Matson Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 4, 2023

There are 7 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Matson First Quarter 2023 Financial Results Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Lee Fishman.

Operator

Please go ahead.

Speaker 1

Thank you, Felicia. Joining me on the call today are Matt Cox, Chairman and Chief Executive Officer and Joel Winnie, Executive 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.

Speaker 1

These risk factors are described in our press release and presentation and are more fully detailed under the caption Risk Factors on Pages 14 to 24 of our Form 10 ks filed on February 24, 2023, and in our subsequent filings with the SEC. Please also note that the date of this conference call is May 4, 2023, and any forward looking statements that we make today are based on assumptions as of this We undertake no obligation to update these forward looking statements.

Speaker 2

I will now turn the call over to Matt. Okay. Thanks, Lee, and thanks to those on the call. I will start on Slide 3. Despite being down from the extraordinary pandemic driven demand level over the last 2 years, Matson's Ocean Transportation and Logistics Business segments performed well in a challenging business environment.

Speaker 2

For the Q1 within Ocean Transportation, our China service generated lower year over year volume and freight rates, which were the primary contributors to the decline in our consolidated operating income. We also saw lower year over year volumes in Hawaii, Alaska and Guam compared to the year ago period. In logistics, operating income decreased year over year primarily due to lower Contributions from Supply Chain Management and Transportation Brokerage. I will now go through the Q1 performance of our trade lanes, SSAT and Logistics. So please turn to the next slide.

Speaker 2

Hawaii container volume for the Q1 decreased 0.8% year over year, primarily due to lower eastbound volume. For the quarter, we saw muted growth in westbound volume And we saw a steadier level of retailer related freight demand consistent with pre pandemic trends. Volume in the Q1 of 2023 was 0.9% higher than the volume achieved in 2019. Please turn to Slide 5. Hawaii's economy continues to grow from strong tourism trends and low unemployment, but it's slowing.

Speaker 2

UHERO's March projections continue to show economic growth in 2023, supported by continued strength In total tourism and a relatively low unemployment rate, UHERO projects weakness in domestic tourist arrivals from Weakening macroeconomic conditions to be countered by continued improvement in international tourist trends. Unemployment is expected to rise A little as the economy responds to the effects of higher interest rates to subdue inflationary pressures. Despite UHERO's view of continued economic growth, in the near term, we expect muted freight demand. In the medium term, the trajectory of economic growth in the state remains uncertain given the negative trends as a result of higher inflation and higher interest rates. Moving to our China service on Slide 6.

Speaker 2

Matson's volume in the Q1 of 2023 was 35.4% lower year over year, primarily due to no CCX service in the quarter and lower demand for our CLX and CLX Plus services. Nearly 2 thirds of the year over year volume decline was related to the CCX service in the year ago period. Matson continued to realize a significant rate premium over the Shanghai containerized freight index in the Q1 of 2023. We achieved freight rates that were lower than in the year ago period, but higher than those achieved in the Q1 of 2019. Please turn to Slide 7.

Speaker 2

In the Q1, our retail customers continued to conservatively manage the inventories amid weakening consumer demand, Increasing interest rates and economic uncertainty. As we noted on our Q4 earnings call, In the weeks post Lunar New Year, we saw light demand for our China service and as a result, we decided not to sail the CLX Plus vessel from Shanghai for a few weeks. Currently in the Trans Pacific, business conditions are mixed with general improvement in trade lane capacity and some improvement in retailer inventories. Regarding trade lane capacity, We have seen more short term capacity management in the form of Blight Sailings. Within our scope of expedited ocean, We have seen one competitor terminate its West Coast bound service.

Speaker 2

On the demand side, we continue to see conservative inventory management by our retail customers in light of the economic uncertainty. Given the conservatism in inventory management, Retail inventories could become quite tight to the extent consumer demand stabilizes or firms up, which could drive incremental short term demand for our expedited services. Looking ahead, For the Q2, we expect our CLX and CLX Plus services to reflect freight demand levels below normalized condition with lower year over year volumes and a lower freight rate environment. Absent an economic hard landing in the U. S, We expect improved trade dynamics in the second half of twenty twenty three as the Trans Pacific marketplace transitions to a more normalized level of demand.

