Matson (MATX) Q1 2019 Earnings Call Transcript

Matson (MATX -1.60%)
Q1 2019 Earnings Call
May. 08, 2019, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen. This is your conference operator today. At this time, I would like to welcome everyone to the Matson first-quarter 2019 financial results conference call. [Operator instructions] As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Lee Fishman. You may begin your conference.

Lee Fishman -- Director of Investor Relations

Thank you, Laurie. Joining me on the call today are Matt Cox, chairman and chief executive officer; and Joel Wine, senior vice president and chief financial officer. Slides from this presentation are available for download at our website, www.matson.com, under the Investors tab. Before we begin, I would like to remind you that during the course of this call, we will make forward-looking statements within the meaning of the federal securities laws regarding expectations, predictions, projections, or future events.

We believe that our expectations and assumptions are reasonable. We caution you to consider the risk factors that could cause actual results to differ materially from those in the forward-looking statements, in the press release, the presentation slides, and this conference call. These risk factors are described in our press release and are more fully detailed under the caption, Risk Factors, on Pages 11 through 20 of our 2018 Form 10-K filed on March 4, 2019, and in our subsequent filings with the SEC. Please also note that the date of this conference call is May 8, 2019, and any forward-looking statements that we make today are based on assumptions as of this date.

We undertake no obligation to update these forward-looking statements. And with that, I will now turn the call over to Matt.

Matt Cox -- Chairman and Chief Executive Officer

Thanks, Lee, and thanks to those on the call. Please turn to Slide 3 for my opening remarks. Matson is off to a good start to the year. Ocean Transportation's first-quarter operating income came in as expected with a number of positive and negative year-over-year comparisons.

We saw strong demand in our China service with stronger volume post-lunar new year and SSAT continued its steady performance excluding the one-time favorable items in the year ago period. But we also faced significant weather related issues that primarily impacted our Hawaii service. In logistics, another outstanding quarter with stronger-than-expected operating income as a result of all lines of service performing well. Moving onto the outlook for the full-year 2019.

We are maintaining our outlook for Ocean Transportation operating income and we're raising our outlook for Logistics. Joel will go into more detail on the financials and outlook later in this presentation. Please turn to Slide 4 On our last earnings call, I went through our current priorities , which are a mix of operational and financial objectives. Given the size and scope of the priorities, we wanted to provide a quick update on each of them and will continue to do so as we progress throughout the year.

So I'll start with the Hawaii fleet renewal. The Kaimana Hila was delivered on March 28 and we placed her into service on April 18, working the PNW Oakland Triangulation. Lurline delivery is on track for the fourth quarter of 2019 and her christening is coming up in the middle of June. We look forward to the first of the Kanaloa Class vessels entering service, which will allow us to shift to a nine ship fleet deployment and deliver operational and financial benefits.

And lastly, after nearly six months in operation, the Daniel K. Inouye is performing as expected, with actual speed meeting the design speed of 23.5 knots. Next to the Sand Island Terminal upgrade, I'm pleased to report that three new gantry cranes arrived at the terminal in mid-April. Other infrastructure work to support the new cranes, the three retrofitted cranes, and other systems continues, and we expect Phase 1 to end in early 2020.

We're nearly seven months away from IMO 2020 Regulations coming into effect and I think we're very well-positioned. We've begun the installation of a scrubber on the first of the three vessels in the CLX service and our board approved scrubbers on three additional vessels. I'll circle back to this topic shortly to provide more detail. Our leverage covenant level for the fourth quarter remained just below three times and our trailing 12-month cash flow remains strong to fund the vessel and Sand Island terminal investments.

We continue to expect our debt level to peak in the first quarter of 2020 and shortly thereafter, we will begin to delever the balance sheet to our targeted leveraged levels of the low twos. And last but not least, we continue to source organic growth opportunities that build upon our valuable Pacific network and U.S. West Coast port operations. Some of the opportunities are one-off, nonrecurring projects, but good pieces of business.

And others are smaller recurring streams that could be long-term beneficial. In Logistics. We're finding opportunities in niche areas such as expanding our 53-foot box fleet and additional contract warehouse opportunities. With improving economic conditions in Alaska, we're looking at a number of initiatives that could benefit both Ocean Transportation and Logistics.

Our SSAT joint venture picked up an additional terminal in Seattle this quarter, which I'll describe later on, but this highlights another opportunity for us to drive long-term organic growth. Turing to Slide 5, April was a busy month for our operations team with Kaimana Hila entering service and the new gantry cranes arriving at the Sand Island Terminal. The three new gantry cranes have already been installed on the rails of the terminal and commissioning each crane will occur over the next several months. The new cranes, the retrofitted cranes, and the new vessels are integral in efficiently managing the growth in volumes at our Pacific Hub for the next 40 to 50 years.

Please turn to Slide 6. I wanted to spend a few minutes on our IMO 2020 strategy given its importance. First and foremost, I wanted to remind everyone that Matson will be 100% compliant with the IMO 2020 Regulations on day one. As we've discussed before, our fuel strategy should maximize the opportunity for the company and provide the means to lower the cost for us and our customers.

