Q3 2019 Earnings Call
Please turn to slide three for my opening remarks.
That's it's consolidated performance in the third quarter came in as expected.
Ocean transportation was slightly weaker than expected with strong demand in China. We also saw weakness in our Hawaii market and a softer than expected volume in our Alaska service.
And logistics.
Star stronger performance with nearly all service lines, making positive contributions to operating income.
As a result for the first nine months performance and our expectations for the business in the final quarter of the here, we're maintaining our consolidated operating income outlook for the full year 2019.
We expect a slight decrease and the outlook for Ocean transportation operating income provided on the second quarter earnings call offset by a slight increase in the outlook for logistics, despite some market headwinds.
Joel will go into more detail on the financials and 2019 outlook later on in the presentation.
We're also reaffirming the approximately $30 million and financial benefits in 2020 compared to 2019 with a significant financial benefit coming from the reduction in Hawaii fleet deployment to nine vessels, which I will cover in a moment.
Please turn to slide four.
This table outlines our current operational and financial priorities.
And I'll start with progress on the Hawaii fleet renewal.
Our lean is on track for delivery later this quarter and we expect to be placed into service shortly following delivery.
What she enters service, we expect to step down into a nine ship deployment for our Hawaii service and begin to realize the financial benefits of one less fleet unit.
As a result to this fleet transition two vessels are expected to go into reserve status.
The new Matt Sonia remains on track for delivery in the third quarter of 2020.
Next to the sand Island terminal upgrade.
All three of the new gantry cranes were placed in service by the end of the third quarter and this quarter, we've begun the demolition process on for existing legacy cranes.
The remaining infrastructure work to support the new cranes to three retrofitted cranes and other system continues and we expected a mixture cost items in phase one to be complete in the first half of 2020.
Onto the next priority.
Our IMO 2020 preparations continue as we near the effective date of the regulations I want to reiterate that mattson will be 100% compliant with IMO 2020 on January Onest that continue to believe we're very well positioned within our industry.
The second of six vessels to receive a scrubber is back in service so the fully operational scrubber.
The third vessel is now in dry dock and we expect the fourth vessel to be in dry dock in the first quarter next year.
By the end of 2020, we will have scrubbers on eight of the 12 active vessel, serving our core trade lanes and one scrubber kind of reserve vessel.
Our leverage covenant level for the third quarter was below 3.25.
And our trailing 12 of cash flow remains strong to fund the remaining vessel and sand Island terminal investments.
We continue to expect our debt level to peak in the first quarter of 2020 as shortly thereafter, we'll begin to de lever the balance sheet to our targeted average level of low twos.
On the organic growth opportunities front, we continue to pursue a number of opportunities to leverage our network in the Pacific and complement our logistic service.
Within Alaska, we continue to pursue business that could benefit both ocean transportation and logistics lastly, the new span Alaska Anchorage facility opened in October and I'll highlight this more in a few moments in my remarks.
Now onto our trade lane surfaces. So please turn to slide five.
In the third quarter container volume in our Hawaii service declined 2.1% year over year, primarily due to negative container market growth.
Hawaii's GDP continues on a slowing growth trajectory, despite favorable and resilient key economic factors, such as construction activity and visitor traffic and I'll return to this in a moment.
For a full year 2019 outlook, we expect volume to be lower compared to the level achieved in 2018, which reflects less containerized freight volume in Hawaii, and a stable market share.
From our perspective, the Hawaii container market remains flattish within a slowing Hawaii economy.
Please turn to slide six.
This slide summarizes you heros latest economic forecast I will briefly walk through some of the key economic factors.
GDP growth in 2019 is forecasted to remain modest.
But there is a more pronounced slowdown in effect.
Which the chart on the left illustrates.
Population growth for 2019 remains muted, but you hero is forecasting it to stabilize in 2020.
As you May recall population has a direct impact on the growth in consumption as especially of recurring goods that we carry to the islands.
Unemployment rate is forecasted to pick up slightly but it remains at or near cycle lows.
