Q2 2019 Earnings Call
Please also note that the date of this conference call is August seven 2019, and any forward looking statements that we make today are based on assumptions as of this date.
We undertake no obligation to update these forward looking statements with that ill now turn the call over to Matt.
Thanks, Lisa and thanks to those on the call.
Please turn to slide three for my opening remarks.
Mentions performance in the second quarter was mixed with Ocean transportation coming in below expectations and logistics continuing its good performance and coming in stronger than expected.
Within Ocean Transportation, we saw continued strong demand in China.
And improve performance at Alaska.
But these solid contributions were outweighed by the weaker than expected, Hawaii market and a lower contribution from SSH key.
Which was hurt by additional expenses related to the early adoption of the new lease accounting standard and higher terminal operating costs.
We expect the additional expense from the lease accounting adoption to reverse in the second half of the year.
To be clear all of our trade lanes performed as expected except for the shortfall in Hawaii, which I'll discuss later.
And logistics, we continue to perform well with all service lines, making positive contributions to operating income.
As a result of the first half performance.
Updating our outlook for the full year 2019.
We are lowering our outlook for ocean transportation operating income.
And we are raising our outlook for logistics.
The net result is that we now expect to EBITDA outlook for the year to be approximately $18 billion lower than the previous outlook. As a result of continued weakness in the Hawaii trade lane as well as higher operating costs in the SS 80 in the second quarter that are largely behind us.
We view 2019 as a transition year as we prepare for IMO 2020, and migrate from a 10 ship fleet servicing Hawaii to nine ships and begin to benefit from one less vessel.
We remain confident in achieving the approximately $30 million in previously mentioned annual financial benefits from the new vessels when they were all in service.
For 2020, we expect to see the majority of the financial benefits from the new vessels and to realize the financial benefits from other recent vessel infrastructure and infrastructure projects, which in total will result in approximately $30 million and financial benefits compared to 2019.
In 2021 and thereafter.
We expect the full year run rate of those total investments to produce approximately $40 million of annual financial benefit compared to 2019.
Joe will go into more detail on the financials and the 2019 outlook later in this presentation.
Please turn to slide four.
This table outlines our current operational and financial priorities and I'll start with the progress on the Hawaii fleet renewal, we christen the lurleen on June 15th in San Diego and the vessel remains on track for delivery in the fourth quarter of this year.
Construction of the map Sony that Sonia.
Is on the building ways at NASSCO when it started and it remains on track for delivery in the third quarter of next year and lastly, both the Aloha class vessels are performing to our expectations.
Next to the sand Island terminal upgrade.
We received our three new gantry cranes in April and expect them to be in service by the end of the third quarter.
The remaining infrastructure work to support the new cranes, the three retrofitted cranes and other systems continues and we expect the major cost item in phase one to be completed in the first half of 2020.
Our preparations for IMO 2020 continue as we near the effective date of the regulations and I continue to believe we're very well positioned.
The first of the six vessels to receive a scrubbers back in service.
With a fully operational scrubber.
The second vessel is now in dry dock and we expect the third vessel to be in Drydock later this year.
The remaining three vessels in the program will receive scrubbers next year.
By the end of 2020, we'll have scrubbers on eight of the 12 active vessels, serving our core trade lanes and one scrubber on a reserve vessel.
Onto the next priority our leverage covenant level for the second quarter remain just below 3.0, and our trailing 12 month cash flow remains strong to fund the vessel and sand Island terminal investments.
We continue to expect our debt level to peak in the first quarter of 2020 and shortly thereafter, we'll begin to de lever the balance sheet.
To our targeted levels of the low twos.
On the organic growth opportunities front I wanted to highlight two important developments. The first one is we made a decision to shift the chi monarchy level to the CLX service in light of the muted growth expected in the Hawaii market.
This repositioning will accomplish two things.
It will help relieve CLX vessels entering drydock for scrubber installations.
Which will consequently bring a bit more capacity into the CLX service during a seasonally strong period.
Added better aligns capacity and demand in the Hawaii trade Lane.
The U.S., China trade situation is likely in the short term to create volatility in the Trans Pacific Trade Lane.
And we tend to outperform in unsettled environments.
After the lurleen enter service and we stepped down to a nine ship fleet in Hawaii in the fourth quarter of this year.
We will have the option to reposition the Daniel K. in no way to the CLX, depending on the outlook for the Hawaii market and the US China trade situation at that time.
The second development, we briefly mentioned on our last earnings call. Our SSH key joint venture picked up an additional terminal in Seattle during the quarter I'll discuss SS 80 operations in Seattle later in this presentation.
Turning to slide five.