As many of you know, in 2016 we got a head start over most of the other ocean carriers with the installation of scrubbers on our D7 vessels in the Alaska service. Based on the results of the D7 scrubber program and the available fuel options for us, we initiated a program last year to install scrubbers on three vessels in our CLX service, and the first of these vessels is already in dry-dock for the scrubber installation. We expect two of the three vessels to be back in service by year end and the third will be in dry-dock at year end and available in early 2020. After many months of analyzing the fuel strategy on the remaining vessels in the fleet, our board has approved the installation of three additional scrubbers, two on the remaining vessels operating in the CLX service and the Maunalei.

As a result of this approval, there are some operational and financial details that we wanted to make you aware of. First, we expect the installation on all three vessels to be complete by the end of 2020. Second, the scrubber on Maunalei will provide additional operational flexibility to use her as a reserve vessel for the CLX and Alaska services. And lastly, we expect each of these scrubber installs to cost approximately $10 million.

Now, onto our trade lane services. Turning to our Hawaii service on Slide 7. Container volume declined 2.2% year over year, primarily due to one less westbound sailing and the effects of weather related impacts. We faced difficult weather conditions in the quarter that impacted schedule integrity.

In my 32 years in the business, I haven't seen storm activity like this that we had in our operating areas in the Pacific. To get our Hawaii service back in line, we had to run an additional vessel for a short period of time, which increased operating costs by several million dollars. Looking through the weather-related impacts to our service, the container market environment in Hawaii is relatively flat. The economic picture in Hawaii remains favorable with modest economic growth and steady construction activity.

So for our full-year 2019 outlook, we continue to expect volume to approximate the level achieved in 2018, which reflects modest economic growth in Hawaii and a stable market share environment. Slide 8 provides an overview of some key Hawaii economic indicators as forecasted by UHERO for 2019 and beyond. According to the latest UHERO forecast, GDP growth in Hawaii is expected to slow to 1%. But most of the state economic indicators are supportive of continued growth for this year and next.

From our perspective, we continue to believe we're operating in a flat container market this year with modest economic growth and stable construction activity. Moving onto our China service, on Slide 9. Matson's volume in the first-quarter 2019 was 16% higher year over year. This increase is primarily the result of one additional sailing and stronger post-lunar new year volume.

We expected more of a lull in demand post-lunar new year but there were a number of blank sailings or canceled sailings from other transpacific carriers and continued port congestion in Southern California that collectively played right into our strengths as a faster, higher-quality service. We also continue to realize a sizable rate premium and achieved average freight rates during the quarter that were modestly higher than the first quarter of 2018. For 2019, we believe volatility in transpacific trade lane capacity and demand will remain throughout the year, with capacity attempting to adjust to demand as trade flows normalize following a stronger seasonal fourth quarter in 2018. With respect to Matson, we're expecting our highly differentiated CLX service to have another strong year with volume approximating the levels achieved in 2018.

Specifically, we expect a stronger first half of the year versus the prior year but expect volume to normalize to more traditional levels of activities in the third and fourth quarters, both of which were exceptionally strong last year due to the pull forward of volume associated with the U.S.-China trade situation. As for average freight rates, we're up against a difficult comp in the second half of the year, as last year was exceptionally favorable due to the U.S.-China trade situation. But we remain cautiously optimistic that average freight rates for the year will approach the healthy levels achieved in 2018. This view includes the effect of the annual contract renewals season, which recently concluded with pricing as we expected.

It's important to note that this outlook for 2019 is dependent on a neutral outcome to the U.S.-China trade situation. Turning to Slide 10, Guam container volume was 4.1% higher year over year, primarily due to typhoon related relief volume. The overall container market was essentially flat year over year. For the full-year 2019 outlook, we continue to expect modestly lower volume as the highly competitive situation remains.

Our strategy remains to fight for every single container of our customers' business. Given our long history in Guam, with strong customer ties, a shorter transit time, and significantly better on time performance, we expect to retain an outsized share of that market. Moving to Slide 11, in Alaska, Matson's container volume for the first quarter of 2019 was 5.7% lower year over year, primarily due to an expected decrease in northbound volume, mainly related to the dry-docking of a competitor's vessel in the year ago period, and one less northbound sailing falling just outside the end of this quarter. Adjusting for the dry-dock volume, and the additional sailing in the year-ago quarter, we saw a modest year-over-year increase in volume.

The container market in Alaska also grew year over year as economic conditions in Alaska continue to improve. Construction activity appears to be ticking up a little, which is good to see at this early stage of the economic recovery cycle. For 2019, we expect volume to be modestly higher than the level achieved in 2018 with higher northbound volumes supported by improving economic conditions in Alaska and higher southbound seafood related volume due to a stronger seafood harvest levels than in 2018. Turning to slide 12, our terminals of joint venture SSAT contributed $8.5 million in the first quarter of 2019, compared to $10.5 million in the prior period.

