Matson, Inc. (MATX) Q4 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Matson Fourth Quarter 2017 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 be given at that time. [Operator Instructions]. As a reminder, today's program is being recorded. I would now like to introduce your host for today's program, Mr. Lee Fishman. Please go ahead sir.

Thank you, Jonathan. Joining me on the call today are Matt Cox, Chairman and Chief Executive Officer; and Joel Wine, Senior Vice President and Chief Financial Officer. Slides from this presentation are available for download at our website www.matson.com under the Investors tab. Before we begin, I would like to remind you that during the course of this call, we will make forward-looking statements within the meaning of the federal securities laws regarding expectations, predictions, projections, or future events. We believe that our expectations and assumptions are reasonable. We caution you to consider the risk factors that could cause actual results to differ materially from those in the forward-looking statements in the press release, the presentation slides, and this conference call. These risk factors are described in our press release and are more fully detailed under the caption Risk Factors on Pages 11 to 18 of our 2016 Form 10-K filed on February 21st, 2017, and in our subsequent filings with the SEC. Please also note that the date of this conference call is February 20, 2018, and any forward-looking statements that we make today are based on assumptions as of this date. We undertake no obligation to update these forward-looking statements. I will now turn the call over to Matt.

Thanks, Lee, and thanks to those on the call. Please turn to Slide 3 for my opening remarks. Matson's operating results in the fourth quarter are in line with our expectations, with favorable contribution from a higher average rate in China, and higher lift volume at SSAT, were offset by lower construction related cargo to Hawaii and competitive pressure in Guam. Our net income and diluted EPS benefited from a one-time non-cash adjustment of $155 million or $3.62 per diluted share in the fourth quarter as a result of the passage of the Tax Cuts and Jobs Act which Joel will touch upon later. In 2017, we had an exceptional year in our China service, with record volume and higher average rates. We also saw a benefit related to the timing of our fuel surcharge collections and higher lift volume at SSAT led to a significant contribution from our equity investment in the joint venture. Offsetting these favorable contributors were lower volumes in Hawaii primarily driven by weakness in construction-related cargo, lower volume in Guam as a result of competitive pressure, and higher terminal handling costs. And lastly, the full-year net income and diluted EPS results benefited from the one-time non-cash adjustment related to the Tax Act. On the operational front, our new vessel build program remains on track with the first vessel expected in the third quarter of this year. In August, we announced the order of three new gantry cranes and the upgrade of three existing cranes at Sand Island. These cranes, along with the associated electrical and infrastructure upgrades at the site are necessary expenditures to support the new vessels, to bring greater efficiency to our container operation and expect to support the growth and volume over many decades. Lastly, we recently announced that we upgraded our barge shipments in our Neighbor Island operation with the launch of the new Mauna Loa, which is far larger than the barge it replaces. This barge will increase our service levels and bring operating efficiency with swifter and more fuel-efficient transits. Moving onto the outlook for 2018, for the full-year 2018 we expect consolidated operating income to approximate the level achieved in 2017. We expect to face an exceptionally -- we expect to face continued competitive pressures in Guam, and modestly lower volume in China, coming off an exceptionally strong year, offset by modest improvements in our other core businesses. For the first quarter of 2018, we expect Ocean transportation operating account to be moderately higher than the first quarter of 2017, primarily due to the timing of fuel surcharge collections and logistics operating income to approximate the level achieved in the prior year period. Turning to Slide 4, I'll briefly highlight the financial results for the quarter and full-year and Joel will go into more detail on the results and outlook later on in the presentation. In the fourth quarter of 2017, we earned net income of $166.9 million or $3.90 per share compared with $20 million or $0.46 per share in the year ago period. Adjusting for the one-time non-cash adjustment in the quarter related to the enactment of the Tax Cuts and Jobs Act, our fourth quarter net income would have been $11.9 million or $0.28 per share. We generated EBITDA of $62.5 million in the quarter versus $73.5 million in the fourth quarter last year. For the full-year, we earned net income of $232 million or $5.37 per share compared with $81.4 million or $1.87 per share in the year ago period. Adjusting for the one-time non-cash adjustment in the fourth quarter related to the enactment of the Tax Cuts and Jobs Act, our full-year net income would have been $77 million or $1.78 per share. We generated EBITDA of $296 million in the year versus $290 million in the prior year. Now on to our trade lanes services. Turning to our Hawaii service on Slide 5. While Hawaii economy continued to show modest growth in the fourth quarter 2017, Matson's container volume declined 11.1% year-over-year. A little over half of this volume decline was due to the 53rd week in 2016. The balance of the decline was primarily related to lower construction-related cargo at the construction cycle in Oahu transitions from high-rise projects to the master planned community developments in West Oahu. For the full-year, container volume declined to 6.5% year-over-year primarily due to the lower construction-related volume, one less week versus 2016, and the absence of competitive volume gains we saw in the first half of 2016. For 2018, we expect flat to modest volume growth which reflects continued economic growth in Hawaii and a stable market share environment. I'll touch on some of our thinking on the next slide. Slide 6 provides an overview of the key economic indicators forecast by Hawaii for 2018 and beyond. According to the latest UHERO forecast Hawaii GDP growth slowed in 2017, but is expected to pick up slightly in 2018. Unemployment continues to remain lower than the national average and is forecast to improve further. Visitor arrivals hit a record in 2017 and the forecast for continued growth although at a more modest pace. And hotels are expected to see further improvement in the average daily room rate and occupancy rate in 2018. So tourism is doing quite well and the underlying economy looks good. With respect to construction, contracting jobs peaked in mid-2016, and have declined since then as several large scale retail and condo projects wound down and the transition to single-family home