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

Thank you, Chris. 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 14 to 24 of our Form 10-K filed on February 24, 2023, and in our subsequent filings with the SEC. Please also note that the date of this conference call is October 30, 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 will now turn the call over to Matt.

Okay. Thanks, Lee, and thanks to those on the call. Starting on Slide 3. Matson's Ocean Transportation and Logistics business segments continued to perform well despite a challenging business environment and relatively difficult economic conditions impacting the U.S. consumer. For the third quarter, within Ocean Transportation, our China service experienced solid freight demand despite the muted peak season in the Transpacific tradelane, but generated lower year-over-year volume and freight rates, which were the primary contributors to the year-over-year decline in our consolidated operating income. We also saw lower year-over-year volumes in Hawaii, Alaska, and Guam compared to the year-ago period. In Logistics, operating income decreased year-over-year primarily due to lower contributions from Transpacific brokerage. I will now go through the third quarter performance of our tradelanes, SSAT and logistics. So please turn to the next slide. Hawaii container volume for the third quarter decreased 1.9% year-over-year primarily due to lower general demand. Volume in the third quarter of 2023 was 0.8% higher than the volume achieved in the third quarter of 2019. Please turn to Slide 5. In August, Maui experienced a significant economic disruption from devastating wildfires. According to UHERO, September's economic report, tourism to the islands may not fully recover in the next several years and the rebuilding of homes and businesses may take many years. Demand for construction workers is expected to increase with the rebuilding efforts in Lahaina and other areas in Maui. In the near term, Matson expects economic growth in Hawaii to moderate as tourism and visitor arrivals slowly rebound from the effects of the Maui wildfires. Moving to our China service on Slide 6. Matson's volume in the third quarter of 2023 was 1.3% lower year-over-year, primarily due to no CCX service in the quarter, partially offset by higher CLX+ volume. The higher CLX+ volume in the quarter compared to the prior year period was a result of higher utilization on the vessels and greater capacity of the CLX+ fleet. As you may recall, in the third quarter of last year, we began to see a path to normalization from the pandemic-driven highs as congestion throughout the supply chain eased. During the quarter, we continued to see solid demand in the e-commerce and e-goods verticals and stable demand from the garments vertical. We achieved average freight rates in the quarter that were lower than the year-ago period but well above those achieved in the third quarter of 2019. Matson continued to realize a significant rate premium over the SCFI in the third quarter of 2023. Please turn to Slide 7. Currently, in the Transpacific marketplace, we continue to see a reduction of deployed capacity in light of lower volumes as a result of lower consumer demand for retail goods. We continue to differentiate our China service from the others in the tradelane with a high degree of reliability and consistency, an 11-day ocean transit time, and 24-hour availability at the unique shippers transport off-dock facility. At 10% to 15% of the cost of air freight, our China service continues to offer a significant value proposition for airfreight customers with only 5 to 7 days of additional transit time. For those customers looking to reduce their product carbon footprint while saving a considerable amount of money, our customers tell us that switching from air freight to our expedited ocean freight product reduces their CO2 emissions by approximately 95%. Looking forward, absent an economic hard landing in the U.S., we expect trade dynamics in 2024 to be comparable to 2023 as consumer-related spending activity is expected to remain stable. Furthermore, regardless of the economic backdrop, we continue to expect to earn a significant rate premium to the SCFI, reflecting our fast and reliable ocean services and unmatched destination services. Please turn to the next slide. In Guam, Matson's container volume in the third quarter of 2023 decreased 1.9% year-over-year. The decrease was primarily due to lower general demand. Volume in the third quarter of 2023 was 12.8% higher than the level achieved in the third quarter of 2019. In the near term, we expect continued improvement in the Guam economy with a low unemployment rate and a modest increase in tourism from low levels. Please turn to the next slide. In Alaska, Matson's container volume for the third quarter of 2023 decreased 9.1% year-over-year. The decrease was due to lower export seafood volume from AAX, lower northbound volume due to lower retail-related demand and lower southbound volume primarily due to lower domestic seafood volumes. Approximately 85% of the year-over-year volume decline was a result of lower seafood volumes in the AAX and Southbound services. Year-to-year, there can be rather meaningful changes in summer volumes depending on the strength of the seasonal Alaskan catch. Compared to the third quarter of 2019, volume in the quarter was 12.9% higher. In the near term, we expect the Alaska economy to continue to benefit from low unemployment and increased energy-related exploration and production activity as a result of elevated oil prices. Please turn to Slide 10. Our terminal joint venture, SSAT, declined $22.1 million year-over-year to $1.3 million. The lower contribution was primarily due to lower demurrage revenue and lower lift volume. SSAT saw significantly less demurrage revenue in the quarter due to easing port congestion and lower lift volume consistent with lower year-over-year demand in the Transpacific service. In the fourth quarter of 2023, we expect lift volume to reflect a relatively challenging environment for the Transpacific tradelane. Turning now to logistics on Slide 11. Operating income in the third quarter came in at $13.9 million or $6.2 million lower than the result in the year-ago period. The decrease was primarily due to a lower contribution from transportation brokerage. In the near term, we expect a mix of activity across the logistics lines of business. We expect continued growth in Alaska to be supportive of our freight forwarding demand. We expect supply chain management to track our China service. And for Transpacific brokerage, we expect continued near-term challenges with lower freight demand and excess capacity. And with that, I will now turn the call over to Joel for a review of our financial performance.