As I mentioned, a moment ago, we christened the lean on June 15th.
At the NASSCO shipyard.
It was a special event for all involved including our employees, who put in countless hours in the development of the kind of lower class vessels, we look forward to taking delivery of the vessel later this year.
Now onto our trade Lane services. So please turn to slide six.
For the second quarter in our Hawaii service container volume declined 2.3% year over year, primarily due to negative container market growth.
We're certainly disappointed that by the weaker than expected performance in the market as the key economic indicators remain largely favorable and the GDP of Hawaii continues to grow but at a slowing pace I'll go into more detail in a minute about where what we are seeing in Hawaii.
For our full year 2019 outlook, we now expect volume to be lower than the level achieved in 2018, which reflects less containerized freight volume in Hawaii, and a stable market share.
Please turn to slide seven.
I want to spend a few minutes moments discussing what we're seeing in the Hawaii market in light of the second quarter results.
On the less side of the slide our select Emick economic statistics from New Heroes second quarter report.
Some of which we provided on the first quarter call.
The trends noted in this table are mixed and we believe reflect a slowing economy.
We believe the trends will continue and for some indicators, we expect more short term pressure.
As the economy continues to slow.
As you May recall, our west on container volume is primarily driven by consumption and replenishment construction activity and population growth consumption and replenishment has impacted positively or negatively by trends in tourism, including visitor arrivals and expenditures as well as the population spending which is influenced by a number of things, including disposable income employment inflation to name a few.
But Hawaii is experiencing today is record tourism arrivals.
The aggregate and per visitor expenditures are declining and this directly impacts consumption and replenishment.
Furthermore, the population growth has been muted in both civilian population and the armed forces, which also has a direct impact on the growth and consumption of recurring goods of carry to the islands.
Anecdotally, we saw our retail customers in the second quarter adjust to this slowing economy as aggregate consumption flattens.
We expect the trends in consumption and replenishment to persist in the short term.
Construction of the state has remained stable at a relatively high plateau of activity.
This construction cycle is unlike the previous boom and bust cycles and real estate.
This cycle started with meaningful condo development on Wahoo and little to no activity on the neighbor Islands.
Today, there is still some condo development and neighbor island construction has been slower to start but is occurring.
At this point in the cycle, we expected the construction environment to shift from condos to master planned residential communities, but this development has been more gradual than anticipated given the ongoing acute shortage of primary residential housing.
Nevertheless, we expect construction activity to remain flat at this higher plateau of activity in the near term.
In summary, Hawaii container volume in the second quarter was not what we expected.
And the slowing economy present, some headwinds for growth.
But the trajectory in volume we've been experiencing for the last several quarters and anticipate for the rest of the year and the core westbound market is around flat.
This flat market view as going forward as the primary driver.
Two our downward revision of approximately $18 million in annual 2019, EBITDA that I mentioned earlier and Joel will comment in his section of the financial report.
Moving on to our China service on slide eight.
Matsons volume in the second quarter 2019 was 2.5% higher year over year. We also continue to realize a sizeable rate premium and achieved.
Average freight rates.
Over the quarter that were moderately higher than the second quarter of 2018.
We believe volatility and transpacific trade lane capacity and demand will continue into the second half of the year as cat capacity adjusts to tariff related demand changes and the realities of the coming IMO 2020.
With respect to Mattson, we expect another strong year for madsen's highly differentiated service within the volatile landscape.
We expect the CLX volume in the second half of the year to be lower than the strong level achieved in 2018 as volume normalizes to more traditional levels of activity.
As we noted before the third and fourth quarters of 2018 were exceptionally strong due to the pull forward of volume associated with the us China trade situation.
As for average freight rates, we are up against a difficult comparison in the second half of the year as last year was exceptionally favorable due to the U.S., China trade situation, but we remain cautiously optimistic that the average fully freight rates for the year will approach the healthy levels achieved in 2018.
Our updated CLX outlook includes the effect of adding the kind of on a HILA into the CLX fleet.
It's important to note that this 2019 outlook is predicated on a neutral outcome.
To the us China trade situation.
Turning to slide nine long container volume in the second quarter was flat year over year and the overall container market was also essentially flat.
For the year full year 2019 outlook, we expect volume to approximate the 2018 levels 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 significantly better on time performance, we expect to retain and outsize share of the market there.
Moving to slide 10.
In Alaska Matsons container volume for the second quarter, 2019 was 8% higher year over year due to the timing of two additional northbound sailings adjusting for the additional sailings in the quarter, we saw a modest year over year increase in volume.
The container market and Alaska also grew year over year as economic conditions, and Alaska continue to improve.
