Earnings Call Transcript
Matson, Inc. (MATX)
Earnings Call Transcript - MATX Q3 2020
Operator, Operator
Thank you for joining us for Matson's Third Quarter 2020 Financial Results Conference Call. All participants are currently in a listen-only mode. After the presentation, we will have a question-and-answer session. I will now pass the call to Lee Fishman. Please proceed.
Lee Fishman, Moderator
Thank you, Jenifer. Joining me on the call today are Matt Cox, Chairman and Chief Executive Officer; and Joel Wine, Senior 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, and projections of 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 24 to 34 of our Form 10-Q filed on November 2, 2020, and in our subsequent filings with the SEC. Please also note that the date of this conference call is November 2, 2020, 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.
Matt Cox, CEO
Thanks Lee, and thanks to those on the call. I'm going to start with a quick recap of our third quarter results, so please turn to Slide 3. Matson's businesses continued to perform well, despite the ongoing challenges from the COVID-19 pandemic and related economic effects. Ocean transportation had a very strong quarter and was led primarily by our China service, which included a full quarter of the CLX+ service as well as year-over-year volume improvement in our regular CLX service due to increased capacity. Volumes in Hawaii, Alaska, and Guam improved from levels achieved in the second quarter as freight demand improved with the reopening of local economies. Volumes in Alaska and Guam were higher year-over-year and Hawaii volume approached the level in the third quarter of last year. Logistics had a good quarter as the continued reopening of the U.S. economy led to improved performance in all of our business lines. In the fourth quarter, we expect our businesses to continue to perform well and to generate strong financial results. Before moving on to our current priorities and the current trends we see in our business, I want to spend a few minutes on the CLX+ service and why we believe we can make it permanent. Please turn to Slide 4. There are three main reasons we're confident we can make the CLX+ service permanent. First, Matson has a 15-year track record of operating the industry-leading expedited China to Long Beach service. Our CLX service has demonstrated best-in-class on-time freight availability, and through our relentless focus on reliability, we've developed strong longstanding relationships with customers where service has been integral to their growth. Many of our long-term customers are riding on both the CLX and CLX+ given the outsized growth in their volumes, which they've experienced this year. The introduction of the Alaska-to-Asia Express service, or AAX service, as the westbound seafood backhaul from Dutch Harbor to China is expected to help the long-term economics of the CLX+ service. Third, the demand and supply dynamics in the transpacific tradelane have been favorable, and we expect those favorable trends to continue. So let me spend a few minutes on the key demand and supply factors in the tradelane. Since the start of the pandemic in the U.S. in early March, there's been a seismic shift in e-commerce activity, and we expect the key drivers behind this shift to remain for some time. It's estimated that at least four to six years' worth of e-commerce sales growth was pulled forward into 2020. For the second quarter of 2020, the U.S. Commerce Department estimated that $1 out of every five spent on retail was purchased online as both retailers and consumers adapted to the new environment. With the ease with which an e-commerce transaction can take place and the time saved in the process, e-commerce growth is expected to remain robust, even as COVID-19 restrictions become less stringent over time. Lastly, e-commerce wants and needs expedited transit. Consumer spending on services such as travel and leisure shifted to home improvement, home appliances, electronics, and other discretionary and non-discretionary items. Early on in the pandemic, there was outsized demand for refrigerators and freezers to store perishable items and electronics to support the working from home experience. Demand for key household items, such as dishwashers, refrigerators, washers, and dryers, has been so strong since the pandemic hit that there are key shortages in many models, and those shortages are expected to last into 2021. Demand for household appliances continues to remain strong for three reasons: first, family sheltering in place and many working from home are using their appliances more frequently, thereby reducing the replacement cycle time; second, the housing market has been and remains strong as many residents in cities opted to move out to more suburban and rural settings. With increased turnover of homes comes an upgrade cycle in household appliances; third, many homeowners have opted to improve their surroundings, given the amount of time they're spending at home with do-it-yourself and professional home improvement projects. As service businesses continue to reopen, we expect some consumer dollars to migrate back, but with consumers adapting to less spending on services, home ownership and relatively high demand, and companies embracing the work from home environment as a part-time or full-time solution, we expect demand for home improvement appliances and other home electronics to remain elevated relative to pre-pandemic levels. I briefly touched on this a moment ago regarding shortages in appliances, but a significant amount of inventory restocking across many industries is needed to keep pace with the elevated consumption trends and