Good day and thank you for standing by. Welcome to the Matson Fourth Quarter 2022 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 that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Lee Fishman, please go ahead.

Thank you. 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, we will make forward-looking statements within the meaning of the Federal Securities Laws regarding expectations, predictions, projections or future events. We believe that our expectations and assumptions are reasonable. We caution you to consider the risk factors that could cause actual results to differ materially from those in the forward-looking statements in the press release, the presentation slides and this conference call. These risk factors are described in our press release and presentation and are more fully detailed under the caption Risk Factors on Pages 26 to 37 of our Form 10-Q filed on November 3, 2022, and in our subsequent filings with the SEC. Please also note that the date of this conference call is February 21, 2023, and any forward-looking statements that we make today are based on assumptions as of this date. We undertake no obligation to update these forward-looking statements. I'll now turn the call over to Matt.

Okay, thanks, Lee. And thanks to those on the call. I'll start on Slide three. For the fourth quarter, Matson's differentiated Ocean Service performed well in a difficult business environment. Matson has a solid financial position with low leverage and currently $622 million in cash deposits in our CCF for the new vessel program, while returning $445 million in cash to shareholders in 2022 through dividends and share repurchases. For the fourth quarter within Ocean Transportation, our China services achieved lower year-over-year volume and freight rate, which contributed to the decline in our Ocean consolidated operating income. We also saw lower year-over-year volumes in Alaska, Hawaii, and Guam compared to the year-ago period. In logistics, operating income decreased year-over-year primarily due to a lower contribution from supply chain management, consistent with lower demand in the Transpacific tradelane. I'll now go through the fourth quarter performance of our tradelanes, SSAT and logistics. So please turn to the next slide. Hawaii container volume for the fourth quarter decreased 13% year-over-year primarily due to lower retail and hospitality related demand compared to the elevated pandemic levels in the year-ago period and the effect of one less week. Excluding the 53rd week in the year-ago period, volume in the quarter decreased 7.9% year-over-year. Volume in the fourth quarter of 2022 was 3.2% lower than the volume achieved in 2019. We saw retail customers continue to manage inventories to weaker consumer demand levels despite continued improvement in the Hawaii economy. Hawaii Tourism during the quarter remained relatively strong, including a modest improvement in international tourist trends, although there was a little bit of softness in December. For the full year, container volume decreased 5.8% year-over-year, primarily due to lower retail-related demand compared to the elevated pandemic levels in the prior year and the effects of one less week. Excluding the 53rd week in 2021, volume declined 4.4% year-over-year. Please turn to Slide 5. Throughout the year, the Hawaii economy continued to recover from the pandemic with increasing tourist arrivals and a decline in the unemployment rate. Tourism was predominantly driven by domestic arrivals. But the industry did see some modest improvement in international tourist arrivals in the second half of 2022. In the latter half of 2022, we saw our retail-related customers manage their inventories down to a lower consumer demand levels. Through the first seven weeks of 2023, we have seen a steadier level of retail-related freight demand consistent with pre-pandemic trends. UHERO's December projections continue to show economic growth in 2023, supported by continued strength in tourism, and a low unemployment rate. However, the economic growth trajectory is uncertain, given the negative trends as a result of higher inflation, higher interest rates, and the end of the pandemic stimulus helping personal income. Moving to our China service on Slide six. Matson's volume in the fourth quarter of 2022 was 47.2% lower year-over-year, primarily due to lower demand for our CLX and CLX+ services, the discontinuation of the CCX service in the third quarter of 2022 and one less week. Excluding the 53rd week in the year-ago period, volume declined 42.1% year-over-year. Matson continued to realize a significant rate premium over the Shanghai Containerized Freight index in the fourth quarter of 2022, but achieved average freight rates that were lower than in the year-ago period. For the year, volume was 11.7% lower, primarily due to the lower demand for the CLX and CLX+ services, and one less week, partially offset by incremental volume on the CCX service. Excluding the 53rd week in 2021, volume declined 9.4% year-over-year. Please turn to Slide 7. On our November earnings call, we indicated that we expected the fourth quarter of 2022 and the first quarter of 2023 to be challenging in the Transpacific tradelane, as retailers' inventories adjusted to consumer demand levels, while ocean liners reduced vessel capacity to meet these lower demand levels. We did see this happen and we continue to see vessel capacity adjust as retailers continue to right-size inventory to meet weakening consumer demand, increasing interest rates, and economic uncertainty. In the weeks ahead of Lunar New Year, we saw a modest improvement in demand for our CLX and CLX+ services compared to December. But in the weeks post Lunar New Year, we saw light demand for our CLX service, and as a result, we