For 2019, we expect volume to be moderately higher than the level achieved in 2018 with hired northbound volume supported by improving economic conditions in Alaska and higher southbound seafood related volume due to a stronger seafood harvest level than in 2018.
Turning to slide 11.
The Anchorage Economic development Corporation or AGTC recently released its three year outlook. There are a number of positive developments, taking shape in Alaska as economic recovery, but the ultimate trajectory will be greatly influenced by state policy decisions to address the budget.
Certain industries that were most affected by the oil recession or on the rebound supported by increased activity on the north slope.
With our other areas of the economy kind of me that if not participated in the recovery as a result of state budget considerations.
We remain cautiously optimistic about the economic recovery as we see increased activity from our customers, but we fully appreciate the fragility of the recovery as a result of the fiscal situation.
Turning next to slide 12.
Our terminal venture SS 80 contributed $900000 in the second quarter of 2019 or $8.2 million lower than the prior year period.
The decrease was primarily attributable to additional expense related to the early adoption of the new lease accounting standard and higher terminal operating costs for the quarter SSH keys us slightly higher lift volume compared to the prior year.
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, partially offset by higher lift volume with lift volume expected to be a benefit in the second half of the year.
From.
Terminal expansion and the new customer in Seattle.
With respect to our previous outlook, we expect approximately $5.8 million in lease related cost to reverse and be a benefit to SSH keys results in the second half 2019.
In summary, despite the recent challenges of higher terminal operating costs and the additional expense related to the early adoption of the accounting standard we expect the performance at SS 80 in the second half of the year to be much closer to the strong second half of last year as each of its terminals remain well position.
Please turn to the next slide as I wanted to briefly discuss the specific terminal plan in Seattle and some recent changes that have occurred.
The map on this slide shows the port of Seattle with the key terminals.
Matsons moved terminal fiber T. Five in the second quarter is part of a multistage plan to organize operations at a few terminals.
The first step was for mattson to move to T. Five to facilitate the movement of the ocean other ocean carriers to new locations. Some of the users of T. 18 were moved to T 30, and users at T 46 were moved to 18.
As of July Onest SSH key is operating at three terminals in Seattle with opportunities for growth.
Particularly at T, five which is being renovated to accommodate some of the largest ocean vessels.
As a result of the reorganizations SSH key NAV has interest in all of the container terminal in Seattle and one terminal in Tacoma, We look forward to the opportunities. This reorganization presents.
Turning now to logistics on slide 14 operating income in the second quarter of 2019 of $11.3 million or increase of $1.8 million over last year came in stronger than expected.
The increase was primarily due to higher contributions from freight forwarding and transportation brokerage.
But similar to the first first quarter all the service lines posted year over year contributions.
Span, Alaska performed well as a result of improving economic conditions in Alaska.
Although logistics quarterly revenue declined year over year, its operating income increased and operating income margin improved quite significantly to 7.9% for reasons, which I'll touch on in a moment.
In the interest of time I'll skip over the logistics outlook, which Joel will provide later on in the presentation. However, I did want to provide a stat status update on a couple of organic projects that we've mentioned on previous calls first the new span Alaska facility in Anchorage is coming along nicely and we look forward to its opening in the fall.
The new facility will be state of the art and built to our specifications and needs to some extent and we will continue to support our leading position in the freight forwarding market in Alaska.
Second 110, new 53 foot boxes for intermodal program will be placed into service this quarter and we look forward to the opportunities this affords us with customers.
Turning now to slide 15.
Since our acquisition of span Alaska in the third quarter of 2016, the operating income and margin for logistics has increased quite significantly in the last 18 months all of our lines of business and logistics have been delivering solid contributions driving operating income and margin to all time highs.
Most recently.
Operating income has increased in the face of declining revenue and I wanted to spend a moment on this.
In the second quarter of 2019 logistics revenue declined primarily due to lower transportation brokerage.
Partially offset by revenue gains in freight forwarding.
Within transportation brokerage, we saw the effect of lower truck pricing impact our intermodal highway business volume, but this did not translate into lower margins for us.
In our freight forwarding business to Alaska has relatively higher margins than the other business lines and logistics. So it was also a contributor to the higher operating income for the rest of the year. We expect similar consists conditions to persist.
With transportation brokerage revenue challenged but margins to remain favorable.
And with that I will turn the call over to my partner Joel for a review of our financial performance and outlook Joel.
Thanks, Matt.
Now on to our financial results on Slide 16.
Ocean Transportation operating income for the quarter decreased $16.8 million year over year in the second quarter to $19.7 million.
The decrease was primarily due to higher vessel operating costs, including the model a lease expense.