Visitor traffic is expected to hit new record this year, but it is forecasted to modestly declined in 2020.
Arrogant visitor expenditures are forecasted decline this year and next which represents a small headwind for the economy.
Construction activities remained stable at a healthy pace and the activity appears widespread across the islands.
There are large condo projects underway on Oahu, and we're seeing large resort renovation projects on a few of the islands.
Residential building is proceeding across the islands with most of the activity centered on Oahu.
Construction jobs continue the entire to support the current backlog of projects.
As a result, we expect construction activity to remain flat at this higher plateau of activity in the near term.
Although hawaii's economy continues to grow.
Key factors and conditions remained favorable for continued economic growth.
Moving to our China service on slide seven.
Matters volume in the third quarter, 2019 was 3.4% lower year over year, primarily due to the timing of an additional sailing in the year ago period.
We continue to realize a sizable rate premium and achieved average freight rates during the quarter that approximated the level achieved in the third quarter of 2018.
For 2019, we expect this CLX volume to approximate to level achieved in 2018, which is a major achievements since the second half of 2018 in the fourth quarter. In particular was unusually strong due to the pull forward of volume associated with the U.S., China trade situation.
We remain cautiously optimistic that average freight rates for 2019 will approach to healthy levels, we achieved in 2018.
We believe this level of demand is a testament to the strength of our highly differentiated service within a chaotic transpacific trade lane, which at various times in the year has seen numerous blank sailings and port congestion issues.
Turning to slide eight.
Guam container volume the third quarter was down 2.1% year over year within a softer container market.
For the full year 2019 outlook, we expect volume to approximate the 2018 level as the highly competitive environment remains.
Our strategy remains to fight to retain every single container of our customers business.
Given our long history in Guam with strong customer ties a shorter transit time and its significantly better on time performance record, we expect to retain an outsize share in this market.
Moving to slide nine.
In Alaska Matsons container volume for the third quarter 2019 was flat year over year.
We saw a slightly lower lower northbound volume year over year, primarily due to the timing of an additional north bound sailing in the year ago period.
And we saw a modest increase in southbound volume year over year.
Adjusting for the additional northbound sailing in the year ago quarter, we saw modest year over year increase in volume.
Southbound volume was positively impacted by higher seafood related volume, but aggregate demand was lower than expected as the sea food season was weaker than forecast and is expected to be well short of the 2017 levels.
For 2019, we expect volume to be modestly higher than the level achieved in 2018 with higher northbound volume at approximately flat south down seafood related volume.
Turning next to slide 10.
Our terminal joint venture SSH key contributed $8.4 million in the third quarter 2019.
Or $800000 lower than the prior year period.
The decrease was primarily attributed to higher terminal operating cost.
Hartley offset by the timing of some of the additional expenses related to the early adoption of the new lease accounting standard in the second quarter and higher lift volume.
For 2019, we expect SSH keys contribution to our Ocean transportation operating income to be lower than the level achieved in 2018, largely due to higher terminal operating costs.
Actually offset by higher lift volumes.
Turning now to logistics on slide 11.
Operating income in the third quarter 2019 of $11.3 million.
Or an increase of $1.4 million over last year came in stronger than expected.
The increase was primarily due to a higher contribution freight from freight forwarding nearly all of the service lines made positive contributions to operating income.
The quarter, we saw a lower transportation brokerage revenue year over year, primarily due to lower intermodal and highway revenue both of which were negatively impacted on a volume basis by the soft truck priced market.
Operating margin was higher primarily due to greater contribution from higher margin freight forwarding revenue.
Joel will provide details on the logistics full year outlook later on in the presentation, but I'd like to mentioned that or implied outlook for the fourth quarter is muted as we face a period of more difficult comparisons based on the very strong fourth quarter last year, which Joe will explain further.
Turning to the next slide.
I wanted to highlight the new span Alaska Anchorage facility opened in October and we're pleased to have this modern facility built to our specification up and running within 15 months of breaking ground.
