| Copyright: | CCBN, Inc. and FDCH e-Media, Inc. | | Source: | FD (FAIR DISCLOSURE) WIRE | | Wordcount: | 9872 |
OPERATOR: Good morning, ladies and gentlemen. Thank you for standing
by. Welcome to the Horizon Lines Q1 2008 fiscal year earnings results
conference call. During today's presentation, all parties will be in
a listen-only mode. Following the presentation, the conference will
be open for questions. (OPERATOR INSTRUCTIONS) This conference call
is being recorded today, Friday April 25th of 2008.
I would now like to turn the conference over to Mike Avara, Senior VP
and CFO. Please go ahead, sir.
MIKE AVARA, SVP, CFO, HORIZON LINES INC: Mary, thank you. Good
morning everyone and welcome to Horizon Lines' first quarter 2008
earnings release call. Thanks for joining us today. Joining me in
Dallas are Chuck Raymond, our Chairman, President and CEO, John
Keenan, President of our Liner Company, Brian Taylor, President of
our Logistics Company, Catherine Walsh, our VP and Controller, and in
Charlotte John Handy, our Executive Vice President. Our call will be
conducted today in the normal fashion. Chuck will provide an overview
of the first quarter, John will review the shipping operations, Brian
will take through our Logistics business, and I'll wrap up with the
financial review. And we'll conclude with a Q&A session.
Before we get started, my-- I must turn your attention to our
forward-looking statement on Page 3. During this call we will be
making certain forward-looking statements. And although we certainly
believe them to be reasonable at this point in time, we obviously can
provide no guarantees that they'll actually come to pass. There are a
number of risk factors that could cause actual results to differ
materially from our projections, and I suggest that you review our
filing with the SEC for a description of these risk factors. So with
that, I'll now turn the call over to Chuck Raymond. Chuck?
CHUCK RAYMOND, CHAIRMAN OF THE BOARD, PRESIDENT, CEO, HORIZON LINES
INC: Mike. thank you and good morning. Thank you for joining us on
the call today. Our highlights for the first quarter of 2008 are the
following: First of all our business is fundamentally healthy.
Revenues as you'll see from the 10-Q and from the power point
presentation, are up about $32 million over the first quarter of
2008. That's about a 12% increase in revenues. Now part of that is
fuel of course which is a major cost for us and the cost of fuel
during the first quarter are up some 46%. over the same quarter of
2007.
With this recession that we're in and the continuing softness in the
markets , nevertheless our business line is close to flat for the
first quarter of '07, rather over the first quarter of '07, down
right around 1%. Most of that of course, as you might imagine in the
Puerto Rico trade lane. We still earn growing volumes from our key
customers. Critical brands out there to us and very renown customers
suck as Walgreens, Wal-Mart, Sams, Costco, Lowe's, Target stores.
These are all very, very successful retailers and businesses that
make up our customer list. And our volumes with these customers
continue to be impressive. During the quarter our volume was impacted
by a lack of a Puerto Rico recovery. And also by severe weather, not
only in Alaska but in the Pacific Northwest. That was a-- an anomaly
that we believe will not repeat during the next three quarters,
particularly in Alaska. And we expect to make up a big portion of
that here as we go forward.
However, the Puerto Rican economy is one that we still have some
questions about, and that will be dealt with more by John Keenan,
whose been working on that matter along with our Management team.
Schedule integrity and fuel conservation actions and surcharges have
tempered the volatility of fuel costs in our P&L. We've had
another 3% improvement in our arrivals and our on-time reliability of
our fleet. That I think is incredible, particularly with the weather
that we've had, and with the, with the very cautious approach we're
taking on burning fuel of these vessels. During the first quarter and
throughout 2008 we will continue to invest in our terminals. Our
CapEx this year, as you see, is about $28 million, probably half of
that will be on our terminals, and maybe the other 40%, 50% related
to our vessel fleet and containers. So the Company continues to
invest in the infrastructure of the entity.
Our logistics business has scored some impressive wins over the last
quarter. Heinz brands, Michelin tires, McDonald's, just to mention a
few. And Brian will take you through those. We're excited about that
ramping up. And then finally, once again, Horizon is recognized by
one of the premier shippers in this business, Wal-Mart, our sixth
Carrier of the Year award from Wal-Mart since the Company came out
from under CSX and Sea-Land in the year 2000.
The outlook for 2008. As I mentioned the Puerto Rican economy is
recovering, but we think that is not going to recover, or we're not
sure it's going to recover to a level that we would have hoped. And
that's reflected in our guidance going forward. We want to make sure
that we're appropriately representing that. The fuel price
volatility, everybody expects that to persist. We can't predict
what's going to happen to fuel. Pretty much everybody believes it's
going up, it has been going up, and we've reflected that in our
forecast, as well.
In Alaska, there's been a reduction in the product quota. That
impacts us principally in our export volume that we hand off to Asia
on Maersk line vessels. As you know, we're their agent in Alaska, so
the terminal handling cost that we incur for that, the profit we
built into that as well as the earnings by being Maersk's commercial
agent in that state impacts us because of the product quota
reduction. Not a huge issue, but we thought we ought to mention it.
There in the state of Alaska, as well as in Hawaii and Puerto Rico,
too, our business is fundamentally sound and is still poised for
future growth. I believe that the vessel deployment changes that we
made in 2007 are going to serve us well going forward as these
markets come back.
Market diversification. The fact that we are in Alaska and Hawaii,
and Guam and Puerto Rico really is one of the Company's strength. Not
only from a, from a marketing standpoint, but also because we look at
Alaska today as a very solid economy, Hawaii and Guam basically
stable, not going down, not taking off like a wildfire, but still
doing well. And Puerto Rico going through it's difficulties there,
but when you average it all out at Horizon Lines, I think we can look
you straight in the eye and tell we are recession-resistant in this
Company, and I think our revenues and our EBITDA generation stand
behind that.
