Matson, Inc. Q3 FY2024 Earnings Call

Good day, ladies and gentlemen, and welcome to the conference call to discuss Matson's Third Quarter 2024 Results. As a reminder, today's program is being recorded. And I would now like to introduce your host for today's program, Mr. Justin Schoenberg. Please go ahead, sir.

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’ll 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 in the captioned Risk Factors on pages 13 to 25 of our Form 10-K filed on February 23, 2024 and in our subsequent filings with the SEC. Please also note that the date of this conference call is October 30, 2024 and any forward-looking statements that we make today are based on assumptions as of this date. We undertake no obligation to comment on these forward-looking statements. I will now turn the call over to Matt.

Thanks, Justin, and thanks to those on the call. Starting on slide three, Matson had a very strong third quarter that exceeded our expectations with higher year-over-year operating income in both Ocean Transportation and Logistics. In Ocean Transportation, our China service saw significantly higher year-over-year freight rates and was the primary driver of the increase in consolidated operating income. For our domestic tradelanes, we saw higher year-over-year volume in Alaska, but lower year-over-year volume in Hawaii and Guam. In Logistics, operating income increased year-over-year due to higher contributions from supply chain management and transportation brokerage services. As a result of our performance in the third quarter and the expected strength of our China service in the fourth quarter, we're raising our outlook for 2024. Joel will go into more detail on our updated outlook later in this presentation. I will now go through the third quarter performance of our tradelanes, SSAT and Logistics, so please turn to the next slide. Container volume in our Hawaii service decreased 2.2% in the third quarter year-over-year. The decrease was primarily due to lower general demand. Hawaii's economy continues to grow slowly with stalled growth in statewide tourist arrivals. Tourism continues to be impacted by declines in Maui tourism following last year's wildfires and by the sluggish pace of the recovery in Japanese tourist arrivals, which has been impacted by weakness in the yen to the US dollar exchange rate. I will go through our full year outlook on the next slide, so please turn to slide five. According to UHERO's third quarter 2024 economic report, the Hawaii economy is projected to grow slowly in 2024 supported by a low unemployment rate, increasing construction activity and low growth in tourist arrivals. For 2024, we expect volume to be modestly lower than the level achieved last year primarily due to low or no growth in tourism, continued challenges in population growth, and lower discretionary income as a result of higher inflation and interest rates. Moving to our China service on slide six. Matson's volume in the third quarter of 2024 was 2.6% higher year-over-year due to two additional sailings. We continued to see strong demand for our CLX and MAX services and achieved significantly higher average freight rates year-over-year. Please turn to slide seven. The elevated freight rates in the third quarter 2024 were primarily due to a traditional peak season with strong freight demand. A resilient US economy and a stable consumer demand environment coupled with tighter supply chain conditions supported these elevated rates. From a demand perspective, US retail sales during the quarter were solid, and e-commerce continued to grow faster than the overall retail market. E-commerce continued to be an underlying driver of freight demand for both our Transpacific services during the third quarter as well as seasonally strong categories like garments and e-goods. We also continued to see conversion of airfreight to the CLX and MAX, particularly in the e-goods vertical. With respect to tighter supply chain conditions, the traditional peak was augmented by some shifting of consumer routing through the US West Coast in response to continued disruptions in the Red Sea as well as to risk management against impacts from the ILA negotiations on the East and Gulf coasts. Looking ahead, for the fourth quarter, we expect our China service freight rates to be significantly higher than the levels achieved in the year-ago period as long as the underlying economic supply chain and geopolitical consistence persist, but lower than the average rates achieved in the third quarter as the peak season demand eases. Regardless of the economic and geopolitical uncertainties, we remain focused on continuing to deliver a differentiated value proposition compared to air freight with CLX and MAX services as the two fastest and most reliable expedited ocean services in the Transpacific. Please turn to the next slide. In Guam, Matson's container volume in the third quarter of 2024 decreased 9.4% year-over-year due to lower demand from retail and food and beverage segments. In the near term, we expect the Guam economy to remain stable with a low unemployment rate, but slow growth in tourism. Similar to Hawaii, Guam tourist arrivals have been impacted by the slow recovery in Japanese visitors. For 2024, we expect container volume to be lower than the level achieved last year. Please turn to the next slide. In Alaska, Matson's container volume for the third quarter of 2024 increased 1.4% year-over-year due to higher retail-related demand. 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 $5.6 million year-over-year to $6.9 million. The higher contribution was primarily due to higher lift volume. For full year 2024, we expect the contribution from SSAT to be higher than 2023 due to an expected increase in lift volume. Turning now to Logistics on slide 11. Operating income in the third quarter came in at $15.4 million or approximately $1.5 million higher than the result in the year-ago period. The increase was primarily due to higher contributions from supply chain management and transportation brokerage. Our supply chain management service benefited from a similar market condition to those in our China service, while our transportation brokerage business benefited from stronger international intermodal demand. For the fourth quarter of 2024, we expect operating income to be modestly higher than the level achieved last year. I'll now turn the call over to Joel for a review of our financial performance.

