Matson Q2 2024 Earnings Call Transcript

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August 1, 2024

There are 7 speakers on the call.

Operator

by. Welcome to the Matson Second Quarter 2024 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 session. Please be advised today's conference is being recorded.

Operator

I would now like to hand the conference over to your first speaker today, Justin Schoenberg. Please go ahead.

Speaker 1

Thank you, Corinne. Joining me on the call today are Matt Cops, 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.manson.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 in the meaning of the Federal Securities Board regarding expectations, predictions, projections, future events. We believe that our expectations and assumptions are reasonable.

Speaker 1

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. These risk factors are described in our press release and presentation in a more fully detailed specific captioned Risk Factors, pages 13 to 25 of our Form 10 ks filed February 23, 2024 and in our subsequent filings with the SEC. Please also note that the date of this conference is on August 1, 2020, and any forward looking statements that we see today are based on assumptions we have made. We undertake no obligation to update these forward looking statements. I will now turn the call over to Matt.

Speaker 2

Okay, Justin. Thanks. Thanks to those on the call. Starting on Slide 3. Matson's Ocean Transportation and Logistics Business segment performed well, higher year over year operating income in the Q2.

Speaker 2

In Ocean Transportation, operating income increased year over year. Our China service saw significantly higher year over year freight rates and was the primary driver in consolidated operating income. We had higher year over year volumes in Alaska, primarily due to 2 additional sailings. Hawaii and Guam saw lower year over year volume. In logistics, operating income increased year over year on the strength of supply chain management.

Speaker 2

As a result of our performance in the second quarter and the expected strength of our China service in the back half of the year, we're raising our outlook for May 24. Dole will go into more detail on our updated outlook later in the presentation. I'll now go through the Q2 performance of our trade lanes, SSAT and logistics. So please turn to the next slide. Container volume in our Hawaii service decreased 3.6% in the Q2 year over year.

Speaker 2

The decrease was primarily due to lower general demand. Tourist arrivals in the Q2 were lower primarily due to significantly lower visitor traffic to Maui as a result of the wildfires last year. I will go through our full year outlook on the next slide. So please turn Slide 5. According to UHERO's Q2 2024 Economic Report, Quarter, the Hawaii economy is projected to grow modestly in 2024, supported by low unemployment rate and increasing construction activity.

Speaker 2

While we're encouraged by UHERO's longer term forecast and some of the positive factors supporting that growth, our recent performance is reflective of a softer market. We expect volume in 2024 to be modestly lower than the level achieved last year, primarily due to continued challenges in population growth and lower discretionary income as a result of higher inflation and interest rates. Moving on to our China service on Slide 6. Matson's volume in Q2 2024 was 3% higher year over year as we continue to see a high level of demand from the e commerce and garment customers. We achieved average freight rates that were significantly higher year over year.

Speaker 2

Please turn to Slide 7. Supportive economic and consumer demand environment in the U. S, coupled with tighter supply chain, led to elevated freight rates during the quarter. The supply and demand dynamics we experienced in the second quarter were not consistent with normalized operating environment. We outperformed from a freight rate perspective.

Speaker 2

We expect our China service to continue to see elevated freight rates during the traditional peak season in the 3rd and early 4th quarters. While we feel good about rate levels during the traditional peak season period, trajectory after the peak season is uncertain given several factors, including the strength of U. S. Economy and interest rates, transpacific supply, the Red Sea situation and its related supply chain effects, the East Coast Labor Union Negotiation and the U. S.

Speaker 2

Elections. Nonetheless, we expect freight rates to remain elevated as long as the underlying economic supply chain and geopolitical conditions persist. At some point, we expect rates to normalize, timing in which will likely the duration and the degree to which these factors influence supply and demand dynamics in the trade lane. Regardless of the environment, we expect the ongoing shift from airfreight to expedited ocean and the continued growth in e commerce goods drive long term demand for our China service. I'm confident in our positioning with the 2 fastest and most reliable expedited ocean services in the Trans Pacific trade lane and our unmatched destination services.

Speaker 2

Please turn to the next slide. In Guam, massive container volume in the Q2 of 2024 decreased 6.1% year over year due to one less sailing compared to last year. In the near term, we expect continued improvement in the Guam economy underpinned by low unemployment rate. For 2024, we expect container volume to approach the level achieved last year. Please turn to the next slide.