decided not to sell the CLX+ vessels from Shanghai for a few weeks. In the regions in which we operate in China, we are seeing businesses and factories reopen and life returning to normal from the most recent COVID-19 wave. Looking ahead, for the first quarter and the first half of the year, we expect our CLX and CLX+ services to reflect freight demand levels below normalized conditions, with lower year-over-year volumes and a lower rate environment. Absent an economic hard landing in the U.S., we expect improved trade dynamics in the second half of 2023 as the Transpacific marketplace transitions to a more normalized level of demand. We will continue to manage volume in the CLX and CLX+ at freight rates to match it with the premium services we provide on the ocean, at the terminals, and shippers transport. Currently, freight rates for our CLX and CLX+ services are above pre-pandemic levels. Regardless of the economic environment, we operate the two fastest and most reliable ocean services, and as a result, we continue to expect to earn a significant rate premium to the Shanghai Containerized Freight Index. Please turn to the next slide. In Guam, Matson's container volume in the fourth quarter of 2022 decreased 14% year-over-year. The decrease was primarily due to lower retail-related demand. There was no impact from the 53rd week in the year-ago period. Volume in the fourth quarter of 2022 was higher than the level achieved in the fourth quarter of 2019. For the full year, container volume decreased 3.7% year-over-year, primarily due to lower retail-related demand. In the near term, we expect continued improvement in the Guam economy with increasing tourism and a low unemployment rate. However, there are negative trends as a result of higher inflation, higher interest rates, and the end of the pandemic-era stimulus helping personal income that creates uncertainty in the economic growth trajectory. Please turn to Slide nine. In Alaska, Matson's container volume for the fourth quarter of 2022 decreased 7.7% year-over-year. The decrease was due to lower northbound volume primarily due to one less sailing and one less week and lower southbound volume, primarily due to lower domestic seafood volume and one less week. Partially offset by higher export seafood volume from AAX. Excluding the 53rd week in the year-ago period, volume declined 5.3% year-over-year. Volume in the fourth quarter of 2022 was higher than the level achieved in the fourth quarter of 2019. For the full year, volume increased 8.6% year-over-year. The increase was due to higher export seafood volume from AAX, higher northbound volume primarily due to higher retail-related demand, and volume related to a competitor's drydocking, partially offset by one less week and higher southbound volume primarily due to higher domestic seafood volume. Excluding the 53rd week in 2021, volume increased 9.3% year-over-year. Turning next to Slide 10. The Alaska economy continues to show good growth and improvement in the key indicators from the depths of the pandemic. In the near term, we expect the economy to benefit from low unemployment and continued job growth. The Federal Infrastructure bill is expected to lead to additional jobs in the near and medium term. The state's economy is also expected to benefit from increased energy-related exploration and production activity as a result of elevated oil prices. However, there are negative trends as a result of higher inflation, higher interest rates, at the end of the pandemic era stimulus helping personal income that creates uncertainty in the economic growth trajectory. Please turn to Slide 11. Our terminal joint venture SSAT contributed $1 million in the fourth quarter of 2022 compared to $21.3 million in the prior year period. The lower contribution was primarily due to lower other terminal revenue, lower lift volume, and higher operating cost. SSAT saw significantly less detention and demurrage revenue in the quarter due to easing of congestion and lower lift volumes, consistent with lower demand in the Transpacific tradelane. For the year, SSAT contributed $83.1 million for an increase of $26.8 million year-over-year. The increase was primarily due to higher other terminal revenue. For 2023, we expect the first half lift volume to reflect the challenging environment in the Transpacific tradelane. Absent an economic hard landing, we expect SSAT to trend to pre-pandemic profitability levels in the second half of the year. For the year, we expect significantly lower detention and demurrage revenue due to the easing of Port congestion in Southern California. Turning now to logistics on Slide 12. Operating income in the fourth quarter came in at $12.8 million or $2 million lower than the result in the year-ago period. The decrease was primarily due to a lower contribution from supply chain management, consistent with the lower demand in the Transpacific tradelane. For the full year, operating income was $72.4 million or $22.6 million higher than 2021. The increase is primarily due to higher contributions from transportation brokerage and freight forwarding. In the near term, we expect a mix of activity across the logistic lines of business. We expect continued growth in Alaska to be supportive of freight forwarding demand. We expect supply chain management to track our China service, so a challenging environment in the first half of the year, as I previously discussed. And we expect our transportation brokerage business to weaken from the highs achieved in the pandemic period as freight demand normalizes. Modal shifts amid markedly improved rail congestion conditions and over-inventory retail customers continue to manage down consumer goods. I will now turn the call over to Joel, for a review of our financial performance. Joel?