Thanks, Matt. Please turn to slide 12 for a review of our third quarter results. For the third quarter, consolidated operating income increased $110.2 million year-over-year to $242.3 million, with higher contributions from Ocean Transportation and Logistics of $108.7 million and $1.5 million, respectively. The increase in Ocean Transportation operating income in the third quarter was primarily due to significantly higher freight rates in China and higher freight rates in the domestic tradelanes, partially offset by higher vessel operating costs. As Matt noted, the increase in Logistics operating income was primarily due to higher contributions from supply chain management and transportation brokerage. We had interest income of $10.4 million in the quarter. Interest expense in the quarter decreased by $0.6 million year-over-year due to the decline in outstanding debt in the past year. Net income increased 66.1% year-over-year and diluted earnings per share increased 73.2% year-over-year with a difference between the two due to a 4.2% decrease in the diluted weighted average shares outstanding. Please turn to slide 13. This slide shows how we allocated our trailing 12 months of cash flow generation. For the LTM period, we generated cash flow from operations of approximately $704.5 million from which we used $39.7 million to retire debt, $205 million on maintenance and other CapEx, $40.6 million on new vessel CapEx including capitalized interest and owner's items, $35.5 million in cash deposits and interest income in the CCF, net of withdrawals for milestone payments, $12.3 million on other cash outflows while returning approximately $259.1 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 third quarter, we repurchased approximately 400,000 shares for a total cost of $48.1 million, including taxes. Year-to-date, we repurchased approximately 1.4 million shares for a total cost of $169.2 million, including taxes. Since we initiated our share repurchase program in August of 2021 through September of this year, we have repurchased approximately 11 million shares or 25.2% of our stock for a total cost of approximately $925 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 $410.6 million, a reduction of $10.1 million from the end of the second quarter and $30 million year-to-date. With that, let me now turn to slide 15 and walk through our outlook for the fourth quarter of 2024 on the left-hand side of this page. We expect Ocean Transportation operating income for the fourth quarter 2024 to be meaningfully higher than the $66.4 million achieved last year. We expect our China service to continue to see elevated rates in the fourth quarter and for the rates to be significantly higher than the levels achieved in the year-ago period, but lower than the average rates achieved in the third quarter of this year as peak season demand eases. For our domestic tradelanes in aggregate, we expect full year volumes to approach the levels achieved in 2023 absent a significant change in the trajectory of the US economy. For Logistics, we expect operating income in the fourth quarter 2024 to be modestly higher than the level achieved last year. Lastly, we expect to have an effective tax rate of 22% in the fourth quarter of 2024. On the right-hand side of this slide, we expect the following outlook items for the full: Depreciation and amortization to approximate $180 million inclusive of $27 million for drydock amortization; interest income to be approximately $47 million and as noted in the second quarter, this includes $10.2 million in interest income earned on our federal tax refund that was received on April 19th of this year; interest expense to be approximately $8 million; other income to be approximately $7 million; and drydocking payments of approximately $35 million. Moving to slide 16. The table on this slide shows our CapEx projections for the full year 2024. Compared to what we said previously provided on our second quarter call in August, our range for maintenance and other capital expenditures is the same at $110 million to $120 million. We tightened our range for our LNG and reengineering projects to $85 million to $90 million versus $85 million to $95 million previously, and our new vessel milestone payments increased slightly by $2 million to $77 million. So, overall, for the year, we now expect total million of $272 million to $287 million. I would like to note that we completed all of our LNG projects with Kamina Hila exiting the drydock in October and we expect that vessel to be back in service starting next week. Please turn to the next slide. We are excited to share the update that on September 30th construction officially began on the first of our three new Aloha Class vessels with the first cutting of steel at the Philly Shipyard in Pennsylvania. Upon delivery, these new vessels will have dual fuel engines capable of operating on both conventional marine fuels and LNG. As a reminder, we expect to carry approximately 15,000 more containers per year in our China service once all three vessels are in service. We currently expect the first vessel to be delivered in the fourth quarter of 2026 and the remaining two vessels to be delivered in 2027. Please now turn to slide 18. The table on the slide shows our expected milestone payments for the new vessel build program. As of September 30, we had cash deposits of $635 million in the CCF and cash and cash equivalents of $270 million. These two balances combined exceed our remaining milestone payments, so we are in a great funding position on the new build program. Lastly, I would like to point out that in October we made the reference fourth quarter milestone payment of approximately $36 million. I will now turn the call back over to Matt for closing remarks.

