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Matson Inc  (NYSE:MATX)
Q3 2018 Earnings Conference Call
Nov. 05, 2018, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to Matson's Third Quarter 2018 Financial Results Call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call may be recorded.

I'd now like to turn the conference over to Director of Investor Relations, Lee Fishman. Please go ahead, sir.

Lee Fishman -- Director of Investor Relations

Thank you, George. Joining me on the call today are Matt Cox, Chairman and Chief Executive Officer; and Joel Wine, Senior Vice President and Chief Financial Officer. Slides from this presentation are available for download at our website www.matson.com under the Investors tab.

Before we begin, I would like to remind you that during the course of this call, we will make forward-looking statements within the meaning of the federal securities laws regarding expectations, predictions, projections or future events. We believe that our expectations and assumptions are reasonable. We caution you to consider the risk factors that could cause actual results to differ materially from those in the forward-looking statements in the press release, the presentation slides and this conference call. These risk factors are described in our press release and are more fully detailed under the caption Risk Factors on pages 13 to 21 of our 2017 Form 10-K filed on February 23rd, 2018 and in our subsequent filings with the SEC.

Please also note that the date of this conference call is November 5th, 2018 and any forward-looking statements that we make today are based on assumptions as of this date. We undertake no obligation to update these forward-looking statements.

I will now turn the call over to Matt.

Matthew Cox -- Chairman and Chief Executive Officer

Thanks, Lee. And thanks to those on the call. Please turn to slide three for my opening remarks. Matson's results for the quarter were in line with our expectations with Ocean Transportation results approaching the level achieved in the third quarter last year and logistics continuing it's solid execution across all of its service lines. We're pleased to see the exceptional performance of our Logistics segment for the quarter and year-to-date.

For the quarter within Ocean Transportation, we saw a favorable rate environment in China, continued strong performance from SSAT and steady performance in Hawaii. But we also faced unfavorable timing and fuel surcharge collections relative to fuel cost increases, continued negative impact from the ongoing competitive dynamics in Guam and lower southbound volume in Alaska, largely due to the weaker-than-expected seafood season, compared with the strong seafood harvest levels in 2017.

In the quarter, we earned net income of $41.6 million or $0.97 per share, compared with $34.1 million or $0.79 per share in the year ago period. We generated EBITDA of $91.5 million in the quarter versus $96.2 million in the third quarter last year.

Moving onto the outlook for 2018, based on the performance in the first nine months of the year and current business trends, we're raising our full-year 2018 outlook for Ocean Transportation and maintaining our higher outlook for logistics. For the full year 2018, we expect Ocean Transportation operating income to be modestly higher than the $126.4 million achieved in 2017. And in logistics, we continue to expect operating income to approximate $30 million. Joel will go into more detail on the financials and outlook later in the presentation.

Please turn to slide four. After countless man hours and the exceptional hard work of our employees and the workers at Philly Shipyard, we welcome the first of our four new vessels into the fleet with the arrival of the Daniel K. Inouye. This is a very proud moment for our organization and we look forward to the arrivals of the Kaimana Hila, the Lurline and the Matsonia in the coming years. We're also excited for the financial and operational benefits when all of the vessels are in operation. These four new ships and the modernization, the Sand Island terminal will support our market-leading position well into the future.

Now on to our trade lane services. Turning to our Hawaii service on slide five. Hawaii container volume for the third quarter decreased 1.1% year-over-year, largely due to one less sailing. Matson's market share remained stable in the quarter and the economic conditions within Hawaii remained favorable. In short, we saw steady performance in Hawaii. For the full year 2018, we expect container volume to approximate the level achieved in the prior year, which reflects a favorable economic backdrop in Hawaii and a stable market share environment.

Slide six provides an overview of some key Hawaii economic indicators forecast by UHERO for 2018 and beyond. According to the latest forecast, UHERO continues to expect reasonably strong economic growth as a result of low inflation, low unemployment, a high level of tourism activity and supportive global economic conditions. With respect to the construction industry, UHERO's construction related metrics continue to suggest a flattish growth profile in the medium-term, which is consistent with our view that new construction demand primarily from master-planned communities and condo projects on Oahu is offsetting the projects nearing completion.

Moving to our China service on slide seven. Matson's volume in the third quarter 2018 was 3.3% lower year-over-year, largely due to a drydock return voyage in the prior-year period. I'd like to highlight that every CLX vessel in the quarter was full. Our CLX Service experienced a higher quarterly eastbound average freight rate versus the third quarter 2017, which again is a sizable premium to the SCFI. Year-to-date in the transpacific trade lane we've seen a fair bit of volatility in capacity and demand. In the first half of the year, we saw capacity, well in excess of demand and in the second half of the year so far we've seen a movement to a more balanced capacity demand situation.

Specifically for Matson, we had a strong third quarter performance and is the peak period for the year for the CLX Service and while the fourth quarter is traditionally not as strong as a result of the early shipping cycle to manage holiday inventory, given the elevated demand for the CLX Service, we expect to have a stronger fourth quarter than normal. As a result, we now expect an average freight rate for the full year of 2018 to be higher than the level achieved in 2017. Volume for the full year 2018 is expected to be modestly lower than the exceptional level achieved last year -- largely due to the negative comparison for the drydock return voyage volume in 2017.