Okay. Thanks, Matt. Please turn to Slide 12 for a review of our third quarter results. For the third quarter, consolidated operating income decreased $203.2 million year-over-year to $132.1 million with lower contributions from Ocean Transportation and Logistics of $97 million and $6.2 million, respectively. The decrease in Ocean Transportation operating income in the third quarter was primarily due to lower freight rates in China and a lower contribution from SSAT, partially offset by higher volume in the CLX+ service and lower operating costs and expenses, including fuel-related expenses primarily related to the discontinuation of the CCX service, which occurred in September of last year. As Matt noted, the decrease in Logistics operating income was primarily due to a lower contribution from transportation brokerage. We had interest income of $9.3 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 the prior year period. Interest expense in the quarter decreased $2.6 million year-over-year due to the decline in outstanding debt as compared to the prior year period. The effective tax rate in the quarter was 14.5% compared to 20.4% in the year-ago period. Please turn to the next slide. The 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 $568.5 million, from which we used $81.5 million to retire debt, $168.9 million on maintenance and other CapEx, $102.6 million on new vessel CapEx, including capitalized interest and owners' items, $24.1 million in cash deposits and interest income in the CCF, net of withdrawals for milestone payments, and $24.5 million on other cash outflows, while returning $253.2 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 quarter, we repurchased approximately 0.3 million shares for a total cost of $25.8 million, including taxes. For the first 9 months of the year, we repurchased 1.6 million shares for a total cost of $110.3 million. Since we initiated our share repurchase program in August 2021 through September 30th of this year, we have repurchased 9 million shares or nearly 21% of our stock for a total cost of over $705 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 third quarter was $450.3 million, a reduction of $12.1 million from the end of the second quarter. I'm now going to walk through an update on a couple of financial items, so please turn to the next slide. The cash balance in the CCF at the end of the quarter was $591.6 million. Based on the remaining milestone payments of roughly $899 million today, nearly 2/3 of the program is funded by restricted cash in the CCF. Note that the 2/3 figure excludes cash and cash equivalents currently on our balance sheet, interest income on cash and CCF deposits that may be earned in future years, and also excludes the 2022 tax-year IRS refund of $119 million that we still expect to receive. On vessel construction payments, we continue to expect to make our next milestone payment in the second quarter of next year. Lastly, for the fourth quarter, we anticipate an effective tax rate of approximately 23% versus the 14.5% tax rate in the third quarter. I'll now turn the call back over to Matt.

Okay. Thanks, Joel. Please turn to Slide 16, where I'll go through some closing thoughts. We expect consolidated operating income in the fourth quarter of 2023 to be higher than the level achieved in the first quarter of 2023. Normal seasonality trends have returned to our domestic tradelanes and logistics. For our China service, we expect continued solid freight demand with some seasonality in the post-holiday timeframe. We also expect CLX and CLX+ freight rates in the fourth quarter of 2023 to be well above pre-pandemic rates. Lastly, as I mentioned in our last earnings call, we are beginning to see consistency in our demand levels post-pandemic and therefore continue to evaluate the return of our annual financial outlook with the release of our fourth quarter earnings in February. And with that, I will turn the call back to the operator and ask your questions.