The decrease was primarily attributable to the absence of favorable one-time items in the year ago period. SSAT saw higher year-over-year lift volume as it continues to benefit from strong import volume on the U.S. West Coast. For 2019, we expect SSAT's contribution to our Ocean Transportation operating income to be lower than the level achieved in 2018, largely due the normalization of import volume on the U.S.

West Coast after a stronger seasonal demand in the fourth quarter of 2018. And although we're expecting a lower contribution this year, we're coming off an all-time high and we expect the overall environment at SSAT to be satisfactory. And of course, it remains well-positioned as the premier stevedore on the U.S. West Coast.

As you may have seen in the news, in April, SSAT initiated service at an additional terminal in Seattle as part of a new opportunity in the port area. Accordingly, Matson moved into Terminal 5, or T5, which becomes the eighth terminal on the U.S. West Coast for our joint venture SSAT. We look forward to continued long-term volume growth across the terminals in Seattle and Tacoma, as well as additional opportunities to grow organically with SSAT.

Turning now to Logistics on Slide 13. This team continues to deliver strong performance. Operating income in the first quarter of 2019 of $8.1 million, or an increase of $3.9 million over last year came in stronger-than-expected. The increase was due primarily to higher contributions from transportation brokerage and freight forwarding, but all the lines of service posted year-over-year improvements.

Span Alaska performed well as a result of improving economic conditions in Alaska. In the interest of time, I'll skip over the Logistics outlets, which Joel will provide later in the presentation. And with that, I'll now turn the call over to my partner, Joel, for a review of our financial performance and outlook. Joel?

Joel Wine -- Senior Vice President and Chief Financial Officer

Thanks, Matt. Now, we're onto our financial results on Slide 14. Ocean Transportation operating income for the quarter decreased $15.1 million year over year in the first quarter to $9.4 million. The decrease was primarily due to higher vessel operating costs, including weather-related impacts, and the Maunalei lease expense, higher terminal handling costs, and lower container volume in Alaska and Hawaii.

Partially offsetting these unfavorable year-over-year comparisons was a higher contribution from the China service. The company's SSAT terminal joint venture investment contributed $8.5 million or $2 million less than the prior-year period. The decrease was primarily attributable to the absence of favorable one-time items in the year-ago period. Logistics operating income for the quarter was $8.1 million versus $4.2 million in the prior-year period.

The increase was due primarily to higher contributions from transportation brokerage and freight forwarding. EBITDA for the quarter decreased $12.8 million year over year to $49.3 million due to lower consolidated operating income of $11.2 million, a small decrease in other income of $200,000, and a reduction of $1.4 million in depreciation and amortization, which includes dry-dock amortization. Interest expense for the quarter was $4.6 million and as a reminder, capitalized interest associated with the Kaimana Hila vessel ended at the beginning of this quarter when the vessel was delivered. So therefore, we will have a greater amount of income statement interest expense each quarter going forward this year.

Lastly, on the tax rate for the period. As we mentioned on our fourth-quarter call in February, we expected a non-cash adjustment of $2.9 million related to the reversal of an expense adjustment in 2018 arising from the enactment of the Tax Cuts and Job Act of 2017. Adjusting for this favorable one-time item, the effective tax rate for the quarter would have been 29%. And we expect the effective tax rate to remain higher in the second quarter than our annual outlook figure due to the timing of adjustments recorded throughout the year.

Slide 15 shows how we allocated our trailing 12 months of cash flow generation. For the LTM period, we generated cash flow from operations of $308.5 million, received proceeds from sale-leaseback transactions of $134.4 million, and had other positive cash flows of $3.7 million from which we used $35.4 million to repay debt, $63 million on maintenance capex, $301.8 million on new vessel capex, including capitalized interest and owners items, while returning $35.8 million to shareholders via dividends. In short, our cash flows remain strong to support investments in our new vessels, the terminal upgrade to Sand Island, and our other growth initiatives. Turning to Slide 16, for a summary of our balance sheet.

You will note that our total debt at the end of the quarter was $868.1 million and our net debt to LTM EBITDA ratio was 3.0 times versus 2.8 times at the end of 2018. 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. Going forward, we do expect our leverage ratio to increase as we near the end of the Hawaii fleet renewal program and the first phase of the Sand Island Terminal upgrade. We expect the leverage ratio to peak in the mid-threes in the first quarter of 2020, after which we will focus our strong cash flows on reducing leverage back toward our targeted levels of the low twos.

On an annual basis, we continue to expect about a half a turn reduction in the leverage ratio after the completion of our vessel program. Before leaving this slide, I wanted to point out that in the first quarter of 2019, we adopted the new lease accounting standard, ASC-842, which resulted in a few new line items on the balance sheet, which are $243.3 million of operating lease right of use assets recorded in long-term assets; $54.3 million in short-term operating lease liabilities; and $196.7 million in long-term operating lease liabilities. The impact of this accounting standard is relatively modest because we own a substantial percentage of our vessels and equipment. I also want to note that the adoption of this new lease accounting standard has no impact on our leverage covenants in our debt agreements.