Please turn to slide eight. Since our last earnings call, the US has implemented additional tariff measure of 10%, on an incremental $200 billion in imported goods, on the heels of the 25% on the initial $50 billion in imported goods. The 10% on the $200 billion in products brings to 25% on January 1st. Although nearly 20% of the goods that Matson transports are subject to these tariffs as of today, we've not seen any meaningful negative impact from these tariffs.

The largest of the product categories on the CLX service is garments and footwear. And these product categories are not part of the current implemented tariff or proposed tariff in future in rates. Although a large percentage of our volume is unaffected by the current tariffs, our customers that are subject to the tariffs are preparing for ongoing and escalating US, China tariffs. In the short term, some of our customers have chosen to advance freight ahead of the January, when deadline were possible; to manage the long-term effects of tariff escalation. Our customers have indicated to us that they're exploring different manufacturing sourcing locations within Asia. But for many customers it could take at least a couple of years to adjust their supply chains to meet all their long-term needs of manufacture quality and cost competitiveness. So the tariffs, on the margin will likely have an impact with respect to how our customers source primarily within Asia.

The single biggest factor in transpacific trade lane heading into 2019 will be the management of shipping capacity versus demand. In the near-term there is potential risk with respect to volumes slated in the first quarter that is pulled forward into the fourth quarter. Beyond this, they remain significant uncertainty as to how the end demand will be ultimately impacted by the tariffs and have trade lane capacity in the transpacific will adjust accordingly.

Turning to slide nine, a couple of weeks ago Super Typhoon hit the Micronesia region, causing widespread devastation in Saipan and Tinian. Matson has served this region for decades. We placed our support to help these communities recover and are working closely with the American Red Cross and government agencies to speed and the recovery efforts. With respect to our Guam Service, volume in the third quarter was flat year-over-year and sequentially. The overall container market in Guam was essentially flat year-over-year.

Moving on to the full year outlook, we expect a ongoing heightened competitive environment and lower volume in 2018. As we've said before, our strategy this year is to continue 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 better on-time performance, we expect to retain an outsized market share.

Moving now to slide 10. In Alaska, Matson's container volume for the third quarter 2018 was 2.2% lower year-over-year, primarily due to lower southbound volume, as a result of a weaker-than-expected seafood season relative to the exceptionally strong harvest last year, partially offset by an increase in northbound volume. To try to put the southbound seafood volume weakness in context, according to the Alaska Department of Fish and Game, the in-season salmon harvest for 2018 is projected to be substantially below the state's forecast, which was over 35% below the 2017 harvest figures. With respect to northbound volume, we continue to see signs of Alaska's economy beginning to stabilize, but await further data to confirm that bottom and the recession has occurred.

For 2018, we expect volume to be modestly higher than the level achieved in 2017, with improvement in northbound volumes, primarily resulting from volume associated with the drydocking of a competitors vessel to be partially offset by lower southbound volume as it was -- again that was a result of the weaker-than-expected seafood season, compared with the very strong seafood harvest levels in 2017.

Turning next to slide 11. Our terminal venture SSAT continues to show strong performance. For the third quarter 2018 SSAT contributed $9.2 million, compared to $7.5 million in the prior year period. The increase year-over-year was attributable to higher lift volume. For 2018, we continue to expect SSAT's contribution to our Ocean Transportation operating income to be higher than the level achieved in 2017. There were a few key factors in support of this view, including the benefits to SSAT from the launch of new global shipping alliances as container flows and supply chains are adjusted between the US West Coast terminals, SSAT's reputation the best operator on the US West Coast and recent strength in import and export volume on the US West Coast.

Turning now to Logistics on slide 12. Logistics continued its strong performance, driving operating income to $9.9 million in the third quarter of 2018 versus the $7.3 million in the year ago period. All of the service lines made positive contributions in the quarter. Our transportation brokerage business performed well, primarily due to the well documented tightness in the trucking market, which plays to Matson Logistics strength in customer service. With respect to Span Alaska, the business continues to perform well with improving year-over-year volume as the Alaska economy shows early signs of stabilizing.

Given logistics performance in the first nine months of the year and current business trends, we maintain the higher outlook and expect operating income to approximate $30 million.

I'll now turn the call over to Joel for a review of our financial performance and our outlook. Joel?

Joel Wine -- Senior Vice President and Chief Financial Officer

Okay. Thanks, Matt. Please turn to slide 13 for our third quarter and year-to-date financial results. Ocean Transportation operating income for the third quarter decreased by $2.3 million year-over-year to $48.7 million. This decrease was primarily attributable to the unfavorable timing of fuel surcharge collections and higher terminal handling costs, partially offsetting these unfavorable year-over-year comparisons were higher container rates in China and Hawaii.