Our first question will come from Jack Atkins of Stephens.

Congratulations on executing so well in this challenging environment. Matt, to start with your closing comments about fourth quarter consolidated operating income being above the first quarter, that's encouraging. However, when I consider normal seasonality, typically, there's a decline of about 45% to 50% from the third quarter to the fourth quarter. Is there any reason to believe this year will be significantly different? If so, could you help us understand the factors influencing that?

Yes, sure. I'd be happy to try to do that, Jack. So I would say, firstly, we still do expect the seasonality that we saw pre-pandemic to return. And so, as you know, in our business, the second and third quarters are our busiest and our fourth and first are weaker, just because of the amount of cargo in the market given the seasonality of purchasing and holiday periods in our market. It always has been and it always will be that way to a certain extent. But one of the verticals, Jack, that might be just a bit different coming out of the pandemic, as we've talked about on last quarter's call, was the growth in e-commerce. And there's an element we believe, although we don't know exactly what it is yet, but some of that e-commerce moves year-round. There's less seasonal pattern. It's recurring items that people purchase rather than holiday gifts or back-to-school or a seasonal element to it. And so that may explain why we think the differences in both, frankly, in our fourth and first quarters may not be as seasonal as we've seen pre-pandemic, but we still overall expect the seasonality pattern to remain pre- and post-pandemic, if that helps.

Okay. So if anything, maybe there's a little bit less seasonality. And I understand we're still trying to understand what the new normal looks like, but perhaps maybe there's a little bit less seasonality in the business going forward than there has been in the past just based on that e-commerce factor.

That's right. Yes.

Okay. Got it. That's helpful. I'd also love to maybe touch on a comment that you made, Matt, around the kind of the thoughts around the 2024 Transpacific trade. I think one of the questions we get a lot is just folks kind of trying to understand what's happening with inventory balances and have we kind of reached a new normal from an inventory destocking perspective. I guess, what are your customers telling you about how to think about that going into next year? It sounds like they're expecting relatively stable volume, but do you feel like we're kind of through the destocking phase of this last, call it, year, 1.5 years?

Yes. I'm going to answer that in two ways, Jack. To answer your question directly, we are hearing from many of our customers that this inventory overhang that they had when there was a very sharp decline in the year-ago period. Most of our retailers have worked through those inventories. And so now there are exceptions, and there are SKUs or product lines that they are still surplus on. But our general feeling is that retailers have done a really good job of working through their overhang. But the other context point here, at the risk of over-answering your question, Jack, is where from our perspective, how we see the Transpacific market. And in our prepared comments, we refer to 2019 as a benchmark, the world changed over the last few years. And so if you look at the imports into the United States for the first 9 months of 2023, compare that to the first 9 months of 2019, cargo volumes into the United States, both East Coast and West Coast, from all foreign origins, is close to 7% higher than 2019. So while it's true that there were significant declines in the year-over-year period and when and how we lap the bad news, just from a context standpoint, when we talk about seeing a new normal and are we there? We see the inventories have largely been absorbed. These excess inventories to your first part of your question. And we see growth from those levels. So it's just another data point in our own thinking about us having reached equilibrium, and it's also why we think that 2024 is going to look a lot like 2023, given those underlying factors. So just again, at the risk of over-answering your question, I wanted to provide some context into our thinking.

No, that's really helpful. Maybe one more for me, and I'll hand it back and jump back in queue, just to make sure everyone can jump in. But I guess we think about trying to frame up the 'new normal' one area of the business that's underperforming relative to pre-COVID, the SSAT joint venture. And obviously, it had some really good years there during the supply chain disruption, but it's losing a little bit of money now on a quarterly basis. How do you think about the normalized earnings power for that part of your business? And I guess what level of import activity do we need to see to be able to get back to a stable level of profitability there? I know you don't own that asset outright. I'm just trying to kind of get a gauge for that.