Okay. Thanks, Matt. Please turn to Slide 13 for a review of our fourth quarter and full-year results. For the fourth quarter, consolidated operating income decreased $382.9 million year-over-year to $92.6 million, with lower contributions from Ocean Transportation and logistics of $380.9 million and $2 million respectively. The decrease in Ocean transportation operating income in the fourth quarter was primarily due to lower volume and average freight rates in China and a lower contribution from SSAT, partially offset by lower operating costs and expenses, primarily related to the discontinuation of the CCX service. As Matt noted, the decrease in logistics operating income was primarily due to lower contribution from supply chain management. We had interest income of $6.9 million 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 $1 million year-over-year, due to the decline in outstanding debt in the past year, including the $50.4 million in debt principal we prepaid in the third quarter. The effective tax rate in the quarter was 20.4% compared to 16.5% in the year-ago period. For the full year consolidated operating income increased $166.1 million year-over-year to $1,353.6 million with higher contributions from Ocean Transportation and logistics of $143.5 million and $22.6 million respectively. The increase in Ocean Transportation operating income for the year was primarily due to higher freight rates in China and a higher contribution from SSAT, partially offset by lower volume in China, higher operating costs and expenses primarily due to the CLX+ service and higher terminal handling costs. The increase in logistics operating income was primarily due to higher contributions from transportation brokerage and freight forwarding. Please turn to the next slide. The next slide shows how we allocated our trailing 12 months of cash flow generation. For the LTM period, we generated cash flow from operations of $1,271.9 million from which we used $111.5 million to retire debt, $146.9 million on maintenance and other CapEx, $62.4 million on new vessel CapEx including capitalized interest and orders items, $518.2 million in cash deposits and interest income in the CCF net withdrawals from milestone payments, and $21.9 million on other cash outflows while returning $445 million 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 fourth quarter, we repurchased approximately 1.5 million shares for a total cost of $101.9 million. For the year, we repurchased approximately 5 million shares for a total cost of $397 million. At the end of 2022, we had approximately 1.5 million shares remaining on our share repurchase program. Turning to our debt levels, our total debt at the end of the quarter was $517.5 million. We reduced outstanding debt principal by $111.5 million during the year, of which $60.1 million was through regular amortization and the balance of $50.4 million was through the prepayment of long-term debt. In January 2023, we prepaid $14.3 million for all the outstanding principal on the Maunawili Title X debt and we plan to prepay in March $12.1 million for all of the outstanding principal on the Manukai Title XI debt. I'm now going to walk through an update on the capital construction funds, so please turn to the next slide. We ended 2022 with cash deposits of approximately $518 million in the capital construction fund, and year-to-date 2023, we have an interest income of approximately $4 million. This month, we deposited an additional $100 million in cash into the CCF and pledged accounts receivable to reduce taxable income in 2022. Following this $100 million cash deposit, we currently have approximately $622 million in cash deposits in the CCF to cover 66% of the approximately $949 million remaining milestone payments for the new vessel program. Note that this funding calculation excludes the cash and cash equivalents on the balance sheet, which was approximately $250 million at year end. We currently do not expect to make additional cash contributions to the CCF for milestone payments until 2026. I would like to note that interest income on CCF cash deposits is tax-advantaged and will help pay for future milestone payments. Considering the interest rate environment we are in currently, interest income could be a meaningful contributor of additional cash deposits into the CCF in the next couple of years. Please turn to Slide 17. The table on this slide summarizes our $209.3 million in capital expenditures in 2022. We had capitalized construction expenditures of $62.4 million, of which $11.9 million was for the new inter-island barge placed into service in the third quarter and $50.5 million was for a milestone payment and other related costs on the new vessel program. We had maintenance CapEx and other CapEx of $146.9 million, of which $60.5 million was for equipment to support new tradelane services and to provide stability in the network, and $21.3 million was for the LNG installations on the Daniel K. Inouye, Kaimana Hila, and Manukai. Please turn to the next slide. Slide 18 shows the key areas for capital deployment over the next three years. Starting with maintenance and other capital expenditures, we expect $80 million to $90 million per year. This capital spend includes Phase 2 and Phase 3 work at Sand Island in Honolulu, and normal course capital expenditures to support our vessels, shore side operations, and logistics businesses. The next line item related to the new vessel program. The figures shown reflect the milestone payments, owner’s items, and capitalized interest we currently expect. There's enough cash on deposit in the CCF today to pay for all of the remaining milestone payments in the next three years and partially into 2026. The last item is the LNG installation and reengineering CapEx on existing vessels. The Daniel K. Inouye is currently in drydock for its LNG installation and is expected to be back in service in the middle of this year. Following Daniel K. Inouye, Manukai will enter drydock for a one-year project to reengineer to operate on both LNG and conventional fuels. Kaimana Hila will enter drydock in the second quarter of 2024 for a roughly five-month period for its LNG installation. So in total, we expect capital expenditures of $195 million to $210 million in 2023, $205 million to $220 million in 2024, and $440 to $450 million in 2025.