Speaker 2

Regardless of the economic environment, we expect to continue to earn a significant rate premium to the SCFI, reflecting our fast and reliable ocean services and unmatched destination services. Please turn to the next slide. This slide is a summary of our China service offerings in the last couple of years and what we expect in 2023, 2024 and beyond. Our expedited service in the Trans Pacific have evolved through and beyond the pandemic to meet the demands from our Out of the pandemic, we gained the CLX Plus service as a permanent fast transit service into Southern California that complements our highly differentiated CLX offering. The Matson brand was enhanced during the pandemic With our CLX Plus and CCX offerings as we responded quickly to our customers' needs and provided reliable ocean and terminal services during a difficult period with port congestion and supply chain issues.

Speaker 2

Going forward, We will continue to uncover growth opportunities in the Trans Pacific by leveraging our brand and success with the CLX and CLX Plus service. Given the vessel changes in the CLX string in the next couple of years, we expect the annual run rate of volume for the CLX To be approximately 60,000 to 65,000 containers until the 3 new Aloha Glass vessels are in service in 20262027. As the new Aloha Class vessels enter the trade lane, We expect the CLX capacity to increase approximately 500 containers per vessel per voyage. For the CLX Plus service, we expect the annual run rate of volume to also be approximately 60,000 to 65,000 containers. Please turn to Slide 9.

Speaker 2

In Guam, Matson's container volume in the Q1 of 2023 decreased 10.9% year over year. The decrease was primarily due to lower retail related demand. Volume in the Q1 of 2023 was 3.9% lower than the level achieved in the Q1 of 2019. In the near term, we expect muted freight demand in Guam despite continued improvement in the economy with increasing tourism and a low unemployment rate. There are also negative trends as a result of higher inflation and higher interest rates that create uncertainty and the economic growth trajectory.

Speaker 2

Please turn to the next slide. In Alaska, Matson's container volume for the Q1 of 2023 decreased 4.8% year over year. The decrease was due to Lower export seafood volume from AAX, primarily due to 3 less sailings Lower southbound volume primarily due to lower domestic seafood and household goods volume, partially offset by higher northbound volume due to 2 additional sailings. Compared to the Q1 of 2019, volume in the quarter was 20.7% higher. The Alaska economy continues to show good growth and improvement in key indicators from the depths of the pandemic.

Speaker 2

In the near term, we expect continued economic growth from continued job growth and increased energy related exploration and production activity. However, there are negative trends as a result of higher inflation and higher interest rates that create uncertainty in the economic growth trajectory. Please turn to Slide 11. Our terminal joint venture, SSAT, declined $35,800,000 year over year to a negative $1,800,000 The lower contribution was primarily due to lower other terminal revenue And lower lift volume. SSAT saw significantly less detention and demurrage revenue in the quarter due to easing port congestion and lower lift volume consistent with lower demand in the trans Pacific trade lane.

Speaker 2

For the Q2 of 2023, we expect lift Volume 2 reflect the challenging environment in the transpacific trade lane. We also expect significantly less detention and demurrage revenue than the year ago quarter. Absent an economic hard landing, we expect SSAT to trend to pre pandemic profitability levels beginning in the second half of the year. Turning now to logistics on Slide 12. Operating income in the Q1 came in at $10,900,000 were $5,500,000 lower than the results in the year ago period.

Speaker 2

The decrease was primarily due to a lower contribution from supply chain management consistent with lower demand in the transpacific trade lane and a lower contribution from transportation brokerage. In the near term, we expect a mix of activity across the logistics line of business. We expect continued growth in Alaska to be supportive of our freight forwarding demand. We expect supply chain management to track our China service, So a challenging environment in the Q2 as I discussed previously. For transportation brokerage, we expect near term challenges with lower freight demand, driven primarily by retail customers continuing to manage down inventories, excess capacity and declining accessorial fees.