Logistics operating income for the quarter was $9.9 million or $2.6 million greater than the result in the year ago period. The increase was due primarily to higher contributions from transportation brokerage. EBITDA for the quarter decreased $4.7 million year-over-year, due to lower other income of $2.8 million, and lower depreciation and amortization, including drydock amortization of $2.2 million, partially offset by the increase in operating income of $0.3 million.

On a year-to-date basis, Ocean Transportation operating income increased by $3.4 million to $109.7 million. This increase was primarily attributable to lower vessel operating costs, higher container rates in China and Hawaii and a higher contribution from SSAT, partially offsetting these favorable year-over-year comparisons were higher terminal handling costs and a lower contribution from Guam.

Logistics operating income for the first nine months of the year was $23.6 million or $7.4 million greater than the result in the first nine months of 2017. The increase was due primarily to higher contributions from transportation brokerage and freight forwarding.

EBITDA for the first nine months of the year decreased $0.6 million, compared to the first nine months last year, due to lower depreciation and amortization, including drydock amortization of $11.7 million, partially offset by higher consolidated operating income of $10.8 million and a favorable increase in other income of $0.3 million.

Turning to slide 14, for a summary of our balance sheet, you will note that our total debt at the end of the quarter was $908.1 million and our net debt-to-LTM EBITDA ratio was 3 times based on a trailing 12-month EBITDA of $295.4 million. 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.

Slide 15 shows a summary of the manner in which we allocated our trailing 12-months of cash flow generation. For the LTM period, we generated cash flow from operations of $280.9 million, undertook net borrowings of $68.7 million and received $31.5 million of cash flows from the sale of the equipment from which we used $56.4 million on maintenance CapEx, $302.4 million on new vessel CapEx, including capitalized interest and owner's items, while also returning $34.9 million to shareholders via dividends. We do expect our leverage ratio to increase, as our Hawaii fleet renewal program progresses, but the Company's healthy balance sheet, strong operating cash flows and continued access to attractive financing sources provide ample capacity to fund new vessel construction, consider growth investments, and return capital to shareholders.

Turning to slide 16 for the third quarter, we had new vessel cash -- capital expenditures of $50.6 million and capitalized interest of $5.2 million for total capitalized vessel construction expenditures of $55.8 million. The percent of completion on the three remaining vessels under construction is noted in the table along with the updated delivery timing. As you will see, there is no change to delivery timing of the Kaimana Hila and Lurline, but there is a two-quarter delay with the Matsonia as a result of construction delays in the NASSCO shipyard. As a result of the delay in the Matsonia construction schedule, the schedule of remaining vessel progress payments has changed. For 2018, we now expect the new vessel progress payments to be approximately $317 million versus a prior estimate of approximately $345 million.

Lastly, the picture on the slide shows the house being lifted on to the Kaimana Hila in August. We are excited that she is planned to be launched into the water this month at the Philly Shipyard, as she continues to progress toward the Q1 delivery date next year.

Please now turn to slide 17, where I will discuss our outlook. For the full year 2018, we expect operating income for Ocean Transportation to be modestly higher than the $126.4 million achieved in 2017. For logistics, we expect operating income to approximate $30 million. We expect depreciation and amortization to approximate $132 million, inclusive of $36 million of drydocking amortization. We expect EBITDA to be modestly higher than the $2.96 million achieved in 2017. We expect other income and expense to be approximately $2.5 million in income. We expect interest expense to be approximately $19 million.

And finally, for the fourth quarter, we expect our effective tax rate to be approximately 26%. We want to reiterate that in the fourth quarter of 2017, we had relatively strong fuel surcharge collections in Ocean Transportation, given the nature of the timing of fuel collections in that period. So year-over-year comparisons for the fourth quarter of 2018 should consider the timing of the fuel surcharge collections in the prior year period. As a result, it is not uncommon for us to see timing -- excuse me -- as a reminder, it is not uncommon for us to see timing impacts in our fuel surcharge collection activity on a quarterly basis, but over the course of the year, we expect the timing impact of fuel recovery to effectively be minimized.

On a final note from a capital expenditure perspective, in our last earnings call, we provided our preliminary strategy with respect to the IMO 2020 fuel requirement regulations. At that time, we mentioned that we committed to a scrubber on one CLX vessel and that we were closely evaluating scrubbers for two additional CLX vessels. As of today, we have committed to move forward with scrubbers on the other two vessels. So the current strategy is to install three scrubbers in fiscal 2019. We continue to expect the scrubber installation costs to be approximately $9 million per vessel, the vast majority for which -- for these three scrubbers will be incurred in 2019.

With that, I will now hand it back over to Matt.

Matthew Cox -- Chairman and Chief Executive Officer

Thanks, Joel. With nine months under our belt, we can clearly see the financial benefit out of a diverse set of transportation and logistics services, and look forward to finishing off the year on a strong note. We remain intensely focused on cash flow generation and managing our leverage as we advance our new -- our vessel new build program and progress on the Sand Island crane investment.

And with those concluding remarks, I will turn the call back over to the operator and ask for your questions. Operator?

Questions and Answers:

Operator

Thank you (Operator Instructions) Our first question comes from the line of Jack Atkins with Stephens. Your line is now open.