Speaker 2

In Alaska, Matson's container volume for the Q2 of 2024 increased 4.9% year over year due to 2 additional northbound sailings compared to last year. In the near term, we expect continued economic growth in Alaska supported by a low unemployment rate, job growth and lower levels of inflation. For 2024, we expect Alaska volume to approximate the level achieved last year. Please turn to Slide 10. Our terminal joint venture, SSAT, increased $2,600,000 year over year to $1,200,000 The higher concentration contribution was primarily due to higher lift volumes.

Speaker 2

Although container volumes on the U. S. West Coast system have been particularly strong in the first half of the year, volume across SSAT terminals has not been as strong. In 2024, we expect the contribution from SSAT to be modestly higher than 2023 due to an expected increase in lift volumes. Turning now to logistics on Slide 11.

Speaker 2

Operating income in the 2nd quarter came in at $15,600,000 or approximately $1,300,000 higher than the result in the year ago period. The increase was primarily due to a higher contribution from supply chain management. Our supply chain management service includes purchase order management, origin operation and destination services and allows us to provide a comprehensive solution from factory floor to destinations across the. For the 3rd and 4th quarters of 2024, we expect operating income to approximate the level achieved last year. And with that, 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 12 for a review of our Q2 results. For the Q2, consolidated operating income increased $27,900,000 year over year to $124,600,000 higher contributions from Ocean Transportation and Logistics, $26,600,000 $1,300,000 respectively. The increase in Ocean Transportation operating income in the 2nd quarter was primarily due to significantly higher freight rates in China, partially offset by higher vessel operating costs, including fuel related expenses and higher SG and A costs.

Speaker 3

The increase in logistics operating income was primarily due to higher contribution from Supply Chain Management. In the quarter, we had interest income of $18,800,000 which includes $10,200,000 of interest income earned on our 2021 federal income tax refund. The interest expense in the quarter decreased $800,000 year over year due to the decline in outstanding debt in the past year. Net income increased 40.1% year over year. Diluted earnings per share increased 46.5 percent year over year.

Speaker 3

The difference between the two due to a 4,200,000 percent decrease in the diluted weighted average shares outstanding. Please turn to Slide 13. 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 $608,500,000 from which we used $41,700,000 to retire debt, $206,900,000 on maintenance and other CapEx, dollars 40,300,000 on new vessel CapEx including capitalized interest and owners items, $24,600,000 in cash deposits and interest income in the CCF, net of withdrawals for milestone payments, dollars 12,800,000 on other cash book outflows, while returning approximately $237,500,000 to shareholders via dividends and share repurchase. Please turn to Slide 14 for a summary of our share repurchase program and balance sheet.

Speaker 3

During the Q2, we repurchased approximately 600,000 shares

Speaker 2

for a

Speaker 3

total cost of $72,200,000 including taxes. Year to date, we repurchased approximately 1,000,000 shares

Speaker 2

for a

Speaker 3

total cost of $121,100,000 including taxes. Since we initiated our share repurchase program in August of 2021 through June of this year, we have repurchased approximately 10,600,000 shares or 24.4 percent of our stock for a total cost of approximately 877,000,000 dollars As we have said before,

Speaker 2

we are

Speaker 3

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 second quarter was 420,700,000 dollars reduction of $9,800,000 from the end of the Q1. Two other items to note. On April 19, 2024, Matson received a federal tax refund related to the company's 2021 federal tax return of $118,600,000 as well as $10,200,000 in interest income earned on the tax refund.

Speaker 3

During the quarter, we also paid $35,800,000 into the CCF related to a milestone payment on our new vessel program. With that, let me now turn to Slide 15 and walk through our outlook for the 3rd and 4th quarters of 2024 on the left hand side of this page. We expect Ocean Transportation operating income in Q3 of 2024 to be meaningfully higher than the $118,200,000 achieved last year. And in the Q4 of 2024, we expect operating income to be moderately higher than the $66,400,000 achieved in the Q4 of 2020. We expect our China service to continue to see elevated rates during the traditional peak season, the 3rd and early 4th quarters.