Speaker 2

I will now turn the call over to Joel for a review of our financial performance.

Speaker 3

Okay. Thanks, Matt. Please turn to Slide 13 for a review of our Q1 results. For the Q1, consolidated operating income decreased $393,900,000 year over year to $38,700,000 with lower contributions from Ocean Transportation and Logistics of $388,400,000 $5,500,000 respectively. The decrease in Ocean Transportation operating income In the Q1, it was primarily due to lower freight rates and volume in China and a lower contribution from SSAT, partially offset by lower operating costs and expenses, including fuel related expenses, primarily related to the discontinuation of the CCX service.

Speaker 3

The decrease in logistics operating income was primarily due to lower contributions from supply chain management and transportation brokerage. We had interest income of $8,200,000 in the quarter due to higher cash investment rates on our cash and cash equivalents and cash deposits in the CCF as compared to no interest income in the prior year period. Interest expense in the quarter decreased $300,000 year over year due to the decline in outstanding debt in the past year. The interest expense in the Q1 also includes the premium paid to retire 2 debt securities in the Q1. The effective tax rate in the quarter was 23.1% compared to 21.1% in the year ago period.

Speaker 3

Please turn to the next slide. This slide shows how we allocated our trailing 12 months of cash flow generation. For the LTM period, we generated cash flow from operations of approximately $1,094,700,000 from which we used $137,900,000 to retire debt, dollars 145,000,000 on maintenance and other CapEx, $53,400,000 on new vessel CapEx including capitalized interest and owners items, 623 $27,400,000 on other cash flows cash outflows, while returning $413,000,000 to shareholders via dividends and share repurchase. Please turn to Slide 15 for a summary of our share repurchase program and balance sheet. During the Q1, we repurchased approximately We had 700,000 shares remaining in the repurchase program.

Speaker 3

Since we initiated our share repurchase program in August of 2021 Through April 26 this year, we have repurchased 8,300,000 shares or approximately 19% of our outstanding shares approximately $650,000,000 Last week, our Board of Directors approved adding 3,000,000 shares to the existing program and extended the program end date to December 31, 2025. As we have said before, we are committed to returning excess capital to shareholders and plan to continue to do so in the absence of any large organic or inorganic growth investment opportunities. Turning to our debt levels. Our total debt at the end of the quarter was $476,700,000 All of our outstanding debt is fixed rate. Our $650,000,000 revolving credit facility is our only floating rate instrument and it is undrawn as of quarter end.

Speaker 3

As of the end of the Q1, the average interest rate on the outstanding debt was 2.04%. We reduced outstanding debt principal in the quarter by 40,800,000 of which $14,400,000 was through regularly scheduled amortization and the balance of $26,400,000 was through the repayment in January March of 2 Title XI secondurities. I'm now going to walk through an update on the capital construction fund, so please turn to the next slide. As we mentioned on the Q4 earnings call, in February, we deposited $100,000,000 in cash into the CCF and pledged accounts receivable to reduce our taxable income in 2022. We currently do not expect to make additional cash contributions to the CCF until 2026.

Speaker 3

The cash balance in the CCF at the end of the quarter was $623,700,000 Based on the remaining milestone payments of roughly $949,000,000 nearly 2 thirds of the program has been funded into the CCF. Note that the 2 thirds figure excludes interest income on cash deposits that may be earned in future years. The restricted cash in the CCF is currently held in a U. S. Treasury obligations fund with daily liquidity.

Speaker 3

At the end of the Q1, securities held within the fund had a weighted average life of 35 days. We continue to expect a tax refund this year of approximately $119,000,000 for the cash deposited into the CCF last year that was applied to the 2021 tax year. We expect the refund to be used for general corporate purposes and to be included in cash and cash equivalents on the balance sheet. And lastly, we expect to make our next milestone payment from the CCF in the second quarter in the amount of approximately $50,000,000 With that, I'll now turn the call back over to Matt.