As a reminder, we consolidated two leased facilities in Anchorage into this one larger owned facility. This new facility will bring significant operating efficiencies and the capacity for new service offerings to drive organic growth opportunities.
I will now turn the call over to my partner Joel for a review of our financial performance and outlook Alright. Thanks, Matt.
Now onto our financial results on slide 13.
Ocean Transportation operating income for the third quarter decreased 4.8 million year over year to 43.9 million.
The decrease was primarily due to higher terminal handling costs.
Higher vessel operating costs, including the modeling lease expense and lower container volume in Hawaii.
The company's SSH key terminal joint venture investment contributed 8.4 million $4.8 million less than the prior year period.
The decrease was primarily due to higher terminal operating costs.
Partially offset by the timing of some of the additional expense related to the early adoption of the new lease accounting standard in the second quarter and higher live volume.
Logistics operating income for the quarter was 11.3 million or 1.4 million higher than the prior year period.
The increase was due primarily to a higher contribution from freight forwarding.
EBITDA for the quarter decreased 2.4 million year over year to 89.1 million due to lower consolidated operating income of 3.4 million a decrease in other income expense of 1.2 million.
Partially offset by an increase of 2.2 million in depreciation and amortization, which includes drydocking amortization.
Interest expense for the quarter was 6.2 million and the effective tax rate in the quarter with 25.4 million.
Slide 14 shows how we allocated our trailing 12 months of cash flow generation.
For the LTM period, we generated cash flow from operations of 282.4 million and received proceeds from sale leaseback transactions of 106 million from which we used $25.1 million repay debt.
80.6 million for capital maintenance capital expenditures 224.7 million on new vessel, capex, including capitalized interest and owners items, and 1 million and other items, while returning 36.8 million to shareholders via dividends.
Our cash flow remains strong to support investments in our new vessels and the terminal upgrades sand island as well as our other growth initiatives.
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 883 million and our net debt to LTM EBITDA ratio was 3.2 times.
As a reminder, EBITDA we report in our press release and in this presentation is different and lower than the EBITDA calculated under our debt agreements.
We continue to expect leverage to peak in the mid threes in the first quarter of 2020, after which we will focus our strong cash flows on reducing leverage back towards our targeted levels in the low twos.
On an annual basis, we continue to expect about a half a turn reduction in the leverage ratio. After the completion of our vessel program.
As you mentioned on our last earnings call, we're continuing to look at debt capital structure financing alternatives, including title 11 to further optimize our balance sheet.
Turning to slide 16 for review of our new vessel payments.
For the third quarter, we had new vessel cash capital expenditures of 74.6 million and capitalize interest of 3.5 million for total capitalized vessel construction expenditures of $78.1 million.
As you can see in the middle table. The lean is 99% complete and as Matt said delivery of the vessels expected for later in this quarter.
The mats, Sony and remains on track for delivery in the third quarter of 2020 and is 41% complete.
The table at the bottom shows the cumulative and remaining new vessel progress payments for the remaining three months of 2019, we expect approximately 102.8 million and payments and as of today Mattson is paid approximately $72.7 million of this amount.
For 2020, we expect 62.5 million in payments.
With that let me now turn to slide 17 to discuss our full year outlook.
For the full year 2019, we expect operating income for Ocean transportation to be approximately 25% lower than the 131.1 million achieved in 2018 after adjusting for the additional 11 months impact of the vessel sale leaseback transaction of 6.6 million.
For logistics, we now expect operating income to be approximately 15% to 20% higher than a level achieved in 2018 of $32.7 million.
We expect depreciation and amortization to approximate to approximate 135 million inclusive of 35 million for Drydocking amortization.
We expect EBITDA to approximate $270 million.
We expect income expense to be approximately 1 million in income.
We expect interest expense to be approximately 25 million and finally for the year, we expect our effective tax rate to be approximately 26%, including the $2.9 million reversal. We recorded in the first quarter related to the tax Act.
I wanted to note that the full year operating income outlook for logistics I just walked through implies a decline in the fourth quarter compared to the $9.1 million achieved in the prior year period.