Okay, Joel, thanks. Please turn to Slide 19, where I'll go through some closing thoughts. We expect the financial performance in the first quarter of 2023 to be the weakest of the year. Normal seasonality trends are returning to our domestic tradelanes and logistics. And as mentioned previously, in the quarter, we expect to see freight demand for our China service below normalized conditions. In the near term, we expect continued economic growth in Hawaii, Alaska, and Guam to be supportive of freight demand. But we recognize the potential economic overhang that could negatively affect volumes in each of these core domestic markets. We expect challenging conditions in the Transpacific tradelane in the first half of the year, with freight demand below normalized levels. In the second half of the year, we expect improved trade dynamics as the market transitions to a more normalized level of demand. Please turn to Slide 20. Matson is well positioned financially and operationally to capitalize on opportunities as they emerge. The Matson brand has never been stronger. And we're in an enviable position to leverage the brand on our portfolio of essential high-quality businesses to drive new opportunities. Supporting our opportunistic growth ambitions is a solid investment grade balance sheet with low leverage. As of today, nearly two-thirds of the remaining milestone payments in the new vessel program are funded with cash deposits and the CCF earning interest income on a tax-advantaged basis. So we're in a very good funding position with the CCF on this large vessel project, which will reduce our reliance on using cash flows in the next few years to fund vessel CapEx commitments. Going forward, we will allocate the shareholders capital like we always have in a disciplined manner regardless of the economic environment. We invest for the long term to create value for shareholders. In some cases, the capital decisions we make today are to power us for decades to come, like our $1 billion new vessel build program. We're always on the lookout for opportunities to expand the Matson brand and drive organic growth. We did this during the pandemic with the CLX+ service, and derivative opportunities in logistics, and we're confident that we're positioned well with our customers in the marketplace to drive future opportunities. We will look to acquire businesses as an extension of the great collection of assets we have today. We want to ensure that any business we acquire complements one or more of our existing businesses, provides a unique or differentiated value proposition to our customers, fits culturally with ours, and is purchased at a double-digit cash-on-cash yield with good long-term cash flow characteristics. We did close a small tuck-in acquisition in 2022, and we're actively looking at acquisitions including tuck-ins in both Ocean Transportation and logistics. We still believe that valuation expectations are higher than justified by earnings fundamentals and growth prospects, especially in light of current economic conditions. This may change in the coming year, and we expect attractive candidates to emerge that meet our investment criteria. We also have a solid balance sheet which provides a lot of optionality for us. And last but not least, we will continue to return capital to shareholders after funding our maintenance CapEx expenditures, long-term investments and dividends. In the last two years, we've repurchased approximately 7.5 million shares for nearly $600 million. Going forward, we expect to be a steady buyer of shares. As I've said before, we remain focused only on what we can control and doing what we've always done. And that's to maintain vessel service reliability, provide high-quality customer service, and allocate shareholders capital to its highest and best use to create value over the long term. And with that, I will turn the call back over to the operator and ask for your questions.

First question is coming from Jack Atkins of Stephens. Your line is open.

Okay, great. Good afternoon, and thank you for taking my questions. So I guess, Matt, I'd love to maybe kind of start with a macro question or two. You guys have such an interesting look into what's going on because of your relationship with your customers beginning in their supply chain in China. But, is it your sense that retail shippers are going to be back to more normal ordering patterns around the middle of the year? Is that what’s sort of underpinning your outlook for -- things to kind of maybe get back towards normal in the second half of the year? I don't know -- I'm not trying to put words in your mouth, I'm trying to kind of understand the outlook from that perspective.