Speaker 2

Okay. Thanks, Joel. Please turn to Slide 17, where I'll go through Closing thoughts. We expect the consolidated operating income in the Q2 of 2023 to be higher than the Q1. Normal seasonality trends are returning to our domestic trade lanes and logistics.

Speaker 2

As mentioned previously, in the Q2, we expect to see freight demand for our China service below normalized condition. In the near term, we expect continued economic growth in Alaska to be supportive of improved freight demand. And In Hawaii and Guam, we expect muted freight demand, but we recognize the potential economic overhang that could negatively affect volumes in each of these core domestic markets. As I mentioned previously, in the second half of the year in the Trans Pacific, We expect improved trade dynamics as the market transitions to a more normalized level of demand. In closing, Matson performed well in the Q1.

Speaker 2

It was better than any Q1 in Matson's history before the pandemic. Although there is currently a lot of economic uncertainty, we feel very good about our balance sheet situation, our market positioning in Ocean Transportation and Logistics and the company's potential earnings generation compared to pre pandemic levels. The pandemic highlighted the benefits of our ocean service and logistics units to help our customers through a difficult period of supply chain infrastructure congestion. Within the Trans Pacific, Our efforts to maintain service reliably and focus on our customers' high level of demand significantly expanded our China service and elevated the Matson brand. Going forward, we're in a great financial and operating position to leverage the Matson brand to capitalize on growth opportunities as they emerge.

Speaker 2

And with that, I will turn the call back to the operator and ask for your questions.

Operator

Thank you. At this time, we will conduct a question and answer session. The first question comes from the line of Jack Atkins from Stephens. Jack, please go ahead.

Speaker 4

Okay, great. Good evening, guys. Thank you for taking my questions.

Speaker 2

Sure, Jack.

Speaker 4

So, Matt, if I could maybe start with something you said in your closing comments, and I appreciate Now that things are beginning to at least stabilize somewhat here, you guys are providing a little more commentary on sort of your The forward projections, but as you think about the Q2 and the comment that operating income on a consolidated basis would be higher sequentially, I guess, could you maybe kind of give us some high level thoughts on what will be driving that? Seasonality would suggest that Your volumes in Hawaii would pick up a little bit, maybe the same in the China service. Could you maybe kind of give us some puts and takes in terms of What is going to be driving the higher operating income sequentially for you?

Speaker 2

Yes. And I think you've said it the big part of it in your question, it's really Returning to more normal levels of seasonality, typically and as you know, Jack, from our business, Typically, we see the Q1 being the weakest, and the second is typically The 2nd weakest and then our strong next quarter, so second and third quarter tend to be our strongest and those are really around Seasonal patterns of, in the case of the transpacific trades, the normal selling cycles and the holiday periods and How our customers' demand levels in terms of retail sales and other drivers are reflected. So, our own seasonality is really reflected in our customers' selling patterns. In the domestic trade lanes, you see a little bit of the same where you see more people, travelers and economic demand in those 2 middle quarters, by and large. And so I think we're seeing seasonality being the bigger factor.

Speaker 2

Of course, We and so it isn't we don't think much of a stretch just to say that the second quarter It's going to be higher. It almost always has been if you look back in our history. So those are that's the main driver, Jack.

Speaker 4

Okay, Matt. I appreciate that. And I guess, as you sort of talk to your customers and kind of get a feel for What's going on within their business to think about how you should plan for the future? What are you hearing From your customers around their expectations for the peak shipping season in the Trans Pacific. Do you think we're going to be back to more normal Replenishment patterns by that time or is it still too early to make that call?

Speaker 2

Yes. I mean, of course, our customers Share some of the same uncertainties that we live in. There's the macro as we're all watching issues around continued rising interest rates and Some of the knock on effect of the regional banks is associated with those rate increases, and whether we'll enter a recession or won't we, those continue to be front of mind for And those are driving what I think are more cautious ordering patterns. And so What we're seeing is a level of caution and not to be overstocked. I personally feel that we are making, our customers are that is Making improvements in managing through their inventory overhang.

