Matson - Q2 2024

Transcript

Operator (participant)

Welcome to the Matson Second Quarter 2024 financial results conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Justin Schoenberg. Please go ahead.

Justin Schoenberg (Director of Investor Relations and Corporate Development)

Thank you, Karin. Joining me on the call today are Matt Cox, Chairman and Chief Executive Officer, and Joel Wine, 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, any forward-looking statements within the meaning of the federal securities laws regarding expectations, predictions, projections, 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, the press release, the presentation slides, and this conference.

These risk factors are described in our press release and presentation and are more fully detailed in the [audio distortion], pages 13-25 of our Form 10-K, filed February 23rd, 2024, and in our subsequent filings with the SEC. Please also note that the date of this conference is August 1st, 2020, and any forward-looking statements that we make today are based on assumptions. We undertake no obligation to update these forward-looking statements. I will now turn the call over to Matt.

Matt Cox (Chairman and CEO)

Okay, Justin, thanks. Thanks to those on the call. Starting on slide 3, Matson's Ocean Transportation and Logistics business segments performed well, higher year-over-year operating income in the second quarter. 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 of 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. 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 in 2024. Joel will go into more detail on our updated outlook later in the presentation.

I'll now go through the second quarter 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 second quarter year-over-year. The decrease was primarily due to lower general demand. Tourist arrivals in the second quarter 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 to slide 5. According to UHERO's second quarter 2024 economic report, the Hawaii economy is projected to grow modestly in 2024, supported by a low unemployment rate and increasing construction activity. 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 the second quarter of 2024 was 3% higher year-over-year, as we continued 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. 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 a normalized operating environment, and we outperformed from a freight rate perspective.

We expect our China service to continue to see elevated freight rates during the traditional peak season in the third and early fourth 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 the 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. 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 depend on 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 air freight to expedited ocean and the continued growth of e-commerce goods to drive long-term demand for our China service. I'm confident in our positioning with the two fastest and most reliable expedited ocean services in the Transpacific trade lane and our unmatched destination services. Please turn to the next slide. In Guam, Matson's container volume in the second quarter 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.

In Alaska, Matson's container volume for the second quarter 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 $2.6 million year-over-year to $1.2 billion. The higher contribution was primarily due to higher lift volumes. Although container volumes on the U.S. West Coast 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. Operating income in the second quarter came in at $15.6 million, or approximately $1.3 million 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 services includes purchase order management, origin operation, and destination services, and allows us to provide a comprehensive solution from factory floor to destinations across the U.S. For the third and fourth quarters of 2024, we expect operating income to approximate the level achieved last year. With that, I will now turn the call over to Joel, to Joel for a review of our financial performance. Joel?

Joel Wine (EVP and CFO)

Okay, thanks, Matt. Please turn to slide 12 for a review of our second quarter results. For the second quarter, consolidated operating income increased $27.9 million year-over-year to $124.6 million, with higher contributions from ocean transportation and logistics, $26.6 million and $1.3 million, respectively. The increase in ocean transportation operating income in the second 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&A costs. The increase in logistics operating income was primarily due to higher contribution from supply chain management. In the quarter, we had interest income of $18.8 million, which includes $10.2 million of interest income earned on our 2021 federal income tax refund.

The interest expense in the quarter decreased to $0.8 million 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% year-over-year. The difference between the two due to a 4.2% million decrease in the diluted weighted average shares outstanding. Please turn to slide 13. This slide shows how we allocated our trailing twelve months of cash flow generation.

For the LTM period, we generated cash flow from operations of approximately $608.5 million, from which we used $41.7 million to retire debt, $206.9 million on maintenance and other CapEx, $40.3 million on new vessel CapEx, including capitalized interest and owners items, $24.6 million in cash deposits and interest income in the CCF, net of withdrawals for milestone payments, $12.8 million on other cash outflows, while returning approximately $237.5 million to shareholders via dividends and share repurchase. Please turn to slide 14 for a summary of our share repurchase program and balance sheet. During the second quarter, we repurchased approximately 0.6 million shares for a total cost of $72.2 million, including taxes.

Year to date, we repurchased approximately 1 million shares for a total cost of $121.1 million, including taxes. Since we initiated our share repurchase program in August 2021 through June of this year, we have repurchased approximately 10.6 million shares or 24.4% of our stock, for a total cost of approximately $877 million. 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 second quarter was $420.7 million, a reduction of $9.8 million from the end of the first quarter.