Our EDGE project, which we spent a lot of time talking with you about
in 2006, 2007 is here and serving us well. The culture of the Company
has really changed, and EDGE is no more than really a special project
for us. It's really our culture, and the tools that we've built and
developed and the approach that our people are taking with EDGE is
ingrained in our spirit every day here.
I might take just a minute and comment about the Department of
Justice investigations into the Puerto Rico trade. We are one of four
carriers that have been asked to turn over documents there. The
Company has not been charged. No individual in the Company has been
charged with any offense. We will obviously continue to cooperate
fully with DOJ on this, and we certainly don't expect any service
disruptions to come about as a result of this.
Let me just take a second on Page 7 and talk to you about what we
consider in the Company as a season of opportunity for us. And what
we tried to do here is an array on the left side kind of a
conventional wisdom that companies apply in times of stress, and then
how Horizon is doing with these things. In today's environment of a
questionable economy, rising fuel costs and the obvious impact on
trade volume, I thought it was important to help differentiate
ourselves from conventional wisdom, which most companies would say
now is the time to downsize people. Our approach is not that. Our
approach is to invest in people. We believe that the team we have
here at Horizon, the key people is right on down to the entry level
folks with our Company are the best in the business. And so we
continue to invest in training, we continue to invest in providing
those folks with the right EDGE tools that we talked about, as
opposed to simply laying people off.
In the area of services, many companies would take this as an
opportunity to reduce their services. In our case, we are focused on
increasing our service levels. You will see that by our taking on
higher standards. Our on-time arrivals of our vessels. Cutting out
errors. Using the EDGE projects to provide a better quality product
to our customers. This is where Horizon is focused. You might ask us
to reduce vessel speeds to conserve fuel. Well, our customers can't
have that. Our customers in these countries of Puerto Rico and the
states of Alaska, Hawaii and Guam, rely on schedule integrity.
There's not a lot of warehousing capability there, and the land that
would be used for warehousing is quite dear. So we have a very strong
focus on maintaining schedule integrity. Getting out of port on time
and getting into port on time.
And on the inland factors, making sure that our pick up and
deliveries are on schedule. In that regard, the tools that we've
built in the past, today serve us very, very well. You might avoid
reinvestment. We are not doing that. As I mentioned, we are
reinvesting in container assets, in cranes in our key facilities and
in providing better capacity in Hawaii, Puerto Rico, and Alaska for
future growth. Companies would divest weakness, what we do is address
our weakness. We have built a sales pipeline of accounts that we
believe will be with us. We have continued to look at our deployments
and make sure that we're doing the right thing without degrading our
service to the community. Companies struggled for liquidity in tough
times. In our case, we have great liquidity. We're going through a
review right now of our cash flows, and as you can see from our
guidance the cash flows of this Company are still very, very
impressive. We did lock in our interest rates, as you know, and we
did a share repurchase in the first quarter.
People tend to distance themselves from the community. Our employees
almost down to the person are very, very engaged in their local
communities, they're active everywhere and we certainly are not
backing away from that obligation that we feel we have. Horizon will
not retreat in this environment. We are always there, always
delivering. We have improved reliability and improved reputation with
our shippers. With that, let me turn this over to John Keenan, who
will take you through our line of business.
JOHN KEENAN, PRESIDENT- LINER COMPANY, HORIZON LINES INC: Thank you,
Chuck. I'm going to start on page nine, Alaska economic outlook. As
you know, the high oil prices in the state of Alaska bore the
economy. As a matter of fact, Alaska has some excess state revenues,
unlike a lot of other states in the lower 48. The job growth is
projected for the 20th consecutive year by approximately 1,000 new
jobs in the health care and professional services areas. The fishing
quotas, as Chuck touched on, there's been a reduction in the Pollock
quota which we have factored into our forecast. Going forward, in the
railbelt, the construction remains strong and that construction
coincides with some of our customers, the big box retailers, Lowe's,
Wal-Mart and target. The gas pipeline I think you've seen recently,
is the Denali group, $30 billion, a project between Conoco and BP.
And there's going to be-- they plan to spend $600 million over the
next three years on the planning and engineering and permitting for
this gas pipeline. So very optimistic about the state of Alaska.
On Page 10, Hawaii, Guam, economic outlook. We have -- the Hawaii
GSP, the growth forecasts have been trimmed from 1% down to basically
flat, as a result we have reduced our volumes 1%. That's 2.5%
unemployment in the state of Hawaii, as you -- the visitor arrival
growth we expect to be retained at approximately 1%. Commercial and
the military construction are offset some of the soft residential,
and we feel we're very well positioned with our new flat-rocks that
we put into the Hawaii trade to help move that materials. And as you
know, Guam continues with the military spending, about $1.5 billion
annually, increased construction, especially the project cargo in
support of construction, we're well positioned with the first arrival
of our vessels, as well as the equipment for the Guam market.
The Puerto Rico markets.As you know Puerto Rico's experienced a
combination of slow economic growth, high unemployment, rising places
since the second quarter of 2006. So as a result, we've adjusted our
volumes down accordingly, we've adjusted our volumes down 2% for
Puerto Rico. That being said, there's a-- the fiscal stimulus, the
IRS payments that will be coming out in May. There'll be, we feel, a
short term benefit. That should pump about $1 billion into the
economy when you look at their overall gross state product of about
$72.3 billion. We see that as a fairly significant impact. The
government in Puerto Rico has been addressing the fiscal issues,
including increasing tax revenues and as well as reducing expenses
within the Government. The charges against the Governor, the --
increase the chance for more pro growth administration. As you know
election years historically bring increased government spending and
support, as well as construction spending.
If you look at some of the biomedical investments, there's over $200
million. Look at St. Jude alone, there's $200 million over five
years. They intend to spend in a creation of over 1200 jobs for that
one biomedical investment alone. So I think on that we see some
positive indications of our industry and government working together
to provide incentives for new investments, as well as business
expansion.
On Page 12, a little bit about our volume updates in our business. If
you look at the bar chart there, you'll see that our container
volumes first quarter, year-over-year are down 1%. That 1% is driven
primarily by contracting volumes in the Puerto Rico trade lane, from
the extreme cold in Alaska, that Chuck mentioned earlier, tempered
otherwise our solid demand that we typically see in the Alaska trade.