We are lapping a strong fourth quarter last year, where volumes and margins in our intermodal and highway businesses benefited from a stronger trucking market and as a result for the fourth quarter. This year, we expect volume and margins in these businesses to not be a strong due primarily to the softer market conditions.
Lastly, Matt earlier indicated we are reaffirming that we expect approximately 30 million of incremental benefit for our vessel and infrastructure investments in 2020, when compared to 2019.
We're also reaffirming that after 2020, we expect approximately $40 million an incremental benefit from these investments when compared to 2019.
With that I'll now turn the call back over to Matt Okay. Joel Thanks.
Well as we look to close out this transition year with color lean entering service, we're making a significant step forward and really realizing our previously mentioned approximately $30 million in financial benefits in 2020 as reminder, will provide the outlook for 2020 on our fourth quarter call in February .
And with that I will turn the call back to the operator and ask for your questions operator.
Ladies and gentlemen, if you have a question at this time. Please press Star then the number one.
Telephone.
A question Nelson.
Are you wish to remove yourself from the Q. Please press the pound key.
Your first question comes from Jack Atkins from Stephens, Inc. Your line is open.
Hey, guys. Good afternoon, thanks, very much for taking my questions.
Hey, Jeff.
So.
Matter Joel I guess just to start off on the incremental benefits to 2020 that you just highlighted in your prepared comments, but.
That 30 million number that that is an EBITDA number is that correct.
Yes, Jack Okay Gotcha so.
Is there a way to think about.
All else being equal like the incremental depreciation that you would.
I just wanted just trying to net that down to the EBIT impact from from those.
From from a new vessels.
Is there when thinking about Seattle.
Yes, I mean, we havent, we havent discussed that element we did earlier this year in in our out in our February call in our annual outlook, we did provide some.
Multiyear outlook Jacko, we thought our depreciation and amortization numbers would be so those numbers are still good we haven't updated does that fill our proximity limits for DNA. So the way I would encourage you to look at is look at the $30 million benefit we've talked about here recently as EBITDA benefit and then continue to use what we have out there in our disclosure around DNA.
Okay perfect that makes that makes sense, you'll thank you and then.
Not to say too much from the line items would just kind of it.
I think it's important thinking about the moving pieces is there way to kind of think about interest expense and how that flows now that the capitalized interest income is falling off into next year.
Yes.
Thats a great question, Jack Thanks for that and so we've been purposely highlighting last couple of years, how much capitalize interest there is each quarter. So you can see this past quarter was 3.5 and 3.3 in Q2 to 4.7. So those amounts will begin to decline when that Lurlene is delivered here in the fourth quarter.
It will only be capitalizing interest on the last vessel that Sonia and then as of the third quarter of next year with them at Sony has delivered that capitalized interest will totally go away. So.
Interest expense going through our income statement will increase commensurately for that no longer being capitalized so that you've got to the right way to think about it okay. That's great and then.
I guess.
A bigger picture question just on on the Ocean Transportation segment, and I guess, when we look at.
The implied operating income for this year, it's right around $100 million, maybe just south of $100 million.
You have to go back.
Really to 2011 to sort of find an operating income sub $100 million and I get it I know that next year, we've got the new vessels coming in and that should definitely help with the financial performance I guess theoretically but.
When when I guess as you guys look at at the organization with an Ocean transportation are there maybe some other areas where there are some potential efficiencies to be gained or caustic and maybe be.
Trend just just an effort to help improve profitability, while the Hawaii market sort of finds its footing.
Yes, it's a I would just say jackets and ongoing process and clearly as you've heard us say throughout the year, Hawaii has been a disappointment for us we expected more growth, we'll have more comments about 2020, but the environment looks relatively flattish we said that on the call. So the question is.
What what are we as a management team going to do given the more muted prospects for Hawaii, it's likely that we're going to continue to look to grow and is likely going to be outside of Hawaii, and what asset and overhead and investments are required.
Our yet to be determined but.
For example.
You saw us redeploy the came on a HILA one of the new Aloha class vessels into our CLX service in part it's to cover the.
