Earnings Call Transcript
Matson, Inc. (MATX)
Earnings Call Transcript - MATX Q4 2020
Operator, Operator
Ladies and gentlemen, thank you for standing by and welcome to the Fourth Quarter 2020 Financial Results Conference Call. At this time, all participant lines are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. Lee Fishman. Thank you. Please go ahead, sir.
Lee Fishman, Speaker
Thank you. Joining me on the call today are Matt Cox, Chairman and Chief Executive Officer; and Joel Wine, Executive Vice President and Chief Financial Officer. Slides from this presentation are available for download at our website, www.matson.com under the Investors tab. Before we begin, I would like to remind you that during the course of this call, we will make forward-looking statements within the meaning of the federal securities laws regarding expectations, predictions, projections or future events. We believe that our expectations and assumptions are reasonable. We caution you to consider the risk factors that could cause actual results to differ materially from those in the forward-looking statements in the press release, the presentation slides, and this conference call. These risk factors are described in our press release and presentation and are more fully detailed under the caption Risk Factors on Pages 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 February 23, 2021, 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 for those on the call. I'll start with a quick recap of our fourth quarter and full year results. Matson capped off a strong year with continued solid performance in ocean transportation and logistics, despite the ongoing challenges from the pandemic and related economic effects. The year-over-year increase in operating income for ocean transportation in the fourth quarter was primarily driven by continued exceptional demand for both the CLX and CLX+ services. In our other core tradelanes, we continued to see elevated demand for sustenance and home improvement goods leading to higher year-over-year volume growth in Hawaii, Alaska, and Guam. Logistics operating income for the fourth quarter increased year-over-year as a result of elevated goods consumption and inventory restocking and tight supply and demand fundamentals in our core markets. For the full year 2020, Matson's consolidated financial performance was strong. In ocean transportation, the contribution from the CLX and CLX+ services was the primary driver of the increase in operating income year-over-year. In Hawaii and Guam, container volumes approached the levels achieved in the year-ago period despite the economic challenges from the pandemic. Alaska container volume was modestly higher than the level achieved in the full year 2019. Logistics operating income for the full year 2020 was modestly lower compared to the levels achieved in the full year 2019, largely due to the pandemic's impact on the business lines in the first half of the year. I wanted to spend a few moments on our current priorities as we begin 2021 and continue to navigate our way through the pandemic and economic uncertainty. Our first priority is to maintain our pandemic response effort by continuing to safeguard the health and safety of our employees throughout the organization and to ensure consistency in the services we deliver for our customers. Without a doubt, 2020 was a significant year for us not only financially but operationally. The initiation of the CLX+ service is an important long-term growth opportunity. We fully intend to maximize the potential of our China service by maintaining CLX and CLX+ as the fastest service in the transpacific tradelane, and to continue to invest in new equipment to support the growth from these activities. We are investing $55 million in new containers and chassis, which not only supports the growth in the China service but also the CLX+ backhaul service, which we call the Alaska-to-Asia Express or AAX. Further, the additional capacity helps us address continuing congestion in the ports and terminals in Southern California, and provides us flexibility in equipment repositioning throughout our network with a special focus, of course, on China. With these new assets, we’ll maintain our high levels of service and meet the exceptional demand for our premium service. We expect a quick return on these dollars. In most cases, the equipment is paid for in a couple of transpacific sailings. Joel will discuss our 2021 CapEx in more detail later in his presentation. We're focused on maintaining vessel schedule integrity and positioning our domestic tradelane services for continued economic recovery as the pandemic subsides. We're also positioning our logistics business segment to continue to capture opportunities in rail and trucking from the ongoing chaotic conditions and congestion in Southern California. We also continue to evaluate organic and inorganic growth opportunities. And we remain focused on maintaining our flat financial flexibility with an investment grade balance sheet. Joel will go into more detail on our capital allocation strategy later in the presentation. Now please turn to Slide 5. Our Hawaii fleet renewal came to an end in December 2020 with the delivery of the Matsonia, the second Kanaloa Class vessel and fourth new vessel in the program. The total cost for the program was approximately $1 billion, including capitalized interest and owners' items. These vessels, along with the modernization at the Sand Island Terminal in Honolulu, are important investments in supporting a world-class operation to Hawaii and other lifeline economies that depend on our services. Hawaii container volume for the fourth quarter increased 0.8% year-over-year. The increase was primarily due to an additional westbound sailing and higher demand for sustenance and home improvement goods, partially offset by the continued negative impact from low tourism activity as a result of the pandemic. The state's pre-travel testing program that launched in the middle of October led to an uptick in tourist traffic in the fourth quarter versus the third quarter. But the levels achieved in the fourth quarter remain well below the level achieved in the prior year period. For the full year, container volumes decreased 0.6% year-over-year, primarily due to the