A lower contribution from SSH key.
Higher terminal handling costs and lower container volume in Hawaii.
Partially offsetting these unfavorable year over year comparisons was a higher contribution from the Alaska service.
And higher average freight rates in China.
The company's SSH key joint venture contributed point $9 million or $8.2 million less than the year ago period. The decrease was primarily due to additional expense related to the early adoption of the new lease accounting standard in the quarter as well as higher terminal operating costs.
On a year over year basis about a third of the 18.
About a third of the $8.2 million decline is attributable to these lease related costs, most of which will reverse in the second half of the year.
However, when compared to our previous outlook, we expect approximately $5.8 million and lease related costs or approximately 10 cents per share to reverse and be a benefit to SSH keys results in the second half of 2019.
For logistics.
Operating income for the quarter was 11.3 million or 1.8 million higher than the year ago period. The increase was due primarily to higher contributions from freight forwarding and transportation brokerage.
EBITDA for the quarter decreased $14.4 million year over year to $64.9 million due to lower consolidated operating income of $15 million, partially offset by an increase in other income of $2.4 million, an increase of $2.2 million and depreciation and amortization, which includes dry dock amortization.
Interest expense for the quarter was $6.1 million or 1.5 million higher than the first quarter. This year largely as a result of the come on a HILA entering service in the quarter and the capitalized interest associated with the vessel moving into interest expense on the piano.
Lastly, the effective tax rate in the quarter was 28.4%.
Slide 17 shows how we allocated our trailing 12 months of cash flow generation.
For the LTM period, we generated cash flow from operations of $294.1 million.
Receive proceeds from sale leaseback leaseback transactions of $124.6 million and had other positive cash flows of $3.3 million from which we used $87.9 million to repaying debt.
$75.5 million on maintenance, Capex and $202.4 million on new vessel, capex, including capitalized interest and owners items.
While returning $36.3 million to shareholders via dividends.
In short our cash flow remains strong to support investments in our new vessels and the terminal upgrade and sand island as well as to support our other growth initiatives.
Turning to slide 18 for a summary of our balance sheet you will note that our total debt at the end of the quarter was 844.6 million and our net debt to LTM EBITDA ratio was three times.
As a reminder, the 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 the leverage ratio 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 of the low twos.
On an annual basis, we continue to expect about a half a turn reduction in leverage ratio. After the completion of our vessel program.
The last point I want to make as you would expect is that we are continuing to look at debt capital structure financing alternatives, including title 11 to further optimize our balance sheet.
Turning to slide 19 for a review of our new vessel payments for the second quarter, we had new vessel cash capital expenditures of $6.4 million and capitalized interest of $3.3 million or total capitalized vessel construction expenditures of $9.7 million.
As you can see in the Middle chart Lurleen is now 94% complete and delivery of the vessel is expected in the fourth quarter. This year.
Matt Sony and remains on track for delivery in the third quarter of 2020, and as Andy is 24% complete.
The table at the bottom shows the cumulative and remaining new vessel progress payments for the remaining six months of 2019, we expect approximately $172.3 million in payments and for 2020, we expect only $62.7 million in remaining payments, which is less than our normal free cash flow generation, which is why we expect our deleveraging to began after the first quarter next year.
With that let me now turn to slide 20 to discuss our full year and third quarter outlook.
As a result of the continued weakness in the Hawaii market and the higher operating costs at SSH key in the second quarter that are largely behind US we are lowering our outlook for the full year.
For the full year 2019, we expect operating income for Ocean transportation to be approximately 20% lower than the 131.1 million achieved in 2019 after adjusting for the additional 11 months impact of the vessel sale leaseback of $6.6 million.
For logistics, we now expect operating income to be 10% to 15% higher than the level achieved in 2018 of $32.7 million.
We expect depreciation and amortization to approximate $133 million inclusive of $38 million of dry dock amortization.
These amounts include the effect of accelerated dry dock amortization of $4.2 million for the full year on the two on two of the six vessels in the scrubber program.
We expect EBITDA to approximate 270 million or approximately $18 million lower than our previous outlook.
The breakdown of $18 million EBITDA outlook decline is approximately one third from this quarter's results.
And the and the majority of the remaining two thirds due to lower expected, Hawaii volumes and a small portion.
Due to some of the ongoing higher operating costs, continuing SSH key and in the third quarter.
We expect other income to be approximately $2.7 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%. Excluding the 2.9 million reversal. We recorded in the first quarter related to the tax Act.
For the third quarter 2019, we expect Ocean transportation operating income to be moderately lower than that $48.7 million achieved in the third quarter of 2018 and for logistics, we expect operating income to approximate the 9.9 million achieved in the third quarter 2018.