development appears to have elongated. Job growth is forecast to continue to decline in 2018 albeit slightly. Despite the continued contraction in jobs growth, construction activity over the next couple of years is expected to remain near current levels as projects working towards completion are offset by new projects making ground. With respect to these new projects, in late 2017, the Koa Ridge project broke ground with the timeline of the first home deliveries in mid-2019, and there are number of residential and mixed use projects working through the planning process that will generate activity in the next several years. Given the recent economic data, and our conversations with developers, we're taking a cautious view on the trending construction activity in 2018, which is we don't foresee any meaningful pickup in construction volumes. On Slide 7, we have a summary of the recent industry announcements regarding the Hawaii Jones Act market. On January 26th, TOTE provided an update on its entry into the market in which TOTE stated that it will put its plan on hold as a result of its Phase 1 technical review of Piers 1 and 2 in the Honolulu Harbor. TOTE conducted a preliminary study of the site's infrastructure which indicated that upgrades and improvements will be required to accommodate the new operations. Due to the scope and timing of the upgrades and improvement, TOTE did not renew the LOI with Philadelphia Shipyard. Following TOTE's announcement, Philly Shipyard announced on January 26 that it is placing TOTE's containership project on hold and is considering alternative projects. Philly Shipyard is suspending substantially all constructed-related activity on these vessels, including design, planning, and procurement work. Moving to our China Service on Slide 8, Matson's volume in the fourth quarter of 2017 was 14.3% lower year-over-year. Near half of the decline was due to 53rd week in the year ago period. Our year-over-year volume result was also impacted by the benefit from the Hanjin bankruptcy in the year ago period. Despite the negative comparisons I just mentioned, China volume came in largely as expected and we experienced a higher quarterly eastbound average rate versus the fourth quarter 2016. For the full-year 2017, our China Service experienced record volume and achieved a sizable rate premium as our transit advantage over the international carriers and the transpacific resonates with customers. Container volume for the year decreased 7.1% year-over-year. One thing to note is that we had several dry-dock return voyages in the year that favorably impacted the year-over-year comparison. For 2018, we expect transpacific capacity to increase in excess of demand which is likely to lead the softness in the SCFI. Despite this macro backdrop, we expect demand for Matson's highly differentiated expedited services to maintain relatively strong with rates as favorable as 2017. Volume is expected to be modestly lower than the exceptional level achieved in 2017, largely due to the negative comparison for the dry-dock return voyage in 2017. Turning to Slide 9, as expected Matson's Guam volume in the fourth quarter and full-year declined year-over-year, primarily due to competitive losses to APLs U.S. flag containership service that increased frequency to weekly in December of 2016. Regarding 2018, we will continue to fight for every single container of our customers business, and only to our long history in Guam, with strong customer ties of five to eight days transit advantage from Oakland and Long Beach, and a dramatically better on-time performance record, we expect to retain an outsized market share. As we expect this to be a highly competitive market situation, we will not be providing any more specific market share comments beyond that goal. Moving now to Slide 10 in Alaska, Matson's container volume for the fourth quarter 2017 was 10.1% lower year-over-year primarily attributable to the negative comparison from the additional week in the prior year period. Approximately 75% of decline was attributable to the extra week in 2016. I'd also like to point out that in the quarter we had a positive contribution from an agreement with TOTE to carry volume during one of their vessels dry-docking. For the full-year 2017, container volume decreased 1.5% year-over-year primarily to the impact of the 53rd week in 2016, partially offset by higher southbound volume from a stronger Seafood season. For 2018, we expect volume to approximate the level achieved in 2017. The economic backdrop in Alaska remains challenging, although improving relative to 2017 and I'll touch on that in a minute. We expect modest improvement in northbound volume to be offset by lower southbound Seafood-related volume due to moderation from the very strong Seafood harvest in 2017. On Slide 11, we highlight recent forecasts by AEDC and the Alaska Department of Labor. The chart on the left shows the employment growth for Anchorage in Alaska and the chart on the right shows the AEDC figures for the population growth in Anchorage. Both charts illustrate the depths of the recession that has taken place in the region over the last couple of years. Employment is forecast to decline modestly in 2018, but AEDC believes that the shedding may reverse course later in the year, and that 2018 will mark the bottom of this recession. From our perspective, we do think a bottoming is near, but that the economic recovery trajectory is too early to tell. Turning next to Slide 12, our terminal joint venture, SSAT, contributed $8.9 million in the fourth quarter 2017 compared to $6.6 million in the fourth quarter 2016. The year-over-year increase was primarily due to higher lift volume. For the full-year 2017 higher lift volume drove a higher contribution from the joint venture of $28.2 million compared to $15.8 million in the year ago period. For 2018, we expect SSAT's contribution to our Ocean Transportation operating income to approximate the 2017 level. We expect SSAT to continue to benefit from the launch of new global shipping alliances as container flows and supply chains are adjusted between West Coast terminals. Turning now to Logistics on Slide 13. Operating income in the fourth quarter 2017 came in largely as expected with the contribution of $4.6 million or approximately equal to the results in the year ago period. The positive contribution from higher revenue was offset by higher costs. For the full-year 2017, operating income increased $8.7 million year-over-year to $20.6 million, primarily due to the inclusion of Span Alaska for the full-year versus the prior year, partially offset by lower intermodal yield. For 2018, we expect Logistics operating income to modestly increase from the level achieved in 2017, and for the first quarter of 2018, we expect Logistics operating income to approximate the level achieved in the first quarter 2017. From my earlier comments on the economic outlook in Alaska, a bottoming of the recession or relative economic improvement should be positive for our Span Alaska business. And with that, I will now turn the call over to Joel, for a review of our performance and our outlook. Joel?