manage through any further disruptions. Inventories were depleted shortly after the pandemic hit, and companies have been playing catch-up ever since. To avoid disruption this fall and winter from any COVID-related lockdowns, manufacturers are moving quickly to ensure enough inventory is on hand and at warehouses in the U.S. Beyond the risk of further COVID disruptions, many manufacturers are expected to evolve their inventory management to increase the inventory of fast-moving items in the end markets where the consumption is likely highest. The pre-COVID just-in-time inventory management model is giving way to a more resilient inventory model. Lastly, regarding demand, the end of this pandemic may be gradual and could potentially take several years. There are many unknowns on the timing of the vaccine, whether herd immunity can be achieved, distribution of the vaccine, and general responses to a vaccine. The U.S. economy has rebounded sharply from the second quarter lockdown, aided by government stimulus, but the recovery going forward is likely to be slow and may require further government support efforts to assist those businesses and individuals negatively impacted by the pandemic. Consumption trends are likely to remain intact and possibly supported by government efforts during this unprecedented time until an effective and widely distributed vaccine is available. So the demand picture remains favorable given current consumption trends, relatively low inventory levels, and manufacturers trying to get ahead of the elevated demand and the possible need for further government support to aid individuals and businesses greatly impacted by the pandemic and help the economy recover. Please turn to Slide 5. On the supply side, the constraints in the transpacific air and ocean markets are expected to remain for some time. On the second quarter call, we discussed the dislocation in transpacific air freight markets due to the loss of passenger plane belly capacity. Although some transpacific passenger routes have been reinstated in the last few months, according to IATA, global passenger plane belly space capacity, which is approximately 50% of the global air cargo capacity, is unlikely to see pre-COVID levels until 2024. Complicating the airfreight picture is the means by which a vaccine and related injection supplies will be handled and distributed. According to IATA, providing a single dose of the vaccine to 7.8 billion people would fill 8,747 cargo airlifts at a time when freighter utilization is already operating at a high level. DHL recently noted that delivering 10 billion doses over the next two years would require 25,000 flights—about 2,000 pallet and container moves and 15 million cooler boxes. This is an enormous logistical effort that will further strain air cargo resources. Turning to the capacity of the ocean transportation market, there are a couple of points I want to make regarding capacity. First, several transpacific ocean carriers have fully deployed capacity in the trade lanes in recent months to manage the elevated import volumes, and the order book for new container ships is at its lowest level since 2003. This is due to a number of factors, including global economic uncertainty. So at least in the short to medium term, the ability for ocean carriers to add additional capacity in the tradelane is limited. Second, industry consolidation in the last decade and the formation of alliances in the last three years should lead to better alignment of capacity to avoid over tonnage in the markets. Ten years ago, there were 21 international ocean carriers, and today there are 12. The three alliances that most of the remaining 12 operate in control approximately 85% of the capacity across the transpacific. Today, it is much easier for these alliances to balance market demand by adding small increments of capacity across their constituencies. Lastly, on the supply fundamentals, there is significant equipment demand and port congestion on the U.S. West Coast. These two factors are incredibly important governors on the growth capacity in the tradelane, particularly during the peak volume periods, such as the one we're experiencing now. As container volume ramped in the second and third quarters of this year to meet elevated consumer demand, demand for containers and chassis was exceptionally high. Many inbound containers were being trucked and sent on rail to the interior without paying a return trip, thereby expanding the supply of available containers. The increase in intermodal volume led to congestion at the rail yards in Southern California and also led to delays in the delivery and return of equipment. Warehouses on the West Coast have taken on more and more volume, given the demand, with many containers sitting on chassis in the warehouse slots. In the ports, with increased volume comes increased time to offload and increased turn times at the terminals. This has also had an impact on the availability of equipment and has led to berthing delays of vessels. According to the Pacific Merchant Shipping Association, in September 2020, 21.2% of the containers at the ports of LA and Long Beach stayed on the terminals for five or more days before getting picked up. In September 2019, it was 2.8%. Every ocean carrier is undertaking a massive effort to reposition containers to Asia to meet the elevated demands. We don't expect the equipment demand and port congestion factors to change in the near future. So the supply side trends are quite favorable given the capacity constraints in the ocean and air freight markets, as well as the outsized demand for equipment and the issues that come from increased volume and congestion at the