Yes, I think -- first of all, thanks, Jack for the question. A couple of things. I think our view now is that because of the very significant contraction in Transpacific demand and ordering that occurred, especially in the fourth quarter, we saw the beginning towards the end of the third quarter, as retailers saw a slowing demand pattern by their customers and a significant backlog of inventory that was caught in the supply chain congestion caused an air pocket to occur, if you will, in Transpacific demand, as our customers individually curtailed future purchase orders. So I think what we're seeing is that -- and we're obviously listening to our large customers, the big box retailers and others for how well they're managing their inventory levels. And so we're watching that metric very closely. And the early read on that is, while there has been improvement in managing inventory levels down in some cases, and in other cases, other retailers that haven't occurred as quickly as they had expected. So, we're expecting some of the slowness that we saw in that fourth quarter to continue into the first quarter and frankly, into the first half. And then we do expect more normal seasonality to occur as we approach the Thanksgiving and Christmas holiday seasons. And so we're expecting a weaker first half of the year, owing to those questions and ongoing impacts of higher interest rates and the Feds desire to curb inflation, some persistent inflation, some of the macro trends that all of us are following closely, will weigh on demand, we think particularly in the first half.

Okay, got it. Now that's helpful, Matt, thank you for that. And I guess, you know, maybe to kind of help us frame up the first quarter of the first half. I know you guys are not giving guidance. But this is the forum, maybe if you can help us think a little bit about seasonality. And maybe what that looks like, you said, the first quarter is going to be the most challenging quarter of the year from a financial perspective. If I heard you correctly. If I think back and kind of look back to how the business historically kind of trends fourth quarter to first quarter, typically, marine transportation margins can be roughly half of in the first quarter what they were in the fourth quarter, is that the right way to think about the business this year, or is that maybe a good baseline? Anything to kind of help us think about how to frame it up, just because there's just so many moving pieces this year. I'm not trying to put you on the spot with guidance, just kind of looking for some direction.

Yes. And, part of our lack of guidance is the macro uncertainties that we're seeing. So it's not as if we have a number, and we're not going to share it with you. We're watching it along with everyone else. But we do think that, as we've said, if you look historically, the first quarter has historically been our weakest, followed by I guess you would say, the fourth quarter. And our historically, our two strongest quarters are in the second and third quarter. So if you just look historically there, we're also seeing, I think, in the first quarter of this year, we had some disruptions related to COVID in China and weakening certain demand patterns. I also think the piece that I haven't mentioned, but I think it's going to bear on what happens in the second half of the year. We saw it beginning in the fourth quarter, but I don't think it's taken its full force is in the China markets. Will the other international ocean carriers resize their transportation fleets in line with the lower expected demand? We're seeing some of that occur; we've seen announcements. But I think more of that does need to occur, so that there isn't an overhang of capacity in the market, that could weigh down on freight rates. So I would say as without talking about margins relative to the fourth quarter, I would just urge you to think about historic earnings and then just apply what we see as a more cautious first half than the second half.

No, that helps a lot Matt. Thank you. And then that gives me up to work with there. So let me maybe ask one more, and I'll jump back in the queue. But I guess, Joel, if you have some thoughts on this, let me get you to chime in on it too. But, when we kind of think about the last couple of years, obviously been extremely strong from an underlying demand perspective, a lot of things kind of happening, easy to layer on so maybe additional costs through that process. Now that the businesses are normalizing, in some cases, maybe below normalized levels. Are there opportunities to maybe take costs out of the business, maybe kind of look for ways to tighten the belt a bit in certain parts of the business that can help offset some of the challenges from a business perspective?

Yes, Jack, let me just start with my thoughts. And then I'm going to turn it over to Joel to get his perspective. I think what we -- the biggest levers that we can pull, as you know, are really around fleet deployments. Our cancellation of the CCX service that occurred towards the end of the third quarter and through the fourth quarter is a way in which we could take every one of our vessels which were deployed, put them back, in some cases into reserve status, and lower the operating costs by reducing our fleet size. The other element that we're going to be focused on in 2023 is that at its peak, we had seven vessels in the CLX+ service. We're going to be moving towards a more conventional five vessels, as we as we continue with the CLX+ service into '23 and likely moving forward. So there's a couple of big levers. One of the things that did not occur, Jack, in the last three years of the pandemic was really on the G&A and people side. We added less than 3% to our workforce in each of the two years of the pandemic. And we have a normal level of retirements and other kinds of things that doesn't put us in a position where we feel like our people resources are significantly overstretched. But having said that, we're going to go back to doing what we've done in a normal environment, which is looking for ways to operate more efficiently, whether it's the speed of our vessels, the size of our equipment fleets, the use of overtime, and gate times, and a lot of just blocking and tackling that will occur and does occur in a normal environment that will allow us to reflect that we're in a different environment and trying to keep our costs in line with this less congestion and lower demand environment overall. But I would turn it over to Joel for his thoughts as well.