The scrubber installations that were in the middle of but to the extent for example that the market remains muted in Hawaii does it have a more permanent place in our CLX. Those are the kinds of things, we'll look at to make sure that we've got our assets deployed in such a way that reflects our maximum ability to leverage those assets and then the ongoing blocking and tackling.
Operating costs happens every day behind the scenes here and we're always looking for ways in which to become more efficient and to operate very effectively so I would say thats more of an ongoing process. Okay. Alright got you and then last one from me and I'll hand, it over but you know with IMO 2020 it.
Just to wrap around the corner.
You were talking about it for so long and hard to believe it's almost here but.
Yes, Matt just.
Be curious to know what you're hearing I.
Found it interesting that.
We really haven't seen the.
Changes in prices within the distillate market.
Any significant magnitude.
I'm just curious.
Why you think Thats the case and just what you're hearing out there if its enforcement if it if it's adoption.
Time over 2020, I'm just curious what's what's going on there why you think we haven't really seen fuel price fuel prices really change on a much given I think thats been the expectation now for quite some time.
Yes, our sense is we're just getting into it like if you look at.
Current pricing contractual spreads mattson has.
We think we're well positioned we've dealt with all the suppliers that provide different different grades of fuel depending on our fleet and as you know part of it will be.
Hi, Russell sulfur content for the using our scrubbers and.
Our our newer ships will be using the compliant fuel we secured all those sources feel really good about them. There our current spreads that we see in those in those markets, which are which are consistent with what we're seeing around the world I think.
What you're going to see here in the last or just in the next four weeks or six weeks or even sooner.
In the case, so the international shipping lines during the process of taking vessels out of service and removing the noncompliant fuel.
So you're going to start seeing increases people are starting to purchase as fuel now. So I think we're just at the very beginning of it.
And again, you might have noted debt.
Mattson had announced a fuel surcharge increase.
From 32% to 35% in our Hawaii, and Guam trade, we actually took fuel prices are surcharge down 2% in the Alaska trades, because we're going to continue to burn the higher residual fuel content given the scrubber installation. So we've already made the step that we need to make we've got.
Very good ability in our other trades, including our trying to trade to recover the higher fuel costs. So I think we'll start to see it whether the market accepts it in the larger dynamics on the international side remain unclear, but mattson feels really good about the investments we've made and we feel really good our ability of.
About our ability to recover fuel through our various surcharge mechanisms. So.
Let's wait and see but.
Time will tell but we feel really good about.
The position, we find ourselves and not absolute you guys are in a fantastic spot to take advantage of market dislocations on that Thats why I was just curious okay guys. Thanks again for the time.
Okay. Thank you thanks Jack.
We also have Ben Nolan from Stifel. You May ask your question.
Great has not favor management team.
Good Ben how are you.
Don't tell anybody that doesnt want to get out.
The.
I I'm still trying to wrap my head around.
Hawaii, a little bit and the fact that the GDP is growing but the container volumes aren't.
Do you think that there is any element of a shift in mode at all and I know in the past would talk little bit about aviation curious if theres any airfreight.
Dilution per se, but also given sort of all the the trade wars and we've seen west coast volumes flat to slightly declining coming in from international.
Is there maybe more direct cargos coming in directly into why from Asia or elsewhere or is consumption just lower.
How do you feel that.
Yes, So we took a deep dive it's a great question and we said we've been disappointed and this is our one of our core markets right. So I think it's been first of all we looked at airfreight there is.
And Amazon effect of of.
Amazon Prime and so there is a very small slice of the market that is using prime like everywhere else, but its limited to.
Container a day equivalent of cargo that goes into Hawaii. So it's very small.
We are similarly keep it up keep an eye all the international freight volumes that come directly from Asia into Hawaii There've been no discernible changes in volumes.
At all.
But we've seen.
Some of our large customers be more careful about inventory management.
We've seen.
A little bit of slowdown in Theres, a small net migration of people output just small on the margin.
