Earnings Call Transcript - MATX Q1 2024

Operator, Operator

Good day, and thank you for standing by. Welcome to Matson's First Quarter 2024 Financial Results Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Justin Schoenberg, Director of Investor Relations. Please go ahead.

Justin Schoenberg, Director of Investor Relations

Thanks, Vic. 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 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 April 30, 2024, 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.

Matthew Cox, CEO

Thanks, Justin, and thanks to those on the call. I'll start on Slide 3. Matson is off to a solid start for the year with Ocean Transportation performing better than expected and logistics meeting our expectations for the first quarter of 2024. In Ocean Transportation, operating income was roughly flat year-over-year, reflecting an improvement over our outlook provided in late February. Our China service experienced healthy demand coming out of a more traditional post-Lunar New Year period with higher year-over-year freight rates, but with lower year-over-year volume. We had lower year-over-year volumes in Hawaii and Alaska and in Guam, the volume was flat year-over-year. In Logistics, operating income declined year-over-year due to continued market softness in transportation brokerage. As a result of the performance in the first quarter and expected improving demand for our CLX and MAX services, we are raising our full year outlook. For 2024, we now expect consolidated operating income to be modestly higher than the $342.8 million achieved in 2023 with a higher contribution from ocean transportation than in our previous outlook from February. Joel will go into more detail on our updated outlook later in the presentation. I will now go through the first quarter performance of our tradelanes, SSAT and logistics. So please turn to the next slide. Hawaii container volume for the first quarter decreased 1.7% year-over-year due to lower general demand. Tourist arrivals in the first quarter were comparable year-over-year despite the continued impact to Maui tourism from last year's wildfires. For the full year 2024, we expect volume to approach the level achieved last year. Please turn to Slide 5. According to UHERO's First Quarter 2024 economic report, the Hawaii economy is projected to grow modestly in 2024, underpinned by a low unemployment rate and increasing construction activity. Construction jobs are projected to increase due to large federal and state contracts and homebuilding on Oahu. Tourism is projected to increase modestly as the industry continues to recover from the Maui wildfires last year and the gradual return of international visitors. While UHERO projects modest economic growth in 2024, our outlook is a little more cautious, reflecting feedback from our retail-related customers that saw tepid demand for consumer goods in the first quarter and expect to see this sluggish environment continue in the near term. Moving to our China service on Slide 6. Matson's volume in the first quarter of 2024 was 4% lower year-over-year, with lower volume for both CLX and MAX. We achieved average freight rates that were higher year-over-year. Please turn to Slide 7. Our China service experienced healthy demand coming out of a more traditional post-Lunar New Year period with a gradual recovery of volume after factories reopened and workers returned compared to a more accelerated increase in volume experienced post-Lunar New Year last year. The ramp in volume in the post-Lunar New Year period met our expectations, but our freight rates in the post-Lunar New Year period were higher than we expected. Currently, in the transpacific marketplace, we continue to see steady U.S. consumer demand. For 2024, we expect improving demand for CLX and MAX services in 2024 as compared to 2023. We also expect average freight rates to be higher than the 2023 levels. We're in a good position with CLX and MAX and our primary focus with these two services is to consistently demonstrate the speed and reliability that our customers have enjoyed. Please turn to the next slide. In Guam, Matson's container volume in the first quarter of 2024 was flat year-over-year. In the near term, we expect continued improvement in the Guam economy with a low unemployment rate and a modest increase in tourism. For 2024, we expect container volume to approximate the level achieved last year. Please turn to the next slide. In Alaska, Matson's container volume for the first quarter 2024 decreased 5.1% year-over-year, primarily due to one less northbound sailing compared to last year. Adjusting for one less sailing, northbound volume was roughly flat and overall Alaska volume decreased 1.7%. In the near term, we expect continued economic growth in Alaska, supported by a low unemployment rate, jobs growth, and a lower level of inflation. For 2024, we expect Alaska volume to approximate the level achieved last year. Please turn to Slide 10. Our terminal joint venture, SSAT, increased $2.2 million year-over-year to $0.4 million. The higher contribution was primarily due to higher lift volumes. In 2024, we expect the contribution from SSAT to be higher than 2023 due to an expected increase in lift volumes. Turning now to Logistics on Slide 11. Operating income in the first quarter came in at $9.3 million or approximately $1.6 million lower than the result in the year-ago period. The decrease was primarily due to lower contributions from transportation brokerage. For 2024, we expect challenging business conditions for the transportation brokerage to continue. And as such, we expect operating income to be lower than the level achieved in 2023. I will now turn the call over to my partner, Joel, for a review of our financial performance. Joel?