Yes. First, I want to mention that we will provide more detailed information in our year-end earnings call, but I can share my thoughts now. We believe 2023 has not been a year of normalization for the joint venture, but we expect to see normalization in 2024. There are a few reasons for this. Initially, the inventory overhang from last year, which significantly reduced cargo in the market, is being addressed. Additionally, other factors were suppressing volumes during that time. One of these was the ILWU contract, which has now been ratified and implemented. We think some cargo was redirected as our customers aimed to mitigate risks by routing cargo either through the Suez all-water route from Asia or via the Panama Canal. Looking ahead to 2024, we anticipate a few developments. The inventory overhang will largely be resolved, although there are ongoing issues with the Panama Canal related to drought, which are slightly reducing the effective capacity for U.S. Panama all-water services from Asia. Furthermore, there will be a contract renewal for the ILA in 2024, and some of the risk management actions our customers took during the ILWU negotiation in 2023 are likely to influence the situation again. These factors should enable a more normal performance level for the SSAT joint venture in 2024, though it won't reach the exceptional pandemic-era levels, when there was considerable cargo at terminals that could not be picked up due to full warehouses. It might be more useful to refer to profitability levels from earlier years before the pandemic, although I don't have those figures at hand. We'll have more insights in the next quarter's call.

And our next question will come from Jacob Lacks of Wolfe Research.

So your China volumes took another step up to around 39,000 containers this quarter. So it seems like you're tracking well above the 120,000 to 130,000 annual run rate you gave a couple of quarters ago. Is this sustainable? Or how should we think about these moving forward?

Yes, Jake, it's Joel. It was a strong quarter for us, but we still think there will be seasonality. So the fourth quarter will have some lighter periods of time relative to the third quarter. So I would say don't just take our 39,000 for the third quarter and multiply it by something near 4 and assume that's the annual rate. We're still sticking with the 120,000 to 130,000 total volume for the whole year. We'll see how the fourth quarter plays out. If we feel like adjusting that on a 2024 basis, we can talk about that in February. But definitely, caution that's not going to be the run rate every quarter.

Sounds good. And then it looks like share repurchases a little in the quarter. I guess, how should we think about the cadence there moving forward?

Yes, we will continue to be steady buyers. Our performance over the last 12 to 9 months is likely a good benchmark for our annual rate. There may be slight fluctuations up and down, but I wouldn't read too much into that. We encourage all investors to adopt a long-term perspective. We maintain a long-term focus and aim to be consistent over time.

Okay. And then one last one for me. I know you aren't giving guidance today, but if the 2024 trade dynamic is similar to 2023, does that mean Matson's earnings should be stable? Or are there some puts and takes for Matson specifically that you're able to call out?

We haven't put all of our own thoughts yet together, frankly, on '24. We did comment that we think that the Transpacific trade and one of our more important drivers of earnings is going to look a lot like it did this year, which was, frankly, pretty good. We talked about the beginning of a normalization of SSAT or joint venture that will be up. There could be others that are down, but we're saying we'll have more to say. I don't know, Joel, would you add anything to that?

Yes. Exactly. There will be some pieces up and down a little bit. But overall, we're saying it's shaping up to be a year that looks similar to 2023. We made that comment specific to operating income.

And our next question will come from Ben Nolan of Stifel.

I have a few questions. I wanted to follow up on the volumes in China. Joel, I know it's always seasonal, and I appreciate that. However, Matt, you mentioned in your prepared remarks regarding the CLX that there was increased capacity. Could you elaborate on that? Are you now able to transport more than before, possibly due to the chartered vessels or other factors?

Ben, it's Joel. It's not significantly different. In any given quarter, when you have 12 or 13 sailings, some of your larger ships may sail twice or even three times more than the smaller ships. Overall, we don't expect significant differences for the quarter. Currently, we have five ships on charter, four of which are similar in size, with one slightly larger, and a fifth ship that is smaller. The frequency of how often that smaller ship sails in a quarter can affect the overall capacity. Additionally, we have chartered a sixth ship that will arrive in a few weeks, which will help us maintain a high level of on-time performance. This sixth ship will be similar in size to the other four. Therefore, capacity in any given quarter will largely depend on how often that smaller ship sails during the 12- or 13-week period.