West Coast ports. Our CLX+ service has proven to be the second-best service in the transpacific tradelane behind our CLX service. Both services rely on the same competitive advantages at the destination end. We own and control our own chassis, which is an important differentiator for us, given the terminal congestion and equipment availability challenges in Southern California, which I just described. We avoid the issues with chassis pools that our competitors rely on. By providing the chassis ourselves, we help the truckers save time and money. We also have a great combination of SSA Terminal operations and Shippers Transport off-dock facilities. SSAT is the best terminal operator on the West Coast, with efficient operations. The Shippers Transport facility is a unique off-dock bonded facility that is difficult to replicate. Taken together, our competitive advantages in destination services drive industry-leading turn times and provide next-day cargo availability for our customers that is simply unrivaled. We also avoid the congestion issues that other carriers face during these peak periods. In summary, I am confident we can make the CLX+ permanent. We have 15 years of experience operating an expedited service in the tradelane, offering unparalleled destination services that our customers value. Our customers' businesses are growing to meet the challenge of this time, and so are we. We seek opportunities to improve the long-term economics of the service; the AAX service is one such opportunity that not only helps lower the breakeven economics but also drives additional customer engagement on a new service offering. We have the backdrop of favorable demand and supply fundamentals that are unlikely to dissipate anytime soon. Our expedited ocean services and air freight are perfectly suited for the demands of an increasing e-commerce world, but given the constraints in the air cargo markets, we expect demand for our expedited service to remain elevated. With all this said, a number of demand and supply factors could change that might alter our views, but as we sit here today, this is how we see it in our planning for 2021. I will now move on to Slide 6. I want to spend a few moments on our current priorities as we continue to navigate this pandemic and period of economic uncertainty. Our first priority is to continue safeguarding the health and safety of our employees throughout the organization, guided by processes on PPE, disinfecting, and social distancing put forth by the Coast Guard, CDC, and other government agencies. We're also maintaining our position and working from home for those whose job functions allow them to do so. Our second priority is ensuring the consistency of our ocean transportation services and delivering exceptional service for our logistics customers. Within ocean transportation, we're focused on maintaining our best-in-class on-time performance, ensuring quick turn times at the terminals, and providing the quickest cargo availability for our customers. For our logistics customers, we continue to provide the highest quality customer service and execution for our customers as the supply and demand conditions remain volatile. Our third priority is to find new opportunities in this evolving pandemic environment and drive organic growth. The organic opportunities tend to be low-risk and high investment returns given the low capital outlay. On our second-quarter call, we went into greater detail on one such opportunity, the CLX+ service, which is a key contributor to our year-over-year improvement in financial results. In August, we announced the introduction of the AAX service, which is a backhaul service on the CLX+ from Alaska to China. Our fourth priority is maintaining cost and capital discipline during this period of economic uncertainty. Since we amended our debt agreements in the early days of the pandemic in March, we've been intently focused on free cash flow generation and reducing leverage. I'm happy to report that our leverage under those amended debt agreements is now approximately 2.4 times versus 3.4 times at the end of the first quarter. Since the end of 2019, we've reduced our total debt by nearly $135 million. On our first-quarter earnings call, we outlined operational changes and management initiatives to address the challenges of the pandemic. We meaningfully exceeded the high end of the $40 million to $50 million range that we provided, with the introduction of the CLX+ as the largest contributor to this effort. Regarding capital expenditures, we continue to be selective in our investments. We are investing in new equipment to support the China service and AAX, which amounts to approximately $30 million, as well as some equipment that we've leased to support these efforts. We're also completing our committed capital projects that are coming to an end this quarter, namely: the first phase of the Sand Island terminal renovation and the last new vessel in the Hawaii service, which are the next few priorities that I will discuss. The final vessel in the four-vessel new build program for the Hawaii service is expected to be delivered at the end of this quarter. Matsonia's arrival will mark the completion of a major achievement for us, and is a nearly $930 million program that has taken eight years to complete from design stages through delivery. We're nearing the end of the work on the first phase of the Sand Island terminal in Honolulu. We completed the last major items in this phase earlier this quarter, and we'll begin wrapping up the smaller items by the end of this year. We expect to begin work on the second phase in 2021. We've previously indicated that we expect to trend on our