Joel M. Wine, CFO

Okay. Thanks, Matt. Now on to our financial results on Slide 12. For the first quarter, consolidated operating income decreased $1.8 million year-over-year to $36.9 million, with Ocean Transportation declining $0.2 million and logistics declining $1.6 million. Ocean Transportation operating income in the first quarter experienced higher vessel operating costs, including fuel-related expenses and the timing of fuel-related surcharge collections, partially offset by higher freight rates in China. As Matt noted, the decrease in logistics operating income was primarily due to a lower contribution from transportation brokerage. We had interest income of $8.8 million in the quarter, an increase of $0.6 million year-over-year due to higher interest rates on our cash and cash equivalents and CCF cash deposits and investments in fixed rates and fixed rate U.S. treasuries. Interest expense in the quarter decreased $2.3 million year-over-year due to the decline in outstanding debt in the past year. Net income increased 6.2% year-over-year and diluted earnings per share increased 10.6% year-over-year, with the difference between the two due to a 4.7% increase or 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 $450.4 million from which we used $46.2 million to retire debt, $214.2 million on maintenance and other CapEx, and $53.6 million on new vessel CapEx, including capitalized interest and owners' items, offset by $20.9 million withdrawn from our capital construction fund, $14.2 million on other cash outflows while returning approximately $207.3 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 first quarter, we repurchased approximately 0.4 million shares for a total cost of $48.9 million, including taxes. Since we initiated our share repurchase program in August of 2021 through March of this year, we have repurchased approximately 10 million shares or 23% of our stock for a total cost of approximately $804 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 first quarter was $430.5 million, a reduction of $10.1 million from the end of the fourth quarter. Last, on April 19, 2024, Matson received a federal tax refund related to the company's 2021 federal tax return of $118.6 million as well as $10.2 million in interest income earned on the tax refund. The tax refund was placed into cash and cash equivalents and is expected to be used for general corporate purposes. With that, let me now turn to Slide 15 and walk through our outlook for the full year and the second quarter of 2024. For the full year 2024, we expect year-over-year growth in Ocean Transportation operating income and for it to be higher than the outlook from the February earnings call based on the performance of Ocean Transportation in the first quarter and an expected improving demand for the CLX and MAX services. Absent a significant change in the trajectory of the U.S. economy, we expect trade dynamics, trade demand dynamics across most of our trade lanes in 2024 to be comparable to 2023 as consumer-related spending is expected to remain largely stable. For logistics, we expect challenging business conditions for transportation brokerage, which we expect to lead to lower year-over-year business segment operating income. As a result, we now expect consolidated operating income to be modestly higher than the level achieved in the prior year with quarterly seasonality patterns similar to 2023. In addition to this full year operating income outlook, we expect the following for the full year: Depreciation and amortization to be approximately $180 million, inclusive of $27 million for dry dock amortization; interest income to be approximately $45 million and interest expense to be approximately $8 million; other income to be approximately $7 million, an effective tax rate of approximately 22%, and dry-docking payments of approximately $35 million. The interest income outlook we are providing is based on current CCF deposits and cash and cash equivalents invested at current short-term government money market rates as well as the CCF fixed rate portfolio yielding 4.53%. This outlook includes the $10.2 million in interest income received on April 19, 2024, with respect to our federal tax refund. For the second quarter of 2024, we expect Ocean Transportation operating income to be moderately higher than the $82.4 million achieved in the second quarter of 2023 and logistics operating income to be lower than the $14.3 million achieved in the second quarter of 2023. As such, we expect consolidated operating income in the second quarter to be modestly higher than the prior year. We expect interest income to be approximately $18 million, including $10.2 million of interest earned on our 2021 federal tax return that I mentioned before. Moving to Slide 16. The table on the slide shows the CapEx projection for 2024 to 2026. This outlook remains unchanged from what we provided on our fourth quarter call in February. Again, milestone payments for new vessel construction are expected to be paid from the capital construction fund, which already covers two-thirds of the remaining obligations. I will now turn the call back over to Matt.