Jack Atkins -- Stephens -- Analyst

Hey guys, good afternoon, and thank you for taking my questions and congratulations on a nice quarter.

Matthew Cox -- Chairman and Chief Executive Officer

Thanks, Jack.

Jack Atkins -- Stephens -- Analyst

So let me just kind of go to the fourth quarter outlook, we're just -- I guess the broader 2018 outlook and sort of the changes there. If I'm hearing what you're saying correctly, it certainly sounds like the fourth quarter is a bit stronger than what you were expecting three months ago. Do we, kind of, track that up to some pull-forward related to the tariffs, which is going to positively impact the CLX operations and I'm assuming that will impact positively SSAT. Is that, sort of, the way to think about it or if not, what's sort of driving the better fourth quarter outlook than this time three months ago?

Matthew Cox -- Chairman and Chief Executive Officer

Yeah, Jack, I think you have got -- you are on the right path here. It's really the implementation of the additional tariffs as we outlined from 10% to 25%. We do think that there is a pull-forward effect, you know, usually, Jack, as you know, as we get the merchandise into the stores prior to the holiday season, we usually see a low in December, as most of the merchandises wind its way across the Pacific and into our customer supply chains. We think there sort of a beating of the clock factor going on in the broader market in general, and so we will see some pull-forward volumes, as we noted that Matson's principle commodities, footwear and garments are not subject to these tariffs.

But nonetheless, we do see a sort of beat the clock in the -- as you rightly point out that benefits both Matson on the Ocean Service, it also benefits SSAT and probably through a lesser extent Matson Logistics as well, so we do. That's the primary driver in the upgrade for the quarter. That may impact to have a little bit of a weaker quarter, we have an early lunar New Year in 2019. And so, it may be some pull-forward that reflect some weaker volume post the lunar New Year, but we'll have more to say about that when we do our year-end earnings call. But I think, that's a recap of how we're seeing it.

Jack Atkins -- Stephens -- Analyst

Okay, OK. That makes sense. And, sort of, is in line with what we are hearing, as well in terms of fourth quarter, first quarter, so makes sense. Shifting gears here for a minute to Guam, I was encouraged to see that those volumes were flat both sequentially and year-over-year. Should we take that as a sign that while the competitive landscape in Guam still remains very challenging that things have at least sort of stabilized somewhat there or is that not the way to read that?

Matthew Cox -- Chairman and Chief Executive Officer

Yeah, it's hard to know, Jack. I mean, as we've said before, our position has been, we're going to fight for every stick of freight and I think what we've seen is that APL has not seen the momentum that it's hoped for, and we're just going to be continuing to compete. So hard to know exactly what's going to happen in the future, but I think it is fair to say that we have seen a lessening or a flattening, as we've lapped the bad news as their share of the market has stabilized. What they do from here is really hard -- it's really up to them and hard for us to know.

Jack Atkins -- Stephens -- Analyst

Okay, makes sense. And then just to go along with that, I saw that you all recently announced a -- your another service direct from the West Coast, excuse me, direct from Hawaii, down into the Pacific -- South Pacific. Could you talk for a moment, are there other opportunities like that, as you saw, because I know this is one of several that you guys have announced in the last 12, 18 months, that you see in terms of other Island communities in the Pacific where it's not going to be something huge from an EBITDA perspective individually, but combining can be sort of a nice supplement to, sort of, what you're already doing within Ocean Transportation?

Matthew Cox -- Chairman and Chief Executive Officer

Yeah, the entry into the Kwajalein market direct from Honolulu really shortens the transit time and provides US Flag service into that region, I think that's a positive step. Jack, it does complement our strategy to grow into adjacent markets in the Pacific, and you've seen we did a small announcement of -- in addition to Christmas Island -- last year we initiated a service directly in Tahiti, which is on the heels of a -- of an acquisition a couple of years ago.

And New Zealand into the Cook Islands and so I do see us continuing to expand a strategy that allows us to link Matson's hubs in Guam and Honolulu into adjoining Pacific markets. So this is really, as we see it a continuation of a strategies that we outlined a few years ago, growing organically into adjacent markets where we can -- our service can allow us to grow and as you say, modestly, but over time I think what can move the needle for us.

Jack Atkins -- Stephens -- Analyst

Okay, OK. Thanks, Matt. Makes sense. Last question, I'll hand it over, it's -- we'll have a follow-up on IMO, I know you all have a very clear strategy on -- in terms of what you are planning to do to, to install scrubbers on at least three of your vessels, I guess three for now. But when you think about the impact that IMO 2020 could have on cost structure of competitors, I'm not so much thinking about your Jones Act lanes, but more specifically to the competitors in the transpacific when coming back from China.

Is there a way to, sort of, think about the impact that could have on pricing within the broader transpacific lane looking out 12 months to 18 months. I think would you imagine that there's going to be a -- an upward bias to pricing as, I was curious to pass this through, because it seems like this could have a pretty significant impact on the cost structure of your prices for some of your competitors?