Our schedule integrity supported the strength of the Hawaii volumes,
and I'll touch on that schedule integrity in a minute. And our Guam
service was impacted by reduction in Saipan garment shipments which
we had previously in our plan.
On 13, when you look at our rate per container, if you look at the
unit revenue, or our revenue per box, our unit revenue is up 8.9%
year-over-year, quarter-over-quarter. And about 5% of that, just so
you're aware, is attributed to fuel. But the other increase is our
general rate increase and contract renewal rate increases that have
driven that revenue growth, as well as our cargo mix improvement.
When you move to Slide 14, and look at our vessel performance, again
we're very proud of this. The vessel on-time arrival, as you know,
we've timed this to the minute, there's not many other carriers in
the industry that can say that. From 2007 to 2008, our on-time
arrival has improved 3%, we're at 81%. The major improvement in this
area has been Hawaii Guam trade lane where year-over-year with our
new TP1 vessels, we've seen a 30% improvement in our on-time arrivals
with schedule integrity. Our vessel availability basically is
unchanged year-over-year, and our utilization has dropped from 84% to
83%, and that really correlates to the volume reductions that you've
seen and I've discussed on earlier slides.
On Page 15, the investment that we made in our container fleet,
you'll see that it continues primarily with our dry boxes. In the
second quarter of this year we'll see 1800 new dry boxes. These are
high cube boxes that will continue as part of our fleet enhancement
program, come into our--into service. And that helps when you look at
the numbers below that, the maintenance course below, where you see
the traumatic improvement. This is a cross comparison for repairing a
box old versus new. And I think the key take away here is the
reinvest in our equipment results in obviously lower maintenance
expenses going forward. In addition, we've seen a 7% improvement
year-over-year of our maintenance expense, which is really driven by
a lot of our EDGE processes and our corporate maintenance processes.
As Chuck touched earlier on the awards and recognition, Page 16.
We've awarded one more time to Wal-Mart, Jones Act Carrier of the
Year, which we're extremely proud of. We've also received the Lloyd's
List 2008 award. That's based on Horizon's Falcon, that's our vessel
operating in our TransPacific service, and they received an award for
rescue of the Chinese seafarers in 2007. And Horizon Lines joined the
SmartWay Transportation Partnership and we earned this highest fuel
efficiency as well as environmental performance ratings from the EPA.
On our EDGE update, our first quarter accomplishments, we continue to
focus on the top two bullets there where you see the public
segmentation, sales tactical planning tools, yield tools. These all
translate into better cargo mix. Better ability to segment and to
serve our key customer groups. We've achieved greater fuel
efficiencies and allowed us with our onboard technology programs that
we've put on our vessels. As you know, we burn predominantly low
sulfur fuel, or fuel that's in the 2% to 2.5% sulfur range below the
IMO standards that exist today. We reduced crew overtime with our
onboard management controls and our EDGE processes. Worked on our
optimization with our inland empty miles and reducing miles, as well
as reducing chassis. And I think the key take away on this slide is
our EDGE processes are engrained in every aspect in key work stream
of our businesses.
Coach-wise, shipping solutions. I think what you see here is our
product offering, and if you look at the slide, you'll see some
networks on the up and down and East Coast and into the Gulf, and our
targeted customers here are some of the large liners, large
international liner companies that we've targeted, as well as
domestic markets served by truck and rail. And to offer alternate
service options, we show one of our vessels here, as you know, this
is one of our vessels that has been freed up based on our TP1
deployment next year. And so our next step is to finalize the
discussions with international carriers and our target customers,
secure the path of the harbor maintenance tax, negotiate with the
shipboard unions and shoreside labor groups and port Authorities to
come up with favorable economics to hopefully implement this sometime
in the near future.
As you're aware, from a labor relations update perspective, we are --
we utilized the ILWU on the West Coast, the current contract is due
to expire July 1st. We commence bargaining on March 17th of this
year. We started early. We believe that the contract will be renewed
with minimal impact, and as well as the IBT. We had our negotiations
with the IBT. We signature to the national master trade agreement
which was ratified, and I think the key take away on this slide is
that we anticipate no business interruption with both of these
agreements and these bargaining units. So with that, I'll thank and
you turn it over to Brian Taylor.
BRIAN TAYLOR, PRESIDENT- LOGISTICS, HORIZON LINES INC: John, thank
you very much. I'm going to provide you with a quick update on the
status of the Logistics Company now that we are seven months into the
operation of this new business unit. Slide 21. Where are we today?
Aero Logistics, our August '07 acquisition is now really fully
integrated into the Horizon Logistics network. 95% of all of the
integration work that needs to be done within the organization is now
complete. Our newly-formed integrated truck brokerage network is now
up and running. We're beginning to see some nice solid wins from this
new service offering. Full technology integration is well underway
and on track as we expected it to be. We have refocused the
technology team, really on the development of integrated logistic
solutions versus some of the core technology services that we were
focused on previously.
Slide 22. Our growth model really remains unchanged from the last
time that we spoke. We are obviously continuing to leverage our
expertise to deliver value-added services to existing and new
customers. We're using the existing expertise that we have in
logistics within this organization, and we're adding new skills and
new resources that are really helping us create a greater value for
our customers. The liner customers that we have have been demanding
these services, they've been asking us for these solutions, and now
in the first six months of this operation of this business, we're in
a position where we are now starting to deliver some of those
solutions. Clearly focused on further integration into our customer
supply chains. We're creating some long-lasting relationships in
stickiness with existing customers, and looking at many new customers
to add to the portfolio. Our growth will be driven by obviously some
organic growth, but we are well aware that our -- a good portion of
our growth moving forward will be through future acquisitions.