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 $118.6 million, as well as $10.2 million in interest income earned on the tax refund. During the quarter, we also paid $35.8 million 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 third and fourth quarters of 2024 on the left-hand side of this page. We expect ocean transportation operating income in the third quarter of 2024 to be meaningfully higher than the $118.2 million achieved last year.

In the fourth quarter of 2024, we expect operating income to be moderately higher than the $66.4 million achieved in the fourth quarter of 2023. We expect our China service to continue to see elevated rates during the traditional peak season, the third and early fourth quarters. For our domestic trade lanes, 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 third and fourth 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 million, inclusive of $27 million for dry dock amortization, interest income to be approximately $45 million, and interest expense to be approximately $8 million. Other income to be approximately $7 million, an effective tax rate of approximately 22.0%, and dry docking payments of approximately $35 million. Moving to Slide 16, the table on this slide shows the CapEx projection for 2024. Compared to what we previously provided in our first quarter, first quarter call in April, we increased our capital expenditure outlook for LNG installations and reengineering projects by $15 million to $85 million-$95 million because of higher parts and labor associated with the LNG installation on Manukai. 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.

Matt Cox (Chairman and CEO)

Okay, thanks, Joel. In closing, Matson 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 conditions. And while we acknowledge a number of factors in the China service 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 (participant)

Thank you. At this time, we will conduct a question-and-answer session. As a reminder, to ask a question, you will need to press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from Ben Nolan of Stifel. Your line is now open.

Ben Nolan (Managing Director of Research)

Thanks. Good quarter, guys. I've got a couple. Can I do three? Is that allowed?

Joel Wine (EVP and CFO)

Sure. Sure, Ben.

Ben Nolan (Managing Director of Research)

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? Is that, is that what you'd said?

Matt Cox (Chairman and CEO)

Yeah. Yeah, Ben, I did say that.

Ben Nolan (Managing Director of Research)

Can you maybe explain that a little bit?

Matt Cox (Chairman and CEO)

Yeah, sure. So we operate a portfolio of eight terminals along the U.S. West Coast, that is, the SSAT joint venture does. And two of those are in L.A., Long Beach, two are in Oakland, with the balance being in the Pacific Northwest, both our Tacoma operation and three terminals in Seattle area. And what we saw as the volumes increased generally in the transpacific, 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.

That was the explanation for why we didn't see the averages move up, given the portfolio and the geographic location of those terminals.

Ben Nolan (Managing Director of Research)

Okay. That's very helpful. Appreciate it. And then sort of, in the same vein, it's been interesting to see what's happening on the freight side, and I thought you guys would probably be really well positioned to talk to it. But we've seen a lot of freight coming into the ports, but the trucking market's not been great, the domestic logistics market's not been great. There's... You know, I've talked to a lot of people who just don't know what's happening to all this freight. Doesn't seem like it's building up in inventories. Can you maybe talk through what you're seeing, what the type of freight that's moving is, where it's going? Anything that can maybe help demystify this a little bit?

Matt Cox (Chairman and CEO)

Yeah, I'll try. 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.S. domestic markets and trade. What we're hearing from customers are probably, Ben, some of the same things you're hearing, and you mentioned it in your question, which is, you know, 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.

So we're not seeing, other than seasonal getting ready for peak season, changes in inventory levels. That remains pretty steady. I think if you look at the consumer, as we know, the consumer is hanging in there, and consumer spend has held its own. 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 on 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.

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 Matson story is a little 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 you know, 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 in air freight, all of those things are pointing 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.

Ben Nolan (Managing Director of Research)

Mm-hmm. I'll take it. I appreciate it. All right, and then last, and 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. 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, you know, 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?

Matt Cox (Chairman and CEO)

Sure. Yeah, happy to. And you're right. I believe it's the first time we've called it out, and, you know, I would also just note for qualification that the changes in profit for logistics are very small, so it tends to amplify things that, you know, typically are not part of our core story. 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, and moved onto a Matson container and onto Matson's, expedited service offering. And that has been, you know, 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 on the radar, again, with, the acknowledgment that the numbers are relatively small in, in the logistics business in terms of its relative change in profitability. So that's, that's the, story there, Ben.