lower volume as a result of the pandemic and its effects on tourism, partially offset by volume from Pasha in the second quarter due in part to the dry-docking of one of its vessels and higher demand for sustenance and home improvement goods. The Hawaii economy remains in a significant downturn and its recovery trajectory remains uncertain, as tourism-related businesses are operating in a difficult environment that will be extended for some time. UHERO is projecting a 10.2% decline in GDP in 2020, with near-zero growth in 2021, and more pronounced growth in 2022 if tourism rebounds more meaningfully. According to UHERO, visitor arrivals in 2021 are expected to be 58% below the record level achieved in 2019, followed by an 85% increase in visitors in 2022. The timing and extensive vaccinations across populations will have a direct impact on the recovery trajectory in tourism. Unemployment in the state remains elevated and is projected to be well above 2019 levels for the next several years. UHERO is projecting the unemployment rate for 2021 and 2022 to be 10.9% and 5.6%, respectively, compared to 2.7% in 2019. One bright spot in the pandemic has been construction jobs, which grew 1% in 2020 and is expected to be near flat to slightly up in the next couple of years, supported largely by state and federal government spending projects, with some pickup in residential and non-residential building. To give you a sense of the volume trend one month into the first quarter, our westbound container volume in January decreased approximately 5.7% year-over-year, due to one less sailing than the year-ago period. Normalizing for the one less sailing, year-over-year growth would have been a decline of 3.1%. The westbound volume largely consisted of sustenance, home improvement, and retail goods. So a soft start in January, but in the first few weeks of February we're seeing higher volumes year-over-year. March will be the end of the first pandemic shelter in place and the initial rush for home goods and essential goods. Moving to our China service on Slide 8, Matson's volume in the fourth quarter of 2020 was 139.1% higher year-over-year. The supply and demand dynamics in the transpacific trade that we outlined in our prior earnings call remained favorable. For the full year, volume increased 85.8% due to the introduction of the CLX+ service in the second quarter and in addition to the increased capacity of the vessels in the CLX string. As a reminder, at the end of June 2020, we moved the Daniel K. Inouye into the CLX service, which added approximately 500 containers of additional capacity for each voyage. The demand for our expedited ocean services from China changed throughout the year as the pandemic and its effects evolved. Early in the second quarter of 2020, we saw outsized demand driven by PPE, e-commerce, working from home electronics, and other high demand goods. There was so much demand for the CLX that we initiated a new service in May 2020 called the CLX+, which started as a few charters and subsequently became a weekly service working in concert with the CLX to meet the increasing demand. Late in the second quarter and into the third quarter, we saw a pickup in retail goods as lockdowns subsided and stores reopened. And late in the summer and heading into the holiday period, we saw increasing levels of e-commerce goods as the pandemic drove more consumption of imported goods in lieu of services. We also saw the need of manufacturers to replenish inventories depleted from the elevated consumption in the first few months of the pandemic, and the manufacturers have been playing catch up ever since. Our CLX service has been the leader in expedited ocean transportation services in the transpacific tradelane for the last 15 years. And our CLX+ service is now the second best service in the tradelane behind the CLX service. Both services rely on our competitive advantages in our destination services, such as owning and controlling our own chassis to help truckers save time and money and the unrivaled combination of SSAT terminal operation and our off-dock facility’s Shippers Transport, which leads to industry-low turn truck times and next-day container availability. These competitive advantages become more apparent in high-volume peak periods as we avoid the congestion issues that others face. I'll now comment on the current business trends. So please turn to Slide 9. Picking up where our fourth quarter ended, January 2021 eastbound container volume increased 130.4% year-over-year. The same key factors remain, which are favorable supply and demand characteristics in the tradelane, inventory restocking, and elevated consumption of goods, including e-commerce and other high-demand commodities. We also experienced a very strong pre-Lunar New Year period. In the peak week prior to Lunar New Year, which began in early February, we saw demand in excess of 2x the capacity of our CLX and CLX+ vessels combined. As many of you know, the post-Lunar New Year period is traditionally slow as factories idle and workers go on vacation during the public weeklong holiday. This year was different. The slowdown was abbreviated and our vessel sailed near full the week after Lunar New Year as there was a significant supply of freight available at warehouses still waiting to be shipped throughout the holiday. One of the underlying network benefits of the CLX+ service is the ability to reposition additional equipment to markets where it's needed to take advantage of supply and demand imbalances. We remain committed to having ample equipment to meet the needs of our existing customers, as well as potential new customers. To this end, given the steady volume demand on the CLX and CLX+ services, we're investing approximately $55 million in new containers and chassis to support the growth of the CLX+ and AAX services, and increase the availability of equipment across our network. We continue to expect largely all of the supply and demand dynamics in the tradelane to remain favorable in the first half of 2021, as the pandemic persists. As the pandemic is anticipated to subside with the widespread vaccinations, we expect some of the supply and demand factors we're currently benefiting from to remain and continue to drive demand for CLX and CLX+ services. Lastly, with