Now turning to slide 21.
And Matt opening remarks, he briefly mentioned our expectations for financial benefits in 2020, and thereafter from the new vessels and other infrastructure investments.
At this time, we reaffirm the approximately $30 million in total benefits, we expect from the four new vessels on an annual run rate basis. Once all four vessels are deployed.
In addition, we have mentioned on our more recent quarterly calls that we expect significant financial benefits from our investments in scrubber installations on our vessels as well as the cranes and other infrastructure projects at the sand Island terminal.
Given the magnitude of all of the investments and the timing and the different timing of when each will begin to positively affect our financial results. We wanted to give investors a sense of the annual benefits, we expect from the investments in calendar year 2020 and beyond.
Specifically in 2020, we expect approximately 30 million of incremental benefit from these investments when compared to 2019.
And after 2020, we expect approximately $40 million in incremental benefit when compared to 2019.
These benefits will be generated primarily from the reduction of 10 shifts to nine in our Hawaii trade Lane.
Operating and maintenance cost reductions from the four new vessels.
The benefits from the exhaust gas scrubbers.
Auto is enrolling rolling stock efficiencies on the Con Aloha class vessels.
Higher volume from the larger capacity vessel in the CLX trade and the newly installed and modified cranes and sand Island.
We may also achieve financial and operational benefits and other areas over time from these investments, but the area as noted on this slide are expected to be the largest and overall, we believe we will achieve the noted 30 and $40 million benefits mentioned before.
Lastly, I want to emphasize that this is not an outlook of $30 million higher performance in 2020 in 2019 and should not be interpreted as such.
We are making no comment at this time about our 2020 and beyond outlook.
But rather describing the benefits we expect from all of these investments.
Our 2020 and beyond outlook and performance could be higher or lower due to fluctuating trends in all of our trade lanes and business units and we are not making any comment on those trends are outlook today.
We plan to provide our 2020 outlook on the fourth quarter earnings call in February of next year.
With that I'll now turn the call back over to Matt.
Okay. Thanks Joel.
Why don't we open the call up to operator to questions.
Ladies and gentlemen, if you have a question at this time. Please press Star then the number one key on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound.
Our first question comes from the line of Jack Atkins from Stephens, Inc.
Your line is open.
Hey, guys. Good morning, really appreciate the time and thank you for taking my questions.
You bet, John So so I guess, let's let's start off just.
You'll have to go back to your comments around.
Your prepared comments around the change in the guidance down 18 million I think versus your prior.
Your prior outlook.
Could you maybe just if you could kind of kind of bridge us again, just to make sure everybody on the same page in terms of what the what the primary drivers are between the 270 million now versus 288 million before could you just kind of walk us through that if you could.
Sure Jack share thanks for that so.
Of 18 million about a third of it was embedded in this second quarter results. So approximately 6 million and EBITDA translating down to about 10 cents of earnings per share.
And of that $6 million.
Yes, Matt mentioned, we talked about the Hawaii volumes came in less than expected and we also experienced some higher cost at SSH key so of that $6 million about it's about half and half between those two drivers Hawaii volumes and SS 80 in the second quarter.
The remaining 12 million of of downward reduction in our outlook for the really the second half of the year. The vast majority of that is the Hawaii volume impact Jack.
We expected there to be some growth this year in the second half of the year and it's just not it's not materializing, we're seeing a flattish market. So thats. The majority of the remaining 12 coming down a small portion of that remaining 12, though also is some of the SSH key higher cost spilling over in the third quarter. We believe those are largely behind us, but not 100% so that will flow that impacted that as well, but those are the components of the 18 down for the full year.
Okay, all right that that that helps add.
I guess for my second question, if I could I'd like to shift.
Yes gears, a little bit and kind of think about your CLX service and Matt we've seen obviously.
Accelerating tariff rhetoric over the last.
Oh jeez over the last year.
And it seems like everyone is expecting it to get better at it only gets a little bit worse. So could you could you sort of talk about this.
This last round of.
I guess the tariffs that are going to go into effect on September the first.
How do you think that that impacts your business what are your customers telling you about about their freight flows as a result of these tariff if thats changing at all.
And did that did that.
This potential change in tariff policy coming up.
No next month does that have any impact on your on your outlook for steel acts in the second half of the year.
Okay sure.
Super Easy question to answer so thank you for asking is it in all seriousness show it to them.
I would make a couple of general observations and then dive down I think what we're seeing Jack in talking to our customers is that.
Customers. If if if you were a customer that sourced only out of China.