Turning to Slide 17, for a review of our new vessel payments for the quarter. We had new vessel cash capital expenditures of $16.2 million and capitalized interest of $4.7 million for total capitalized vessel construction expenditures of $20.9 million. As you can see in the middle chart, the Lurline is 85% complete. Her christening is set for the middle of June and delivery of the vessel is slated for the fourth quarter this year.

Matsonia remains on track for delivery in the third quarter of 2020. The table at the bottom shows the cumulative and remaining new vessel progress payments. For the remaining 9 months of 2019, we expect approximately $172.5 million in payments. And for 2020, we expect $61.8 million in payments.

With that, let me now turn to Slide 18 to discuss our full-year and second-quarter outlook. As a result of the strong performance in Logistics in the first quarter, we have updated our full-year outlook. For the full-year 2019, we continue to expect operating income for Ocean Transportation to approximate the $131.1 million achieved in 2018, after adjusting for the additional 11 months impact of the vessel sale-leaseback of $6.6 million. For Logistics, we now expect operating income to be moderately higher than the level achieved in 2018 of $32.7 million.

We expect depreciation and amortization to approximate $130 million, inclusive of $35 million for dry-docking amortization. We expect EBITDA to approximate $288 million or higher than the 2018 level after adjusting the 2018 result for the additional 11 months impact of the vessel sale-leaseback of $11 million. We expect other income to be approximately $2.7 million in income. We expect interest expense to be approximately $25 million.

And finally, for the year, we expect our effective tax rate to be approximately $26 million excluding the $2.9 million reversal we recorded in the first quarter related to the Tax Act. For the second quarter of 2019, we expect Ocean Transportation operating income to be moderately lower than the $36.5 million achieved in the second quarter of 2018. For Logistics, we expect operating income to be modestly higher than the $9.5 million achieved in the second quarter of 2018. Please turn to Slide 19.

On our fourth-quarter call, we provided estimated other capital expenditures, including maintenance capex for 2019 and 2020. In light of the expansion of the scrubber program to include three additional scrubbers, the estimated capex for 2020 is expected to increase by $27 million to a total of $112 million. As for the estimated figures we provided on the fourth-quarter call for depreciation, and amortization, and interest expense for 2019 through 2021, the additional scrubber capex will not materially change the estimates we previously provided. I now turn the call back over to Matt for his final remarks.

Matt Cox -- Chairman and Chief Executive Officer

Thanks, Joel. We're pleased with our start to the year and look forward to progressing through the year on our new vessels and the Sand Island infrastructure project. We remain intensely focused on cash flow generation and managing our leverage levels as we head down the home stretch on the last two new Hawaii vessels. And with that, I will turn the call back to the operator and ask for your questions.

Questions & Answers:

Operator

[Operator instructions] Your first question comes from the line of Steve O'Hara from Sidoti. Please ask your question.

Steve O'Hara -- Sidoti and Company -- Analyst

Hi. Good afternoon. 

Matt Cox -- Chairman and Chief Executive Officer

Hi, Steve.

Steve O'Hara -- Sidoti and Company -- Analyst

Hi. Thanks for taking the question. I guess on the pricing and negotiations with the China service, can you just walk me through the rate -- the way rates work in that market given the fact that it sounds pretty, like there's a lot of clarity in terms of what happens with rates next year with IMO 2020, and fuel, and all that.

Matt Cox -- Chairman and Chief Executive Officer

Yeah. So it's an interesting dynamic, Steve. Let me speak to both Matson and the trade in general. And I'll make sure I distinguish between the two.

So I would say for Matson and for the trade, these first comments are around the rollout of the IMO 2020 and the new fuel standards. And so what you see happening there on that dynamic are most transpacific carriers have not installed scrubbing devices like we have, or emission scrubbers. And what we understand in the market are the discussions and mechanisms around how to handle the fuel impact have been put off until the end of the year, as they get more sense probably in the fourth quarter when they need to be actually purchasing this fuel so that they have it available and they have the noncompliant fuel out of their systems before January 1. So my sense is, is that there's a lot of wait and see.

There are discussions about mechanisms and I think for the customers of the international ocean carriers, it's sort of a wait-and-see approach in terms of determining what is the impact and of that impact, how much is that going to be borne by the customers versus absorbed by the international shipping lines. And so it's a really open question. I would say for Matson, who has advantage of having a scrubber strategy, our discussions with our customers was somewhat different in the sense that our discussion was around seeking to earn a reasonable return or a recovery of the cost of installing the emission scrubbers. But once the recovery is complete, it's our customer's expectation and our belief that we will continue to have a very effective fuel pricing relative to the rest of the market.