maintenance CapEx levels of between $50 million to $60 million per annum following the completion of the Hawaii new build program. As I noted a few moments ago, we're investing approximately $30 million in new equipment to support the growth of our China service and AAX to maximize the opportunities for us. So we expect to be higher than the maintenance levels in 2021 in light of this equipment investment. Our last priority is to complete the scrubber program, which remains on track. The last vessel in the sixth vessel program is currently in dry dock and is expected to be back in service early next year. I will now go through the third quarter performance and provide commentary on current business trends. Please turn to Slide 7. Hawaii container volume for the third quarter decreased 0.8% year-over-year, and the westbound container market declined modestly year-over-year. The westbound container market benefited from the reopening of the local economy, following the shelter-in-place and temporary retail store closures in the second quarter, and it also benefited from government stimulus efforts. However, these benefits were outweighed by the continued negative impact from the state's COVID-19 mitigation efforts, including restrictions on tourism and the second shelter-in-place that took effect in August. The second shelter-in-place had a modest negative impact on volume in September, and we did not carry any major volume during the quarter. I will now go through the current business trends in our Hawaii service. So, please turn to Slide 8. The Hawaii economy remains in a significant downturn, challenged by near-zero tourism in the last half-year. Travel restrictions to Hawaii were eased on October 15th with the pre-travel testing program. However, in the near term, the levels of tourism are expected to remain low, negatively impacting Hawaii's economy. The economic recovery trajectory in Hawaii remains highly uncertain given the low levels of tourism. The difficult business environment for tourism-related businesses, along with uncertainty regarding government stimulus and support efforts for businesses and individuals adversely impacted by the pandemic, add to this uncertainty. UHEROs latest economic projection shows GDP growth in 2020 and 2021 of -11.8% and 1.2% respectively. Unemployment in the state remains elevated and is projected to be well above 2019 levels for the next several years. The September unemployment rate for the state was 15.1%, the highest in the country, and UHERO is projecting unemployment rates for 2020 and 2021 to be 12.4% and 9.7% respectively. These levels are well above the 2009 unemployment rate of approximately 2.7%. To give you a sense of volume trends one month into the fourth quarter, our westbound container volume in October decreased approximately 0.3% year-over-year and remained consistent week-to-week. The westbound volume largely consisted of home improvement and retail goods in advance of the holiday season. Moving to our China service on Slide 9, Matson's volume in the third quarter 2020 was 124.7% higher year-over-year. Approximately 85% of the year-over-year volume increase was driven by the CLX+, with the remaining approximately 15% related to the increase in volume on our regular CLX service. The capacity of the CLX service increased year-over-year due to the addition of one of our larger vessels, the Daniel K. Inouye, at the beginning of the third quarter, in addition to its sister vessel, the Kaimana Hila, towards the end of the third quarter last year. We continue to see dislocation in the air freight markets leading to strong demand for Matson's expedited service, with both the CLX and CLX+ vessels sailing at capacity in the third quarter. Demand for the CLX and CLX+ was driven by e-commerce and other commodities as a result of tight inventories in the U.S. and continued consumption of imported goods in lieu of services. To give you a sense of the current volume trend, our eastbound container volume in October increased 148.6% year-over-year, led by the CFX+ service, as well as a higher volume on CLX due to the Daniel K. Inouye in the service. The volume strength we saw in the third quarter continued through October. Throughout the month, we saw increasing customer demand to get on our CLX and CLX+ services as a means to avoid congestion at the U.S. West Coast ports. Please turn to Slide 10. On August 26, we announced the introduction of the Alaska-to-Asia express, or AAX, as a backhaul service on the CLX+. The first voyage took place on September 29th from Dutch Harbor. The AAX will serve as an important route for Alaska seafood exports to Asia, consisting of dry and frozen fish volume. We will provide connecting service from Anchorage and Kodiak from our domestic Alaska service that is served by three vessels. We expect the AAX service to be a modest contributor to the Alaska volume and not a material contributor to consolidated operating income for the full year 2020. We're excited to provide this service for the upcoming fishing season in the beginning of 2021. Turning to Slide 11. In Guam, Matson's container volume in the third quarter 2020 increased 2.1% year-over-year, primarily due to increased demand for home improvement and government cargo. Volume in the quarter benefited from the reopening of the local economy, following the shelter-in-place in the second quarter, and it also benefited from government stimulus efforts. The local government issued a second shelter-in-place order in August to mitigate the spread of COVID-19, which had a minimal impact on our volume. Similar to many respects to the Hawaii economy, the Guam economy is in a downturn as tourism levels remain depressed