Matthew Cox -- Chairman and Chief Executive Officer

I think you're right about that. I think what we're seeing as we get closer to this 2020 implementation, many of the largest international Ocean carriers have said they're primarily going to depend on the imposition of additional fuel surcharges to cover what will be a substantially higher fuel costs. I think you may also see some further slowing down of services as they try to manage this increase in fuel costs. But I think the big question, that while it is clear that the Ocean carriers are going to be incurring additional expense associated with this compliant fuel, what is less clear is the industry on the international sides track record of being able to pass through costs and in most -- in my mind, Jack its primarily a function of whether or not the international Ocean carriers can manage the supply and demand adequately to allow for those factors to be in balance and create somewhat more orderly market that would allow for those incremental fuel surcharges to be implemented. To the extent that they can't do that, then I think they're in for a world of hurt in managing that additional cost burden. So, time will tell, I think in the way we're seeing it.

But that's why we love our position, we think the implementation of scrubbers as Jeff -- as was mentioned on three of our five vessels allows us to continue to -- we think burn less expensive fuel and put ourselves in a good competitive position, regardless of what the market conditions. But I hope we are right in the premise of your question, that there is an orderly market and that rates do go up and we would certainly benefit from that market if it occurs. I'm just saying that it's not a sure thing that it would occur.

Jack Atkins -- Stephens -- Analyst

Okay, Matt. Thank you, very much for your answers.

Matthew Cox -- Chairman and Chief Executive Officer

Sure. You bet Jack.

Operator

Thank you. And our next question comes from the line of Kevin Sterling with Seaport Global. Your line is now open.

Kevin Sterling -- Seaport Global Securities -- Analyst

Thank you. Good afternoon, gentlemen.

Matthew Cox -- Chairman and Chief Executive Officer

Hi, Kevin.

Joel Wine -- Senior Vice President and Chief Financial Officer

Hi, Kevin.

Kevin Sterling -- Seaport Global Securities -- Analyst

Matt, just following up on the scrubbers question. You're going to start three scrubbers out of five on your CLX vessels. What's -- can you remind me what's the plan with the other two vessels?

Matthew Cox -- Chairman and Chief Executive Officer

Yes, I think the way we're looking at this, Kevin, is that as, you know, we have three scrubbers installed on our Alaska vessels. Those are to comply with the Eco requirements that were in place, those are up and running. And as Joel mentioned, we'll have three CLX vessels. So, six of our 12 core vessels, three in the Alaska and nine in our Hawaii, Guam and China service will be installed with scrubbers. We're going to continue to take a hard look at the remaining six vessels, that is the four new vessels and the remaining two vessels. And at this point, we're making no predictions, but at the next drydock period on those vessels will be taking a hard look at whether or not we install over time scrubbers on the remainder of our fleet. Exactly when that will occur is unclear.

But to the extent that the less than two-year payback spreads that we've seen, I think there -- we'll continue to be a strong economic case for us to do it. And given that we're relatively small and focused, we're going to be able to implement it in many of the other larger and perhaps less capital -- capable companies and implementing the scrubber strategy.

And one other point on the scrubber strategy that I think is helpful, we cannot predict exactly what the spreads of fuel are going to be from -- in the market. Once all the market settles out, some are saying that, that there's going to be big underlying demands on diesel as this residual product is put into the market, so spreads may narrow they may grow wider, but we really see this is having the optionality to burn the least expensive fuel. So that option value, we think is definitely worth $8 million to $10 million a ship, and $9 million a ship that Joel mentioned for our fleet. So for us, it's not a no-brainer, but it seems a pretty strong business case within the larger context.

Kevin Sterling -- Seaport Global Securities -- Analyst

Yes, that makes sense. Thank you. Joe, you mentioned -- you talked about 2018 vessel progress payments, I think, moving down to $317 million for 2018 from $345 million, because of the timing delays. How about 2019, has that changed at all?

Joel Wine -- Senior Vice President and Chief Financial Officer

That changed slightly and it has been decreased little bit as well. So, what's happening is really you're seeing things slide, the last ship is sliding into -- further into 2020, Kevin.

Kevin Sterling -- Seaport Global Securities -- Analyst

Okay.

Jack Atkins -- Stephens -- Analyst

But not a lot -- not an overall, it changed slightly in 2019, but not a big magnitude of change, because the delivery date for ship two and ship three is still pretty much on track and ship one just got delivered last week. So, not a big change in 2019.

Kevin Sterling -- Seaport Global Securities -- Analyst

Okay, thanks. And Joel while I got you -- as I look out, obviously your vessel progress payments are decreasing for the next, call it five years, seven years. My sense is, you guys don't need a vessel fleet replacement program like you're going through now. You're going to generate, I think significant free cash flow. Can you outline your priorities as you think about redeploying that free cash flow? I assume you delever first, but after that is it stock buyback, increasing the dividend? And just make sure I'm thinking about it right to this kind of next couple -- call it three years to five years, your free cash flow generation. If you could help walk us through your priorities?