Construction has been a little slower but in talking to our construction customers who are moving in they feel they personally in their businesses are projecting towards a pretty solid 2020 and based on what's in the backlog as we mentioned in our comment so.
It's it it it's a little unclear about what's going on it's probably a combination of factors.
Including of course in overall slowing in the growth rate, but absent to us recession or some other shock, we're continuing to expect to flattish environment. We're not saying. Okay. This is the beginning of a big slide we're careful not to say it because we don't believe it none of our customers are telling us that and thats not what the economic stats are telling us either so it is but I acknowledge is a bit of upon.
I will.
Okay.
Now switching over to.
Alaska little bit it's.
Span apparently was that the the real Rockstar, maybe the whole company last quarter.
And that's despite the fact that the Alaska volumes were sort of unimpressive.
It is in and I guess, the new cross dock doesn't really even kick in until this quarter is it.
Market share gains is that business.
Doing anything different or is that trajectory of that business different than maybe thought that it was.
Well I guess.
First of all we've seen increases across all of our lines of business, except the rail and truck brokerage in the last quarter as we started to see the that overall market change, but if you were to look at the income statement by segment, which you can't because we don't show to you.
It all of our lines are contributing and year to date above last year, including span Alaska, which of course is a large part of the now consolidated operating income and span has done well spend.
Has continued to perform well just as a.
A reminder, when we acquired span Alaska couple of years ago. They had in the previous year before we acquired them purchase another Alaskan freight forwarder PPA Jeff.
And.
They were continuing to wring out the internal efficiencies.
On on the on the mainland side. We're also now taking the second step to consolidate our two warehouse operation in Anchorage to a single warehouse there, but I would say they've continued to perform as or better than we expected and they have performed when we acquired the company a few years ago, we knew at the time that the state of.
Last go is likely going into a recession, which infected occur.
And the volumes there have been good but I think it's a lot of factors I mean.
Clearly span has done well, but we've got a lot of what well performing units and even within our.
Domestic brokerage lines of business, we've seen reductions in volume, but the margins in our brokerage businesses have remained pretty healthy which has helped our overall contribution as well.
Okay. That's helpful in and just sticking on that for second the.
The new cross dock.
In Alaska that the impact from that is.
Part of the 30 million or 40 million in 2021.
It's all incorporated in their correct.
No that's not in that 30 million dollar number.
Okay.
Is there any way to maybe quantify that is it just make you a little bit more efficient or or.
As the material in terms of.
It's not it's not going to immaterial in 2020, we still have a couple of the existing leases that will that are scheduled to continue in 2020. So we're not going to getting an essay immediate benefit on the lease expense side, we'll get some benefit on the efficiency side and on the final delivery side, but it's not it's not something material that we.
Well of course include what those amounts are in our annual outlook in February but it hasn't been such a big number that we called it out in advance, but but I would say this is Matt one of the what are the things that we are excited about is our ability to serve our customers faster make that freed.
Have favorable earlier upon delivery. So there's a lot of operational benefits that will be seen from our customers in that business, which I know our team at span are very excited about.
Great. Okay I appreciate it thanks guys.
Thanks, Matt Thanks.
Thanks, Kevin Sterling from Seaport Global Securities.
Thank you.
And gentlemen.
Hi, Kevin Kevin.
Matt if I can follow up a little bit on Ben's question talking about.
International and then your China service and International Air freight has been pretty weak this year.
And your China container volumes were down I think looks like 3.4% year over year.
We kind of think when I think of your China services businesses to deferred air freight.
Offering.
Is there a correlation there do you believe between your your so the weakness you saw in your China service in terms of volume as it relates to kind of what we're seeing in the international Air markets.
I think what Youre seeing is.
The numbers are a little misleading in the sense that we had an extra sailing in the prior year quarter.
That we would that we didnt have this quarter, but otherwise we were full every week okay. So the.
We could have said that a little differently, but what we're seeing is when we looked at 2018, and we said because of all this tariffs and deadlines and we just saw this unbelievable contribution.
From.