Yes, those are the key items, Jack. Just to put a little bit of order of magnitude on it, our biggest cost is terminal handling. So as the freight package goes up and down over time, and right now it's soft with the declines you've seen, that naturally goes down. You do get some reduction in costs on a per unit basis, as you have less freight moving through your terminals. The next costs are the vessel operating costs broadly, including fuel, and there’s, as Matt said, our fleet is pretty fixed right now. We will go to ratchet down two units on the CLX+ from seven ships to five, that'll help. And we'll do that over the course of the first two quarters of this year. The rest of it is a pretty fixed network of vessels, staying on schedule, and then we have fuel that fluctuates based on fuel prices. So that's the next biggest category. And then equipment, Matt touched upon that. We did flex up, we've repurchased a lot of equipment in the early and midstream days of the pandemic. Then we actually leased quite a bit in the last 12 months that we now can hire and turn that equipment back to the lessors and ratchet down a little bit across our network there which will help the cost structure a little bit. And the last piece is the people, as Matt said, we see elections; additional channel services do not require big increases in our headcount. So we're pretty disciplined about adding people only when necessary in the last couple of years. Therefore, there's not a big additional number of headcount that increased our cost structure.

No, I really appreciate that. Joel, thank you. And I'll hand it over and jump back in the queue.

Our next question is coming from Jake Lacks of Wolfe Research. Your line is open.

Hey, thanks for your time.

Hi, Jacob.

So we spent a fair amount of time talking about the demand environment. Can you talk about how you view the supply side for the balance of the year? I think you talked a bit about some blank sailings, but the order book is pretty elevated. Could that be offset by vessel scrapping? I would like to get your thoughts there.

Yes, I certainly can give you my thoughts. And let me give you my thoughts about what should happen. Well, what I think will happen and what should happen is that the international ocean carriers, operating through their global alliances will ultimately resize their fleets in the Transpacific and globally, but in the markets we care about in the Transpacific, for ultimately the level of demand that is needed in the trades. We acknowledged there was a larger order book, that those vessels are going to be delivered, some of those will be delayed, as ocean carriers seek to push back the delivery; we will see some advanced level of scrapping. We'll see for vessels that are chartered, which represent about 50% of the global fleet, many of those vessels will be returned to their vessel owners when the charter periods are over. So I think you're going to see a combination of resizing that's going to occur, and even potentially laying up vessels or again, scrapping vessels that should have been scrapped, or would have been scrapped, except for the extraordinary market cycle that has occurred over the last few years. You'll see a combination of all of those things occurring over the coming months. As I said, some of it has occurred. We ourselves are an example of that, having three Transpacific services at our peak, and then scaling that back to two in light of slack falling demand. So those are really our thoughts about what should and are very likely to happen as we go through 2023.

Got it. Thanks. And then, I understand there's a lot of noise right now, given inventory stocking. But do you think there's sufficient demand for two weekly transpacific services year round? Or is there an option to make a CLX+ seasonal or every other week or something?

Yes, I mean, I think our view is -- let me address the market that we care about, which is the expedited market. It is a good reminder that even while customers may be handling a lot of inventory in their systems, in part as a result of inflation on the underlying cost of that inventory. There is still going to be a need for product that is moving that needs to be replenished. Our view is that while customers will likely remain cautious on managing their inventory levels, they are going to want to fill the shelves. Matson's view is that there is a size of a market sufficient in the expedited space for two weekly services. Our view is that if we remain the fastest and most reliable, which we expect to, that we're going to get the lion's share of all that expedited freight, and there's enough expedited freight in the market that will allow us to sustain two services.

That makes sense. And then one last one for me. You noted some weakness in the demand environment and one key coming out of China. You had a big decline in rates from Q3 to Q4, has that found a bottom yet? Or should we think rates decline again in the first quarter?

Yes, it's a good question. I mean, I think it's important here to differentiate between what we'll say our market rates or spot rates and what that believes rates are. So let me let me first start talking about our thoughts about the spot rates in the market. I think typically after, historically, after Lunar New Year or before the factory is reopened, we typically see that as the lowest point in the year for spot rates, where the demand is low as international ocean carriers typically void or cancel or blank sailings during that period. That's when you see the spot rates at their lowest. So whether we're exactly at the bottom or near the bottom, I think we're close, if we're not there. What we're going to do, based on my belief and expectation that ultimately the capacity will be reset, as I mentioned, is that spot rates will come up from these lows. The extent to which it will be determined by lots of factors on the supply and demand side. But I think we're at or near the bottom on the spot rate side. I think if you look at then we move into the sort of in the Transpacific this annual contracting cycle and what I expect to occur is that in the entire transportation trade, we will see lower contracted rates than in the previous year as these contracts renew. They'll likely be above the spot rates but below the rates at which they were contracted last year. That's pretty clear. The other thing that up for Matson, while our rates are down from the previous year, and volumes were down as we mentioned, our rates remained significantly higher than the market rates, and they remain above where they were pre-pandemic in our expedited space. It's hard to know exactly what will occur. But we feel comfortable that we are receiving a premium to the market that is commensurate with our highly differentiated service. So not knowing exactly how it's going. We like where our position is in the market.