Just quickly on the acquisition front, it will be a key growth
component for us. We have created a team inside of this organization
that is helping us refine an acquisition methodology in helping us
finalize a list of potential targets that we want to look at going
forward. Some of the key criteria that's been identified, obviously
functional alignment with the services that we already have inside of
the organization and the culture. Size and scope of some of the
potential targets we may look at, and obviously sticking very close
to an asset light model. We are engage some investment banks and key
industry contacts and we're using their expertise to help us round
out the list of targets and help us make sure we have the most
refined acquisition process to insure success.
On Slide 24. We have told you early on and talked about really the
two distinct sales channels that we have inside of this business.
None of that has changed. We are continuing to work on these distinct
sales channels, and we've added resources in all areas, sales and
operations, to position the organization for solid growth. Chuck
mentioned early on some of the wins that we have seen. We feel very
confident right at the moment that we have a robust pipeline of
potential customers that are going to add a significant value to this
business in '08 and beyond.
One of the key focus areas that we have touched on previously is the
area of warehousing and distribution. We've made a great deal of
progress in developing our capability in this segment. One of the key
facilities that we focused in the last four months is our facility in
Lexington, North Carolina. This is a facility that now is a key raw
materials consolidation center for several textile and apparel
customers. We have built out a truck brokerage and consolidation
business that is really helping us grow. Our truck volumes in some
key specific lanes. We've added technology and support resources to
this operation, and we are creating greater economies of scale that
are allowing us to take on more business, and helping us build a
model that will create sustainable value and also be able to be moved
to other locations in the future.
Our GPS equipped trailers that we use for this facility, as well as
the proprietary warehouse systems that we've implemented in our
network is really helping provide our customers with some real-time
visibility, and encouraging them to give us an opportunity to handle
more of their supply chain process.
One other component that we talked about as a key focus point for us
in '08 is our Mexico freight services. Clearly we are expanding our
offering in Mexico and over a short period of time we really feel
that this initiative is beginning to gain some traction. Our
land-based transportation services use same dedicated GPS equipment
fleet that I have touched on earlier. We have moved into a new state
of the art 60,000 square foot facility that is secure, safe and
giving us the ability to offer enhanced distribution and even
supplier managed inventory processes for our customers. We are
positioned to provide the services that really are allowing us to
manage the entire Mexico supply chain process for the customers that
are working with Horizon logistics.
Slide 27. Quarter one is traditionally the slowest quarter in our
business. Recent economic moderations clearly have impacted our
growth, with a couple of our main retail customers. You may remember
I mentioned to you early on, on the last earnings call, that we did
intend to add additional resources, methodically, add additional
resources that would help us support and position this business for
future growth. We will see the benefit of those resource additions
going forward. Clearly, clearly it's important for us to invest in
the resources that are required to build this business out, the
people, the technology, the operating resources to serve our
customers in the way they expect to be served. At this point, we are
very excited about where this business is at, and feel that we can
take this Company very far in 2008 and beyond. With that, I'm going
to turn this over to Mike to review the financial results. Mike?
MIKE AVARA: Brian, thank you. I'll start on Page 29 with operating
revenue. You can see that revenue was up nicely during the quarter,
$32.2 million or 11.8% over 2007. This is largely driven by the
strength of our Hawaii-Guam trade, as well as revenue from
acquisitions.
Turning to Page 30, a little more color on the $32.2 million increase
I just referred to. Revenue per container grew by $320, or 8.9%, and
is reflected in both the higher fuel cost recovery, as well as the
rate improvement that you see here. Our 2000 acquisitions Aero
Logistics in Hawaii Stevedores contributed a combined $10.1million
additional revenue during the quarter. These positive factors were
offset slightly by the 1% decline in revenue loads, primarily in
Puerto Rico that John referenced earlier.
Turning to Page 31. You can see that operating income declined by
$4.9 million in the first quarter. The increase in operating expenses
led by higher fuel expense of $9.4 million and higher vessel lease
expense of $6.2 million, more than offset the healthy growth in
revenue that I referenced earlier. The vessel lease expense, should I
recall that we have the five new vessels in place now, versus only
one in the first quarter of 2007 that we were incurring lease expense
on.
EBITDA reflected on Page 32 declined by $6.4 million from the first
quarter of 2007. The same factors impacting operating income that I
referenced also affected EBITDA. Looking at adjusted net income. Net
income declined $2.4 million during the quarter, after adjustments to
exclude the $2.6 million deferred tax revaluation benefit that was
included in the results for 2007. Interest expense benefiting from
our restructuring of our debt, was down $2.2 million over 2007 and
also falling interest rates, which we have strategically taken
advantage of. Over the last nine months, we've been able to reduce
our blended cost of debt from 8.8% to 4.6%, to cut that almost in
half. Our fixed-to-floating debt ratio is now at 72% fixed to 28%
variable after the execution of our $122 million interest rate swap
on March 31st of this year. And that interest rate swap effectively
locked in the current $122 million portion of our term loan through
it's August 8th, 2012 maturity at 4.52% with a 3.02% fixed swap rate
and our current LIBOR spread of 1.5%.
Turning to EPS. Our diluted EPS of $0.07 declined $0.06 from 2007.
Again, after adjustments removed the one-time deferred tax
revaluation benefit of $2.6 million from the 2007 results. We did
have two share repurchase programs. You might remember we acquired 1
million shares as part of our refinancing, and 2.8 million shares
during our $50 million repurchase program at $17.82 per share. Those
combined repurchases have allowed us to reduce shares outstanding by
about 10%, down to 30.8 million shares outstanding this quarter,
versus 34.1 million shares in 2007.
Turning to free cash flow. Even in these difficult times, you can see
that free cash flow has improved by $14.4 million in the first
quarter of 2008. We were helped by the absence of a bonus payment the
vessel lease mid-term balloon payment on our ships in Alaska that you
might remember last year of about $25 million. And that more than
offset the lower EBITDA, some increased working capital consumption
that will get here and the year and higher cash interest payments in
2008. You also note that net cash flow actually improved by $46.8
million during the quarter. The free cash flow increase of $14.4
million contributed to this of course as well as debt borrowings net
of repayments of %56.4 million that were utilized to fund our share
repurchase program.