Speaker 3

For our domestic tradelines, we expect volumes to approach the levels in 2023, absent a significant change in the trajectory of the U. S. Economy. For logistics, we expect operating income in both the 3rd and 4th quarters of 2024 to approximate the levels achieved last year. On the right hand side of this slide, we expect the following outlook items for the full year: depreciation and amortization to approximate 180,000,000 dollars inclusive of $27,000,000 for drydock amortization interest income to be approximately 45,000,000 dollars interest expense to be approximately $8,000,000 other income to be approximately $7,000,000 an effective tax rate of approximately 22 0.0 percent and drydocking payments of approximately $35,000,000 Moving to Slide 16, The table on the slide shows the CapEx projection for 2024.

Speaker 3

Compared to what we previously provided in our Q1 call in April, we increased our capital expenditure outlook for LNG installations and reengineering projects by $15,000,000 to $85,000,000 to $95,000,000 because of higher parts and labor associated with the LNG installation of Monokai. All other line items remain unchanged. Milestone payments for new vessel construction are expected to be paid from the Capital Construction Fund, which already covers approximately 71% of the remaining obligations. I will now turn the call back over to Matt.

Speaker 2

Okay. Thanks, Joel. In closing, Matt has performed well in the first half of the year. For the remainder of the year, we expect higher year over year financial performance driven largely by elevated freight rates in the China service. At some point, we expect supply and demand activity in the transpacific trade lane to trend towards normalized operating.

Speaker 2

And while we acknowledge a number of factors in China's surface outlook remain uncertain, we remain confident in our ability to respond to changing market conditions to serve our customers at an extremely high level. 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. Our first question comes from Ben Nolan of Stifel. Your line is now open.

Speaker 4

Thanks. Good quarter guys. I've

Speaker 1

got a couple.

Speaker 4

Can I do 3? Is that allowed?

Speaker 3

Sure, Ben.

Speaker 4

Okay. I appreciate it. So first of all, it was breaking up a little bit, but, Matt, did you say that SSAT, while there was a lot of volume moving through the West Coast, SSAT did not have as much as some of the other ports of that? Is that what you'd say? Yes.

Speaker 4

Can you maybe explain that a little bit?

Speaker 2

Yes, sure. So we operate a portfolio of 8 terminals along the U. S. West Coast that is the SSAT joint venture does. And 2 of those are in LA Long Beach, 2 are in Oakland with the balance being in the Pacific Northwest both our Tacoma operation and 3 terminals in Seattle area.

Speaker 2

And what we saw as the volumes increased generally in the Trans Pacific, that cargo historically and in this case the same generally fill up in Southern California first and then migrate north to Oakland and lastly go to the Pacific Northwest and it's really in the Pacific Northwest is where most of that volume really did not appear and has not yet appeared. And so that was the explanation for why we didn't see the averages move up given the portfolio and the geographic location of those terminals.

Speaker 4

Okay. That's very helpful. Appreciate it. And then sort of on the same in the same vein, it's been interesting to see what's happening on the freight side. And I think you guys would probably be really well positioned to talk to.

Speaker 4

But we've seen a lot of freight coming into the ports, but the trucking market has not been great. The domestic logistics market has not been great. There's I've talked to a lot of people who just don't know what's happening to all this freight. It doesn't seem like it's building up in inventories. Can you maybe talk through what you're seeing?

Speaker 4

What the type of freight that's moving is? Where is it going? Anything that can maybe help demystify this a little bit?

Speaker 2

Yes. I'll try it. It's a complicated question, Ben. But I think what we're seeing, let me first comment on the market more generally before we go to Matson specific customer sets and dynamic, which we think are a little bit different. But I agree with you that it's interesting to see how the international freight markets are performing much better than the U.

Speaker 2

S. Domestic markets and trade. What we're hearing from customers are probably been some of the same things you're hearing and you mentioned it in your question, which is there don't appear to be surplus inventories. And our customers are continuing to take very close or pay very close attention to their inventory levels. And so we're not seeing other than seasonal getting ready for peak season changes in inventory level.

Speaker 2

So that remains pretty steady. I think the parts, if you look at the consumer, as we know the consumer is hanging in there and consumer spend has held its own. And so broadly, we're seeing a pretty good level of demand that supports the increase in imports. What has been interesting is really the changes around excess of supply, the trucking side and other things that are holding down some of the pricing mechanisms in the domestic trades. We're seeing it in our intermodal brokerage as well.