Matthew Cox, CEO

Okay. Thanks, Joel. Matson had a solid start to the year. We have a great balance sheet and are well-funded on our Aloha Class newbuild program, as Joel just described. We are positioned well in all of our markets to capitalize on opportunities as they arise. So far, 2024 is shaping up to be another good year for Matson. And with that, I will turn the call back to the operator and ask for your questions.

Operator, Operator

Please stand by while we compile the Q&A roster. Our first question comes from Jacob Lacks with Wolfe Research.

Jacob Lacks, Analyst

Higher year-on-year second quarter ocean even implies a pretty big sequential ramp from 1Q. Is that all volume? Or is there pricing there, too? And then any way you can give us a bit of a sense of what you're thinking when you say up modestly for consolidated EBIT in the second quarter?

Matthew Cox, CEO

Yes, Jacob, let me address part of your question, and then I will pass it to Joel for his insights. What we're observing is a more typical first quarter. This means there has been a longer period of ramping up after the Lunar New Year holiday. In some ways, this is the first year since the pandemic where we experienced an extended period as factory workers returned to their home provinces without the need to rush back to fulfill orders. This might indicate a shift to what we can expect for normal seasonality moving forward. Traditionally, the first quarter tends to be our weakest, and it seems we are returning to that trend. However, we did see positive volumes emerging from the Lunar New Year as activity picked up. Additionally, we mentioned that freight rates will be higher compared to the same period last year. Overall, aside from Joel's previous remark on interest income related to the tax refund, which is a one-time advantage, we anticipate improvements in ocean transportation. I will let Joel elaborate on this further.

Joel M. Wine, CFO

Yes, Jacob, when we say modestly, we just mean a little bit more. It's intended to be straightforward and not dramatic. Then when we use the term moderately, it refers to a slightly greater increase than modestly. That's how we use those words.

Jacob Lacks, Analyst

Okay. Makes sense. And then last quarter, when we spoke, you mentioned you haven't seen any real impact from the Red Sea disruptions with spot rates remaining elevated? Is that still the case? Or is some of that starting to bleed through to your business?

Matthew Cox, CEO

Yes. I will address the question generally first and then focus on our business specifically. We have observed that carriers who typically used the Red Sea and the Suez Canal have mostly redirected their routes around Africa. As a result, additional capacity has been added to accommodate the longer transit times. From our customers' supply chain perspective, this transition has been fairly smooth. While transit times are longer, there hasn't been much disruption regarding delivery or port deployment, whether the cargo is headed for the Mediterranean, Europe, or the U.S. East Coast. Overall, the industry has not experienced significant disruptions. There have been minor routing changes on the margins, particularly for countries like Vietnam and some locations in Southeast Asia for cargo headed to the East Coast, but these changes have been minimal. Therefore, the impact on Matson remains relatively small.

Jacob Lacks, Analyst

Got it. That's helpful. As we consider SSAT, it saw a slight profit this quarter, contributing about $4 million in the fourth quarter. Given the impact of the Lunar New Year on volumes in the first quarter, is there any reason you believe it won't return to the profitability levels of the fourth quarter as the year progresses?

Matthew Cox, CEO

Yes. I think we're going to see continued improvement in SSAT. I think that it's probably going to take us into 2025 before we see a more normalized level of profitability. I'm speaking to full year profitability rather than any individual quarter. We've seen improvement. I think we believe we've hit bottom from the volume perspective, and we're going to see steady improvement from here based on our views of the market on the U.S. West Coast. So it's probably just going to take a little bit longer than some of our other businesses that have recovered more quickly.

Operator, Operator

Our next question comes from the line of Daniel Imbro with Stephens.