respect to the duration of the CLX+ vessel charters, we've extended three of the six vessels into 2022 and two into 2023. We expect to enter into a new charter on a six vessel sometime in the first half of this year. Turning to Slide 10. In Guam, Matson's container volume in the fourth quarter 2020 increased 4.2% year-over-year, primarily due to higher demand for sustenance and home improvement goods partially offset by lower tourism activity as a result of the pandemic. For the full year 2020, container volume decreased 2.6% primarily due to lower demand for retail-related goods resulting from the pandemic and its related effects. The Guam economy remains in a downturn as tourism levels remain depressed and tourism-related business activity remains very low. Unemployment remains high and well above pre-pandemic levels. The economic recovery trajectory remains highly uncertain, and it’s largely dependent on the recovery of tourism. For the month of January, our westbound container volume increased 1.8% year-over-year, primarily due to a higher volume of building materials. In the near term, we expect to see a stable retail environment but we also expect tourism to remain challenged by the pandemic and have a negative impact on freight demand. Moving now to Slide 11. In Alaska, Matson's container volume for the fourth quarter 2020 increased 18.9% year-over-year. The increase was driven primarily by higher northbound volume due to two additional sailings and higher demand for sustenance and home improvement goods, and modestly higher southbound volume. Excluding the positive impact from the two additional northbound volume sailings, container volume would have increased approximately 11.5% year-over-year. For the full year, container volume increased 4.6% year-over-year, primarily due to the higher northbound volume, including volume associated with the dry dock of a competitor’s vessel and one additional sailing, partially offset by modestly lower southbound volume. I'll now go through the current trends in Alaska. So please turn to Slide 12. The Alaska economy continues to recover from the second quarter lows, but the recovery trajectory remains uncertain. The jobs market remains challenging in the pandemic environment with employment in the state and in Anchorage down a little over 8% year-over-year for 2020. Both AEDC and the Alaska Department of Labor are projecting a rebound in employment growth, but the pace of jobs recovery will likely be dependent on further stimulus efforts during the pandemic, continued virus mitigation efforts, and the timing and extent of vaccinations across the state. Population growth is similarly tied to the waning of the pandemic and its effects on the economy. For 2021, AEDC shows continued population declines in Anchorage. The low oil price environment continues to negatively impact oil exploration and production, which has a direct and indirect impact on the state economy. But there is optimism that we'll see an uptick in development activity in 2021 from new projects. In January, northbound volume decreased 12.4% year-over-year due to one less sailing. Normalizing for the one less sailing, northbound volume would have increased 2.9%. The volume strength we saw in the fourth quarter 2020 has carried into the early part of 2021 where we continue to see a higher volume of sustenance and home improvement goods. The A fishing season and consequently our Alaska southbound volume in AAX services is off to a delayed start due to an outbreak of the virus at several fish processing facilities in Alaska’s Aleutian Islands. We expect this situation to only be a tiny change in this fishing season and do not expect negative potential over time for seafood container volume. Turning next to Slide 13. Our terminal joint venture SSAT contributed $10.9 million in the fourth quarter of 2020 compared to $3 million in the prior year period. The higher contribution was primarily a result of higher container lift volume. SSAT volume benefited from the significant year-over-year increase in import volume into the U.S. West Coast from China. For the full year 2020, SSAT contributed $26.3 million or $5.5 million higher than the year-ago period. The increase was largely due to lower operating costs. In January 2021 and throughout the Lunar New Year period, import volume from China into the U.S. West Coast remained strong and we expect SSAT to be a beneficiary from the elevated import volume. Turning now to logistics on Slide 14. Operating income in the fourth quarter came in at $9.6 million or $2 million higher than the results in the year-ago period. The increase was primarily due to a higher contribution from transportation brokerage, where we saw elevated goods consumption and inventory restocking coupled with tight supply and demand fundamentals in our core markets. For the full year, operating income decreased $2.8 million year-over-year to $35.5 million. The decrease was largely due to a lower contribution from freight forwarding, but other business lines were also negatively impacted in the first half of the year by the pandemic. In January 2021, we saw transportation brokerage continue to benefit from elevated container volumes in Southern California in line with the trends in the U.S. West Coast import volume. At Span Alaska, our freight forwarding business remained steady and tracked our northbound volume trends in our Alaska ocean business. We continue to see steady business activity in warehousing and supply chain services in line with what we've seen throughout much of 2020. Currently, many of our business lines are actively helping customers navigate a fairly challenging environment. These are the effects of continued congestion in Southern California from the elevated import volumes that I spoke about a moment ago, but there's also a broad set of challenges with the rails and trucking companies as a result of winter storms throughout most of the country last week. Historically during periods of disruption, we tend to perform better, helping our customers navigate the difficulties because we own the chassis and assets and have years of experience maintaining freight in challenging times. And with that, I will now turn the call over to Joel for a review of our financial performance. Joel?
