough cycles now so we feel good about it.

Okay and then another thing that seems to be working exceptionally well is the SSAT side and I understand there is some seasonality do that but, is this the new normal where you can legitimately make whatever $15 million a year from that business just sort of on a go forward basis. Unidentified Company Representative: You will recall Ben that before the great recession those were levels of earnings that we had seen in this position before things turned. It is hard to say if it’s the new normal. I would say the West Coast is in a significant transition with the move towards larger and larger vessels with more congestion, lots of moving around between carrier alliances, underlying ocean carriers deciding they no longer want to be in the terminal business. So I would say it’s a period of relative instability, lots of things moving on but it does prove and we have said many times and continue to believe that SSAT and Carrix, our partner is the best operator in the U.S. West Coast. And so if you have large vessels that want to come to the West Coast, you want to have your vessels steamed it over to SSAT and we are seeing some of the benefit of that and producing pretty good earnings in the period of relative dislocation. So we feel great about that.

Okay and then my last question relates to sort of what’s going on so far with respect to the synergistic benefits of the Alaska acquisition. I mean you said things are going well, is there anything anecdotal that you can point to where you are finding cost savings and have you -- has there been any considerations consolidating the Pacific North West terminals or anything of that sort?

Sure Ben, I’ll take that one. The primary driver to the cost savings and the synergies in the deal really were on the corporate overhead side. And remember this is a three way deal to see it carve out of a whole business unit and that Hawaiian it was sold to Pasha. And we essentially were just looking for and achieved the outcome of just getting Alaska operations which is what we wanted. Horizon did all the heavy lifting really before closing and shutting down the Puerto Rico operations. And so most of the final synergies were really -- we’re still working on them but it is really taking the Alaska business and putting it on our systems and platforms which will take us several quarters to do. That’s where most of the savings and what we bake into the transaction for our expectations were all coming from. Now overtime there might be some operational areas of benefit or like you mentioned the Tacoma operations, equipment sharing, equipment efficiencies, dry-docking efficiencies there might be a number of other areas we can get at 1%, 2%, 3% kind of efficiency savings overtime just like we do with our other trade lanes. But those are just part of running good business in an integrated way that really weren’t baked into our upfront expectations. Does that make sense?

Yes, that’s pretty thanks Joel. Again its fantastic quarter for you guys, congratulations.

Okay, thanks Ben.

Thank you. Our next question or comment comes from the line of Michael Webber from Wells Fargo. Your line is open.

Hey, good morning guys. How are you?

Hi Mike.

I’ll say you that I will say good quarter, but I will start by saying congrats on the Molasses settlement. I am pretty sure I asked you about that for 12 quarters in a row so, congrats on getting that behind you?

Yes, we are pleased.

I had a couple of questions here, I want to start with I guess Matt you already talked about kind of run through the synergies Alaska, I guess on a mechanism standpoint, I guess, that your fuel charge mechanism with Alaska is that similar to what you got in place with Hawaii and should we expect any differences there in terms of how that plays out with the results, or modelling anything else, I am just curious?

The fuel surcharge mechanism for Alaska is unique to the Alaska trade and we are not envisioning any significant changes to that. And our thinking about fuel surcharges are further embedded in the $70 million in net results that Joel had mentioned and we have been talking about since announcement.

Okay, I can dig into that later. I guess Matt sticking with you, Ben brought up trans pack and now there seems like there has been a bit of decoupling there and hopefully that will last. I guess if we just look at that broader trade, we have seen weakness there, we have seen weakness in Asia to Europe. We’ve actually seen a couple I think three strings have been pulled from Asia to Europe already. Do you think we could start to see that in the trans pack lane and do you think that could eventually give any sort of reprieve in terms of some of the pressure that I guess your competitors are seeing and it could potentially weigh down eventually, the Euro is going to back our results?

It’s hard to know. I think just in listening to other international ocean carriers talk about their results and prospects for the year you’ve got some international ocean carrier saying they think that difficult the market conditions that are difficult now will remain difficult. Others are expressing some hope that things could get better. My own sense is that there continues to be a significant lack of pricing discipline caused by chronic over capacity in the trans pacific trade. So I personally am not very optimistic that we are going to see a market turnaround or if we see it, it will only be for very, very short periods of time. So I personally am not very optimistic and having said that I continue to believe in this environment where that environment which we expect, we continue to have confidence in our own marketing positioning and those are embedded in their own thinking and built into our outlook.