From the check from our trying to trade lane and what you're hearing to say now is that we now believe that both volume at a rate have approached or will be the same as the unbelievably. Good year. In 2018 was repeated in 2019 and so we're seeing a continued strong interest in move.
Even cargo out of airfreight.
And of course, we have our traditional garment electronics, we're seeing e-commerce and a lot of stuff is looking for ways to move out of airfreight into our deferred air freight product. So I don't want to say, we're beating them off with the stick.
But but.
The demand has remained very buoyant.
I think are doublet, that's what our corporate communication team would encouraged me to say instead of beating them up for the stick.
Okay. No. That's awesome. That's very helpful. Thank you that I think thats a very good explanation.
And you touched on this apologize if you have because some of the weakness we saw in Alaska. This quarter do you think its combined the Q3 or could it linger.
Well, there's such a strong seasonal component to the Alaska trade right. It's the second and third quarter, it's to the tourist season, it's the construction season.
And so I think we we've seen so I would say a more normal sort of looking third quarter going into the fourth quarter, nothing pops out at us and despite the weaker volume we feel really good about our position in the Alaskan market and the investments we've made.
And and.
It's time will tell I know, we're talking to a number of our customers, including the north slope folks and there's a lot of investment that's going on in the north slope and we're not necessarily a large participant in the north slope market, but the entire state benefits from the investments that go our go through that Anchorage gateway.
Through to the north slope so.
While there is questions about the overall economy, the north slope remains a silver lining to the states the economy.
Southbound I would say Conversely has been a little disappointing.
It's an every other year fishing season based on mother nature.
And the southbound volumes, partly due to a lower Flynn fishing harvest.
And catchment.
In the markets, we participated in than we expected. If there was a downside it was just a little bit in the disappointment there, but all overall, we're feeling okay are pretty good about where we are in Alaska.
Got you okay.
Lastly on logistics, obviously, you mentioned freight forwarding and span just.
Really being the star there, but also seems like you took advantage of.
But some of the capacity looseness that they're in truck brokerage and intermodal and bulk capacity.
Much cheaper and better so do you think kind of what we're seeing in logistics as you scaled that business.
Are you guys getting better at buying capacity or is it just you're taking advantage of kind of what the market gives you.
I think it's I mean, I'd like to say the former but it's more of the latter I think the market has changed I think a fewer and asset base truckload guys. We've seen through other quarterly reports those guys have taken to a pretty hard turn on their margins and volumes.
In the markets in the same on the rail side there was almost no peak season surcharge on the rail network this year.
But for us in our business the margins have held up better than the asset base overall rates have been in the market, so well and as we all know the peak season has been relatively muted.
And but I would say.
The benefit and I've said this a few times is we had through the last cycle the benefit of resetting our margins.
On all that rail and truck brokerage business and and moving away from some of the very thin margin business and.
The management team at maps, and logistics and Rusty and his team like where they are now of course, the market is going to change and we'll have more to say about the to the market in 2020 at year end earnings call and it's likely to be different but we'll see what happens, but I think overall, we're feeling pretty good about our position and where we are as we end the year.
Got you, Okay, I'm relieved electrical give all the credit to Jerome.
I know Jerome he is behind the scenes guided charge of everything basically.
[laughter] he's only good jobs, but that's all at the thanks for your time today.
Okay, Kevin Thanks.
And they also have Steve O'hara from Sidoti and company. Your line is open.
Hi, good afternoon.
Hi, Steve Steve.
Hi, just.
I guess going to the outlook for logistics. So in third quarter, you had good margin improvement on declining revenue and then yes, I guess it we're looking for kind of.
You know.
Decline in operating income in the unit and I'm, just kind of curious what the dynamic between Threeq and Fourq you is it because of the way. The I mean, I know you had a very strong year last year.
But as it is that kind of the normal seasonality in the businesses that's what's happening.
Kind of.
As well as having a real good year last year.
Yes that is if the seasonality is a factor and so it's both those things Steven So last year, we declined just a little bit Q3 into Q4 at about $800000. This year, probably a little little bit more remember.