Joel Wine, CFO
Okay. Thanks, Matt. Now on to our fourth quarter financial results on Slide 15. Ocean transportation operating income for the fourth quarter increased $90.3 million year-over-year to $108.1 million. The increase was primarily due to a higher contribution from the China service, including the contribution from the CLX+ service, the timing of fuel-related surcharge collections, a higher contribution from SSAT and a higher contribution from the Alaska service, partially offset by higher SG&A expenses. The company's SSAT terminal joint venture investment contributed $10.9 million or $7.9 million more than the prior year period. The increase was driven by higher lift volume. Logistics operating income for the quarter was $9.6 million or $2 million higher than the prior year period. The increase was due primarily to a higher contribution from transportation brokerage. EBITDA for the quarter increased $95.3 million year-over-year to $156.3 million due to higher consolidated operating income of $92.3 million, higher other income of $1.3 million and $1.7 million in higher depreciation and amortization, which includes dry-dock amortization. Interest expense for the quarter was $4.9 million. And lastly, the effective tax rate for the quarter was 25.2%. For the full year 2020, ocean transportation operating income increased $154 million year-over-year to $244.8 million. The increase was primarily due to higher contribution from the China service, including the contribution from the CLX+ service, and lower vessel operating costs, including the impact of one less vessel operating in the Hawaii service, partially offset by a lower contribution from the Hawaii service. The company's SSAT terminal joint venture investment contributed $26.3 million or $5.5 million more than the prior year period. The increase is largely attributable to lower operating costs. Logistics operating income for the full year 2020 was $35.5 million or $2.8 million lower than the prior year period. The decrease was primarily due to lower contributions from freight forwarding. Slide 16 shows how we allocated our trailing 12 months of cash flow generation. For the last 12 months ending December 31, we generated cash flow from operations of $429.8 million and received $14.3 million from sale leasebacks from which we used $198.3 million to retire debt, $104.5 million on maintenance CapEx, $87.8 million on new vessel CapEx including capitalized interest and owners’ items, and $23 million on other cash outflows including $18.5 million in financing costs related to the two Title XI transactions and amendments to our debt agreements in the first half of 2020, while also returning $39.2 million to shareholders during the year via dividends. Turning to Slide 17 for a summary of our balance sheet. You will note that our total debt at the end of the quarter was $760.1 million and our total net debt was $745.7 million. During the quarter, we reduced total debt by $63.5 million. At the end of the fourth quarter, our leverage ratio per the amended debt agreements was 1.7x compared to 2.4x at the end of the third quarter. The outstanding revolver balance at the end of the quarter was $71.8 million. Please turn to the next slide, on Slide 18, for a review of our new vessel payments. This will be the last time we present this slide since the Hawaii fleet renewal was completed in the fourth quarter. For the fourth quarter, we had new vessel cash capital expenditures of $20.2 million and capitalized interest at $1.8 million for total capitalized vessel construction expenditures of $30 million. Our final payment on Matsonia was made in the fourth quarter when we took delivery of the vessel. Cumulative vessel progress payments on all four vessels through the end of 2020 were $924.2 million. Please turn to the next slide on Page 19 where I'll spend a few minutes giving an update on our capital expenditures. Firstly, we have our annual maintenance CapEx, which includes equipment replenishment. Historically, we have commented that we expected our maintenance CapEx to be in the $50 million to $60 million range annually. In light of our recent volume growth with CLX+ as well as significant cost increases on containers, chassis, and other equipment where we have seen price increases on many types of equipment of 50% to 150%, we now estimate our annual maintenance CapEx to be higher in the range of approximately $60 million to $70 million. This year, we also expect to make scrubber installation payments of approximately $20 million, which includes payments on a seventh scrubber installation this year and carryover payments from the fifth and sixth scrubber installations which started last year. The sixth scrubber installation was actually completed in early February this year, and that vessel was already back in service. The seventh vessel scrubber installation is scheduled to begin within the next month. We continue to believe the long-term scrubber economics remain compelling, despite the low oil prices and the narrowing of fuel spreads that occurred in the early months of the pandemic. The additional vessel in the scrubber program will also help us to be more operationally flexible for reserve capacity during necessary dry-docking and to maintain schedule integrity when the need arises. The seventh vessel will conclude our announced scrubber program. Longer term, we continue to evaluate the use of LNG or scrubbers on our new Aloha and Kanaloa Class vessels, which are dual fuel capable and currently burn low-sulfur fuel. We will defer fuel strategy decision on these vessels until we near the first dry-docking of each vessel, which is five years from each vessel’s first-in-service date. As Matt noted previously, we expect to spend approximately $55 million this year on new equipment to support the CLX+ and AAX services. In 2020, we spent approximately $37 million on new equipment to support our organic growth initiatives to launch these two new services. This total equipment investment of approximately $92 million is