But again, in the big picture of things, Matson has a very differentiated service and we don't compete on fuel anyway. So I would say that with that backdrop, Matson -- about some portion of our business is done on that May 1 to April 30 contracting cycle. We had a satisfactory outcome with regard to our customers in terms of that portion of our business. And the rest of it is on a more spot basis with shorter-term contracts.

But again, we feel very well-positioned given our highly differentiated service.

Steve O'Hara -- Sidoti and Company -- Analyst

OK. Thank you. And then just following up to that, I mean, what does the competitive landscape look like in the Jones Act trades that you're in? Is everybody going to be compliant, to your knowledge, by IMO -- by the date and if not, how does that work?

Matt Cox -- Chairman and Chief Executive Officer

Yeah. So what we know is that -- I'll start with the Alaska trade. Steve, I mentioned that we've installed emissions scrubbers and our base fuel cost will not change. And IMO -- what we have needed to do for IMO 2020 has already happened in the Alaska trade.

Our principal competitor in Alaska is Totem Ocean Express. They are burning compliant fuel now and they're in the process of taking a slightly different approach, which is to convert their vessels to accommodate liquefied natural gas. So they're in the process of converting their vessels to an LNG solution that will likely happen over a longer period than 1/1/2020 but will be fully compliant, it's our understanding, as they are today by burning low emission fuel. In the Hawaii trade, where our principal competitor is Pasha, they have two vessels that are compliant not.

These are roll-on/roll-off vessels. They have two vessels, as we know, are under construction now. Those will be delivered in -- some time both during 2020 after January 1, 2020. And then are in the process -- we don't know but they still have two remaining steamships that will no longer be compliant.

And they've not indicated what their plans are with respect to how they're going to address compliance on those remaining steam vessels that are in their fleet. So I would not predict any significant changes on 1/1, although I can say that we are very confident in our ability and a plan in place to be fully compliant from Matson's perspective, on 1/1.

Steve O'Hara -- Sidoti and Company -- Analyst

OK. All right. Thank you very much.

Matt Cox -- Chairman and Chief Executive Officer

Sure, Steve.

Operator

Our next question comes from the line of Jack Atkins from Stephens. Please ask your question.

Unknown speaker

Hey, guys. This is actually Andrew on for Jack. Thanks for the time today. Matt, I wanted to follow-up on one of those previous questions around the pricing in the transpacific lane you're trying to service.

We've heard from some of our contacts we talk to about carriers looking to putting in some sort of a floating bunker surcharge. I don't know if that's the right term to call it, but something along those lines in their contracts. Is that something that, one, you guys put in your contracts or two, that you guys came across during bid season this year?

Matt Cox -- Chairman and Chief Executive Officer

Yeah. So there are existing floating bunker mechanisms that we also, and the trade uses today. And there are various calculations in the way that those are addressed. And so I think it's fair to say, and thanks for asking Andrew, to be a little more precise, that there are existing mechanisms in place to handle this floating, or this fuel surcharge or bunker adjustment factor, a BAF, or there's different terms for it.

But it's largely those mechanisms, which will need to be addressed, and whether or not those mechanisms need to be adjusted based on the higher cost of fuel, all is going to get kind of played out in the fourth quarter of this year we think. At least that's what we understand. But you're right, there are existing bunker -- floating bunker mechanisms. Whether the existing mechanisms allow for carriers to recover their full cost of fuel remains unclear but there are mechanisms in place.

Unknown speaker

OK. OK. That's helpful. Matt, you guys called out some weather headwinds in Hawaii during the quarter.

I think you said in your prepared comments it was several million I think is the word you used in terms of the impact. Is there any way you can help us put maybe a finer point on that, maybe from a volume or an EPS standpoint, just to get a sense for the headwind you faced. And then also in Hawaii, the guidance of the year, flat in volumes. I know the weather, I think one less sailing impacted the first-quarter results.

But as you look at the rest of the year, is there any green chutes that you see in terms of maybe getting those volume -- seeing a little bit of a tick up in volumes to kind of get back to that level?

Matt Cox -- Chairman and Chief Executive Officer

Yeah. So I think with regard to the cost in the first quarter of the weather-related days, we said several million. You can use $2 million pre-tax as a good proxy. That would get you in the ballpark as we had to deploy additional vessels and we had to do other things in order to try to keep our base schedules intact given the difficult weather situation.

Of course, we do not expect significant weather-related delays now that we've gotten out of the winter months and that's baked into our thinking about the rest of the year. I would say, I wouldn't want at this point to go above our general feeling in the Hawaii trade for -- we're seeing very low single-digit growth in the overall economy. It hasn't translated into freight volumes. It hasn't, over the last couple of years, translated into meaningful freight volumes.

So we're just approaching it being relatively flat for the market. I think we're more optimistic about Alaska and the start you can see there. But in Hawaii our best thinking at this point, just because we haven't seen it, is significant incremental growth in the overall market. So it's a little ahead of where we'd like to be in terms of how we're approaching the Hawaii market.