Our financial guidance is reflected on Page 36. You'll recall that we
transitioned to providing annual guidance in the fourth quarter of
2007. Really for a couple of reasons. It's better in line with our
long-term approach to running the business and eliminates seasonal
and timing difference distortions that sometimes fall into quarterly
guidance. So we're reducing our 2008 guidance in reflection of the
growing problems in the U.S. economy, continued weakness in Puerto
Rico that Chuck touched on and reduced growth assumptions in in some
of our other trades that John referenced. Record high oil prices also
are having an impact in causing the revision that you see here.
But based on current market conditions, what are we projecting?
Operating revenue at $1.315 billion to $1.350 billion, EBITDA at $145
million to $160 million, diluted EPS of $1.30 to $1.69 and free cash
flow of $72 million to $87 million. We've taken our guidance range
and expanded it a little bit from our usual range of about $10
million to $15 million to better reflect some of the increased
uncertainties in the economy and fuel prices.
On Page 37 we have our segment breakdown of our 2008 projections.
Using the mid-point of the guidance, you'll see lighter EBITDA
forecast at $148.5 million, Logistics at $4 million, and recall that
the $176 million revenue elimination reflects services that the
Logistics business currently provides to the Liner at point of cost
basis.
I thought it was important to walk you through some of our major
assumptions in our budgets and forecast and guidance, and you can see
the trend has continued from November through April. We've had to
reflect obviously in our volumes and to our rates the change in the
deterioration in the U.S. economy and some softening, quite frankly,
in our trades. We have engaged in what I consider a very thorough and
robust forecasting process. We have challenged the assumption all of
our trade lanes, we've conducted this under various scenarios and
Page 38 reflects the resulting forecast assumptions. We're confident
that this provided guidance is achievable under at least any
reasonably foreseeable circumstances.
So let me just take a minute and wrap up and try to put things in
perspective here. As Chuck mentioned our business is financially very
sound. Our recession-resistant business model is being evidenced by
2008 projections, even at these reduced levels close or equal to our
2007 $160 million of EBITDA, despite significantly worse economic
conditions and higher fuel prices. Horizon EDGE, which Chuck had the
foresight, and John Handy and the rest of the team to put it back in
2006, when we were operating on all eight cylinders has really served
its intended purpose, it's helped us out here on the cost side when
things have been difficult on the revenue side. We continue to
generate very strong free cash flows, both in absolute terms, and
especially in contacts for our market cap. And we're poised for
future growth when market conditions improve, which they will, with
our vessel capacity additions that John referenced. And Brian's
Logistics business will in the future increasingly contribute to our
earnings and our cash flows. So with that, I'll turn the call back to
Mary. Mary?
OPERATOR: Thank you. (OPERATOR INSTRUCTIONS) Our first question comes
from John Chappell with JPMorgan. Please go ahead.
JOHN CHAPPELL, ANALYST, JPMORGAN: Thank you. Good morning, guys.
CHUCK RAYMOND: Good morning, John.
JOHN CHAPPELL: Chuck, I assume that you can't say a whole lot about
this price investigation, the Puerto Rico market, but I do have a
couple of broad questions on that. First of all, as I'm sure you saw,
Alexander & Baldwin put out a press release on last Friday saying
that they've been told by the Department of Justice that they'll
receive subpoenas for their Hawaii trade. Have you received any
notice about potential subpoenas or investigations on the Hawaii and
or the Alaska trade?
CHUCK RAYMOND: John, we've not hearing in the about haw Hawaii or
Alaska.
JOHN CHAPPELL: Okay. The other thing is and I know this is going to
be, we're in the very early stages of this, but as you kind of think
about best-case and worst-case scenarios, or the way that this
finally plays out, what's really the kind of the worst-case scenario?
You don't have to give the numbers, fines, whatever, I know that's
too early and you can't tell on that, but is there any way that this
investigation could lead to an opening up of competition in some of
the trade lanes, the Jones Act trade lanes?
CHUCK RAYMOND: John, I just can't speculate on that, and I wouldn't,
I'm sorry.
JOHN CHAPPELL: Okay. No problem. Question about cash flow use, as
Mike said the cash flow is still pretty strong. You went through your
whole buyback program. The stock is about $6 lower than what you
purchased it at. What you look to re-op share buybacks in this type
of credit environment, does debt repayment become the top priority of
uses of cash, or do you maybe want to keep some back for unforeseen
events?
CHUCK RAYMOND: Well, John share repurchase is always something we
keep on our radar screen. Clearly with the stock down where it is
right now, we have a much more compelling case for a share buyback.
When you look at the cost of our debt and the yield that we would
save on this thing, it would probably makes sense. But on the other
hand we've got opportunities to grow this business that are a good
long-term opportunities, and I think that we'll take a good hard look
at it. Are we considering a buyback right now? The answer is no. We
haven't -- we haven't come to that conclusion. But we will certainly
keep that alive as an option.
JOHN CHAPPELL: Okay. One last one, and then I'll turn it over. As I
look at the last slide here the guidance assumptions and the big drop
downs, 2% every time on Puerto Rico, would you categorize this
negative 2% volume growth as basically kitchen sinking Puerto Rico? I
mean is this the absolute worst-case scenario, or do you think that
still the U.S. economy doesn't bounce back, that there's still some
potential down side to this market, in a worst-case scenario?
CHUCK RAYMOND: I think you're -- you characterize it as the kitchen
sink. I think we're close to that. If you go back and kind of review
the bidding here for the last year or so. About a year ago, we
started to speculate that 2009 would be a -- could be a -- 2008,
excuse me, could be a turning point for us in Puerto Rico because of
the elections. They are still, of course, scheduled for November.
There's been a little bit of change down there politically in the
sense, as I think as John mentioned, that the sitting Governor more
than likely will not run for reelection now, so it's likely that
you're going to see a new Governor in [Porta Lisa]. There is the
combination of some excitement about new industrial incentives down
there which the Legislature and private enterprise have been working
very diligently on now for the last several months. Our intelligence
is that later this week, or early next week, the Legislature will
roll out a new industrial incentive package for Puerto Rico, and I
think that's very, very necessary.