a one-time cost to support the significant demand levels and growth in the channel and AAX services. In most cases, we expect the payback on these equipment investments to be relatively quick and just a couple of transpacific sailings. This equipment, which has a life of at least 13 to 14 years, can also be deployed across our broader network over time if needed. When we started CLX+, we serviced the demand with our own equipment from the domestic tradelanes, which were experiencing significantly reduced volumes at the time due to the pandemic. Over the summer and through the rest of the year, the domestic tradelane saw some recovery in volume. And given this increase, plus the equipment needs from the new CLX+ and AAX services, we decided to both lease additional equipment and order new equipment six months ago during the third and fourth quarters of last year. Given the lead times for the new equipment, many of these equipment orders will now show up in our 2021 CapEx. During this period, our goal was to remain well positioned heading into 2021 to support our customer volumes if demand remains strong, which it has. And lastly on our 2021 CapEx, we expect to spend approximately $25 million on a new neighbor island flat-deck barge. This new barge would be in lieu of an expensive near-end of useful life dry-docking on an older barge that is currently in service. We expect the new barge to provide efficiency improvements to our Hawaii neighbor island barge operations. Adding it all up on this page, the total amount of CapEx for the higher amounts of the indicated ranges on this page sums to approximately $170 million in 2021. Looking into 2022, we expect to be at the maintenance CapEx level I previously mentioned of $60 million to $70 million. Please now turn to Slide 20. In light of our improved financial position, I want to spend a few moments on our capital allocation strategy, which remains consistent with our prior approach. Our uses of cash after funding our ordinary dividend and maintenance CapEx are expected to be, in no particular order, organic growth, debt reduction, acquiring businesses, and returning capital to shareholders. I will briefly comment on each of these four areas. With respect to organic growth, we continue to evaluate new opportunities as demand across the ocean tradelanes and in logistics continues to fluctuate in a pandemic-impacted environment. Like CLX+ and AAX, organic initiatives tend to be low risk or lower risk, higher return opportunities that require less upfront capital than typical M&A transactions. 2020 was clearly a strong year for us in this regard, which led to our total debt outstanding declining by nearly $200 million during the year, and our leveraged covenant at the end of the year finished at approximately 1.7x, down from the peak of approximately 3.4x at the end of the first quarter of 2020. In 2021, we expect to continue to pay down outstanding debt from free cash flow generation. It is important that we retain our financial flexibility and maintain a strong investment grade balance sheet, which we view as a competitive advantage in capitalizing on growth opportunities. In 2020, we evaluated acquisition opportunities in both ocean transportation and logistics. But some of the businesses did not fit well with our existing operations, and others were sidelined pending valuation and/or timing considerations in light of the pandemic’s impact on these businesses. Overall, we remain disciplined in our review of opportunities with the key acquisition criteria we set out in our prior investment communications, which are the following. The acquisition opportunities must firstly have an enduring competitive advantage or economic moat and be difficult to replicate by others. Second, they need to be a good strategic or complementary fit to our existing operations and to our network. Thirdly, they need to generate a cash on cash return in excess of 10% initially and have the financial means to independently grow organically thereafter. And fourthly, they need to be a good cultural fit. Lastly, on capital allocation, in the absence of organic growth or acquisition opportunities, we will consider return of excess cash to shareholders in the form of share repurchases and/or special dividends over time.
Matt Cox, CEO
Thanks, Joel. To wind it up, as I reflect on Matson’s operational and financial performance in 2020, I'm proud of our accomplishments amidst a difficult environment and a year that we will long remember as far from normal. Matson’s employees adapted on the job and at home in the face of extraordinary conditions. We moved quickly to seize organic opportunities and to drive exceptional financial performance throughout much of 2020. Across ocean transportation and logistics, we did what we've always done for 138 years, provide exceptional customer service and on-time delivery to meet our customers’ needs. 2021 will be far from normal as well, but our mindset hasn't changed. We remain focused on moving freight better than anyone and uncovering new opportunities for long-term growth to drive shareholder value. And with that, I will turn the call back to the operator and ask for your questions.
Operator, Operator
And your first question comes from the line of Jack Atkins with Stephens.
Jack Atkins, Analyst
Great. Good afternoon, everyone and congratulations on a great quarter, really a great year.
Matt Cox, CEO
Thanks, Jack.
Jack Atkins, Analyst
So, Matt, maybe we could start with what’s going on in the transpacific market. It’s quite extraordinary at the beginning of the year as we’ve seen an acceleration of rates. As we approach the traditional contract negotiation period over the next 60 to 75 days, how do you anticipate things will unfold, considering the high spot rates we’ve observed? How will this affect Matson’s ability to secure higher contractual rates, particularly for the legacy CLX business? I assume you also intend to include part of the CLX+ business in contracts for 2021. Can you help us understand this better?