Speaker 2

I don't think it's done yet, but I think they are making steady progress On that, I think in our transpacific trade, we continue to see strong demand for our expedited product, most of which is coming out of the air. I think if you look at e commerce and other things that typically go by air, we're seeing very strong volumes of e commerce as Our customers are trading out of airfreight and moving it into our expedited products. So I think that's a welcome sign. And I think that continues That trade down into our expedited ocean, we'll continue to see support even in a period of economic uncertainty. So those are some of the factors I think that are driving our demand patterns.

Speaker 4

Okay. No, that helps, Matt. And I appreciate the Longer term commentary around the volume dynamics in the transpacific trade for you guys. If I kind of think about that, you're sort of on that run rate currently in terms of that 60,000 to 65,000 container For each service level, if we sort of think about what you did in the Q1 and kind of annualize that out, So I guess as you sort of think about your business today, do you feel like that the business is kind of on more of a Sort of a normalized I hate to use that word, but normalized run rate basis now. I mean, I know the economy is still challenged, freight rates aren't great.

Speaker 4

But I mean, So all of that sort of pandemic fueled congestion, do you feel like that's kind of come out and we're seeing More of a baseline run rate for the business as we sit here today?

Speaker 2

Yes. It's a great question, Jack. From my perspective, I think the answer is, we were pleased to see the level of demand in the transpacific traits that we saw in the Q1. It affirmed our hope That there would be a continued trade down out of airfreight as our customers are trying to manage their transportation spend. So We were pleased to see the level of the expedited market allowing us to keep our CLX and CLX Plus ships Relatively full during the quarter except for the few weeks of the Lunar New Year period.

Speaker 2

And so I think to a certain extent, We feel good about our positioning in the market, but with the caveat that there continues to be a lot of uncertainty about Whether we're going to go into a recession or something else, but I would say, absent as we said in our prepared comments, absent a recession, I think we are starting to see the benefit of normalized trade volumes. I think the other thing, if you just look at the transpecific capacity, Not specific to Matson, from a contextual standpoint. I think you've seen The lows have been reached. We hit bottom. Ocean freight rates have trended back up, not a significant amount, but at least we've hit bottom.

Speaker 2

We're also seeing the international ocean carriers doing a relatively good job of managing capacity, Primarily, as I mentioned in my prepared comments through the use of blank sailings, so that they are capacity to meet the market demand, but without a significant overhang in putting capacity in the market. So It's good to see the behavior that we saw really frankly at the beginning of the pandemic when ocean carriers withdrew capacity with the expectation that there would be a freight recession, Which then when there wasn't reintroduced that capacity. So it's good to see the ocean carriers Managing their capacity for the current level of demand, that's somewhat encouraging. But again, there's still a lot of macro risks out there. But What we've seen is encouraging, frankly.

Speaker 4

Okay. That's great. I guess last question and I'll hand it over. But I guess Looking outside of the Transpacific, which has been sort of a key focus here for the business for the last couple of years and thinking about Hawaii In that Jones Eck Lane, Matt, I guess, as you look out over the next couple of years, where do you think I understand that there are obviously issues around the economy and lending standards and things like that. But as you sort of think about the long term construction cycle In Hawaii, do you think we're kind of getting to a point where we're going to need to see increased levels of construction activity?

Speaker 4

Obviously, not in 'twenty three, maybe not even 'twenty four, but do you feel like there's sort of a there's a wave building there at some point? It feels like it's been a while We've really seen elevated levels of construction activity in Hawaii. Just sort of curious longer term if you feel like that's a potential volume catalyst In the out couple of years.

Speaker 2

Yes. So let me pretend I'm a politician and answer a question you didn't answer a question you didn't ask, Okay. But I'll eventually get the question, which is, I continue to feel good about the overall state of the Hawaii economy long term. I think it will continue to be a desirable tourist destination. I think the military has made big investments there.