I think there is a lot of risk mitigation planning on developing sourcing from other countries to the extent that the U.S., China situation worsens or.
If tariffs go up above even current levels.
And so we see a lot of our customers many of them have sourced from from multiple countries and in those cases theyre looking at talking to their partners. In these other countries about whether they have the ability to increase production. So there is a lot of thinking going on around Miss risk mitigation.
But I still think you will see.
Independent of what what's happening with tariffs, which are more difficult to predict.
With that.
That there is still a very difficult to replicate in the short run ecosystem in China for the commodities, we care about which our garments.
Put where electronics things that are fashion in electronics, let's just call those those items and.
So we will see some stickiness, but with a fair degree of of planning. The second thing I would say Jack as it relates to the Trans Pacific market in general is to the extent, let say that production is shifted incrementally out of China into Malaysia to India to Vietnam, and enter the Philippines or wherever wherever that might go.
The international Ocean carriers can change their allocations from some market to others. So that they could point more capacity towards the markets that are growing incrementally and it doesn't necessarily mean that there is a disruption to the trans Pacific trade in its entirety international Ocean carriers.
Migrate some capacity from China to these other origins because very little of what we're hearing of what potentially is leaving China is coming back to the United States I think that ship has sailed for a lot of the commodities we deal with.
And then to mats and more specifically I think we're also seeing of course theres a significant degree of uncertainty and mattson thrives in chaos, and we don't say it to boast, but we have the fastest service there.
And just because of where we are with respect to future concerns about the economic cycle retailers are being more cautious the carrying less inventory.
They are waiting till the last minute to place orders all of that falls exactly into the market. This expedited ocean market as an alternative to airfreight. So despite all the ongoing uncertainty, including the IMO 2020, we're continuing to feel and hear from our customers that there continues to be a strong demand from absence product dimmit admittedly a fairly uncertain environment.
Okay, no that definitely makes sense and I know you guys have a very unique and specialized service.
And so that that that all makes a lot of sense I appreciate that Matt last one and I'll I'll jump back in queue and handed over to someone else but.
Yes.
I was interested in the commentary around shifting of some capacity, particularly that at least one of the new vessels out of the Hawaii turnaround services and into CLX and that made you may do that again with the.
With.
I think you said that the Daniel can you knew a win win the lurleen is deliberate if I'm not mistaken, but anyway. So I guess could you just talk about.
What capacity does that add to the CLX service that sort of what what does that do to capacity in the Hawaii serve as I'm, just trying to get a feel for how capacity could be shifting between between those two different services.
Yes, so I think the the the view at least between now and the end of the year in the Hawaii market is likely to remain muted. So as we took down our outlook and Joel mentioned.
Our expectations for growth have now been reset and we're looking for a flat environment for the remainder of the year. The other thing I would say is the the vessels.
The two new Aloha class vessels, the two large container ships that you mentioned.
That are now in service.
Are going to be busy any way some of them were placing vessels on our CLX service as we take those vessels out to install emission scrubbers. So theres a few CLX vessels will be coming out of service. So.
At this point.
And the third thing I'll mention about the Aloha class vessels is.
Number one it allows us to just slipped into a nine ship fleet, but they were also built to accommodate future growth and so our view is that they are they can be moved from our Hawaii service, which will continue to allow us to carry all of the cargo for the Hawaii service, but potentially the idea is to point additional capacity.
Into the CLX trade, where we have a better chance of filling that capacity, especially during seasonally busy times and so.
I think what we'll see is that the the increase in China capacity, let's say between now and the end of the year, replacing a CV 26 hundreds it's in there now.
With at one of the Aloha class vessels adds a few hundred container slots to 300 container slots out of but voyage every five weeks. So it's not a huge mover to capacity, but potentially both of those vessels could be deployed in China.
Or in our CLX service to the extent that Hawaii remains muted muted and we've got a our CLX vessels could easily carry our entire cargo package in the Hawaii service and stay into a nine ship fleet against the previous so it's it's an idea we were not overreacting to a short term.
Hawaii flattish market, but we're also acknowledging that we have assets that can move where potentially we have greater chances for utilization.
Okay that makes a lot of sense, well I'll hand, it over thanks again for the time guys.
Thanks, Jeff Thanks, Jack.
Our next question comes from the line of Kevin grading of Seaport Global Kevin Your line is open.
Thank you good afternoon gentlemen.
Hi, Kevin.
Matt.
Very good kind of step back here.
You know I've been following you guys, a long time and even when you are part of Alexander Baldwin.
We can always remember you can always look at construction volume and get a good read it.
On your end markets for Hawaii, and kind of see how you guys are doing.