All right, thanks for your time.

And our next question will be coming from Jack Atkins of Stephens.

Yes, Jack Atkins with Stephens, thanks for letting me jump back in and ask a couple more questions. So I guess, I know you guys don't like to talk about tradelane level profitability. But there's a lot of question, I think out there in terms of like what rates where they are, and the CLX+ not necessarily having that full double head all like the original CLX has. How does it fare in this type of operating environment? Do you feel like that with the cost levers that you have to pull in terms of being able to blank sailings when necessary, and going from seven ships to five ships, that should be able to keep CLX+ profitable or at worst neutral to earnings, even in this type of rate environment? Is that reasonable to expect?

Yes, it's a good question. And I'll start by saying we don't talk about trade-level profitability. What I can say with confidence, Jack, is this. There is even in this last week sailing, more demand for expedited service than we can fit on our CLX+ service. And this is at the seasonal low. We do expect that the size of the expedited market can't be satisfied with a single vessel even in a down market we're in an overshot market. Over time, there will be long-term value creation by having the fastest and second fastest markets in a trade. There's demand for it, there'll be pressure to try to move products out of air freight into our expedited or deferred airtight product. I would say that, obviously profitability is going to be lower on all of our Transpacific services than in the previous year, but we remain confident that these two services will create long-term value for our shareholders.

Okay, got it. I knew that was going to be a tough question to answer. But I want to see if you guys would, would maybe elaborate. So I guess maybe kind of shifting gears to a couple of other items. You know, Joel, could you maybe help us think about how interest expense should trend? I know it's interest rates can move around a lot. So not asking for a full year look. But, with the progress payments being made into the capital construction fund and higher rates on your cash balance? I mean, what's the right way to think about interest income, I guess I should say, over the next couple quarters?

Yes. Well, interest expense will be very easy to project. We'll have four instruments after we pay off these two Title XI here in the first quarter, so that two remain private placement tranches, and two remaining Title XI tranches. That will be very fixed on the interest expense side. Your question on the interest income side, just take a look at the cash on deposit in the CCF as well as cash and cash equivalents on the balance sheet itself. All of those funds will be invested in short-term, high-rated securities. The interest income on those two total amounts going to be? I mean, right now it's running close to 4%. We told you what we made; we made $4 million of interest income here, so far year to date, just from the CCF alone, which had $518 million at year end and through -- up until the $100 million deposit we made just this past week. It's really a function of this, look at those two numbers together on the balance sheet Jack, CCF plus cash and equivalents, and then look at what market rates are for high-quality money market, government-backed types of securities, because we'll maintain a very high quality of money market type investments with those funds. So that's the kind of return you should expect on the interest income side.

So in terms of like how that nets out onto the P&L, we're looking at something maybe slightly north of what you saw in the fourth quarter, again, depending on the potential fluctuation with container rates?

Yes.

Okay, got it. Thank you for that, Joel. And then in terms of thinking about a couple of other items on the cash and cash flow side, with the deposit into the capital construction fund, should we be thinking about the cash taxes being just basically backed out of the alternative minimum tax, is that the right way to think about that plus your state income tax? Is there another way to be fairly minimal cash taxes?

Well, it should revert to something more normal, I would say in 2023. What you saw is in 2021, and 2022, we had very high levels of profitability, and we did have high amounts of cash taxes. If you look at those two years together, we're going to get some refund back on the 2022 amount of cash taxes we paid. That'll help overall cash flow. But going forward, Jack in 2023 will actually revert to something more normal in terms of cash taxes relative to our underlying earnings.

Okay, so the capital construction deposit -- that's going to shield the -- that's going to drive a refund from prior periods and going forward, it's going to be more your cash taxes and your payroll taxes maybe it will be fairly similar?