Speaker 2

I think given sort of the geopolitical uncertainties and challenges, The Pacific will remain an area of focus into the future. And I think for those reasons, we will see relatively healthy, although mature, but still healthy Levels of economic demand in Hawaii. So we feel long term good about it. We also acknowledge that it's a relatively mature market and will grow with the state's GDP. I think there will be a subset to get to your question of capital spending, capital spending Renovations of hotels and new hotels, improvements in Military spending, including a large dry dock that is going to be built over the next few years in Pearl Harbor.

Speaker 2

So I think you'll continue to see growth In spending in the Hawaii market over the next few years.

Speaker 4

Okay. Matt, thanks for the time. Really appreciate it. And I'll hand it over.

Speaker 2

Okay. Thanks, Jeff.

Operator

Please hold for the next question. The next question comes from the line of Ben Nolan from Stifel. Please hold for the next question. The next question comes from the line of Jake Lacks of Wolfe Research. Jake, please go ahead.

Speaker 5

Hey, thanks for the time.

Speaker 2

Hi, Jake. Hi, Jake.

Speaker 5

So you know the premium versus spot rates was still above pre pandemic levels in 1Q. Do you think there's further pressure on your premium versus Shanghai containerized freight index to come? Or do you think the premium is at a structurally higher level now for some reason?

Speaker 2

Yes. I would say that we are seeing higher for Matson's To expedited service offerings, we're seeing higher freight rates On the CLX, which is the only service that existed pre pandemic, we're seeing higher freight rates than we've seen pre pandemic. And there They remain at a sizable premium to the SCFI. We and we're seeing good level of demand for our expedited Service offerings. And so I think that we're going to see I'm going to jump between commentary about Matson and then Commentary about the Pacific, but I continue to believe in the Trans Pacific, the entire Trans Pacific trade lane, Relatively good management of capacity as the demand Begins to improve as we get into the second half of the year owing to see primarily seasonality factors.

Speaker 2

So I see the overall market being Relatively orderly from a capacity management standpoint, and I think Matson continues to believe That we're very well positioned and the freight rates that we're seeing now will continue to be very strong relative to the SCFI.

Speaker 5

Got it. So I guess what I'm trying to understand is do you think there's more of a lag your rates typically lag Shanghai a little bit, do you think there's more of a lag to come

Speaker 2

or? Yes. I don't first of all, I don't know, Jake, what I believe is that we're getting priced off of airfreight, a discount to airfreight products. Our freight rates move somewhat independent of the SEFI now and are based on Savings relative to the airfreight equivalent prices. And so we're not immune from the SCFI in the cycle.

Speaker 2

Of course, we're down with this cycle, but We've landed or at least at the moment landed at a rate significantly higher than pre pandemic and significantly higher than the rest of the market and expect that to Remain the case. So I don't know if there's a lag or not. I just think we've landed at a good spot, and it's owing to our highly differentiated product. Got it.

Speaker 5

Okay. And then China volumes in the quarter were a lot better than normal seasonality. Do you think this was share gains Given the competitor leaving the market or broader demand improvement? And then can you just sort of give us a sense on how these trended through the quarter and into April?

Speaker 2

Yes. I can say relative to the share question, I think we have taken share, But primarily from airfreight competitors because of our value proposition there of moving at a fraction of the cost of airfreight. And so that's where I think we've taken share and that's our primary competitive space. And we were fortunate in that our customers are looking To manage inventories carefully, as they work through their surplus and that which will need to move, from the regular ocean markets will need to move In an expedited fashion, but we again, I think if you look at our traditional customers who are airfreight Managing down in an environment where they're trying to reduce their transportation spend. So I think those are the big factors that we see driving our current pricing and positioning And demand, so

Speaker 5

Got it. And then just one clarification. You made comments about normal seasonality Returning to the business, is that only on the domestic trade lanes? Do you think that applies to China as well?

Speaker 2

I think it applies to China as well. Yes.