Thanks Matt. Turning to Slide 14 for our financial results, Ocean Transportation operating income decreased $11.9 million year-over-year in the fourth quarter to $20.7 million. The decrease was primarily due to lower volumes across the trade lanes as a result of one less week versus the prior year, higher terminal handling expenses, lower container volume in Guam as a result of competitive losses, and lower container volume in China due to the volume gains in the year ago period related to the Hanjin bankruptcy. Partially offsetting these unfavorable year-over-year comparisons were the favorable timing of fuel surcharge collections, higher average freight rates in China and Hawaii, and a higher contribution from SSAT. The company's SSAT terminal joint venture investment contribution increased by $2.3 million year-over-year due primarily to improved lift volume. Logistics operating income for the quarter was equal to the result in the fourth quarter of last year as higher revenue was offset by higher costs. And EBITDA for the quarter decreased $11 million year-over-year to $62.5 million primarily due to the decline in operating income. For the full-year 2017 Ocean Transportation operating income decreased 9.7% year-over-year to $128.8 million. The decrease was primarily due to lower volumes in Hawaii, higher terminal handling expenses, and lower container volume in Guam as a result of competitive losses. Partially offsetting these unfavorable year-over-year comparisons were higher average freight rates in China, a higher contribution from SSAT, and the favorable timing of fuel surcharge collections. The company's SSAT terminal joint venture investment contribution increased by $12.4 million year-over-year due primarily to improved lift volume. Logistics operating income for the year was $8.7 million higher than the full-year 2016 result primarily due to the full-year of Span Alaska. Lastly, EBITDA increased 2.1% year-over-year to $296 million as the year-over-year decline in operating income was more than offset by an increase in depreciation and amortization. Turning to Slide 15 for a summary of our balance sheet. You will note that our total debt at the end of the quarter was $857.1 million and our net debt-to-LTM EBITDA ratio was 2.8 times. Slide 16 shows a summary of the manner in which we allocated our cash flow generation. For the year, we generated cash flow from operations of $224.9 million, undertook net borrowings of $118.2 million, and withdrew $30.3 million from the capital construction fund from which we used $307 million on maintenance and new vessel CapEx, and $7.4 million on other cash flow items, while also returning $53.1 million to shareholders via dividends and share repurchases. As we mentioned on our prior earnings calls, we experienced a heavier than normal dry-docking period in 2017 and 2016 which resulted in maintenance CapEx coming in higher than our normalized range of $40 million to $50 million per year. While we expect leverage to increase as our Hawaii fleet renewal program progresses, our healthy balance sheet, strong operating cash flows, and continued access to attractive financing sources, provide ample capacity to fund new vessel construction, consider growth investments, and return capital to shareholders. Turning to Slide 17 for a review of our new vessel payments. For the fourth quarter, we had new vessel capital expenditures of $76.8 million and capitalized interest of $3 million for total capitalized vessel construction expenditures of $79.8 million. Currently the two Aloha Class vessels at Philly Shipyard are 83% and 38% complete respectively. For the year, we had new vessel capital expenditures of $244.5 million and $7.5 million in capitalized interest for total capitalized vessel construction expenditures of $252 million. For the full-year 2018 we estimate new vessel progress payments of $389 million which excludes owners' items and capitalized interest. Based on current interest rates, we currently project capitalized interest in 2018 to be approximately $17 million. Moving to Slide 18, we wanted to provide an update on the fleet deployment in Hawaii and the associated financial benefits of the new vessels, including their approximate timing of the benefits. Given the expected cost of the existing vessels exiting the fleet as currently scheduled through 2020, we are reaffirming that we expect $40 million to $45 million in full-year run rate operational cost benefits from the new vessels when comparing to an 11-ship deployment. In the fourth quarter of 2017 we shifted to an 11-ship deployment as a result of the lower volume