and tourism-related business activity remains incredibly low. Unemployment remains elevated and well above pre-pandemic levels. The economic recovery trajectory remains highly uncertain. For the month of October, our westbound container volume decreased 1.5% year-over-year, with a modest negative impact from COVID-19 restrictions, partially offset by higher government cargo. In the near term, we expect to see a stable retail environment, but we also expect tourism to remain challenged, which could negatively impact freight demand. Moving now to Slide 12. In Alaska, Matson's container volume for the third quarter of 2020 increased 1.5%. Despite the summer seafood season being in its off-season and our expectations for lower volumes, we saw higher southbound volumes year-over-year as a result of stronger seafood volume compared to the prior year. This increase in southbound volume was partially offset by modestly lower northbound volume. Northbound volume in the quarter benefited from the reopening of the local economy following the shelter-in-place and temporary retail store closures in the second quarter. It also benefited from government stimulus efforts, including the early issuance of the permanent fund dividend. The Alaska economy continues to recover from the second quarter lows, but the recovery trajectory remains highly uncertain. Unemployment remains elevated above pre-crisis levels. The Alaska government paid its permanent fund dividend early in July, compared to typically in October, which may impact customer spending in the fourth quarter. Additionally, the continued low oil price environment has negatively impacted oil exploration and production. Northbound volume in October 2020 increased 12.1% year-over-year, driven primarily by higher volumes of assessment goods and home improvements in advance of the holiday and winter period. Turning next to Slide 13, our terminal joint venture SSAT contributed $7.7 million in the third quarter of 2020, compared to $8.4 million in the prior year period. The lower contribution was primarily a result of lower lift volume. SSAT's lift volume was impacted by blank sailings from the larger ocean carriers in the first half of the quarter and was close to flat year-over-year in September. Deployed capacity in the transpacific trade lane is higher than last year to manage through the elevated demand during this peak season. We expect SSAT to be a beneficiary of the elevated import volumes. Putting that into logistics on Slide 14, operating income in the third quarter came in at $11.9 million, which is $600,000 higher than the operating results in the year-ago period. The increase was primarily due to improved performance in all of the business lines driven by the continued reopening of the U.S. economy. In the near term, we expect the elevated consumption of e-commerce, other high-demand goods, and inventory restocking trends to benefit most of the business lines. Within transportation brokerage, we continue to see increasing intermodal volumes in line with the trends in U.S. West Coast import volume. With increased freight demand and terminal congestion in Southern California comes rail congestion and chaotic truck conditions, which historically has benefited our transportation brokerage business. As for Alaska, our freight forwarding business performance steadily improved since the second quarter low and is tracking similarly with the northbound volume trends in our Alaska ocean business. We continue to see steady business activity and warehousing and supply chain services in line with what we've seen in the first three quarters of the year. And with that, I will turn the call over to Joel for a review of our financial performance. Joel?
Joel Wine, CFO
Okay. Thanks, Matt. Now on to our third quarter financial results on Slide 15. Ocean transportation operating income for the third quarter increased $42.6 million year-over-year to $86.5 million. The increase was primarily due to a higher contribution from the China service, including CLX+. Lower vessel operating costs, including the impact of one last vessel operating in the Hawaii service and the timing of fuel-related surcharge collections, were partially offset by lower contributions from the Hawaii service and higher general administrative expenses. The company's SSAT terminal joint venture investment contributed $7.7 million, or $0.7 million less than the prior year period. The decrease was primarily due to lower lift volume. Logistics operating income for the quarter was $11.9 million, which is $0.6 million higher than the prior year period. The increase was due primarily to a higher contribution from transportation brokerage. EBITDA for the quarter increased by $45.6 million year-over-year to $134.7 million due to a higher consolidated operating income of $43.2 million and higher other income of $2.9 million, partially offset by $0.5 million in lower depreciation and amortization, which includes dry dock amortization. Interest expense for the quarter was $5.7 million, or $2.5 million lower than the second quarter of 2020. Lastly, the effective tax rate in the quarter was 25.4%. On a year-to-date basis, ocean transportation operating income increased $63.7 million year-over-year to $136.7 million. The increase was primarily due to a higher contribution from the China service, including CLX+, and lower vessel operating costs, including the impact of one last vessel operating in the Hawaii service, partially offset by lower contributions from the Hawaii service. The company's SSAT terminal joint venture investment contributed $15.4 million, or $2.4 million less than the prior year period. This decrease was largely attributable