Speaker 5

All right. Great. Thanks for your time.

Speaker 2

Okay, Jay. Thank you.

Operator

Please hold for the next question. The next question comes from the line of Ben Nolan of Stifel. Ben, please go ahead.

Speaker 6

Okay. Can you guys hear me this time?

Speaker 2

We can. Yes. Thanks.

Speaker 6

Good. Good. Well, I'm like decades behind with respect to my Technological Acumen. The I have a handful. Jack did a pretty good job of asking most of mine.

Speaker 6

But The one of the things I was thinking about and then went back and looked at the fleet list is, you guys have on your CLX Plus Service, I think there's 6 vessels that are committed to it. 2 of those, one I think maybe already did come off contract, the other is In a month or 2, is there any ability or room to maybe flex down that or maybe reprice some of that in such a way that it Reducing some of your operating expenses given the softer international market?

Speaker 2

Yes. So We are now into a 5 ship deployment. We can't go further down and maintain a weekly service. So 5 becomes The 35 day rotation that gives us that weekly service into the Shanghai Ningbo markets that we need. So with regard to swapping out charters, why don't I let Joel talk about the charter durations And some of the other

Speaker 5

part of

Speaker 2

your question.

Speaker 3

Yes. Ben, we've got so right now the 5 that are running the service today, 1 charter comes up here in June And then 3 come up in 2025 and then the last the 5th one comes up in early 2026. So it's very unusual once you've committed 2 or 3 years, whatever the underlying charter contract is, is to swap out of that. That could be expensive and that would be an unusual thing to do. So the way we're thinking about is we have one charter to reset here the next couple of months in the Q2 and then we'll have and then 3 more to do in 2025 and one to do in early 2026.

Speaker 6

Okay. But it's fair to think that the one that I don't know, I guess it depends on when you originally set it up, but is there any room For a cost reduction on the one that comes up in July?

Speaker 3

Yes, there is. I mean, we were in such a hot market, obviously wanted to maintain vessel capacity And the rates were up

Speaker 2

for the vessel charter periods

Speaker 3

of time similar to where freight rates were at that time. And so it's all about just Procuring that capacity and not missing a sailing, which is why we took a 6th and 7th ship to make sure we didn't miss sailings and have blank sailing. So all that was very profitable But today's charter rates are below where we fixed in those charters before. So as each of these come up, there could be an opportunity to reduce some of the daily rate charter the daily charter rates.

Speaker 2

Okay. Yes. This is Matt. The other point to make, which I think Joel made, but just to clarify, we do believe that in 2025, we will likely reset Depending on what the market conditions are then, we're paying a little bit more than market. When we look back, the money we earned during that pandemic price Totally justified the pricing that we received on, but we're in a new market now, and we do think an opportunity in the future as we look forward to the reset of those charters At today's rate, it would create a benefit to the company, but at that point in time.

Speaker 6

Sure, sure. Well, I guess while we're talking about cost, you guys have always been pretty good at controlling costs, but In an environment where you don't quite make as much money as you did and you're not pressed to grow as fast, are there other things and we're also Seeing inflation that maybe brings cost more to the forefront here. Are there other areas where maybe you're thinking about you can be a little bit more efficient?

Speaker 2

Yes. I mean, I think the answer is yes, there are. I think to your question or Part of the question, we did not see a significant run up in our headcount or operations over overhead As we flexed up during the pandemic and so our increases in people costs or headcount and stuff was maybe 1% to 3% -ish per year during this and we have plenty of people in these next few years of retirement age that we think we're going to Be able to manage our headcount costs, first of all, because they didn't go up much and second because of just regular retirements. Of course, we're now back into a somewhat normal environment where We have programs that have been in place for a while around looking at ways to become more efficient and every year we identify hundreds of different projects in which We will look for ways to be smarter about the way we spend money and working with our key partners and vendors Look for ways to reduce costs that will happen. That did not really happen during the pandemic years as our whole focus was on Being able to carry the market given the extraordinary level of demand.