Matt Cox, CEO
Yes, I can. From a contracting standpoint, Matson has historically operated its CLX+ using a mix of spot freight, short-term cargo contracts, and long-term annual contracts. As you know, we have been in the transpacific market for 15 years, and this approach has evolved over time. Initially, we maintained a fairly even split between our CLX+ and spot markets, but we have increasingly shifted towards the spot market where we can achieve premium rates compared to contract rates. However, we both believe it is important to maintain a balance of both. In April-May of 2020, we launched CLX+, which mainly operated outside of the usual contract period. Much of the freight on CLX+ was spot freight, which proved advantageous given the changes in freight rates and was in line with our belief that this market environment would be favorable for focusing on contracts. Over time, we will assess the appropriate mix. Given the changes over various market conditions over the past 15 years, we will likely continue to focus on a combination of both, with a greater emphasis on the spot market. It is almost certain that customers operating under annual contracts will experience increases in their contracted freight rates. Their goal will be to secure as much committed capacity as possible at the lowest rates, while carriers will have different objectives. This balance is recalibrated each year. But at the end of the day, those that are focused primarily on contracted freight are going to see significant increases in that contract capacity or contract rate. And I think as we see the world now, we see the supply and demand elements that are in place continuing through the middle of the year, and the freight rate environment to remain relatively elevated. And then as the pandemic subsides, we'll get into what the new normal is, but we really don't, Jack, have a view of when that would happen and what the new normal looks like, although we do feel comfortable that matching CLX and CLX+ service are here to stay, because of increased e-commerce and other factors in the marketplace that I think we feel really good about our long-term prospects for both of our China services.
Jack Atkins, Analyst
No, that was very helpful, Matt, and I appreciate that. I would like to follow up for a moment on CLX+ and the additional CapEx investments associated with it. Could you elaborate on the $55 million additional investment? What impact will it have on your broader network? You mentioned increased equipment availability. Will this allow you to handle even more volume on your chartered ships and CLX+ as well as the original CLX operations, or is the focus mainly on acquiring equipment off lease to replace leased equipment?
Matt Cox, CEO
Yes. The way we approached it, as Joel mentioned earlier, was that when we launched CLX+, we were still experiencing some downturn related to the pandemic and its effects. Our core domestic market volumes had decreased, similar to trends everywhere, which presented an opportunity. When we recognized the potential with CLX+, we decided to utilize the newly available equipment to support the initial phases of CLX+. We also anticipated earlier than most in the industry that transpacific activity would be very high. And our goal and mindset going into the CLX+ was we need enough equipment to not miss a single slot booking availability. And so we were aggressive in basically leasing every available box in the market that was in China, which is most of the equipment in the world a month or two before other carriers became aware of what became more obvious later. The combination of decreased demand in our domestic Jones Act rates and our prompt action in leasing equipment helped us avoid missing any bookings due to a lack of equipment. Additionally, on the destination services side, one of our key differentiators is that we own or control our own chassis. As we implemented the CLX+, the same situation was in play. With domestic shipments declining, we were able to redeploy the chassis previously used for our domestic Jones Act services into the CLX+ service. Over time, we did have chassis available, but our goal is to ensure that as the Jones Act rates normalize and ideally begin to show modest growth as we move past this pandemic, we have enough equipment to maintain our service levels. The other point that Joel made, which is important to repeat and I think I've said it too, that while the boxes and chassis are more expensive than they were historically, the payback on the margin of having a box versus not having a box pays for itself in one or two voyages. And so we wanted to not put ourselves in a position where we couldn't fill every slot and take care of as many customers as we could, which led ourselves to recycling our fleet for this tremendous opportunity in earnings that we've seen out of our upside CLX and CLX+ service. So this is really just more normalizing for the catch up that we're playing on getting equipment, containers and chassis into the fleet.
Jack Atkins, Analyst
Thank you, Matt. I have one final question before I return to the queue. Joel, regarding the $760 million in debt at the end of the quarter, how much of that can be prepaid without incurring a penalty? I understand that the $72 million on the revolver is straightforward. Is there anything else you could prepay this year with cash flow if desired? That's the first part. The second part pertains to free cash flow. Are there any factors to consider when comparing 2021 to 2022 in terms of cash flow, such as cash tax obligations or the absence of CARES Act benefits that were available in 2020? I want to ensure we're considering all aspects related to cash flow. Thank you.
Joel Wine, CFO
Thank you, Jack. I appreciate the questions about cash flow. To address the first part, we have paid down $71 million of our revolver. The remaining debt consists of Title XI debt and long-term private placements that cannot be prepaid without incurring penalties. However, these debts do amortize according to specific schedules. Over the next three to five years, we expect to reduce this long-term fixed debt by approximately $60 million to $65 million each year. This is how we will use our free cash flow to reduce debt, alongside the $71 million to $72 million on the revolver. On the puts and takes question, you touched upon the biggest one, which is now we expect – we utilized all of our tax attributes, NOLs and AMTs. And through the end of 2020, we were not a cash taxpayer. We actually did receive NOL accelerated refunds which helped the cash flow in the last two years. So the biggest difference just kind of operational and cash flow wise for the company is flipping from getting some accelerated AMT credits which were positive to now in 2021 and beyond we expect to be a cash taxpayer. So I would say that's probably the biggest difference in cash flow from operations as you look forward. We don't expect any other kind of changes in our working capital. You see a big increase in working capital investment in receivables in 2020. That was just related to the stand up of the CLX+ service which is a big new service for us with lots of receivables outstanding. Some of those customers are on cash, but overall that was the main driver, which is why you see an increase in receivables investment on our working capital. But 2021, that should actually be levelized now and no big changes on the payable side. SSAT, you've seen a couple of years in a row where distributions have been a little bit higher than annual report income. So over time, we tell investors to expect those to be much closer together. And if you look back five years ago, the distributions during some phases were a little bit lower than reported income. So there’s a little bit of change there potentially over time, but that's really it, Jack. The rest of it is going to be I think comparable as we head into '21 and '22 versus prior years.