Also with-- something else that John mentioned that perhaps people
have not heard, is that as a part of the Federal stimulus program,
the economic stimulus program that was signed into law back in
February. That the taxpayers in Puerto Rico, even though they do not
pay Federal income tax, are all going to get a Federal income tax
refund, fairly substantial, which will average the range of, I think
it's $1200 to $1600 per family. That had occurred before, back in
1991, much smaller at that time, but it had a rather dramatic impact.
So I'mm- if you look at the ledger, on the positive side of the
ledger you've got I think a very strong coalition between politicians
and business people now very seriously addressing what needs to be
done to grow the local economy, married up with some one-time
incentives that will help get us through 2008. So there's a little
bit of good light there for this year, as well as for the future.
On the negative side of that ledger is-- we've sort of seen Puerto
Rico slide, slide, slide, and they've had 16% inflation in 2005, or
2006 excuse me, something very close to that last year. Those
subsidies that caused the inflation have gone away. And the Governor
is addressing the fact that their electricity, $0.25 a kilowatt hours
for example, it's just a, it's just a very, very difficult thing. So
they've got to look at things like privatizing their electrical power
authority and other state-owned entities in Puerto Rico. So at the
end of the day, there's four million people down there, a lot of
business. We've got a great service reputation there. We got a
tremendous array of assets in that trade, and, again, we wanted to be
very, very cautious on this call, because the last thing we want to
do is miss this guidance. And so I'd say repeat what you said, is
we've just about got to the kitchen sink here.
JOHN CHAPPELL: All right, thanks a lot, Chuck.
CHUCK RAYMOND: I hope that helps.
OPERATOR: Thank you. Your next question comes from Peter Wahlstrom
with Goldman Sachs. Please go ahead.
PETER WAHLSTROM, ANALYST, GOLDMAN SACHS: Good morning.
CHUCK RAYMOND: Good morning, Pete.
PETER WAHLSTROM: We saw the gross state product assumptions from
Hawaii and Alaska. Do you have one for Puerto Rico that you can
share, just to help us frame that 2% expected decline in volume.
JOHN KEENAN: Pete, I think the most recent information that we've
seen from -- out of Puerto Rico is zero.
PETER WAHLSTROM: Okay. And staying on that same slide, over the last
couple of quarters we've seen downward revisions in Alaska, Guam and
Puerto Rico, and this time we have Hawaii stable at 1%. Could you go
into a little bit more detail on why you feel more comfortable in
this geographic region?
JOHN KEENAN: Well, Peter, we feel more comfortable based on what
we're seeing and reading and we're hearing from our customer base in
Hawaii, Guam. As I mentioned, in Hawaii we feel we're very well
positioned with the new equipment that we put in, the flat-rock, the
new refrigerator containers and our alignment with the right
customers into Hawaii. Although you'll see a lot of the residential
construction is down, the commercial construction as well as the
military construction, is up. So we're-- we're still-- that's our
position with Hawaii. We still see about a 1%. Now, Alaska, we had
forecasted reductions in the Pollack quota, and we're seeing that.
And what we're also seeing in Alaska is the, as Chuck mentioned, we
have terminal services revenue that we generate from our terminal in
Dutch Harbor, and based on that Pollack quota and the reductions,
we're seeing a reduction in our terminal services revenue, which will
show as other revenue, however the volume growth to Alaska is still
-- is still strong. It's robust. We hope to see Alaska very
consistent.
PETER WAHLSTROM: Okay and actually staying on that, the Alaska topic,
could you give us a sense as to whether its volume or financial
impact related to the weather in the Alaska quarter?
JOHN KEENAN: For the first period it was just volume, it's freight
that just didn't move in the first period.
PETER WAHLSTROM: And can you help us get a-- gauge that a little bit?
Is it 10 containers, 100 containers?
JOHN KEENAN: I think the softening is probably more in the
neighborhood of 100 containers, over the quarter.
PETER WAHLSTROM: Okay. And --
CHUCK RAYMOND: Just to add on that, this is Chuck, as John and I just
finished going through this last nigh. Was that we had that softness
in the first quarter in our, in our headhaul business to Alaska. We
expect it pretty much to be in our plan in terms of shipments up to
Alaska for the rest of the year. Again, the adjustment in our
forecast is related specifically to the export fish that moves on
Maersk line. We are the agent for Maersk out there, and this isn't
related to our core business.
PETER WAHLSTROM: Okay. Shifting quickly to Logistics. Brian, are you
still targeting basically a double in revenue for the next couple of
years, and have you seen acquisition multiples coming down?
BRIAN TAYLOR: Yes, we believe that it is possible for us, given the
right acquisitions, that we could double the size of this business
within the next three to five years, Peter. And of course as you know
right now with economic conditions as they are, there are a lot of
opportunities out there for businesses to be identified as attractive
acquisition candidates for us based on current multiples.
PETER WAHLSTROM: Okay, thanks. And last question for you. With regard
to the EDGE program, you just confirmed that it's still on track. And
can you share your financial benchmark, whether it's what has been
achieved to date, and so remind us of your targets for the run rate
by the end of '08?
JOHN KEENAN: Peter, this is John. Let me take that. The-- when you
look at our EDGE forecast, we are see some softness in volumes and a
piece of our EDGE savings was tied into sales in marketing and our--
it was revenue driven. We were-- we are very we're going to achieve
our operational savings that were tied in to our EDGE forecast, which
is in the neighborhood of $8.5 million, $9 million. The revenue
component of that is reflected in our forward-looking guidance.
PETER WAHLSTROM: Okay and by the end of the year then of '08, I think
you had talked about $25 million and maybe achieving kind of half of
that?
JOHN KEENAN: No, I think on this year we were talking about $12
million to $13 million.
PETER WAHLSTROM: Right.
JOHN KEENAN: Right. And I think that that's -- I would say that's
closer to $9 million.
PETER WAHLSTROM: Okay. Thanks. That's very helpful.