Got you, okay. Just a couple of questions actually around the deck, just to really quickly look at kind of slide 8 and you guys drew up some macroeconomic indicators and we look at some of these maybe not all 5 of them on a continuing basis. It looks like 2015 in sense look like the peak year for a number of these with the exception of residential building permits which obviously you guys are levered to. I am just curious this is something you guys track I am sure on a regular basis. How much of that do you think is kind of natural backward Asian in some of those data points and how much of that is more of a lead indicator that things might plateau?

It’s a good question. I think from our perspective if you look at other pillars of the Hawaiian economy, if you look at let’s say the arrivals or the gross domestic product you see it beginning to flatten out. Those are the functions I think of the sectors that have continued to do well early in the cycle like tourism and broader service related industries have done well early in the cycle. What we haven’t seen are the ones that we track the final three that are more near and dear to our hearts which are constructions jobs and as I mentioned residential and non-residential building permits. Those drive volume growth in the trade and so there is some volatility around non-residential permits. But we continue to believe that the container volume growth is showing up later in this cycle and we believe that there are still legs and it is built into our thinking about how we see the rest of this year and perhaps next year to continue to be in a growth mode.

Got it, now that makes sense. There is one more for me and then I’ll turn it over and maybe for Joel on slide 19 when you guys – the metrics on the deal you adjusted the cost basis to reflect to get a bit the movement or rise in deck which I think you were pretty upfront about in the beginning saying that could move considerably and has moved less than you thought. I am just curious if the 469, is that completely inclusive of all the Puerto Rico shutdown cost?

Yes, you will see as schedule, no sorry, the 469 is transaction value Mike and so when you think of more keen to enterprise value, so when you look at deals look at your multiples, you look at debt plus equity. So that’s debt plus equity that’s it. In our 10-Q which will be filed overnight you can look at from an accounting perspective, there is a number of other items that you look at and you book on your financial statements on a transaction that includes working capital and deferred tax assets and debt break charts [ph] all these other things. And there you will see a bunch of different lot items including the legacy liabilities on the Puerto Rico side as an example. But that is not in that 469 number.

But if I look at what Horizon was putting out in terms of the shutdown, the cash shutdown cost there I think they came in a bit from kind of 85-95, I want to say they were sub 90 but kind of a long way of cash shutdown cost, and it was pension related etc that would not be reflected in that number there?

That is not reflected in that number there correct. That number is debt plus equity at the time of closing.

Right, okay. That complete shutdown, the cash cost the shutdown Puerto Rico, where did that come on a firm basis?

It was pretty much done by this point in time. By the time of May 29 from operational perspective it was done, all that was left was a little bit of equipment sales and then ongoing severance for some employees which is done over the course of their severance which is in most cases 12 months. There is some more severance payments to make and then the other item is just do withdrawal liability which we talked about today which we are booking at as a $61 million number which would be 4.1 million paid over 18 years. So basically all the real business cost except for little bit of remaining severance and the pension withdrawal is already baked into that 469 number because they would have already paid it and took care of it as they shut the business down before May 29, when we close the transaction, does that make sense?

Yes, I just kind of hung in on the total cash cost that are now reflected in that number associated with shutting down Horizon with a long list of pension obligations or severance or what have you?

I mean the total cash cost will be better off to look at. I mean of all the ins and outs including debt breakage cost and other items on our cash flow slide which was this -- the waterfall slide Mike, slide number 22. That number was $495 million.

Okay and we can go through this a bit later but that’s a bump of -- you are talking about a bump of about a third of what was referenced in the Horizon release. Curious as to where whether the remainder lies?

No, I am not following you. A third, a bump of a third of what I am not following your…..

The 85 million to 95 million reference in the Horizon

The biggest component of that which we said at the time of announcement was the withdraw liabilities. So I just told you that was $61 million, and that’s actual amount was $73 million.

Perfect, thank you very much.

And what’s excluding from this also were assets like the NOLs. The NOLs are not included in that number either.

Got you, I believe you break this up. Okay thank you.

Okay thank you.

Thank you. I am showing no additional questions at this time. I’d like to turn the conference back over to management for any closing remarks.