Speaker 2

So we're getting back to sort of regular order. We will not be slow steaming. That's not one of our models. And I think we're not going to slow steam because in our transpacific trades in particular, but all our trades in general, We earn a significant premium in the market in part because we're faster and more reliable and that more than justifies The premium that we receive over the market more than pays for higher additional operating costs and having our own fleet of chassis and Dedicated terminals and all of the other elements that allow us to be the go to carrier, carry costs that we think continue to But notwithstanding that and the ongoing inflationary cost pressures and those things, we're going to be after our regular order Week in and week out of looking to be as efficient as we can.

Speaker 6

Okay. And then last for me, you guys mentioned a couple of times in the prepared March, So as you usually do, but looking for growth opportunities and I think you specifically called out the Trans Pacific As part of that, I'm curious if, again, in this market where maybe there's a little bit less competition And whatnot, I mean, are you beginning to see a little bit more in the way of low hanging fruit either Organically or in every organically?

Speaker 2

Yes. I'll comment on it. I'd like Joel to comment as well. I think When we look back at and that was part of the reason why we put our sort of chart on the progression of the Trans Pacific Services. I think what we've been able to do over time is to prove to ourselves that we can grow.

Speaker 2

Now if we're at the bottom of the cycle, we're hoping that some of the stresses that are being put on others create opportunities. I think we're really well positioned to pull the trigger on acquisitions as they occur. We've also seen the ability over time to grow organically into adjacent markets. So we're going to continue to look for ways in which to grow, Whether that's our seafood export business with the AAX and some of the services between China and New Zealand and other kinds of things, we're going to continue to look for ways to look at markets as opportunities present themselves. It's not obvious yet that we're at that But I don't know, Joel, what are your thoughts about that?

Speaker 3

Yes, I think that's exactly right. And I think, Ben, I think you were also alluding a little bit to like the trends in the M and A market. Are we seeing more companies maybe that have to transact? And I think it's almost The opposite. Things are really quiet right now in the M and A front because there's so much economic uncertainty and there's of course still financial markets in many Sectors are basically closed.

Speaker 3

So therefore, there's less companies that are looking to transact on the sell side. Buyers are still waiting, but you just haven't seen enough clarity for things to pick up yet. So there's less actual activity out there right now. Think a lot of companies point into this period of time with decent balance sheets. It's not like they have to do something.

Speaker 3

They can wait it out. So I don't think there's some wave of Deals coming our way to fit our profile, Ben. And our approach in general is just to maintain discipline and be steady and be focused. So I'm not sure big wave of new Would matter to us anyway, but we're not seeing one come anytime soon.

Speaker 6

Yes, I appreciate that. And I know I think I said The last one was the last one, but I had one other that came to mind. It appears as though there's some pretty good progress being made on the West Coast with Back to labor, but it doesn't seem like it's quite resolved yet. I know in the past that had been something Tailwind for you guys. Are you seeing any impact at all from people looking for a little security with the Matson Business versus everybody else?

Speaker 2

I don't think we've seen it. I don't think that's been really a factor in Our demand levels, I mean, in talking with our customers, I don't think we've come across, anyone who said, hey, we're going to we're shifting our freight to you because you Do things other people can't do as it relates to a potential labor disruption, which we hope does not occur. As you've read, I've read in the trade Press that steady progress is being made and we would direct any inquiry to the PMA, the Pacific Maritime Association. We're a member, but We've all agreed to just let the PMA do the updating on behalf of all the Ship owners. So, but yes, so far we haven't seen that as much of a factor at all.

Speaker 6

Okay. All right. I appreciate it.

Speaker 5

Thanks guys.

Speaker 2

Okay. Thanks, Ben.

Operator

At this time, I would like to turn it Back to the speaker for any further comments, Matt Cox.

Speaker 2

Okay. Thanks, operator. Hey, thanks to everyone for participating today. We look forward to catching up with

Operator

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

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Earnings Conference Call
Matson Q1 2023
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