level in Hawaii. We expect to remain in a 10-ship deployment for the rest of 2018 and until the first Kanaloa Class ship is placed in service in late in the fourth quarter of 2019 at which time we expect to reduce to a 9-ship deployment. The table on this slide shows the various financial benefits of the new vessels. I will walk through the line items but before I want to underscore that the magnitude and timing of benefits is subject to change based upon fleet configuration and in-service timing, and as this analysis excludes the net effects of fuel and any changes in volume. With that said, on a annual basis we expect the following net reductions to cash operating costs. Lower vessel operating cost of $8 million to $9 million, improved auto and rolling stock efficiencies of $7 million to $9 million, and the impact of one less vessel of approximately $13 million as a result of moving from a 10-ship deployment to a 9-ship deployment. These three items total to an annual net operating cash cost benefit of $28 million to $31 million. We currently expect that the bulk of these benefits will begin to be realized following the in-service date of the first ConRo Kanaloa Class ship late in the fourth quarter of 2019 which is when we currently project shifting to a 9-ship deployment. Moving down the table we show the annual cash cost benefit of reducing the fleet from potential 11-ships to the current 10-ship deployment of $12 million to $14 million. Note that this additional benefit would only be applicable if our Hawaii volume was at a level that otherwise would have required in a 11-ship deployment. In addition to these financial benefits, we expect the first dry-dockings of the new vessels to be approximately five years after the in-service dates, resulting in lower dry-dock payments and amortization expense in the initial years beyond 2020. We also expect to have lower initial vessel maintenance expense and CapEx on the new vessels versus the nearly 40-year-old steamships they will be replacing. We expect a reduction in annual depreciation and amortization to be approximately $5 million to $8 million which reflects the difference in depreciation and amortization between the four new vessels in service versus the existing seven steamships they will be scrapped. Now turning to Slide 19. We wanted to provide an initial view on the end -- on the financial impact of the Tax Cuts and Jobs Act. The bottom-line is that we expect the Tax Act to be a meaningful net economic benefit to Matson and its shareholders. In the fourth quarter, we recorded $155 million in total adjustments as a result of the Tax Act which primarily consisted of a revaluation of net deferred tax liabilities. Going forward, we expect to have a lower effective tax rate in 2018 of approximately 28% versus prior accruals of 38% to 39%. And lastly, we expect to pay no federal cash taxes until at least 2023 versus prior expectations about to approximately $25 million per annum in federal cash taxes paid. We view this -- this view is a result of our tax planning work which consists of maximizing the use of the capital construction fund to pay for the new vessel expenditures and offsetting any remaining taxable income with our AMT credits, NOLs, and other tax attributes allowable under the Tax Act. With that, let me now turn to Slide 20, to discuss our full-year outlook. For 2018, we expect Ocean Transportation operating income to approximate the level achieved in 2017 and Logistics operating income to increase modestly compared to the level achieved in 2017. We expect depreciation and amortization to decline to approximately $135 million which is inclusive of approximately $36 million in dry-docking amortization. Consequently EBITDA is expected to decline versus the 2017 result. The company expects interest expense on the P&L to be approximately $22 million. And as I mentioned earlier, we expect an effective tax rate of approximately 28% for the year. For the first quarter of 2018, we expect Ocean Transportation operating income to be moderately higher than the year ago period primarily due to the timing of fuel surcharge collections, and for Logistics, we expect the operating income to approximate the level achieved in the first quarter last year. Lastly, we wanted to point out that in 2017 we had relatively strong fuel surcharge collections in the third and fourth quarters, and we under collected in the first quarter. So quarterly year-over-year comparisons in 2018 should consider the timing of fuel surcharge collections versus the prior year. I'll now turn the call back over to Matt for his final remarks.