But it seems like now that historical relationship may have changed a little because when I hear you talk about why it seems like construction activity construction jobs permitting what have you is doing okay, but maybe the other part of Hawaii, whether its tourism consumption the population growth.
Now impacting you, maybe a little bit more than it has historically.
Help me bridge the gap from.
You know when the path, we can always look at construction volume as a good read to where we are today.
Yes, it's a good question Kevin Van.
I would make a couple of observations you're right in saying that the level of construction activity the level of construction employment have historically been good indicators at the beginning of this more more recent cycle. When we were seeing a lot of the construction activity primarily occur occurring in urban Honolulu or wahoo.
We noted that we have is get less of a benefit from high rise construction.
Because concrete steel often moves and break book style and not in containerized relative to previous cycles, where we saw single family home construction being more active than more dense urban.
Cup condominium type projects.
And so and that continues to this day I think we're seeing that flatten out we no longer term continue to be encouraged by some of the projects that we've mentioned.
In west to Wahoo.
Koa Ridge and others that that will continue to benefit us, but those are longer term.
And we will happen over the next few years so.
The other thing I would say is that we ourselves were a little bit surprise based on trends and we did a dive into what we're hearing from all of our customers and it was really not any single thing you know some customers as Joe mentioned in his comments we're looking at.
More carefully managing inventory levels.
There were no dramatic changes there were others that were looking to two.
Packed their containers, a little bit more efficiency there were more 45 foot containers. Instead of 40 foot containers are there was nothing that jumped out at us that was a cause for deep worry, but we are observing that the market is weaker than we expected.
Because of some of the items that you mentioned so those are my thoughts on the market just a little additional color.
Really appreciate that thank you.
Are you seeing any.
Any aggressive pricing by your competitor in Hawaii as a result of the move of market weakness.
I would say there is always a healthy level of competition between the two of us, but we've not seen anything super unusual nor have we seen any dramatic shifts in share. So that I would say, it's just the normal competitive environment there.
Okay, cool gutted and I'm talking about the SSH key cost being a little bit higher what were some of the drivers behind that was it mainly labor or is there anything else going on there.
Yes, so we took a dive into that as well Kevin I think it's again there are three or four things that drove those costs up as Joe mentioned in his comments, we see those mostly behind us as we get into the second half of the year I think I'll just cite some examples there were some expenses related to the movement of terminals within the Pacific Northwest that I mentioned.
We also saw some higher labor costs.
Because SSH key had some difficulty getting.
A full time longshoreman instead of a steady instead of instead of a more casual type workforce that impacted their own internal productivity those issues are largely behind it.
There was a little bit of ketchup crane maintenance in Oakland that is now largely behind us nothing that caused us. So well first of all was that I don't think we have fully understood the impact or how it would impact the results.
In the quarter, which was which was one of the smaller factors in our underperformance there.
But we're satisfied that we don't have except for a very small tail a chronic issue of performance at SSG.
Okay. Thanks, Joe you mentioned some possible title 11 debt financing alternatives could you expand on that some good that would help result, maybe lower interest expense savings going forward.
In wood and wood in treasury rates today, Kevin and tight.
So that might go or not.
Yeah, exactly we've talked about for a while we don't need to do any more financing were in great shape, our banks have been supportive of guide.
A $650 million revolver that strong less than half of that so we have plenty of room to fund the remaining portions of our investment programs off the revolver, but when you look at the title 11 program.
And the all in rate that you can get on a fixed basis for 25 year paper, that's really attractive we don't like having very much secured paper in our capital structure and so the negative of title Evan is that you've got in place one of the vessels.
But we've talked about for a while that we've got it's public knowledge that we've got applications in for tied 11 financing so.
And the first vessels have been delivered so you can close on a transaction. After a vessel has been delivered so we're continuing to look at that and work on that and then David may be something that we do going forward. It will end to answer your specific question on interest expense the asset at the rates that you would achieve now they would be it would be cheaper all in borrowing than where we're at on the revolver. So not a huge differential on interest expense, but slightly favorable yes, but you could lock it in for long term.
Locking in long term exactly got you lastly, you talked about I guess peak debt in Q1, 2020, we you bump into any potential covenant issues from kind of what you see right now I know you said, you're the banks look at EBITDA calculation on a much different bases and how we look at it.
Well, it's not dramatically different it just EBITDA, there's a few more things in EBITDA to make EBITDA higher, but it's not dramatically different and we can go up to 3.75 on our leverage ratio Kevin So right now we're at three and.