Speaker 2

So we're seeing the same thing and there has been a lot of downward pressure on rates because of that surplus capacity. But beyond that, I can't give you much more insight generally into the trade, but I could say, the matching story is a little bit different. And as it has been, we have been and we seek to and have been consistently the fastest and most reliable on the service for the e commerce for last minute orders for late production for all of the reasons why someone would be willing to pay a premium to get their particular cargo to market, the congestion air freight. All of those things are pointed to very strong demand in the expedited market and in particular very strong demand for the Matson services. So that's only half an answer, Ben, but it's probably the best I can give you.

Speaker 4

I'll take it. I appreciate it. All right. And then last, I appreciate you hanging in with me for this. So, this is the first time that I remember you guys calling out, your supply chain management business.

Speaker 4

I could be not remembering, but is that would you say as you're thinking about your logistics business an area of increased focus? If so, are you looking to expand on that either organically or inorganically? Or can you maybe just talk me through how that fits as part of the puzzle and where you think it's headed?

Speaker 2

Sure. Yes, happy to. And you're right, I believe it's first time we've called it out. And I would also just note for qualification that the changes in profit for logistics are very small. So it tends to amplify things that typically are not part of our core story.

Speaker 2

But it does highlight the synergies between Matson Logistics and Matson's Ocean Businesses with regard to our China service. Matson Logistics operates in multiple locations inside of China. It also as you know moves the intermodal cargo once it arrives in our Long Beach terminals to the final destinations in Chicago and Memphis and Dallas and other locations. So, but the supply chain services we called out are those services that we provide to customers in China that are less than container load that would be consolidated moved into onto a Matson container and onto Matson's expedited service offering. And that has been sort of a very slow and steady organic growth build over the last well, I mean, it's been really accelerated since the pandemic and is now approaching the radar again with the acknowledgment that the numbers are relatively small in the logistics business in terms of its relative change in profitability.

Speaker 2

So that's the story there Ben.

Speaker 4

Okay. And just to round that out, how do you think about sort of the trajectory of it?

Speaker 2

I see it like many of our other businesses continuing to grow organically. We have an unbelievable brand in China. And for customers that have 3.5 container loads of cargo, they want to have that last half of a container loaded into an LTL box consolidated by Matson and delivered. And we're going to continue to see growth in that segment as our China businesses continue to perform well.

Speaker 4

All right. Perfect. I appreciate it. Thanks for putting up with me.

Speaker 2

Okay. No problem, Ben. Thanks.

Operator

Thank you. Our next question will be coming to us from Jake Wax of Wolfe. Your line is now open.

Speaker 1

Hey guys, thanks for your time.

Speaker 2

Sure, Jake.

Speaker 5

So a couple on the guide. I just wanted to see if you could give a little more perspective on the degree of outperformance in Ocean EBIT you're thinking when you say meaningfully. I know it's a little more specific than you typically get, but we've seen a pretty big spike in rates. So any thoughts here would be helpful as we just think about recalibrating our models?

Speaker 3

Yes, Jake. I mean, this you got to take meaningfully we're just saying meaningfully higher. So I can't really elaborate on that. Just use your best estimate based upon that. I would say though that this quarter we just had is meaningfully higher than last year's, Q2.

Speaker 3

But we're just going to leave it with the language you've chosen meaningfully higher.

Speaker 1

Got it. Okay. And then

Speaker 5

in 4Q, are you assuming a pretty full rate normalization there? Yes. I think at this point,

Speaker 2

traditional peak period, meaning after the 1st week or so of October, when we get into our traditional start to see the normal market adjustment factors of peak season surcharge to subside and as we get second half of the fourth quarter return to a more post peak season environment. So it's really more of a traditional return and seasonal turn to a seasonal pattern subject to all the qualifications about other external events that may impact that nature match in positive and negative.

Speaker 1

Got it. Thanks. And then

Speaker 5

one more for me. You guys spoke about long term demand growth and conversion from air for your expedited ocean service. How close or how far are we from demand being there for to reintroduce sort of a third expedited

Speaker 3

service? A third, he's asking about that. I've got it.

Speaker 2

Thanks, Jake. Jake. Yes, it's a good question. We certainly it's on our long term planning radar. I would say it's unlikely that we would see the demand in this time horizon.

Speaker 2

If the market opportunity presents itself, we certainly we have a track record of being able to respond to those changes to be able to take advantage of it. Vessel charter, there aren't a ton of vessels on charter available to put together a service that would need 6 vessels or something like that, but in the transpacific trade lane. But our view is that, it remains an option to us under different market conditions, but not likely expected to be under the current conditions in the way we're thinking about it.

