Horizon: No service cutbacks planned
Horizon Lines' chief executive officer said Tuesday that despite the financial challenges facing his company, it plans to continue to emphasize providing a high level of service to shippers.
'No customer buys from us because they like us necessarily, they buy from us because we do something they cannot get done anywhere else,' said Stephen H. Fraser, a board member who became head of the company earlier this month when long-time CEO Check Raymond retired.
'The fact that we are having some financial skirmishes does not change the fact that the people who need to move their product in the trades we serve choose us because we do something unique for them. We have zero interest or intention to change any of that,” he said.
On Monday, Horizon Lines told shareholders in its 10-K annual report that it expects “to be in covenant default under our outstanding $330 million aggregate principal amount of 4.25 percent convertible senior notes due 2012 during the second fiscal quarter of 2011. In addition, we expect to be in covenant default under our senior credit facility during the third quarter of 2011.'
While the company has been able to reach an accommodation with its senior lenders, it has been unable to reach a deal with the note holders, though Fraser said Horizon is continuing to try.
In the wake of the 10-K filing Horizon's common stock took a beating Tuesday on the New York Stock Exchange, dropping to $1.62 a share from Monday’s close of $3.08. During the past year it had traded as high as $6.09 per share. Volume was heavy with 7.5 million shares trading hands compared to an average of 335,000 per day. Horizon has 30.7 million shares outstanding.
Fraser said the company's financial problems have been triggered by three events. One is the inability to obtain a default waiver from the note holders after the company was fined $45 million by the U.S. Justice Department for its role in a conspiracy to fix rates in the Puerto Rico trade, even though that fine is backloaded over a five-year period.
The others relate to underperformance due to unrecoverable fuel costs and a drop in freight rates in the transpacific.
While the company has put up for sale its Horizon Logistics subsidiary because it is 'not core to our service,' Fraser said the company has no plans to drop any of its shipping services.
The nation’s largest operator of Jones Act container services, Horizon operates ships between the U.S. mainland and Puerto Rico, Alaska, Hawaii and Guam. Last year it started up an eastbound service from Ningbo and Shanghai to Los Angeles and Oakland.
'The services that we have and the level of service we provide is all part of our business model and we are not looking at radical changes to our business model at this time,' Fraser said.
Asked if the company is looking at a merger or combination with some other company, Fraser said 'we are looking at all options we have available to us. We are a public company so when we are publicly exposing that we have issues there are lots of people coming forward with lots of creative ideas and some of those are going to be better than others.
'The board and its advisors are prudently, carefully, and thoughtfully evaluating options. This is early in the stage I could not begin to tell you where this is going to end up. I'm highly confident that the same ships, the same people will continue to provide the same trademark service to customers.'
Fraser said Horizon has been hurt in recent months by the sharp increase in fuel costs.
While Horizon is selectively considering bunker surcharges, he said 'the weird math of fuel surcharges is that if you have sudden, steep price increases, you can't ever recover it all.'
He said Horizon, a new entrant into transpacific, has been hurt by a sharp drop in freight rates.
'Right now we are in the height of contract season and there are all kinds of things that are being considered, but I don't know where pricing will ultimately fall,' he said.
'We can influence service, but we do not particularly influence pricing because of our relative size.' He added, 'this is not impacting volume, it is impacting rates. Our ships are sailing full.'
Securities analyst Chaz Jones of Morgan Keegan & Co. Inc. said his company was lowering its 2011 EBITDA estimate for Horizon from $105 million to $95 million to incorporate lower pricing in the transpacific trade as well as higher fuel costs.
He said Horizon’s inability to obtain a covenant waiver from its convertible note holders and expectation that it will be in default of the revised financial covenants under its credit facility by the their quarter, puts Horizon “in a precarious position with respect to its balance sheet and has negative implications for equity holders. The largest risk over the near-term would involve the company having to issue shares to satisfy the covenant default associated with its convertible debt.” ' Chris Dupin