So we have plenty of headroom on that so we're only six to eight months away from our peak levels and I mentioned here today that our vessel payments that remain in 2020 are only $63 million, so thats quite a bit less than our free cash flow generation. So we feel good that we're not going to have any kind of covenant issues. After the 3.75 leverage ratio level.
Okay, Great Thats, all added I think through time.
Okay. Thanks, Kevin Thanks, Kevin.
Once again, if you would like to ask a question you May press star one on your Touchtone telephone.
Yes.
Hi, not showing any oh, we just have a follow up question coming from the line of Jack Atkins from Stephens, Inc. Your line is open okay. Great Hey, Thanks, guys I just had a couple of additional follow ups here since we have a save a few minutes.
You know, Matt I'd be curious to get your thoughts on Oh, Yeah, I think there's been some reports about a potential grace period related to IMO 2020.
Yeah, we would just be kind of curious to get your thoughts on if you think anything like that is going to maybe go through and and there and I think China also has bad open loop scrubbers. I believe you guys have closed loop scrubbers, but just wanted to make sure about that could you kind of touch on those IMO topics.
Sure I can yes, we're hearing Oh, no strong push for broad based waivers of IMO now, but it you know to the extent lets say a <unk> or a company had a vessel under construction and was looking for a six month or nine month waiver until the delivery of their new vessel something like that might be asked and might be accepted but we don't on a onesie twosie basis, but we don't really see any any large waivers expected now there to the extent that there were some fuel disruptions or unavailability in some ports there may be some some limited waivers until until that we're not hearing of any of that at that point, but those are a couple of.
Exceptions that I think would be short term.
And we're not expecting any of those to occur and in our own fleet as you know.
With respect to your second question about.
Let's say, China implementing its own rules and an open loop scrubber versus a closed loop scrubber.
I would say that madsen's, Alaska vessels are closed loop.
Which mean that when they're in the.
The emission control area or IEC is own or when they're in special sensitive zones. They go close loop, where theyre not letting that this the scrubbed admission.
Resid residue go into the Ocean.
But during that long most of the voyage. It's in an open loop situation Mattson six new scrubbers are open loop scrubbers most likely.
And what that just means is while we're in the coastal area of China. It requires us to burn a deferred fuel.
And we're doing that now and expect to continue to do so.
And that because the majority of the voyage it would be in open loop mode. In the open ocean when we transited either the U.S. west coast or in China, We will be using alternative fuels and we have a method in which to change at our economics and our payback periods on the scrubbers and all of that has been factored into that so we don't we don't see any any significant impact as it relates to maximize use of opens open loop scrubbers.
And the way we've designed it.
Okay. That's that's very very helpful. Thanks. Thank you for that and then just last one for me just going back to the Hawaii.
Volumes for a moment just to make sure I've got that correctly, you know, Matt if I heard your comments correctly. It sounds it sounds like part of what's going on here is just some inventory de stocking going on in in Hawaii, and one I kind of wanted to make sure. If that's if that's the correct way to interpret it and I guess secondly, if that's the case you know do you do you kind of think once this excess inventory gets burned off that maybe maybe the broader market can maybe stabilize at these can start to see a little bit of growth returns I know, it's you've got to kind of middle of bit burned on it this year, but I'm just trying to get a feel for is something sort of changing structurally in Hawaii or is this really sort of a temporary.
Inventory buildup that we've had we've seen this in the past and just kind of we've got to get through it.
Yes, I think.
A little bit of what you said is true Jack but I think the reality is we were down 2.4% in or what but our volumes in Hawaii service.
Yes, but.
And so our view is that the market will remain flat. So some of the issues that we believe are like the inventory a little bit more carefully can only do that once and then you can no longer do it so I agree with that that part of it but I think our expectation is that we'll see a flat environment moving forward. We're picking out we took out the growth for the remainder of the year that just looks like it's coming in and talking to many of our customers Nobody was seeing big significant growth. There was also a number of other smaller factor. So there was no one factor that drove that 2.4%. There was a smaller amount of for example return eastbound cargoes than the market than than we'd seen before.
No significant reason, we could identify that there was a.
And I don't want to get too far down and look at it there were a few items that was a large solar project that we moved last year in the second quarter that Didnt repeat itself. This quarter. So there's just lots of little things, but it really it kind of gave us a feel that we really didnt need to do or a market reset and look at it you know.
Flattish environment moving forward, Okay, no that makes sense. Thank you again for the for the time.
You bet. Thank you Jack.
Hi, guys I'm not showing any questions at this time I would like to turn the conference back over to Matt Cox C.C.
Well, thanks, everybody for listening, we look forward to catching up with you on next quarter's call.
Thank you.
This concludes today's conference call you may now disconnect.
Well.