Speaker 1

Great. Thanks for the time.

Speaker 2

Okay. Thank you, James.

Speaker 3

Thanks, Jake.

Operator

Thank you. Our next question will be coming from Daniel Imbro of Stephens Inc. Your line is now open.

Speaker 6

Yes, thanks. Good evening, guys. Joel, I want to follow-up maybe on the guidance. I think you guys talked about expecting pricing to stay strong through peak season. But how are you thinking about volume through the upcoming peak season?

Speaker 6

Maybe with some of the strength in 2Q pull forward, do you still think we'll see a normal kind of growth sequentially? Just curious how you're feeling about the volume growth side as you talk to your customers through the back half?

Speaker 3

Yes. Thanks, Daniel. We expect to be full. I mean, as you know, pretty much year round, CLX and MAX were full other than off periods around holidays, Lunar New Year, etcetera. So we expect to be full here in the Q3 and also into the early the end of the peak season, as we said, early Q4.

Speaker 6

Helpful. And then on the balance sheet, I think you took up CapEx guide a little bit here, for this year. I guess that's just a pull forward from some of the investments from next year. And then as you think about the windfall of cash with stronger pricing, how do you think about deploying that cash between growth, buyback, any other investments you're looking at?

Speaker 3

Really no change in all of that, Daniel, to be honest. So the only thing we changed was because of actual costs that are coming through on our Mauna Keay project, our LNG reengineering project, we bumped up that lot item by $15,000,000 just due to that one specific project. So really, it's not a pull forward of CapEx from one period to another or things like that. And last quarter, we gave numbers for 20252026 and we've made no change to that either. So overall, the CapEx picture I would describe is unchanged other than just some higher costs on one specific project.

Speaker 6

Helpful. Let me have a third one for me just to come back near term. I know hard to give too much color on 3Q, but did I hear you right, you described the 2Q growth as meaningful, is that the decent bogey when you guys think about meaningful?

Speaker 3

Yes. If you compare last year's, we talk about operating income performance for each of the segments and consolidated. And yes, clearly, this year's Q2 for Ocean and then therefore consolidated as well were meaningfully higher than last year's Q2. So I'm not saying it's going to be that's not don't read that as we're saying it's the exact amount, but it qualifies as meaningfully higher.

Speaker 6

Great. And then one more follow-up. When you think about adding in the new string of ships, whether it's South China or North Vietnam, I guess, would you be looking to add company owned ships? Could you lease ships like you do at the MAX line? Would that make it easier to do financially?

Speaker 6

Just think about what are the considerations or how long would you need to see this growing demand to decide if it's worth setting up a new string of 6 ships?

Speaker 2

Yes. Daniel, this is Matt. I'll answer that one. I think our view is, and as I said, it's not right on our radar at the moment, but if we were to add it to the 3rd string, they would very likely be chartered vessels, foreign built chartered vessels like we have with our MAX service. Those are comprised of chartered vessels that we would do it that way.

Speaker 2

And some of the factors that, of course, would go into it are the, as I mentioned a moment ago, the availability of chartered ships and you'd need to acquire charter 6 of them to be able to have a weekly service. But the other factors are in each of these markets, especially the growing markets like Vietnam and in other places. The question is not so much whether there's a demand for Matson's product, but is there enough demand that would be willing to pay a premium price that would allow us to operate that service at a level of profits that would make sense for us to do. So it's not that there isn't cargo there, but in some of these smaller markets, there's a smaller segment. So for example, in Vietnam, we have a regular service at a Hai Phong, which connects with one of our trusted feeder partners that move a couple of 100 loads a week out of Vietnam, Hifang in particular that meets up with our line haul shifts on the CLX and MAX.

Speaker 2

And so, we need to be confident that those markets would be able to accommodate much greater percentage of the capacity to make those voyages profitable.

Speaker 6

Great. Thanks for all the color.

Speaker 2

Okay. Thank you, Daniel.

Speaker 3

Thank you, Daniel.

Operator

Thank you. This concludes the question and answer session. I would now like to turn it back to Matt Cox, CEO, for closing remarks.

Speaker 2

Okay. Well, thanks for being on the call today. We look forward to catching up with you on the Q3 call. Thanks. Aloha.

Operator

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

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