to lower lift volume. Logistics operating income on a year-to-date basis was $25.9 million, or $4.8 million lower than the prior year period. The decrease is primarily due to lower contributions from transportation brokerage and freight forwarding. Slide 16 shows how we allocated our trailing 12 months of cash flow generation. For the LTM period, we generated cash flow from operations of $339.2 million and received $14.3 million from sale-leasebacks from which we used $59.4 million to retire debt, $80 million on maintenance CapEx, $168.2 million on new vessel CapEx, including capitalized interest and owners' items, and $21.9 million on other cash outflows, including $18.5 million in financing costs related to the two Title XI transactions, and amendments to the debt agreements in the first half of 2020, while returning $38.6 million to shareholders via dividends. Turning to Slide 17 for a summary of our balance sheet. You'll note that our total debt at the end of the quarter was $823.6 million, and our total debt net of cash and cash equivalents was $810.9 million. During the quarter, we retired $66.4 million of debt. At the end of the third quarter, our leverage ratio per the amended debt agreements was 2.4 times compared to 3.03 times at the end of the second quarter. Footnote 4 on this page shows the total debt and EBITDA as defined in the amended debt agreements. Our revolver balance at quarter-end was $123 million and our available borrowings were approximately $519 million. Please turn to the next slide. On Slide 18, to review our new vessel payments for the third quarter, we had new vessel cash capital expenditures of $39.3 million and capitalized interest of $2 million for total capitalized vessel construction expenditures of $41.3 million. The table on the right-hand side of the slide shows the cumulative and remaining new vessel progress payments as of September 30th. Our final payment on Matsonia will be due upon delivery, and as Matt said, we expect the vessel to be delivered by the end of the quarter. The picture on this slide is of Matsonia on her way to sea trials from the NASSCO shipyard in San Diego, and Matsonia is currently 99% complete. With that, I'll turn the call back over to Matt.
Matt Cox, CEO
Thanks, Joel. There's been no shortage of uncertainty in 2020 for us, but Matson and its employees adapted to the extraordinary conditions and fostered organic growth opportunities to drive exceptional financial results in the third quarter. I'm proud of our accomplishments year-to-date, but we are focused on finishing off a good year and preparing for 2021 and the evolving challenges during this unprecedented time. As a key supply chain provider to lifeline economies and a leading provider of expedited ocean services to the U.S. West Coast, we're focused on what we do best: providing exceptional customer service and on-time delivery to meet our customers' needs. And with that, I will turn the call back to the operator and ask for your questions.
Operator, Operator
Your first question comes from the line of Jack Atkins from Stephens Inc. Jack, you may proceed.
Jack Atkins, Analyst
Okay. Great. Thank you, operator, and guys, congratulations on another great quarter here.
Matt Cox, CEO
Thanks, Jack.
Jack Atkins, Analyst
So I guess maybe just looking at the outlook, you know, I noticed that this quarter you guys sort of didn't provide your normal line item guidance, and I certainly understand given all the uncertainty out there right now; it's tough, tough to predict. I guess I was just sort of curious if we could maybe talk about some high-level directional trends sequentially. Typically, we see earnings, let's talk about the ocean transportation segment, down anywhere between 30% and 50% from an operating income perspective sequentially. It just sounds like volume is actually ramping sequentially for you guys though. Can you kind of help us think about how we should be considering normal seasonality and how the business is going to be trending from third quarter to fourth quarter?
Matt Cox, CEO
Yes, Jack, I'll do the best I can. It's difficult to forecast in this environment. We've had conversations with our customers, and they're doing their best to meet this demand that they're seeing throughout their networks. What we're seeing in our Jones Act end markets, what we're seeing in Matson logistics, including China, is the very strong demand associated with the items that we discussed in the call around the work-from-home experience, inventory stocking, the benefits of stimulus, and all of the factors creating this robust freight demand environment. We are pleased to have seen improvement in Hawaii, Guam, and Alaska. It is hard to predict; we might have predicted or guessed earlier in the year, say in March and April, that we would not see the levels of demand that we've ended up seeing. It's a combination of stimulus spending; we tend to provide essentials. Those are some of the factors that contribute to this. Beyond that, how long this lasts is partly a question of macroeconomics. Is there going to be a second stimulus? Is the U.S. economy in recovery? How will the pandemic progress? What's the election cycle look like? When is the vaccine available? Again, it's difficult to know. Many of our normal seasonality factors are really hard to gauge, but we're pleased to be in a position to serve our end markets. I'm really proud that we were able to stand up our second expedited China string. A lot of our end markets are performing better than we would have expected in March or April. That's all I can really say, Jack, without being too specific because we're also not quite sure where the economy is heading from here.