OPERATOR: Thanks. Your next question comes from the line of Kevin
Sterling with Stephens, Inc. Please go ahead.
KEVIN STERLING, ANALYST, STEPHENS, INC.: Good morning, gentlemen.
CHUCK RAYMOND: Kevin, good morning.
KEVIN STERLING: Chuck, you started your prepared remarks by saying
you thought Horizon Lines was recession-resistant. What do you mean
by that when after-- when you just lowered your earnings guidance
about 35%, maybe you could help walk through kind of how you define
recession-resistant?
CHUCK RAYMOND: Yes, thanks, I thank you, Kevin. Well, when I look at
the why we adjusted our guidance, when you take these chunks of
issues that we just talked about, essentially the Hawaii-Guam trade
lane looks pretty good to us. Alaska is, basically because we had
some weather going up there during the first quarter, and the fish
quota in one particular gender, that Pollack that goes out to Asia is
not related to the economy frankly. Puerto Rico, that country has
stag [flations] in it's rear-view mirror now for over 26 months. And
yet our earnings in Puerto Rico are pretty much flat on an EBITDA
basis. If you go back to 2005, 2006, 2007 and I recognize that we
don't publish those by trade lane, because we do have a lot
inter-usable assets there. But the way we allocate it out, it's
fairly accurate. The volumes are only down like 1%. So even though
you're in a recession, the core business that's flowing through our
machine here is continuing. And then there's the impact of fuel. This
is an an anomaly that we have not had in previous recessions in the
U.S., is the dynamic impact of fuel and tha's a compounding factor
for us, Kevin.
KEVIN STERLING: Okay. Well, keeping on I guess down that path, Chuck
on February 1st you guys, you raised your guidance from $2.01 to
$2.26, and now less than two months later, you significantly hair cut
it. We know fuel has always been an issue. It's been rising this
year, so that shouldn't have come out of the blue. As you mentioned,
Puerto Rico has been in the tank. Is that -- is it much worse now
within less than two months since you last spoke on February 1st?
Maybe you could help kind of understand what's changed in about a six
week period to significantly dim your outlook for the rest of this
year.
CHUCK RAYMOND: Very, very good question, and obviously something that
needs to be explained. The February adjustment was because of the
share repurchase, and only that. At that point, we didn't know enough
about the year in the first quarter to be able to say, hey, look,
this plan really needed to be adjusted a little bit. And we were only
a couple of weeks into the year, actually.
KEVIN STERLING: All right. Could you talk a little bit about some of
the trends that you've seen so far in April, maybe you could break
its down by trade lane in terms of volumes? Are we seeing any pickup
at all as we sit here near the end of April?
CHUCK RAYMOND: Well I'm going to let John characterize that. We don't
break out our earnings month-by-month. All I can say is that March is
stronger than February and February is stronger than January. So this
is not, this is not a business that's going into the tank. I mean
we're still operating very efficiently and our volumes versus our
original plan are looking pretty good. I think that our -- that our
share of the Puerto Rico market is up a little bit in April. I think
it's probably very stable in Alaska and maybe up just very slightly
in Hawaii. John, do you want to add to that?
JOHN KEENAN: Yes, I would agree. I think Kevin the best answer to
that is it's consistent with our forecast what we're seeing. I can
tell you we've had good volumes in all three, in--especially the West
Coast trade the last month and -- and as Chuck indicated in Puerto
Rico, we've seen a slight uptick, and that's based on a little bit of
our positioning in the market and a desire to take back a little bit
of market share. So it's -- again, it's consistent with our forecast
and our guidance.
KEVIN STERLING: It's consistent with your new forecast of lower 2%
volumes, or your -- ?
JOHN KEENAN: That's correct.
KEVIN STERLING: Okay. Consistent with your new forecast. Last
question here, then I'll let someone else get in the queue, and it's
probably more for Mike. Your debt level has increased this quarter.
Maybe could you help explain what drove this? I guess I would have
thought we would have seen those reduced with some of your cash flow
generating-- generation that you're able to generate. So maybe you
could talk a little bit about the reason why we've seen debt levels
increase this quarter on a sequential basis.
MIKE AVARA: Sure, Kevin. In this quarter, we have, we have really, in
the first quarter our biggest payments, we had $24 million of lease
payments on the D-7 vessels. In addition, we did fund $29.8 million
of our share repurchase program. So those two big disbursements in
addition to our normal weakest free cash flow quarter really caused
additional borrowings under our revolver. Now free cash flow will
rebound starting now grow significantly during the rest of the year,
and we will generate the free cash flow targets that we have just
laid out here for you.
KEVIN STERLING: Okay. Well one quick follow-up to that. Do you have
on idea of how much debt you want to pay down for the rest of the
year?
MIKE AVARA: As we look at our free cash flow deployment, we certainly
will use some of our free cash flow to pay down debt. That will also
have to play into any acquisitions, opportunities that we may have.
KEVIN STERLING: Okay. Thanks for your time today.
MIKE AVARA: Thank you, Kevin.
OPERATOR: Thank you. And we have time for a final question. And our
final question comes from the line of Chaz Jones with Morgan Keegan.
Please go ahead.
CHAZ JONES, ANALYST, MORGAN KEEGAN: Hey, good morning guys.
CHUCK RAYMOND: Good morning, Chaz.
CHAZ JONES: I kind of get the explanation for the decreased outlook
in volumes, but I guess one thing we haven't touched on here is kind
of the rate environment. pretty substantial reduction from 26 to 15.
Obviously in the first quarter, you were well above that even when
you back out fuel. Could you maybe help us understand that? Is that
lower rate expectation, is it due to volume slowdown, is it due to
capacity maybe coming a little more in excess in the market, or is
there anything else there from a fuel standpoint that's maybe keeping
rates in check?