Thanks, Joel. Our year-to-date results were very strong, primarily driven by elevated rates in the last two quarters in our China service. In the fourth quarter, we expect our consolidated operating income to be meaningfully higher year-over-year as our China service freight rates remain elevated, although lower than those achieved in the third quarter. As a result, we expect to close out 2024 on a high note. As I said on the last earnings call, we at some point expect elevated freight rates in the Transpacific tradelane to moderate, but the timing will depend on the persistence of the underlying economic supply chain and geopolitical conditions. At this moment, it is unclear if any of the elements of risk will normalize during 2025. We will wait until our earnings call in February to provide our outlook for the year ahead. And with that, I will turn the call back to the operator and ask for your questions.

Certainly. And our first question for today comes from the line of Daniel Imbro from Stephens. Your question please.

Hey, good afternoon, guys. Thanks for taking our questions.

Hi, Daniel.

I want to start maybe on a near-term one of the rate side, obviously topical. And Matt, third quarter backdrop rate was strong. It sounds like you're expecting some moderation in 4Q, but maybe how have rates trended as we left the ocean peak season? Ocean rates broadly have fallen, but it looks like the air freight market remains tight. So, how should we think about your pricing? And maybe a second part of that question is, I know you guys typically don't like to quantify it, but any way you can help investors think about what you're anticipating from a sequential rate step down standpoint just as you try to calibrate expectations.

I want to highlight that we anticipate a moderation in earnings opportunities, aligning more closely with traditional trends from Q3 to Q4. If we reflect on past performance, the third quarter has consistently been our strongest, followed by the second, with the fourth quarter typically weaker, and the first quarter being the weakest overall. We expect this pattern to continue, albeit on a higher base than we initially anticipated for this quarter. Currently, much of the product being transported globally is either on the water or en route to the warehouses and distribution systems of our large customers, ensuring they are prepared for the holiday selling seasons. We are observing a typical moderation in this regard. There are several uncertainties and structural changes that have arisen over the past five years, such as an increase in e-commerce sales compared to traditional retail, which tends to be less seasonal. We expect this trend to persist. We also face uncertainties related to the ILA contract renewal in mid-January and the earlier lunar new year this year. These, along with factors like the presidential election and potential tariffs, may affect the fourth quarter. After these events unfold, we will be in a better position to assess their impact. Nevertheless, we remain optimistic about performing significantly better in the fourth quarter compared to the previous year. Now, regarding your inquiries on specifics, I will pass it on to Joel for additional insights.

But I think you hit all the key points, Matt. So, I mean, Daniel, we expect because of the rate environment Matt just discussed, we're going to have meaningfully higher earnings this fourth quarter versus last year's fourth quarter. And it's due to a lot of the trends and strengths that Matt just mentioned. So nothing really to add there.

Got it. Helpful. And then maybe the follow up question. On the CLS/MAX line, I think you guys have chartered these ships the last few years and you've noted you've locked in above-market rates because of when you locked them in. When do those ships reprice as we think about the back half of this year in '25? And what kind of operating margin tailwind could that be next year as you begin to reprice some of those chartered costs?

Yes, Daniel. So, thanks for that question. So, we've actually extended all of our charters now for the six ships in the MAX service into 2026 and a couple actually into 2027. So, I can tell you that the charter market is still pretty tight right now. So, rates have moved up relative to where charter market rates were, let's say, nine or 12 months or so ago. But there will be a little bit of favorable cost for us. It won't be huge, but we're looking at a number around $8 million in 2025 of lower charter costs than 2024. So, a little bit of benefit there on the cost side. The most important thing to us was to lock in these vessels that really meet our service requirements. And we feel really good that we have that locked now into 2026 and 2027.

Helpful. Thank you.