Unknown speaker

Good deal. And then last one for Joel. I think -- I guess as we look out, the new vessel payments start to wind down this year and especially in 2020. And then I think you guys added some capex next year for the new scrubbers.

Maybe if you could, just from a high level, maybe talk through some of the committed capex that you see for next year and maybe how you're approaching or thinking about potential free cash flow in 2020 now that the new ships will be in the business and these payments are kind of winding down.

Joel Wine -- Senior Vice President and Chief Financial Officer

Sure, Andrew. So in terms of the commitments next year, it's all baked into the $112 million number we talked about in our capex schedule slide. But even on top of that, you get the $112 million plus the $62 million for the vessel payments. We expect that free cash flow somewhere near that number, potentially higher if we're at the run rates -- if we maintain the run rates we're at today.

So the first priority will be to deleverage. And that's the first priority after, of course, we invest in our business. So maintenance capex, some of the organic growth that we've been talking about, which is baked into those capex numbers. Those are key priorities for us, but after we have additional free cash flow above those, deleveraging back down into the twos and our target level the low twos is the first priority.

But over time, we're certainly open to M&A as long as we remain disciplined and hit the strategic and financial targets that we've laid out, that will always be an option for us to grow. And then we'll get the dividend. We've had a good track record of growing our dividend commensurate with our growth in free cash flow. So that's something we'd like to continue.

And we're not opposed to special dividends either. Returning that capital through all those mechanisms will be on the table for us as we generate that free cash flow.

Unknown speaker

Good deal. Thanks for your time, guys.

Matt Cox -- Chairman and Chief Executive Officer

Thanks, Andrew. 

Joel Wine -- Senior Vice President and Chief Financial Officer

Thanks, Andrew. 

Operator

Your next question comes from the line of Ben Nolan from Stifel. Please ask your question.

Ben Nolan -- Stifel Financial Corp. -- Analyst

Great. Thanks. Good quarter, guys. My first one relates to the Logistics business.

Obviously, it's been a few quarters now and it continues to do really well and the margins, in particular, are really hanging in there well. And I appreciate that broadly speaking, the industry is in a good place and margins are largely wider. But is there anything else that you would point to that maybe gives you a level of comfort that maybe you're doing something a little bit differently than maybe you had been. Obviously, Span helps but is there something that can keep those margins a little bit higher even in periods of time when maybe cyclically it's not as good of a market?

Matt Cox -- Chairman and Chief Executive Officer

Sure. Well, let me start off by saying that this unit continues to shake and bake, to use a Ricky Bobby phrase. So we're really happy with the performance of the unit. But I guess the way I look at it is -- and then you've heard us say this before -- the first thing we did was -- the team did -- was to look at our entire portfolio of business and we're very disciplined about repricing significant portions of the business.

Or if the margins couldn't go up to levels that we thought were where we needed them to be, to shed those businesses. And so there's been a significant effort under way to reprice our entire transportation brokerage portfolio. And we think that certainly in this current economic environment that that will continue to pay dividends for us. You were right also in calling out Span Alaska.

We don't separately break out the margins in Span. It's a different business and the margins are a little bit higher. So some of the drifting up of the margins from the old days is a result of just the mix of the margin. But I would say, and every single one of our lines of business, our China Logistics business, our Warehouse business, each of them are contributing and improving.

And so it's been great. So to your question about how sustainable are the margins, I think through this current economic environment, we continue -- we do expect margins to remain elevated. Now, if there's a recession in three or four years and the market dynamics change, that's a different bet. But in this current economic environment and climate, which we don't see as changing in the near term, I think we're going to continue to produce very strong high-margin.

I think that can be replicated through this cycle. So we're very optimistic about it.

Ben Nolan -- Stifel Financial Corp. -- Analyst

And then another thing that came up that obviously, you shifted things around a bit and SSAT had added a peer in Seattle. Are there any implications to Matson away from SSAT there? Is this neutral to your business as a whole and additive to SSAT? Or how else should we think about that?

Matt Cox -- Chairman and Chief Executive Officer

I think I understood your question but I think the way we have seen this, and Ben, this has been a -- at least a -- it's been a 20-year joint venture and Matson's position has been we would rather the joint venture continue to reinvest and grow its footprint on the U.S. West Coast. And as opportunities have presented themselves, we want to increase that joint venture's share of the total lift market. And so for example, the Terminal 5 or T5 lease that we put in place allows for other carriers to come on T18 and some of our other joint venture terminals to increase our volume the Seattle-Tacoma area.

That's probably not going to be a needle mover in terms of operating results in 2019. But we do expect moving into the future it will just be another element that allows SSAT to continue to step up and grow as we -- I mean I should say the distributions from SSAT remain very healthy but we've always been focused on identifying organic growth in that joint venture and will continue to do so into the future. I'm not sure if I answered your question fully, Ben.

Ben Nolan -- Stifel Financial Corp. -- Analyst

That's helpful. I guess the other part of my question was is there outside of SSAT, just in terms of the Matson stand-alone business, does this have any real impact on how you do business other than maybe calling at a different spot?