Daniel Imbro, Analyst

I want to also start maybe on the demand side for Ocean. I think you sound a little bit better than others maybe on U.S. demand and kind of what you're hearing. I'm curious how much of that's with your existing customers? Is this more of a secular shift from airfreight to expedited ocean that you think you're seeing with your shippers? And then how does the growth of new maybe e-commerce players? Or just any change in your customer outlook that's kind of informing the demand view because I think the slides that you expect better pricing and demand year-over-year.

Matthew Cox, CEO

Yes, certainly. Let me address that. First, looking at the macro supply and demand factors influencing transpacific trade, I want to highlight Matson specifically. We have observed improvements in volumes coming into the West Coast, showing year-over-year growth. This is partly due to the resilience of U.S. consumers. The economy continues to perform steadily, and barring any major disruptions that we don’t anticipate, we expect to maintain strong and consistent consumer demand. Using that as a baseline, there is a year-over-year increase in volume for all international ocean carriers on the U.S. West Coast, which is a positive sign. On the international ocean side, including factors not specific to Matson, rates are higher compared to the previous year. Turning to Matson, the key fundamentals influencing our expedited market demand are heavily linked to inflation. Significant factors include overall U.S. consumer demand, robust airfreight markets, the growth of e-commerce, and healthy inventory levels with no major stock issues. All of these elements contribute to our expectation of ongoing strong demand in our CLX and MAX expedited services. Our strategy remains focused on being the fastest and second fastest, most reliable carrier in this market, which should position us well to capture a significant share of demand and allows us to feel confident in slightly increasing our outlook.

Daniel Imbro, Analyst

Helpful. I appreciate that review. And then maybe, Joel, on the cash flow side. I just wanted to follow up. It looks like obviously maintenance and other CapEx, is it going to drop off pretty materially in the next couple of years. Just kind of curious, with most of the new vessel payments already funded, what are your capital priorities with the accelerating free cash flow? And how do you anticipate maybe the cadence of that spending, whether it's buyback or debt pay down or what have you?

Joel M. Wine, CFO

Thanks, Daniel, for that. We haven't seen much debt paydown because our $430 million debt consists of $150 million in long-term private placements with an attractive fixed interest of around 3.2% and $280 million at a very low fixed rate of 1.2%. This gives us a low fixed cost of debt, which only amortizes $40 million annually. We don't anticipate significant changes to our overall debt program. As for maintenance CapEx, it should decrease as it primarily focuses on equipment replacement and our operational network. We're not forecasting any new engine or LNG projects in the next year to 18 months, leading to a more normalized CapEx situation, excluding new vessels. This will result in substantial free cash flow, which we will prioritize towards maintaining a stable dividend policy. We've increased dividends every year for over 12 years as we’ve earned it, using this as a way to reward shareholders along with the free cash flow we've accumulated. The majority of our cash flow will be directed to share repurchases, as we've been doing, unless significant opportunities in M&A or organic investments arise. We've consistently talked about share repurchase as a steady focus for a long time, and that's the outlook we have.

Daniel Imbro, Analyst

And then just to clarify on that, with the tax payment of $119 million you received, I guess, how much of the new vessel payments you need over the coming years is either prefunded in the CCF or is that covered? I'm curious how much is now just already accounted for as you look forward?

Joel M. Wine, CFO

Yes. We paid about $100 million of the total $1 billion. So we have about $900 million more to go. And the CCF currently has about $606. So just rough order, that's about $300 million more that we would need to fund. We are earning interest at this cash investment rate. There's a lot of interest income that we'll earn over the next 24 to 36 months that will help. But then also, ultimately, over time, as we get into 2026, sometime in Q2, Q3 of 2026, we'll have probably used all the CCF funds to apply those towards milestone payments. And then around that time, we'll probably then put more money into the CCF to take care of the remaining milestone payments in 2026 and 2027. And that will be funds that will come from our cash and cash equivalents on the balance sheet there today. So right now, we had $25 million of cash at the end of this quarter. We received $118 million plus the $10 million on interest, that's $128 million, so around $160 million of cash and cash equivalents, plus the $600 million, so that leaves of $760 million and interest expense on that gets us up to $800 million. So there's not that much more cash that needs to go into the CCF, but that will begin to happen in 2026 from a timing perspective.