Jack Atkins, Analyst
No, I understand. I just wanted to get your additional thoughts on that, Matt. So that's helpful. Thank you. Maybe just a couple of other questions for me regarding the items that you guys undertook this year to support and improve financial results. You said you're well ahead of the $40 million to $50 million initial expectation, obviously because of the wild success of CLX+. When we think about that $40 million to $50 million number going into next year, how much of that is tied to costs that you guys have maybe taken out temporarily that would be reintroduced next year? Can you kind of maybe quantify that for us as we think about 2021?
Joel Wine, CFO
Hey, Jack, it’s Joel. I'll take that one. So as we said in our last call, it's a mixed bag. There are a number of cost initiatives and some revenue initiatives. The biggest revenue initiative is of course the CLX+. We've talked at length about how we see the supply-demand elements there continuing into 2021. Regarding the remaining cost items, we can't get a lot of guidance, because it really depends on each market and when volumes come back. A lot of those markets where we have to reintroduce some additional costs revolve around our terminals and our hours of operation, where as you get more cargo moving through, you would need to bring some of those costs back. So it will depend on the volumes returning in many of those Jones Act markets. That is a way to think about it.
Jack Atkins, Analyst
Okay. But, Joel, with volume kind of back to flat in Hawaii, it looks like growth again in Guam and Micronesia and Alaska, would you say that those costs have kind of come back into the model now or no?
Matt Cox, CEO
Some of them have, but not all. It depends on different sub-markets within each of those markets. So some of those costs have come back, but a lot of them have not yet. And actually, I will just say, Jack, that some of that will be permanent, but a lot of it—more than half of the remainder that’s not revenue will depend on volumes in those markets.
Jack Atkins, Analyst
Sure. But a lot of it—more than half of the remainder that’s not revenue will depend on volumes in those markets. Okay. That’s helpful. Maybe one last one and I’ll turn it over. Just considering the logistics segment for a moment, obviously a lot of dislocation in the domestic supply chain as well on the surface-based side. I guess you guys did a really great job in terms of maintaining your operating margin there this quarter. We didn’t see others do nearly as well. How are you guys thinking about the logistics business as we head into 2021? You should get some relief on the revenue margin side and obviously underlying demand trends and pricing trends are obviously pretty positive.
Matt Cox, CEO
Yes. I think I would answer that by first saying that all our logistics businesses are performing well. As the President of our logistics business, Rusty Rolfe, states, that logistics tend to thrive in chaos. There's been a lot of dislocation. We're a small, nimble organization that has responded well to those markets, and if we are at the beginning of a grinding and slow economic recovery, we expect—we're not going to provide guidance, but we expect good performance to continue. But I must add, it is more subject to the macro environment in the U.S. But if there is more congestion on the rails and at ports and terminals, then we could benefit even more.
Jack Atkins, Analyst
Okay. That makes sense. Thanks again for the time, guys. Congratulations.
Matt Cox, CEO
Thanks, Jack.
Operator, Operator
Your next question comes from Ben Nolan. Ben, your line is open.
Ben Nolan, Analyst
Thank you, operator. Good quarter, guys. I want to start a little bit and, Matt, it's been very helpful thinking through the permanency of the CLX+ service and sort of how things are different now this time. But I wanted to maybe see if there's a tie-in here between some of the chaos that's happening and congestion issues and everything else on the West Coast. Are you able to leverage your expedited service to win more long-term business? Alternatively, have you seen any expansion in the premium that you get? Is there – if people are grappling for spots, is there anything you're doing to leverage that position?