Okay. So with that, first of all, adding a sixth ship should increase capacity if you’re not releasing one or if the one you’re chartering is slightly larger. As long as there’s demand, the capacity should have some upside. Is that correct? Along those lines, how much of the Shanghai-based expedited market do you believe you’ve captured right now? Is there potential for more growth if you had a bit more capacity?

Yes, Ben, this is Matt. So to the two parts of your question, the sixth ship we're adding is primarily intended to be used to always have a ship to be able to sail on time regardless of if there's a weather event or a port closure. So it's really more about ensuring we have the same number of sailings. And so the primary purpose is not to get an extra 6 or 10 voyages in the year. But rather to ensure that the 52 voyages we have are nearly perfect. And so it's really more of an insurance policy so that we can look at our customers in the eye and say we have a reserve ship. We're not going to have a missed voyage, and we're sort of taking the exact tack that the rest of the market seems to be taking. So just to clarify that one aspect of the question. And then, Joel, do you want to comment on the second part of the question?

Yes. The comment I was making regarding the charters specific to CLX+ is about 5 and 6 ships. The same applies to our regular CLX service with our Jones Act. Not all 5 ships have the same capacity either. Sometimes we use a smaller vessel. Therefore, the capacity and number of sailings for the smaller vessels in any quarter can affect the overall capacity for both CLX and CLX+.

Right. And with respect to the amount of the market share that you think that you've captured?

Yes. I think we're very focused on that expedited market share each week coming out of Shanghai. We still feel like our CLX and CLX+ service is the #1 and #2 service capturing the majority of that but not all of that. We do believe we've got the majority of the expedited freight out of Ningbo and Shanghai on a weekly basis.

And then Joel, I was going to ask on the $119 million tax refund. We've been kind of waiting on that for a while. Do you have any clarity? I mean, do you expect it by the end of the year? Or is there some sort of dispute associated with that?

No, I can't provide a specific timeline. We are uncertain about when we will receive it, but we remain highly confident that it will come, whether before the year's end or not. Our understanding is that it is taking time for the IRS to process it. We believe it is related to the CCF deposits we made last year, which totaled $565 million. This amount is tax-effected and does not appear in the automated IRS systems, so it needs to be processed manually. Our understanding is that it is just taking time for them to review and make that manual adjustment.

If we're waiting on the IRS, it might take a few more years. Just joking there for clarity. I have a couple more questions, if you don't mind. I wanted to ask about the reengineering process of some ships to LNG, as we haven't heard much about it recently. I’m just interested in how that process is progressing and how you're incorporating what you've learned from it.

This is Matt, Ben. The first vessel we have installed LNG on and is now operating on it is the Daniel K. Inouye. It underwent a conversion process, which included adding tanks and manifolds. As you know, the engine was already designed to burn LNG fuel when we ordered it. That vessel is currently underway. The second vessel that will undergo a gas conversion or engine conversion is now in the shipyard. We also have another vessel scheduled to go in next year in 2024. We will provide more details about the timing later, but our conversion projects are progressing well alongside three new vessels that have yet to begin construction but will be delivered in a couple of years, and they will also be LNG ready. Our plan is being executed as expected, and the timing remains consistent with our original schedule for the conversions.

I wanted to ask about Hawaii and the tragic situation in Maui. Considering the long-term perspective, could the rebuilding efforts potentially increase your freight and volume? In the short term, there are challenges from reduced tourism, so I’m trying to understand the potential volume impacts for your business.

And it's a sensitive subject because, obviously, we're focused on the tragedy and wish it never happened. But in the short term, I think you've got it right. It's going to be a situation where in the near term, there are some headwinds, but over the longer term, the rebuild process we expect to, as we mentioned in our prepared comments, the recovery will occur in the medium term, the rebuilding could occur over the longer term. So eventually, I think there will be a rebuild. I know the residents in Maui and the leadership in Maui want it to be rebuilt, and that will translate into freight volumes at some point in the future.

I am not seeing any further questions in the queue. I would now like to turn the conference back to the CEO, Matt Cox, for closing remarks.

Okay. Thanks, operator. Thanks for listening in on our call today. We look very much forward to seeing everyone on our year-end call. Aloha.

This concludes today's conference call. Thank you all for participating. You may now disconnect and have a pleasant day.