Jack Atkins, Analyst
Okay. That's helpful, Joel. Thanks very much for the time, guys.
Joel Wine, CFO
Okay. Thanks, Jack.
Operator, Operator
Your next question comes from the line of Ben Nolan with Stifel.
Ben Nolan, Analyst
Hi, guys. Good quarter. I have – since Jack had three, I'll have three and starting clearly with CLX. Obviously that's at this point probably the biggest driver, but ultimately sort of the biggest question mark from a longer-term go-forward basis. The part that I think was interesting though is I was sort of looking at the implied rate per box across the company and it stepped up quite a bit even with the higher volumes, and I have to assume that that came from CLX because that's where the rate volatility comes. And from looking at the index, it didn't gap up quite as much as what it looked like your rates did. Is that entirely just sort of you guys have a better service than everybody else and so you can charge more for it, or is there something else than that that I'm not seeing?
Matt Cox, CEO
No, I think the premise of your question is correct. We experienced a significant volume increase in China and a notable rate increase year-over-year. Historically, Matson has charged a premium to the market due to our distinct service offerings, and this trend continued even in the elevated market conditions in the transpacific. We continue to earn a premium on both the CLX and CLX+ services. Therefore, when you examine the CCFI, SCFI, or other indexes related to the trade, we maintain a healthy premium compared to the market due to our service advantages.
Ben Nolan, Analyst
Right. And I guess my question really was it looks like that premium went up. Am I reading that correctly?
Matt Cox, CEO
Well, I think the way we think about it is it expands and contracts. So in environments, it's actually maybe counterintuitive. But when rates have been at lows, we command very large premiums that can narrow when rates are at all-time highs but there is still a significant advantage or premium relative to the market. So it expands and contracts with the market cycle where the premium can actually contract in super high markets just to give you a little bit of color there.
Ben Nolan, Analyst
Okay. With regard to volumes, last quarter reached record levels, moving about 40,000 containers. Is that the maximum capacity for a ship? Additionally, Matt mentioned that you renewed charters on several ships, with a sixth in progress. Joel, you previously discussed the potential to increase the size of the ships you charter if volume demands increase.
Matt Cox, CEO
So my question is, is that still an option? Are you considering possibly increasing the size of your CLX+ capacity, or should we expect that the 40,000 number you reached is the maximum if utilization is full moving forward? Yes, I would say five of our six ships have been chartered through 2022. I expect that the capacity we have at the CLX+ service, along with our core Jones Act CLX service, will not change significantly in the near term. Regarding your earlier question about the fourth quarter and the volumes, effectively every slot was filled. We didn't lose a single container or load because we had enough container equipment. That creates a strong profile. There will be instances where we have what we call extra loaders, which are vessels in dry-dock that can be utilized in the eastbound direction on their return to the domestic trades. There are times when there are also sort of one-off wages and those kinds of things. But I would say that the fourth quarter is a good proxy for what we're likely to see, which was every slot that was available was filled.
Ben Nolan, Analyst
Okay. And in terms of maybe upping the size that's not really going to be happening at least in 2021, is that fair?
Matt Cox, CEO
That's right. Yes. With the profile of the charters and the duration of where they are expecting, and size is important, but the speed is more important. So there is – we could go charter some very large ship that can't make the speed and those kinds of things. We're not interested. So we're looking for a fast ship that can get in and out of the terminal relatively quickly that has a profile. We think our current chartered ships are a good fit well with our service model. That's not to say that if we can find a vessel that meets the speed requirements that's a little bit bigger that can carry 300 or 400 more containers when the charter renewals open that we wouldn't look at it.
Ben Nolan, Analyst
For sure, we would. But it's primarily speed that defines what works for us in our environment. Okay, that's helpful. And then the last one from me. This is just more curiosity than anything else. So you guys had preannounced a few weeks ago and you came in meaningfully above sort of that preannounced – the high end of the preannounced range. I'm curious sort of what moved in terms of the numbers over the last few weeks that maybe you didn't know about initially?