Yes, they'll be much closer together. And the way -- what we'll have to do in 2023, is start making quarterly estimated cash tax payments, so that you'll see that, but then that'll be a little bit overwhelmed by at some point here, we'll get a refund from the IRS. We don't know when at some point this year, we'll receive a big one-time refund. But we'll also be making regular quarterly cash tax payments to the IRS based on 2023 estimated profitability.

Okay, I hope I'm going to get a refund this year, too, but I'm not going to hold my breath. Okay, so I guess it'd be last question, then I'll turn it over. It's on the sort of the pace of share repurchases, you guys have been pretty active on those over the last couple of years. And it's really larger share count pretty significantly. How should we be thinking about that moving forward? I mean, is this going to be kind of a similar pace, a little bit more ratable? You guys will be more opportunistic with it. How should you’d be thinking about that?

Yes, I would say it's going to be a slower pace than what we've done this first year and a half. Remember, we started in August of 2021. In that 18 months, we've bought back 7.5 million shares already. That’s more than the steady pace you'd expect for the rest of this decade. The reason we did that is because we had such very large levels of cash flow and profitability in 2021 and 2022. As things kind of revert back to something more normal in '23 and beyond, the share repurchase activity will go down and reduce from that annual pace. More of a steady pace that's more measured with our cash flow from operations minus our kind of maintenance CapEx levels because we funded the big vessel CapEx in the CCF already two-thirds of that. So a more steady pace than what we've seen in the last 18 months, but a steady pace for years to come is what we expect.

Okay, no, that's great to hear. And I guess maybe one last one for me, and I'll hand it over. And I just would like to maybe kind of go back to this idea of sort of what normalized earnings could look like for Matson. And I know it's a difficult question to answer. But I guess as you guys think about sort of the margin range for marine transportation, historically, it's sort of in mid-single digits at the trough of a cycle, mid-teens at the peak of a cycle. It's because of COVID times out for a moment, and sort of high single-digit, low double-digit, and we're in a more normalized operating environment. Is there any reason to think that that range has kind of changed one way or the other through the cycles we look forward? I mean, is that still the right way to think about it? Do you feel like the business is structurally more profitable? Any sort of color around that I think would be helpful for investors.

Yes, Jack, this is Matt. I'm going to try to answer part of it, and then I'll turn it over to Joel. I think we continue to believe that our earnings coming out of this pandemic will be higher than it was going in. I'm not sure whether we've hit normalized earnings, especially in the first half of this year. But we do expect eventually to get there. My view there is partly driven by the addition of the CLX+, which as I said earlier we think will drive long-term value over and above our core earnings. I think the value of our CLX and the brand that it stood out in a really disruptive cycle is also going to allow us to continue to earn a very healthy premium. In a few years, I expect these three new builds to put these additional 500 containers for sailing for those three ships that we're going to be introducing into the CLX to be another bolt on of additional earnings through upsizing kind of an organic growth initiative. I expect us to look for small tuck-ins, and I think those acquisitions in other growth opportunities, absent of a pretty large acquisition which we are not including in our comments if we can find one that fits. Without trying to put a percentage on it, those are some of the things I think give us the confidence to say that we do believe that we're going to be a different company than we are going into it. But I'll turn it over to Joel to give you the mid-cycle percentage profit margins.

Which, and Jack, you've heard us say before, because there's so many moving parts, especially fuel, that margin analysis becomes very, very difficult. I know you went through in your question a couple of predicates there in terms of what margins might be normalized and lower end and high and low points in the cycle. And we honestly, we just don't think of it that way. We don't think of our businesses in terms of what margins they're going to produce; we think of our businesses in terms of what aggregate EBITDA and operating income they're going to produce. For investors, we've always talked about taking a run rate, and then doing your analysis on what you think is going to happen in the future off that run rate. If you assume more volume at x price, then you can back into what your contribution and incremental contribution margins might look like. You can start working on aggregate EBITDA and operating income based on that starting point, as opposed to building a revenue number and then applying the margin against it.

It does, it does. I just -- I think you guys know your business better than anybody else. And it's tough from the outside looking in with all the different tradelanes to be able to model it and think about where things are going to settle out. So I think that once we can get some more clarity around that, I think that will help valuation once we can kind of get some views. So I just tried to get you guys to go on the record on that, but I guess we'll have a better sense for that in the second half of the year. So thank you again for the time. Really appreciate it.

Okay, sure. Thanks, Jack.

Thank you. That concludes the Q&A session for today. I would like to turn the call back over to Matt Cox for closing remarks.

Okay, well, thanks, everybody for your interest in today's call. We look forward to catching up with everyone next quarter. Aloha.

Thank you all for attending today's conference call. You all have a great evening and you may disconnect now.