Thanks, Joel. 2018 is important year for Matson, the beginning of a new chapter and our company's long history. In the third quarter of this year we expect the arrival of our first of our four new vessels in the Hawaii trade lane and throughout the year we will be progressing on the new Sand Island cranes. By the end of 2020, we'll have invested nearly $1 billion in new vessels and related infrastructure, and those are our commitment to bring the most reliable and efficient operations to the Hawaii Islands communities for many decades to come. I remain confident in our long-term prospects and cash flow generation in each of our core businesses and I undoubtedly believe we're on a good course to create value for our shareholders. And with that, I'll turn the call back to the operator and ask for your questions. Operator?

[Operator Instructions]. Our first question comes from the line of Jack Atkins from Stephens, your question please.

Hey guys, good afternoon or good morning. Thanks for taking my questions.

Hi, Jack.

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

No, I understood the question, Jack. Thank you. These cash operating costs benefit numbers that you see on Slide 18 they would equate dollar for dollar with respect to EBITDA. So what we're showing here is on a similar metric as what we showed you before, and there's really been no change I mean what we wanted to do today is really reaffirm the overall $40 million to $45 million number, Jack. But really stretch the point that that's when comparing the new -- four new ships as a 9-ship deployment to what we said earlier which was comparing it to 2017 deployment of a 11-ship deployment. So 11-ships to 9-ships is still that $40 million to $45 million number. What we're stressing today on this call is that we're not in a 11-ship deployment currently; we're in a 10-ship deployment. So when you compare with the 10-ship deployment, it’s less by that one fleet unit which is the new -- the range, the sub-component range of $28 million to $31 million. So there has been no real change with what we said in the past we're just slicing it more finally and letting you see the difference between 11 and 10, and 10 to 9. Does that make sense?

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

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

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

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

Okay, okay. That's helpful. Thank you again for the time.

Sure.

Thank you. Our next question comes from the line of Kevin Sterling from Seaport Global, your question please.

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

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

Got it, thanks Matt. That’s very good. And I guess touched on air freight, we’re seeing rates that are at levels I haven't seen in 15 years or so, you're having some success targeting traditional air customers kind of with your deferred air services, a deferred air product, are you having some success may be getting new customers to come and board your ships, given where air freight rates are today?

Yes, I mean, I think I would really explain it Kevin as a process that has continued especially maybe the last five or six year as we've -- were continuing to look for ways in which to increase our yield on that service. And that process was very much in place in 2017 and we think some of the fundamental as you've pointed out will continue into this year and beyond and that plays right into our sweet spot. So yes and perhaps if our margin over the Ocean market gets too large we'll depart ways with some customers who can't sustain that large of a premium and say hello to some new customers from new modes that are looking to downgrade some air freight. So again, yes, that the process continues.

Can you tell if you're picking up any traditional kind of like e-commerce customers with the service or is it no, no?

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

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

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

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

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

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

Got it. Now it make sense. That's all I had. Really appreciate your time today and best of luck to you in 2018. Thank you.

Thanks, Kevin.

Thank you, Kevin.

Thank you. [Operator Instructions]. Our next question comes from the line of Steve O'Hara from Sidoti & Company, your question please.

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

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

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

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

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

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

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

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