Joel Wine, CFO
Ben, it's Joel. Just year-end accruals, year-end reconciliations, year-end true-ups, things like pension and items that just take a few weeks to get the data to the middle of the end of January. So nothing really unusual in the business, it's just all the year-end accounting items.
Ben Nolan, Analyst
All right, cool. Nice quarter. Thanks, guys.
Joel Wine, CFO
Thanks, Ben.
Operator, Operator
Your next question comes from the line of Steve O’Hara with Sidoti & Company.
Steve O’Hara, Analyst
Hi. Good afternoon. Thanks for taking the question.
Matt Cox, CEO
Hi, Steve.
Steve O’Hara, Analyst
I guess just going through the talk about the first half and you expect some of the factors to continue after the pandemic ends. If you think about the importance of the factors that continue versus the ones that you expect to abate somewhat in terms of earnings production revenue and things like that, how do you frame that in terms of that maybe first half versus second half? And then is that kind of timeline that you're talking about, is that due to more just kind of, hey, look, we're kind of comfortable with a six-month outlook or is there something happening out there that is kind of more concrete that you see kind of on the horizon? Thanks.
Matt Cox, CEO
Yes. Our crystal ball is a little cloudy, but let me give you some of the thinking and approaches and I can try to answer your question the best I can. So I think what we are seeing is when we said we think the current frothy environment is going to remain through the first half of the year implies that we see really strong demand for Matson's services. So the question is about how much capacity we have and at least through Lunar New Year was extremely strong. We see an abbreviated post Lunar New Year period. So we do see a continuing environment of very strong demand. I think over the longer term, the most important factor for Matson in this new normal is to maintain the fastest service in the transpacific and the second fastest service in the transpacific. Other carriers have created some other niche offerings in other markets, but because of our destination services they cannot equal our sale through availability. And the market knows it. Every customer who is looking to move their freight knows that Matson's services are the fast and second fastest. So operationally, our priorities, whether it's in new equipment or sailing or other, our great joint venture with SSAT, are around making sure that Matson's services remain the fastest and the second fastest in the market. I think that long term will be the thing that determines the viability. And of course, we're doing this a very long time and we have confidence that we will continue to be the first and second fastest services. So I don't know if there is another part of the question that I missed, Steve, but those are my thoughts about that.
Steve O’Hara, Analyst
That's helpful. All right. I'll jump back in the queue. Thank you.
Matt Cox, CEO
Okay. Thanks, Steve.
Operator, Operator
And you have a question from Ben Nolan from Stifel.
Ben Nolan, Analyst
Well, if nobody else was I guess I'll take it. I wanted to follow up, and Matt you and I talked a little bit about this at our conference, what was it last week, two weeks ago? You were just talking about how mission critical it is to have the fastest speed and everything else. What we are hearing from a lot of other people is that they are under intense pressure to reduce emissions and that the easiest to most expedient way to do that is to go slower, which is pretty counterintuitive to sort of the value proposition that you guys have.
Matt Cox, CEO
Can you maybe just talk through how you're balancing the need to reduce your emissions, but also have that competitive advantage of speed? Yes, it's an important question. This will become increasingly significant due to the IMO 2030 guidelines aimed at significantly reducing carbon emissions in the ocean transportation industry by 2050. We recognize this as a long-term issue. It's worth noting that while slowing down can help meet carbon emission reduction targets, many ocean carriers often overlook that maintaining schedules while reducing speed may require adding more vessels. For instance, if a carrier goes from operating five ships to six or seven to compensate for slower speeds, that means one or two additional vessels are contributing to carbon emissions. So partly, you have to look at it as a big picture. And so I would say the other thing to keep in mind at least as we see our model, the question to be asked, do we see ourselves as a relatively higher carbon emitting operator compared to a carrier that's moving around 20,000 TEU ships on a per-container basis? The answer is yes, that might be slow steaming. But when you compare it to air freight, we are a fraction, 5% or 10% or whatever of the carbon emission relative to air freight, which is a market that we're pulling, we know, are pulling cargo from and as a result are significantly reducing carbon emissions for that freight that would otherwise go there. Matson definitely has a responsibility to reduce its carbon footprint, and we are making investments to achieve that. In the long term, one of the advantages of the four new ships we have is the large spaces that can accommodate not only LNG but also net zero carbon fuels such as hydrogen, ammonia, and biogases. Although these options are not commercially available yet, there is significant investment and interest in these alternative fuels, which we believe will help us further reduce our carbon footprint over time.
Ben Nolan, Analyst
All right. I appreciate it. Thanks, Matt.
Matt Cox, CEO
Sure.
Operator, Operator
And at this time, there are no other questions in queue. I'll turn it back to CEO, Matt.
Matt Cox, CEO
Okay. Thanks, operator. Thanks for your participation today and thanks for your continuing interest in Matson. We look forward to catching up with everyone at the end of the first quarter. So please stay well and safe, and we'll look forward to speaking with you then. Thank you.
Operator, Operator
This concludes today’s call. You may now disconnect.