Joel Wine -- Senior Vice President and Chief Financial Officer

Sure. Sure, great question. Because we do see ourselves generating free cash flow in that scenario, so it really should start in 2020, because I'll remind folks that in 2020 we'll just have a remaining milestone payments on the last ship. And those milestone payments, when you -- when we get through the winter period and we look at March, April and May of the normal cash flow generation of our company, the normal cash flow should generate more cash than those remaining milestone payments. So, we should just start delevering actually around Q2-ish of 2020.

And so, our first priority is definitely to pay down debt. We've talked about our leverage ratio going into the mid-3s and we've talked about how on an annual basis, we should be able to delever about half a turn a year and so -- and we'd like to be down at least into our target levels in the low-2s. So that means, for two years or three years, we'll be paying -- the priority focus will be paying down debt to get down into those strong investment grade low-2s ratio where we like to be. So, now you're talking about 2020 to 2023 and until that time frame we would tell you, a lot of things can change between now and then of course, but that will be our focus as far out as we can see on a stable performance basis from a priority of cash flow perspective.

Now, the dividends are really important to us, we've got a great track record, we had increased the dividend every year since the time of our spin off. So, no guarantees will have in the future, but we definitely have talked to our investors and with the investment community about the importance of rewarding our long-term shareholders as we grow our free cash flow per share to reward shareholders with increased dividends over time. So, dividends will be on the table for continued sharing with shareholders as we generate cash flow. We bought back stock in the past and we've acquired companies and made growth investments internally in the past. So, we will continue to be looking at attractive M&A investments and internal organic growth investments during those years, Kevin. And the key there for us will be disciplined, we've talked about our return thresholds are -- in the mid teens from a cash-on-cash return perspective, as we look at new investments, we're very much look at it on a cash-on-cash basis and we like our portfolio of businesses today. So we expect that really, we look to grow, but we want to maintain discipline that we're buying quality assets that contribute to our portfolio and return well for shareholders over time. So I'd say, I'd layout those is our priority as we think about that time frame.

Kevin Sterling -- Seaport Global Securities -- Analyst

Got you, thank you, Joel, it's very helpful. Speaking of that, as we look at maybe your pipeline for potential M&A, particularly on the logistics side. Are you seeing multiples come in a little bit or are they still little bit too pricey for your liking?

Joel Wine -- Senior Vice President and Chief Financial Officer

We're not really seeing things change right now, but it's a very dynamic market right now, I mean, clearly it's been a strong economy, a lot of logistics players are doing very, very well right now, given the tight supply demand characteristics, especially on the supply side with trucker, driver shortages and things of that nature. So it's been a very good market for logistics players, profitability has increased, but where is the economy going to be in 2019, will some of these businesses come off a little bit, it's a question. And we really haven't seen a lot on the M&A side, is just a change in the market, so too early to say.

But I think from our point of view, we want -- we don't want to just grow for the sake of growing, if we look at logistics businesses, they've got to make sense in the portfolio and in the businesses that we're in today, where we're bringing something to the table from a synergy perspective or from a overall business, you know, congruity perspective with respect to what we have today. So I think staying close to home with respect to the businesses we're in is really important. And then of course the economics have depends a lot to be in the teens from a cash-on-cash return perspective, that I talked about before. So that's what we will focus on and we haven't seen really a change in the M&A pricing quite yet.

Kevin Sterling -- Seaport Global Securities -- Analyst

Got you. Okay, thank you. And last question and Matt, maybe bit of a bigger question for you. You talk about the uncertainty with tariffs and if manufacturing were to move out of China, where it might go? And the impact of that I know would -- could take years? But if that were to be the case, if your customers were to move manufacturing out of China? Would you say with your smaller vessels you would have maybe a competitive advantage, you could get in and out of smaller ports more quickly, or maybe that some of the other larger vessels may not be able to access, if that were to happen?

Matthew Cox -- Chairman and Chief Executive Officer

Yes, Kevin, we've done contingency planning and off -- I mean, the way we're thinking about this is that if there is some migration of manufacturing capacity out of China, it's likely to migrate to Vietnam, to India, to other places in Asia. So the point we were -- one of the points we were trying to make was that we continue to see China as a dominant player, and ultimately I believe and I don't know when that will occur. There will be a resolution of the US, China trade tariffs.

And again, without knowing exactly where that is. China has built this ecosystem of high quality and it's not just the garments, but it's the dies and the buttons and the zippers and the cloth and the expertise and the quality that is difficult for Vietnam or Malaysia, or in India to match that quality. So there are certain and the other reality is there, already is migration of the low-end manufacturing that is already occurring to going on in Vietnam and Malaysia, and India as we speak.

So we think some of that will get ramped up, I mean if there's a total breakdown in relations with the US and China, which we don't foresee. There are other markets where our small ship could go to, whether it's Vietnam or in Thailand and other places where there are relatively small ports, that big ports can go to that certainly a possibility, but that's really not where our heads were at right now.

Kevin Sterling -- Seaport Global Securities -- Analyst

Okay. Matt and Joel appreciate your thoughts today. Have a good afternoon.

Matthew Cox -- Chairman and Chief Executive Officer

Thanks, Kevin.

Joel Wine -- Senior Vice President and Chief Financial Officer

Okay. Thanks, Kevin.