Thank you. And our next question comes from the line of Jacob Lacks from Wolfe Research. Your question please.

Hey, Matt. Hey, Joel. Thanks for your time.

Hi, Jake.

So, I guess, big picture, it feels like the import data we looked at remains pretty robust in contrast to a lot of the domestic freight data we get. How sustainable do you think this is? And is this just a lot of pull forward, or is there some reason that maybe import levels should be structurally higher here?

I believe it’s a combination of several factors. Examining the health of the US consumer, we see that consumers are managing to maintain their spending, and we expect this to persist. Recent US GDP data indicates that the economy is still strong, which is a key factor behind the demand we’re experiencing. Additionally, in our expedited segment on the Transpacific route, we are benefiting from two trends we’ve discussed previously. First, there is a noticeable shift from traditional commerce to e-commerce, which is growing at a faster rate. This is encouraging because e-commerce is increasingly focused on speed. Secondly, we observe a consistent transition from air freight to our expedited services, as customers are attracted to significantly lower costs and reduced carbon footprints. Another factor at play is some uncertainty surrounding the ILA contract extension and its renewal. We have learned that some customers have mitigated risks by shifting to West Coast routes and are ensuring they maintain sufficient inventory—neither too little nor excessive— to navigate any potential disruptions until the contract is finalized. These are some of the elements contributing to the strength in our business.

That's helpful. And then in the past, I think you've called 2023 maybe more of a normal year. Has anything changed over the past year, and sort of in what respect do you view as a good baseline of operating income? If we want to try to start thinking of more normalcy in 2025 and beyond?

A year ago, we experienced extraordinary earnings during the pandemic, which we anticipated wouldn't last. We thought 2023 might become our new normal, but actual performance has surpassed expectations for 2023, indicating even better results for 2024. I still hold onto the vision of a time when everything runs smoothly. I believe Matson's strong position and control over our supply chain and product offerings allow us to respond more effectively than other carriers to market changes. We're optimistic about our standing. Eventually, uncertainties like those in the Red Sea or other geopolitical issues may stabilize, likely resulting in a decrease in freight rates across the Transpacific market, including ours. However, it's difficult to predict when that might happen. It remains uncertain whether 2023 will be our new normal or if we will see slightly higher results. Nevertheless, we feel confident in our positioning and performance. In our China service, as long as we remain the fastest and most reliable, with CLX as the leader and MAX as a close second, we expect to capitalize more on the economics of the expedited market compared to our competitors. That's a lengthy response, but those are my thoughts.

Thanks for that clarification. I have a couple of follow-up questions regarding the charter issue we discussed earlier. Will you maintain six vessels in the MAX fleet, or will you reduce it back to five? Additionally, I understand that some of the contracts are set to expire in 2025. Is it possible that we might see another reduction in costs in 2026, or should we consider the $8 million as a reliable benchmark moving forward?

Yeah. So on the first question, Jake, so yes, six is what we feel is the adequate number for that service that provides us flexibility to maintain on-time departures and on-time arrivals. So, we think of that as really a permanent six-ship fleet. So that's the number that we focus on. And so, yeah, $8 million to 2025 versus 2024 is the number for 2026. We've got a couple coming up in '26 and then the rest in 2027. They won't be dramatically different. So, there's not going to be a meaningful step down between '26 and '25. The second part of your question, Jake. But again, I want to underscore the most important thing to us is having vessels that meet our really unique service requirements, not all the vessels in the world of this size fit that. So, it's important for us to find the right vessels, lock them in. We've done that. And that was the most important objective we've had in the last quarter or two as we looked at our fleet for the MAX service in '25, '26, and '27.

And Jake, this is Matt. I would just add one other comment. We are the only ocean carrier in the world that we know of that adds an extra shift into a 35-day rotation because we are so committed to delivering this on time. We think it's a big differentiator. It allows us to significantly outperform our rivals and charge a premium for that extra cost that we incur. So, more than recover the cost. So, the model is different and we think it's essential to our branding and to be able to deliver because if there's a fog and a port closure that affects everyone, our ability to respond faster than everyone puts us in a better position. So, we can't control the weather or other kinds of things. But we certainly think this is an investment that more than pays for itself.

Great. Makes sense. Really appreciate the time.

Yeah. Thanks, Jake.

Thanks, Jake.

Thank you. And our next question comes from the line of Ben Nolan from Stifel. Your question please.