Matt Cox -- Chairman and Chief Executive Officer

No, I don't think so. The joint venture terminals are defined on the U.S. West Coast. Carrix, the parent company of our joint venture partner, operates marine terminals in other parts of the world.

Those are not something that we would look to participate in. But I can think of no other benefit or detriment to this joint venture. It operates on a relatively stand-alone basis and I can't think of anything that would impede anything that has to do with Matson associated with this investment.

Joel Wine -- Senior Vice President and Chief Financial Officer

And Ben, I'd just throw out a reminder. So for our Hawaii operations, we call on Seattle, but our competitor, Pasha, does not. So there's no impact relative to competition for our Hawaii trade. With this move and then for the Alaska trade, both we have competitor call down in Takoma.

We actually don't call Seattle. So none of this Seattle movement from one terminal to another for us had any impact whatsoever on our Alaska business or our competitors.

Ben Nolan -- Stifel Financial Corp. -- Analyst

And then lastly from me, I wanted to circle back to make sure I understood your comments about the scrubbers. And you talked about negotiations with your customers. There's sort of an earn back of the capital costs associated with the scrubbers in the contracts, after which it's effectively fuel neutral. Is there any way, though, that scrubber, other than just getting back your investment, is there any way that these can give you sort of a competitive advantage or enable you to sort of earn returns over and above just earning back?

Matt Cox -- Chairman and Chief Executive Officer

I think we do believe that for Matson installing scrubbers is the right thing for us to do. and it allows us, over a long period of time, to burn a less expensive mix of fuel. What the spreads are relative to the other -- it's difficult for anyone to know. And for us, it's really about optionality.

We want to earn an adequate return on the scrubbers, and we continue to be confident in our ability to do it. You know, we have fuel surcharge mechanisms that allow us to recover most of our fuel, or all of our fuel in the Jones Act trades. And once we recover the capital cost of these scrubbers, I think our goal would be to operate as economically as we can, and be as competitive as we can. For example, I've just mentioned in the Hawaii trade, we understand that the Pasha ships will be burning LNG once they're delivered from day one.

At least those are the announcements that the Pasha Group has made in that regard. And so I would expect -- I don't know exactly where the equivalent BTU cost per container is on LNG relative to conventional fuels that can be treated with emission scrubbers. But again, we want to be competitive. I think it would be an overstatement to think that we could gain a competitive advantage.

But I can tell you, for example, in our discussion with our China customers, it's a lot easier for them to understand our approach and it's much more transparent than trying to use a very complicated fuel surcharge mechanism that is really difficult for them to understand. So we're simple and transparent and I think our customers appreciate that approach.

Ben Nolan -- Stifel Financial Corp. -- Analyst

And that might translate into better customer relationships, more volume eventually, or something like that?

Matt Cox -- Chairman and Chief Executive Officer

Yeah. And we don't like to boast very much, but we already have a terrific reputation in the China trade as straight shooters. And this just reinforces that we know what we're doing. We're credible and we're reliable.

So I think it just enhances what I think is the best reputation in the transpacific trade.

Ben Nolan -- Stifel Financial Corp. -- Analyst

Great. All right. Thanks. Appreciate it, guys. 

Matt Cox -- Chairman and Chief Executive Officer

OK. Thanks very much, Ben.

Operator

And we have a question from the line of Michael Webber from Wells Fargo. Please ask your question.

Michael Webber -- Wells Fargo Securities -- Analyst

Hey. Good afternoon, guys. How are you?

Matt Cox -- Chairman and Chief Executive Officer

Hi, Mike.

Michael Webber -- Wells Fargo Securities -- Analyst

First off, it's a great Talladega Nights reference, man. Appreciate it. I wanted to loop back to -- I think you kind of touched on this with your answer to Ben's last question. But as it pertains to actually passing through I guess your fuel surcharge mechanism, one, are you guys going to look to secure your forward HSFO fuel supplies on a long-term basis? And then two, how does that actually work its way into your fuel surcharge mechanism if you've hedged that far enough out I guess on a forward basis? Just curious how that would work.

Matt Cox -- Chairman and Chief Executive Officer

So let me differentiate our trades because in the Jones Act trades, we have a fuel surcharge mechanism that, as you know, allows us to recover 100% of our fuel. So we have an economic mechanism that allows us to recover our fuel over time. In other words, there can be quarters where if you see a big -- a change up or down that we can be over or under collected. But given that we have an economic hedge, we don't need to engage in a financial hedge in our Jones Act Trades.

Nor, do we expect we're going to need to in the future.

Michael Webber -- Wells Fargo Securities -- Analyst

I guess that was kind of the question was do you think need to in order -- in terms of the payback period on the scrubbers, the last thing you would want would be to not be able to get access to HSFO to utilize the scrubbers. So I guess the question is, I guess within the pass through mechanism, passing through all of your fuel costs, I guess is that done on, like, a real-time basis? Or I guess the actual -- the nuance of the mechanism I guess is what I was trying to get at. I don't know if that was particularly clear.