Ben Nolan (Managing Director of Research)

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

Matt Cox (Chairman and CEO)

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 three and a half container loads of cargo, they want to have that last half of a container loaded into an LCL box, consolidated by Matson and delivered, and we're gonna continue to see growth in that segment as our China businesses, you know, continue to perform well.

Ben Nolan (Managing Director of Research)

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

Matt Cox (Chairman and CEO)

Okay. No problem, Ben. Thanks.

Operator (participant)

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

Jake Lacks (SVP)

Hey, guys. Thanks for your time.

Matt Cox (Chairman and CEO)

Sure, Jake.

Jake Lacks (SVP)

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 that 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.

Matt Cox (Chairman and CEO)

Yeah, Jake, I mean, this, you gotta 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, this quarter we just had, is meaningfully higher than last year's second quarter. But we're just gonna leave it with the language we've chosen, meaningfully higher.

Jake Lacks (SVP)

Got it. Okay. And then in 4Q, are you assuming a pretty full rate normalization there?

Matt Cox (Chairman and CEO)

Yeah, I think at this point, Jake, we're expecting a more traditional peak period, meaning after the first 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, you know, 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, seasonal return to a seasonal pattern, subject to all the qualifications about, you know, other external events that may impact that for Matson positive, negative.

Jake Lacks (SVP)

... Thanks. And then 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, you know, to reintroduce sort of a third expedited service?

Joel Wine (EVP and CFO)

A third, he's asking about a potential third service.

Matt Cox (Chairman and CEO)

Yeah. Okay, I'm sorry. Yeah. Okay, got it. Thanks, Jake. Yeah, 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. If the market opportunity presents itself, we certainly 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 six 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 in under the current conditions the way we're thinking about it.

Jake Lacks (SVP)

Great. Thanks for the time.

Matt Cox (Chairman and CEO)

Okay. Thank you.

Joel Wine (EVP and CFO)

Thanks, Jake.

Operator (participant)

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

Daniel Imbro (Managing Director and Equity Research Analyst)

Yeah, 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? Maybe with some of the strength in 2Q, a 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 for the backup.

Joel Wine (EVP and CFO)

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

Daniel Imbro (Managing Director and Equity Research Analyst)

Helpful. And then on the balance sheet, I think you took up CapEx guide a little bit here, for, 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?

Joel Wine (EVP and CFO)

Really, no change in all of that, Daniel, to be honest. So the only thing we changed was the, because of actual costs that are coming through on our Manukai, Manukai project, our LNG reengineering project. We bumped up that line item by $15 million, just due to that one specific project. So really, it's not a, it's not a pull forward of CapEx from one period to another, things like that. And, and last quarter, we are, gave numbers for 2025 and 2026, and we've made no change to that either. So overall, the CapEx picture I would describe as unchanged, other than just some higher costs on one specific project.

Daniel Imbro (Managing Director and Equity Research Analyst)

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?

Joel Wine (EVP and CFO)

Yeah, if you compare last year's, you know, we talk about operating income performance for each of the segments and consolidated, and yeah, clearly, this year's second quarter for Ocean, and then therefore consolidated as well, were meaningfully higher than last year's second quarter. 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.

Daniel Imbro (Managing Director and Equity Research Analyst)

Great. And then one more follow-up. When you think about adding 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 with the MAX line? Would that make it easier to do financially? Just think about what are the considerations, or how long would you need to see this growing demand to decide it is worth setting up a new string of six ships?

Matt Cox (Chairman and CEO)

Yeah, 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 a third 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, we would do it that way. 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 six 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? And 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 Haiphong, which connects with one of our trusted peer feeder partners that move 200 loads a week out of Vietnam, Haiphong in particular, that meets up with our line haul ships on the CLX and MAX.

So, you know, we'd need to be confident that those markets would be able to accommodate a much greater percentage of the capacity to make those voyages profitable.

Daniel Imbro (Managing Director and Equity Research Analyst)

Great. Thanks for all the color.

Matt Cox (Chairman and CEO)

Okay. Thank you, Daniel.

Joel Wine (EVP and CFO)

Thank you, Daniel.

Operator (participant)

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

Matt Cox (Chairman and CEO)

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

Operator (participant)

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