Span is very big piece that business and span is more seasonal just given the nature of the Alaska business than our than the traditional brokerage businesses. So it is going to on average introduce a little bit more Q1 in Q4 seasonality and logistics relative to before so that's definitely a factor on the softening in the brokerage businesses that we talked about as the other important.
Factor heading into this year's fourth quarter.
Okay.
And then maybe on.
The financial benefits commentary it you're just curious in terms of how that translates into cash flow I mean, it would seem like.
Taking out interest cost from that should get you to pretty close to.
Operating cash flow and maybe if you can tell me if your cash that you expect to be a cash taxpayer.
And if not when that might become a factor.
And then just talked about maintenance capex going forward, maybe on a long term run rate as opposed to the current program.
Well.
It looks like you guys should generate good good free cash flow.
In 2020, and 2021, but if you could just kind of delve into that a little bit.
Sure sure happy that always happy to talk about cash flow.
And we we still expect that strong cash so we've been talking about for awhile. So the first part there the 30 million that really should translate into EBITDA and directly to cash flow and the reason is the as most of that's coming from capital we've already put out the door. So if you look at now ratcheting down from 10 ships to nine well that's because of the vessel expenditures themselves.
We look at the scrubbers that capital that would have gone out the door for the most part and then we've got some of that still in 2020, but after the scrubbers are installed and Theres no more capital going out the door. So it's coming from efficiencies in our rolling stock.
And battery capacity utilization in our garage, so thats tied to the capital the vessels themselves and then the other the other items the cranes that we've invested in sand island. So.
Most of that is all behind us and so we're ready to reap the benefits. So think of the 30 million is translating pretty very very high pace into free cash flow.
And the second part of your question around maintenance Capex, we still we still feel good 50 million there'll be some years, where as higher there'll be some years, where it's lower but thats a good run rate for us as we look at the next 510 years and if we see that changing we'll certainly update investors really still feel good that when we get through this period of time and finalize the longer.
First item, which is the sand island terminal upgrades that will be landing around that 50 million dollar free cash flow number. So when you look at when you look at the upside on the EBITDA and then getting back at some point.
To the 50 million of maintenance Capex and the other item is the cash taxes point that you mentioned, we believe that still about two years away before we're going to be a cash taxpayer. So you're looking at very strong free cash flow numbers that back back half of 2020, continuing in 2020 122 and beyond.
Okay, and then maybe just on.
You use that cash flow I know you want to kind of you lever relatively quickly and then I mean so.
When you begin to de lever is or point at which you start to divert more too.
Share repurchases things like that maybe increased size. It did a size of the dividend is it based on is there kind of leverage range you can talk about.
Yes, I mean, the leverage right in the target leverage ranges that low twos and so we do want to get back to that level.
We also believe long term and rewarding our shareholders with an increasing dividend as we earn at Threepi free cash flow generation. So that will be a part of the equation. We've also said, we're not opposed to special onetime dividends and we've done share buybacks in the past so what you're going to see from US is looking at all those different alternatives.
Maximize the benefit to shareholders from a long term cash flow, our IC perspective, and over overall shareholder value perspective, So all those things will be on the table for us to look at.
What's the best equation as we look at 2020 120 to 20 324 those years as our leverage comes down and begins to glide path towards the low twos, where you want to go or or lower into the ones. We'll look at those other return of capital alternatives.
And then we talked a lot about M&A and the priorities and M&A and the key there is finding things that fit to it fit for us, but also being disciplined and not not stretching ourselves to make sure. We're we're very disciplined with respect to our financial criteria and set criteria. So that's the way that's the way we've articulated how we'll think about capital allocation in the years to come.
That makes sense, yes, I know that helps alright. Thank you.
Okay. Thanks Steven.
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Okay. Operator, Thank you Hey, we'll look forward to speaking with everyone at our yearend earnings call in February we hope everyone has a safe and enjoyable holiday period, if we don't talk to you before Aloha.
Ladies and gentlemen that concludes today's conference call. Thank you all for joining the accrual.