Matt Cox -- Chairman and Chief Executive Officer

That's helpful. I think we've been in discussion with our fuel suppliers and are reasonably confident that fuel is going to be available. We also remain confident that our fuel surcharge mechanisms are going to allow us to recover over a fairly short order the capital cost of putting those in. And we continue to think it's the right decision for us.

And then I was just going to comment on China. There's more pieces moving in that trade. But again, we were satisfied with the contract increases we got, a portion of which was going to be assigned toward the beginning of the capital recovery process of the scrubbers. And we feel confident -- continue to feel confident in our ability to be able to recover all the capital cost.

Michael Webber -- Wells Fargo Securities -- Analyst

OK. And I can follow-up offline in terms of the details of the surcharge I guess. Matt, as it pertains to your guidance and I think it's just kind of going through one of your earlier slides. Just kind of referencing the westbound volumes, you mentioned one fewer sailing and Q1 numbers that were just a touch inside of 2018.

Just from a volume basis, you also kind of pointed to a 2019 volume outlook that looks like it was going to be relatively on par with '18. Is the implication there that you guys are seeing or have already started to see this seasonal bump that you would need to kind of get back to that 2018 level from a volume basis? 2018 was a pretty strong year and you had a pretty sizable bump in Q2. I'm just curious if you've seen that early indication.

Matt Cox -- Chairman and Chief Executive Officer

Yeah. I would say that, of course, as you know, Mike, the second and third quarters are the big quarters for the Hawaii trade. That's seasonally when a lot of it moves. Of course, the overlay there is around construction projects that have their own life that add volume at different phases.

Yeah. We're a little bit behind last year. There's always a little noise if a voyage sails a day later or a few hours later and then falls into the next quarter. So we were trying to call that out.

But I think overall, our feeling is that while we're a little behind in the first quarter, we think the seasonal factors are going to allow us to end the year about where we finished '18. And implied in that is we don't really see any big share shifts as we go through the rest of the year. So we're looking for a flattish environment and we will do better as the seasonal elements start to kick in, in the second and third quarter. Although, I think we've called out our second-quarter guidance, Joel did, and our comments are consistent with our expectations for Hawaii volumes and all the other volumes that are embedded in our trade.

Michael Webber -- Wells Fargo Securities -- Analyst

OK. Yeah. No, that's helpful. And then I guess last one, just big picture.

Matt, your -- the last vessel you guys took from Aker Philly, I believe it's the last commercial vessel that they've built. In the scenario where there would only be one provider of commercial Jones Act tonnage of the kind of scale that you guys would need, I guess being NASSCO, is that a positive or a negative for Matson on a long-term basis? And if it's not at least a minor concern, I guess why? I guess what some of the mitigating factors would be there.

Matt Cox -- Chairman and Chief Executive Officer

Yeah. I mean I guess as we see -- first of all, Aker is the -- the Philly shipyard has built two beautiful ships. I mean our engineering teams and our operating teams, these vessels are operating well, at or above spec and the yard takes such pride in its work. We're rooting for that yard to survive.

But having said that, and nobody knows what's going to happen, whether they convert to military work or whether they get some additional ships. We know they're working hard trying to find their next contract. But tactically, with regard to Matson. After we built or took delivery of the two NASSCO ships, the Kanaloa Class vessels, we're going to go through a relatively long period where we're not going to need to build ships.

And those ships that we are going to be building next are somewhere in the second half of the 2020s, sort mid-to-late 2020s. And those are for the Alaska ship, replacements. Those are likely to be somewhat smaller than these very large ships and that opens another level of yard to be able to be on the project. And so I guess while we're rooting for Aker to survive or Philly Shipyard to survive, we know that we're going to be in great shape moving into the future and we're not going to be back in the market unless there is some acquisition or some other opportunity, and that would be a good news story for some time.

So those are my thoughts at this point.

Michael Webber -- Wells Fargo Securities -- Analyst

That's fair. All right. I appreciate them, guys. Thanks.

Matt Cox -- Chairman and Chief Executive Officer

OK, Mike. Thanks.

Joel Wine -- Senior Vice President and Chief Financial Officer

Thanks, Mike.

Operator

[Operator instructions] There are no further questions at this time. Speakers, you may continue.

Matt Cox -- Chairman and Chief Executive Officer

OK. Well, thank you so much for your attention to the call. Again, I think we're off to a good start for the year and we look forward to catching up with everyone on the second-quarter call. Aloha.

Operator

[Operator signoff] 

Duration: 55 minutes

Call participants:

Lee Fishman -- Director of Investor Relations

Matt Cox -- Chairman and Chief Executive Officer

Joel Wine -- Senior Vice President and Chief Financial Officer

Steve O'Hara -- Sidoti and Company -- Analyst

Unknown speaker

Ben Nolan -- Stifel Financial Corp. -- Analyst

Michael Webber -- Wells Fargo Securities -- Analyst

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