Operator, Operator

Our next question comes from Ben Nolan with Stifel.

Benjamin Nolan, Analyst

So I've got a handful here. But first and foremost, I wanted to start, and it's a big deal to finally get that tax refund after all this time. I was curious if you guys are, Joel, modestly or moderately excited to get that?

Joel M. Wine, CFO

We are pleased to have received the tax refund after a long wait. I can say that we also received the appropriate amount of interest income according to IRS regulations regarding our refund filing. It was nice to avoid any disputes over the interest income owed. Overall, I would express a modest sense of satisfaction about both aspects.

Benjamin Nolan, Analyst

Here we go. My first question relates to the current state of the transportation industry. While some segments are facing challenges, it appears your company is performing well. I'm curious if, in this environment where not everything is favorable, you are starting to see more opportunities for acquisitions since not everyone can command high prices these days.

Matthew Cox, CEO

It's a great question, Ben. We're noticing that more companies may be looking to explore the market after a slow period for mergers and acquisitions, with sellers previously hesitant for understandable reasons due to the end of COVID and the challenging transportation environment last year. Some sellers are starting to test the market now, and we've observed an increase in that activity. However, there are still high expectations for valuations, which makes it difficult to reconcile the two. As we've mentioned before, our focus remains on acquiring assets that align with our profile. Therefore, I wouldn’t say there’s been a significant increase in the number of assets for sale that meet our criteria. In other words, we are maintaining our discipline in what we consider.

Benjamin Nolan, Analyst

Got it. Okay. Now, shifting to China. It's encouraging to see an increase in volume, particularly in price. Matt, can you discuss the competitive landscape? I know that passenger airlines operating between the U.S. and China are currently at only about 20% of pre-COVID levels. This suggests that there should be ample demand for expedited services. The port infrastructure seems to be functioning as it should. Are you beginning to notice any competitors attempting to replicate the kind of service you offer?

Matthew Cox, CEO

Yes. I believe the response to that is that there is a developed secondary expedited market. There are three or four carriers that are not Matson, which offer discounts compared to Matson's pricing, but still above the general ocean market rates. These carriers have been operating for a while. For instance, CMA has been in the market for the last few years, and Zim re-entered the market after previously leaving. Additionally, there are a few others that compete for cargo that cannot access our service or are sensitive to travel times and can accept longer transit periods, making their service not as good as Matson but slightly cheaper than our rates. This market has been established and is not solely comprised of us and everyone else; there are various tiers that have developed over recent years, particularly during the pandemic. This reinforces our business strategy; as long as we continue to be the fastest and most reliable option, we will capture the majority of that market. We view this as the evolution of this in-between market, which we monitor while maintaining our focus on service quality, trusting that the rest will fall into place.

Benjamin Nolan, Analyst

Right. Okay. Lastly, do you have some assets that can use LNG as bunker fuel? If so, are you finding it to be a fuel advantage and a way to improve margins?

Matthew Cox, CEO

Yes, we have delivered one vessel, and two others are in the final or intermediate stages of conversion. Additionally, three new vessels will be LNG-ready upon delivery. We have been taking LNG bunkers in China and Southern California, and these vessels are operating well using this alternative fuel. The market is expanding as more LNG vessels join the Pacific trade. From a performance standpoint, LNG is a cleaner-burning fuel, performing well in our engines and maintaining speed. While LNG is currently a bit more expensive than bunker fuels, prices fluctuate, and we have not seen a significant cost advantage or penalty related to this. We also experiment with other fuel types, such as hydrogenated vegetable oils and clean diesel, and anticipate recovering most or all of those costs through our existing fuel surcharge mechanisms. At this point, I don’t see this as a significant advantage or disadvantage in the market as we pursue our climate emission reduction goals alongside the rest of the industry.

Operator, Operator

That concludes today's question-and-answer session. I'd like to turn the call back to Matt Cox for closing remarks.

Matthew Cox, CEO

Okay. Well, thanks for tuning in today. We look forward to catching up with everyone on our second quarter call. Aloha.

Operator, Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.