JOHN KEENAN: Chaz, this is John Keenan, let me take that. I think
when you look at the overall rate impact. First of all, you see where
we've reduced our volumes, as well as our rates out of Guam. If you
look at Guam some of that is the backhaul, which is very high revenue
per box, so that's certainly a -- an impact when you look at the
overall rate lever. In the other trades, I would say in Alaska, our
volumes as you see are basically consistent with what we've had, our
rates have been moderate and I think it's just a sign of in each of
the three markets the -- not only the competitive landscape, but the
state of the markets where we're just choosing to be less aggressive
on the rate lever. And you do have, as you know, the fuel with the
fuel increases and you're seeing fuel as approximately -- when you
look at our rate increase year-over-year, about 5% of that is tied
into fuel. So if you take the balance, it's a little less than 3%.
CHAZ JONES: Right. And maybe on just on--switching back over to the
expense side of the equation, it looks like you kept D&A fairly
constant from a guidance standpoint, obviously, higher fuels baked
into OpEx. You mentioned the EDGE program. Is there anything else
there on the expense front that maybe has crept up here since the
last call that's drive some higher expectations on the expense side?
MIKE AVARA: Chaz, this is Mike. I think you've captured everything
correctly, nothing other than the items you mentioned.
CHAZ JONES: Okay. And then just maybe a couple of quick ones here. It
doesn't sound like from the commentary on Alaska, despite the weather
disruptions, is there any type of catch up from those lost volumes in
the second quarter?
JOHN KEENAN: No, Chaz, we don't expect that.
CHAZ JONES: Okay. And the CapEx was raised modestly, it looks like
you guys went from 21 to 28. Anything happen there that you can share
with us?
JOHN KEENAN: Yes, Chaz, again, this is John. That is a purchase of
Guam cranes that we've added to our CapEx that we're doing a joint
venture with Matson to put three additional cranes into Guam to help
continue to service that market.
CHAZ JONES: Okay. Good. And last one here, the Logistics segment
actually lost some money from an EBIT standpoint, it looks like in
the first quarter. I don't think you have given guidance on the
Logistics front, but if I could ask, was that in line with where you
kind of expected that segment, or could you give us any visibility
there?
BRIAN TAYLOR: Chaz, this is Brian. That was in line with our
expectations, as we have continued to build up this business and put
support resources into it, position it for growth, we had expected
certainly in the first quarter given the softness that we would
typically see in first quarter volumes, that that would be a quarter
that would not deliver up a positive result for us, so it is pretty
much in line with what we saw for the first quarter.
CHUCK RAYMOND: Yes, and I might add that that's a business we're
growing. And if you look at that variance versus plan, that's
basically an investment we made in people. We've added resources into
Logistics to expand our brand awareness and to expand our customer
base, and you'll see the returns from that investment later on in the
year.
CHAZ JONES: Okay. Great. Thanks, guys, for the commentary.
OPERATOR: Thank you. Mr. Raymond, at this time, we'll turn it to you
for closing comments.
CHUCK RAYMOND: Thank you very much, Mary. Well listen folks, again,
thank you. Let me just hit a couple of points here. Many of you have
been with us for several years here and I think you recognize that
Horizon is the premier brand in our business sector. Our customer
support today is strong and growing. Despite these what we call
recessionary times, the Company still generates good earnings and
strong cash flows. And we're going to use those cash flows as
investments to make this Company stronger and to bring strong future
returns to shareholders. Clearly, we believe we're doing the the
right thing by adjusting our guidance for 2008, being cautious there,
to make sure that we give you the right kind of sense of where we see
this business going in the short run while we have these
uncertainties.
And then finally, you have to look at the stock price today and say
to yourself, this really represents a compelling investment
opportunity. And we will reinvigorate our efforts to generate those
kinds of returns to our investors and shareholders going forward.
We'll talk to you on the earnings call that we'll have at the end of
the second quarter, which will be in late July. We thank you for your
time today and look forward to smoother sailing ahead. Thank you.
OPERATOR: Thank you. Ladies and gentlemen, that will conclude today's
teleconference. We do thank you again for your participation, and
thank you for using ACT conferencing. You may now disconnect.
[Thomson Financial reserves the right to make changes to documents,
content, or other information on this web site without obligation to
notify any person of such changes.
In the conference calls upon which Event Transcripts are based,
companies may make projections or other forward-looking statements
regarding a variety of items. Such forward-looking statements are
based upon current expectations and involve risks and uncertainties.
Actual results may differ materially from those stated in any
forward-looking statement based on a number of important factors and
risks, which are more specifically identified in the companies' most
recent SEC filings. Although the companies may indicate and believe
that the assumptions underlying the forward-looking statements are
reasonable, any of the assumptions could prove inaccurate or
incorrect and, therefore, there can be no assurance that the results
contemplated in the forward-looking statements will be realized.
THE INFORMATION CONTAINED IN EVENT TRANSCRIPTS IS A TEXTUAL
REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL AND WHILE
EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE
MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE
SUBSTANCE OF THE CONFERENCE CALLS. IN NO WAY DOES THOMSON FINANCIAL
OR THE APPLICABLE COMPANY OR THE APPLICABLE COMPANY ASSUME ANY
RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON
THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY EVENT TRANSCRIPT.
USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S CONFERENCE CALL
ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY
INVESTMENT OR OTHER DECISIONS.]
[Copyright: Content copyright 2008 Thomson Financial. ALL RIGHTS
RESERVED. Electronic format, layout and metadata, copyright 2008
Voxant, Inc. (www.voxant.com) ALL RIGHTS RESERVED. No license is
granted to the user of this material other than for research. User
may not reproduce or redistribute the material except for user's
personal or internal use and, in such case, only one copy may be
printed, nor shall user use any material for commercial purposes or
in any fashion that may infringe upon Thomson Financial's or Voxant's
copyright or other proprietary rights or interests in the material;
provided, however, that members of the news media may redistribute
limited portions (less than 250 words) of this material without a
specific license from Thomson Financial and Voxant so long as they
provide conspicuous attribution to Thomson Financial and Voxant as
the originators and copyright holders of such material. This is not a
legal transcript for purposes of litigation.]
This is a news service of Thomson Business Intelligence Service ©2006. This content is for your personal use only, subject to Terms and Conditions. No redistribution allowed.
|