Operator

Thank you. And our next question comes from the line of Ben Nolan with Stifel. Your lines now open.

Ben Nolan -- Stifel -- Analyst

Thanks. Hey guys, nice quarter. So I know that you have or will be putting out your 2019 guidance, I think next quarter, and I certainly don't want to step on that. But, especially as it relates to the core, Hawaii and Alaska markets. I'm curious as you look out into next year without putting any numbers on it or anything. Is there anything that leaves you especially optimistic or maybe pessimistic about either of those two markets, or feeling any differently about those than where you sit today?

Matthew Cox -- Chairman and Chief Executive Officer

Sure. Ben, this is Matt. I think our view of Hawaii is very consistent with UHERO, the University of Hawaii Forecast that would look for flat or very low single-digit growth in the overall economy, performing at a relatively high level. I think our views would, probably this point not be very different from that, with regard to Hawaii.

With regard to Alaska and talking to customers now, the feeling is that they may be through the recession and people are more upbeat about the prospects, we understand that in Alaska, there are a significant amount of projects on the North Slope that are going to be done this winter, different from last year, while we are not a big participant in the North Slope there, indirect benefits have come from Matson supplying that, and there was a budget issue in the State of Alaska in past, that's been resolved, and post-election cycle. So there's a little bit of optimism about Alaska, of course, that is dependent on energy prices and so and unlike other places of higher energy prices, it's a benefit to the state. So it is still earlier and subject to where the overall state economy goes there.

But overall we're looking for flat Alaska and potentially up, if or at least bottoming out in Alaska, with potentially some more optimistic views of where the future takes us, that's as best as I can provide. We should have a better feel for that when we do our year-end earnings call.

Ben Nolan -- Stifel -- Analyst

No, and I appreciate that color, even today, extent that you're able to give it, so that was helpful. And then as it relates to really I guess the West Coast port business SSAT or maybe the China trade have been seeing some interesting trading patterns, where the volumes coming into Seattle and Tacoma have really spiked as opposed to like Long Beach and Los Angeles, where they were flat maybe little down. I'm curious if you are seeing anything unique there and if there is a change in the trading patterns, how does that potentially play out or is it relates to SSAT and your business more broadly?

Matthew Cox -- Chairman and Chief Executive Officer

Yes. So, I think to your point about observations of movement within the West Coast, I think we are seeing very small anomaly, I think at this point we're not interpreting them to be permanent, it's just more where vessel capacity and supply and demand is, and there is significant demand across the markets right now that maybe just where there is more vessel capacity and at the end of the day, the carriers will sell whatever they have available capacity and perhaps with less capacity into Southern California, which is traditionally a place where that goes.

The nice part about Matson's investment in SSAT is that we have terminals in all three markets. So regardless of where that volume goes, we're going to be able to participate in those markets. So we feel well positioned regardless of which of those three West Coast markets, where the volume comes in.

Ben Nolan -- Stifel -- Analyst

Okay, and then lastly for me, just on the -- circling back around to the timing, and the delivery over the last, the Matsonia being a few quarters late, obviously that probably has a little bit of an impact on the operating cost savings that you foresee getting out of that. I was just curious, if you have any recourse or remuneration relative to the shipyard for the delay or is that within the parameters of the contract?

Joel Wine -- Senior Vice President and Chief Financial Officer

It is within the parameters of the contract and there are provisions for a delay. So there will be economic consequences under the terms of the contract for that, they're not majorly material to our overall results in this case 2020, Ben. But what I would remind folks is that the $28 million to $31 million that we've talked about is incremental EBITDA benefit of the all four ships being in place compared to our current fleet. Most of the vast majority of that is really coming -- should come when the third ship is delivered, because that's the time that we believe we'll be able to ratchet down from a 10 ship deployment in Hawaii to a nine ship deployment in Hawaii, that is still scheduled for the fourth quarter of next year 2019.

So you might not see a lot of benefit in 2019 toward that $28 million to $31 million benefit, but we should see the majority of it actually in calendar year 2020 even if that fourth ship delivery date moves around and moves back in this case.

Ben Nolan -- Stifel -- Analyst

Okay. All right, that's very helpful. I appreciate, Joel.

Joel Wine -- Senior Vice President and Chief Financial Officer

Okay. Thanks, Ben.

Operator

Thank you (Operator Instructions) And our next question comes from the line of Sahm Cho with Wells Fargo Securities. Your line is now open.

Sahm Cho -- Wells Fargo Securities -- Analyst

Thanks, good afternoon guys.

Matthew Cox -- Chairman and Chief Executive Officer

Good afternoon.

Sahm Cho -- Wells Fargo Securities -- Analyst

Hey. So, I know you talked about some of the option value with the scrubber installations. But how should we be thinking about the payback period of those investments? Is there an incremental repricing strategy for the cargoes going forward or how should we, kind of, think about that?