All right. And I'll tell you what, operator, you have a voice for the job. I've got two questions. Well, I guess I'm only allowed two questions. But my first is, SSAT was meaningfully better. I think last quarter you had said that there was sort of a lag effect because SSAT is sort of over-leveraged to Oakland and the Pacific Northwest relative to Southern California. So, first of all, does that mean that. And it does look like Oakland has had a lot more volume. And so, there's more volume in that category. But then the second part of the first question is, as you think about that and more volume coming into Northern California, is there any thinking about resurrecting the CCX at all?

Yeah. Ben, this is Matt, and I agree with you. This person who's helping us with this conference call has got an awesome voice. So, I 100% agree with you. With regard to your more important comments, I think when we talked about SSAT in the JV, we were talking about its recovery likely taking beyond 2024, that we had sort of gone through the pandemic and got to the other side. And relative to what we said at the beginning of the year, we've seen a little bit better performance. And there were no service changes. New strings added that are calling our customer terminals anywhere. But we saw just an orderly transition of slightly larger vessels that are moving over our operating terminals. We also said that the PNW, where we had surplus terminal capacity, was in particular lighter than we hoped it would be. So, I think what's happened is as we take a step back and have the benefit of a little bit of hindsight, I thought we saw more volume in the Transpacific and through our joint venture terminals as a result of the return of cargo through the Transpacific that had migrated elsewhere during the ILWU West Coast contract renewal. And then as we mentioned, we saw some incremental cargo that moved over Transpacific vessels associated with the ILA contract renewal that's currently in process. So, I think those were both factors. There was incrementally more volume in Oakland, but not materially. There was a threat of a Canadian strike that brought some PNW cargo down or individual calls for over concerns about that. So, there were little things that have happened, but I think our feeling at SSAT is it's hit bottom, it's on its way to recovery. How quickly that occurs will be subject to lots of things, but I think we definitely feel like we've hit bottom and we've come off that bottom. If that provides enough color for you.

Right. And then any thinking on resurrecting the CCX?

I appreciate the question. We are constantly considering where and how we can grow and how to leverage the strong brand we've built. Currently, there are no announcements, but we need to find a competitive market for air freight where we can secure five or six fast vessels on charter. We also need to ensure that our infrastructure on the US West Coast can support this, whether at existing or new locations. If we cannot ensure that we can provide a highly differentiated service that justifies a premium compared to market rates, those will influence our decision. Additionally, as mentioned, there are very few vessels of our speed and size available for charter, so we recognize that charter markets can change. We will keep exploring opportunities to expand our brand into new markets worldwide, and this is something we consider important for our long-term growth strategy.

Okay. So, for my next question, you were talking about some of the e-commerce stuff and it's been pretty topical within broader transport lately, especially around some of the Chinese companies like Shein and Temu, and they're doing mostly air freight. And it has been sort of a problem for some of the partners guys are trying to get away from it a little bit. I'm curious where you sit in that spectrum with respect to that type of shipper. Is that something you're doing? Is it an opportunity? Is it something that maybe doesn't fit what you're doing? Just any color around that sort of new dynamic.

Sure, the market is changing, and the players are adapting. Amazon remains a major force in the industry. However, companies like Shein and Temu have publicly acknowledged the existence of a de minimis trade exemption, which allows for a reduced cost in tariffs. In 2016, the de minimis threshold was increased from $200 to $800, creating a significant market segment. Currently, Shein and Temu rely heavily on air freight in those markets. They anticipate that this de minimis trade exemption may eventually be eliminated. Their products are priced very low, and their business model will need to adapt if this exemption is removed. Over time, we expect that Shein and Temu will be more inclined to shift to expedited ocean freight as the de minimis exemption fades, especially since air freight customers are evaluating whether our offerings can meet their needs. We’re optimistic about the e-commerce landscape and maintain regular discussions with our e-commerce partners, including those selling through Amazon and similar networks. There are numerous opportunities ahead. Each player has a unique approach as they navigate different aspects of the e-commerce market, which is quite diverse. Overall, we feel confident about our position in light of the current market dynamics.

Got it. Appreciate it. Thank you.

Okay. Thanks, Ben.

Thank you. I'm not showing any further questions in the queue at this time. I'd like to hand the program back to Matt Cox, CEO, for any additional comments.

Okay. Thanks very much, operator. I just want to say thanks for everybody who's listening on the call. We'll look forward to catching up with everyone after the holidays on our year-end call. Have a wonderful holiday. Thanks.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.