Matt Cox, CEO
Yes. From our perspective, having been at this for 15 years, we've developed a really good base of customers. As their businesses expanded, we've been able to accommodate that growth. The market today is busy, hectic congestion on the U.S. West Coast. There's a lack of empty equipment, a shortage of chassis, and labor disruptions. That part is temporary. It's hard to say when that will end; it may happen in two weeks or could last until after Lunar New Year. We don't rely on that cargo to impact our belief in the continuity of CLX+. Much of our thinking around CLX+ is driven by the growth in e-commerce, and e-commerce wants expedited transit. Together with a more orderly container supply-demand, the air freight sector, those factors contribute to our confidence. We're always looking to balance leveraged opportunities in the short run while maintaining enduring customer relationships year-round. So, in peak season, we might forego the highest cargo because we seek customers that can commit to us year-round. I can tell you we are turning away more cargo on our CLX and CLX+ service weekly than we are carrying; this reflects demand right now. We don't expect this super high demand to continue, but we expect enough to sustain long-term success.
Ben Nolan, Analyst
Okay. That’s what I would have expected. I guess, I was asking, and maybe you've answered it a little bit. Is there a way to turn that leverage you have with a unique product into saying, okay, I'll fit you in here, but I want to know that I'm going to have 10 boxes a week from you for the next year or something like that, or is that just not part of the process?
Matt Cox, CEO
No, that conversation has been ongoing for 15 years. Everybody wants to get on the ship in peak season, right? The question is, who can provide cargo for us 52 weeks a year? That is a core part of how we approach the market that we have maintained for a long time.
Ben Nolan, Analyst
Okay, that's helpful. For Joel or both of you, deleveraging is happening a lot faster than any of us thought it would. You walked through your capital allocation hierarchy, and I appreciate that, but to the extent that, let's hope and say that some of this elevated level of cash flow continues to be here for a little while, and you delever really quickly, are there things as you look into the future, maybe capital projects or refleeting Alaska or anything else where you say, okay, well, we thought this would be maybe five years away or something else, but now we're in a position where we can maybe pull that forward? Or is that not even necessary? The timeline is what it is, and it’s not a function of capital.
Joel Wine, CFO
Yes, Ben, thanks for that question. We do very much think long-term in everything we do. We have a view on when we'll need Alaska vessels and other major investments as well. All that was really baked into our discussions in the last couple of years and the overall plan for deleveraging when we're finished with this vessel cycle. So we will continue to stick with that plan. Deleveraging has accelerated because of this performance, but we haven’t changed our view. We're maintaining our capital allocation hierarchy, which we feel is very appropriate. We will continue to focus on deleveraging and then on organic growth or other types of investments. But any investment will still be subject to our normal discipline and return thresholds.
Ben Nolan, Analyst
Okay, I appreciate that, Joel. And then lastly for me, I scratched my head at like the Hawaii volumes, given the unemployment and everything else. And it's great for you guys, but how much of that, particularly in Hawaii, but maybe also Alaska. And Matt, you mentioned a little bit about stimulus and a perpetual payment in Alaska and so forth. How much of that do you think is— the cargo is stimulus-specific or at least linked to stimulus that might be at risk if those payments don't continue? Are you at all concerned that there might be a little bit of a volume cliff at some point?
Matt Cox, CEO
Yes, I mean, I stated in all three of the Jones Act markets that we've seen a recovery that is faster than we expected. Partly, it's the same package on the U.S. mainland. There's increased demand for work-from-home and home improvement, and funds are being delivered to the unemployed, along with PPP loans helping small businesses. The swift federal government response to the pandemic has helped immensely. That said, we remain cautious. Our point is that it’s unclear what will happen next. Will the vaccine and additional stimulus bridge us into a lasting recovery, or will there be an air pocket in any trades? All of that is very hard to forecast. We feel fortunate that our business is primarily grocery-related, and there is a certain floor level of demand that will continue. It’s better than we expected, but it's not crystal clear whether it continues, although we hope it will. That's why it's really difficult for us to talk about the specific outlook.
Ben Nolan, Analyst
All right. I appreciate that, Matt and Joel, and I appreciate the time. Congrats again on a fantastic quarter. It looks like it's the second of a number. So good work.
Matt Cox, CEO
Thanks, Ben.
Operator, Operator
And there are no further questions at this time. I'll turn the call back over to Mr. Matt Cox.
Matt Cox, CEO
Okay. Well, thank you for your interest in the call. I hope everyone has a safe holiday season, and we'll look forward to catching up with everyone at the year-end call. Thanks very much. Bye-bye.
Operator, Operator
Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation. You may now disconnect.