Matthew Cox -- Chairman and Chief Executive Officer

Yeah. So, Tom (ph). The way we're thinking about it is that we expect to recover the incremental capital cost in the scrubbers through our fuel surcharge mechanism. I think as you may know, Tom, we -- in many of our trades, we have fuel surcharge mechanisms in Hawaii and Guam and Alaska that allow us to effectively recover our fuel cost in the trades. And so what we think this allows us to do is to keep our fuel surcharge as low as possible once we've recovered the capital related to those scrubber installations, and so for us, there is a very clear payback. It's -- we said before, in the earlier presentations that within -- today's spreads between the MGO and the residual fuel, there is a less than two-year payback and to the extent those spreads widened or shorten or narrow, then the payback period will be adjusted.

But in any event, there is a very strong business case for Matson in making these investments. And over time, we would expect to remain competitive in our marketplaces, being in a position to be able to burn the least expensive fuel and remain competitive in those markets where we are able to recover our fuel surcharge.

Sahm Cho -- Wells Fargo Securities -- Analyst

Got it. So, when we're thinking about modeling the amortization of those costs. So we should really be looking at second half of 2019 through 2022, is that correct?

Joel Wine -- Senior Vice President and Chief Financial Officer

No from an accounting perspective, it will be amortized over a longer period of time. Most of these scrubbers can last the life -- the remaining life of the vessels themselves. So we haven't announced, I mean, done the final work to tell you exactly what that depreciation schedule look like. But in some cases, it could be over 10 years. So a man was talking about is the economic payback period.

Sahm Cho -- Wells Fargo Securities -- Analyst

Yeah. Perfect. And then, when we talk about the cargos that are being pulled ahead of the January 1st tariffs. Can you give us a bit of a split on how much of those cargos you've seen in Q3, and what's being laid on for Q4, or if there is a -- any color on, if it's split evenly or so?

Matthew Cox -- Chairman and Chief Executive Officer

Yeah, I mean it's hard to know or generalize, what our comments are anecdotal comments from customers. I think in some cases, it's really all over the place. So it's really hard for us to aggregate and talking with our small sliver of customers and again some customers have the ability to do it, others don't, others have tried to ramp up and source from other locations. So it's kind of all over the map, so it's difficult to know other than just knowing generally that customers have tried to pull forward, let's say, spring merchandise, stuff that would normally ship in the first quarter to try to cover that spring inventory. But in many cases, customers have limited ability to store it in their warehouses. So there's -- it's, I would say, there is a pull-forward factor, but exactly what percentage it is, it's really hard to say.

Joel Wine -- Senior Vice President and Chief Financial Officer

Yeah, Bryan (ph), you remember in the third quarter, we were full and we were full almost every third quarter and most of our sailings are always full. So in this quarter is probably is more of an impact on rate. Now the fourth quarter, as Matt mentioned earlier, there is a typical low in the December time frame, and so if we see higher volumes this year in December that are persistent until the end of the year, that's where you'd see some volume impact relative to the previous years where you see some declines in the month of December.

But in the third quarter, you should look at our volumes. The main driver of difference in this third quarter volumes were flat, it was just drydock additional voyages from last year, where we had ships returning on drydock, but for our core service or weekly service, we were full last year and we are full this year.

Sahm Cho -- Wells Fargo Securities -- Analyst

Got it. And then just switching gears to the logistics segment. Can you talk about -- can you give us a little bit more color on what you're seeing in the trucking market. I think a couple of quarters ago, you mentioned the consistent market share gains due to the early yield of the implementations. Is that still going on or we'd like -- where do you see your competitors doing in that space?

Matthew Cox -- Chairman and Chief Executive Officer

Yeah, I think what we're doing in our Logistics businesses that what I think other logistics providers are doing, which is in order to secure actual truck capacity, we're needing to pay the trucking company more in order to ensure that they carry the load that increase in cost is passed on to the customer, as well as a reset of margin that's occurred industrywide. So our truck brokerage business we think is not behaving or performing differently. It's allowed us to have a reset with our customer and the customer is not about it's -- in some ways, it's less about price and more about being able to pull, take the load off the dock and get it to its destination rather than to try to knock another $10 off the rate, because that's where the market is. And so I think our experience is very consistent anecdotally of what we're hearing from other truck brokers and domestic providers within the US.

Sahm Cho -- Wells Fargo Securities -- Analyst

Great, that's helpful. That's off me. Thanks so much.

Matthew Cox -- Chairman and Chief Executive Officer

Okay, thank you.

Operator

Thank you. And I show no further questions at this time. I would like to turn the call back over to Matt Cox for any closing remarks.

Matthew Cox -- Chairman and Chief Executive Officer

Okay, thanks, operator. Thanks for everyone for listening in and we look forward to catching up with our year-end call, aloha.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. And you may all disconnect. Everyone have a great day.

Duration: 53 minutes

Call participants:

Lee Fishman -- Director of Investor Relations

Matthew Cox -- Chairman and Chief Executive Officer

Joel Wine -- Senior Vice President and Chief Financial Officer

Jack Atkins -- Stephens -- Analyst

Kevin Sterling -- Seaport Global Securities -- Analyst

Ben Nolan -- Stifel -- Analyst

Sahm Cho -- Wells Fargo Securities -- Analyst

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