Earnings Call Transcript - MATX Q2 2025

Operator, Operator

Thank you for standing by, and welcome to the Matson Second Quarter 2025 Financial Results Conference Call. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Justin Schoenberg, Director of Investor Relations and Corporate Development. Please go ahead, sir.

Justin Schoenberg, Director of Investor Relations

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 35 of our Form 10-Q filed on May 6, 2025, and in our subsequent filings with the SEC. Please also note that the date of this conference call is July 31, 2025, and any forward-looking statements that we make today are based on assumptions as of this date. We undertake no obligation to update these forward-looking statements. I will now turn the call over to Matt.

Matthew J. Cox, CEO

Thanks, Justin, and thanks to those on the call. Starting on Slide 3. Our second quarter financial performance exceeded our expectations amid the challenges of market uncertainty and volatility arising from tariffs and global trade. In Ocean Transportation, operating income was lower year-over-year, primarily due to lower year-over-year volume in our China service. In our domestic trade lanes, we saw higher year-over-year volume in Hawaii and Alaska and lower year-over-year volume in Guam. In Logistics, our operating income was lower year-over-year, primarily due to a lower contribution from transportation brokerage. Looking ahead, we expect uncertainty regarding tariffs and global trade, regulatory measures, the trajectory of the U.S. economy, and other geopolitical factors to continue. However, given our financial performance in the second quarter and assuming these factors do not materially change from current conditions, we are raising our outlook for the full year 2025. Joel will go into more detail on our updated outlook later in the presentation. I will now go through the second quarter performance of our trade lanes, SSAT and logistics. So please turn to the next slide. Container volume in our Hawaii service increased 2.6% in the second quarter year-over-year. The increase was primarily due to higher general demand. For the full year 2025, we expect volume to be modestly higher than the level achieved in 2024, reflecting modest economic growth in Hawaii and stable market share. Please turn to Slide 5. According to UHERO's second quarter 2025 economic report, the Hawaii economy remains stable, supported by strong construction activity, but faces potential headwinds from slowing tourism, increasing unemployment, and high inflation and interest rates. Hawaii is currently experiencing solid construction activity from the public sector and the Maui rebuilding effort. Hawaii tourism showed modest growth in the second quarter despite international tourist arrivals remaining challenged. Please turn to Slide 6. Moving to our China service. Container volume in the second quarter of 2025 decreased 14.6% year-over-year, primarily due to the challenges of market uncertainty and volatility from tariffs and global trade. Freight rates were modestly higher year-over-year. As you might recall, we began to see elevated rates in the middle of the second quarter last year due to tighter supply chain conditions, including the effects of the Red Sea situation, coupled with the supportive economic and consumer demand environment. Please turn to Slide 7. At the onset of tariffs in April, we experienced significantly lower year-over-year freight demand as our customers held back less urgent shipments to work through the tariff impacts. Many of our customers were negotiating the tariffs with their trading partners on an order-by-order basis. At the same time, we saw carriers and alliances begin to reduce capacity in the transpacific trade lane based on the significant volume downturn. Starting in mid-May, we saw a rebound in demand after the U.S. and China agreed to a temporary reduced level of tariffs, but also in anticipation of country-specific reciprocal tariffs returning in August. The buildup of freight that had taken place unwound over several weeks. Market freight rates increased quickly to meet the higher demand levels and capacity returned over the subsequent few weeks. Following the London meeting in June between the U.S. and China that upheld the terms from May, we saw a stabilization of volume modestly below the prior year period amid a number of evolving trade lane supply and demand factors, including trade lane capacity reductions after the cargo rush in May, customers in Vietnam and other Southeast Asian countries advancing freight ahead of July 9 when the 90-day pause on country-specific reciprocal tariffs expired and some customers pulling forward freight from the traditional peak season in the third quarter to derisk ahead of the next U.S.-China deadline. Please turn to Slide 8. During the second quarter, we moved with our customers as they shifted production throughout Asia in response to the tariffs, which resulted in higher container volume levels originating outside of China. Our transshipment volume in the second quarter 2025 represented approximately 21% of our China service compared to approximately 13% in the first quarter of this year. The sequential quarterly increase is primarily due to higher customer demand and the opening of our new expedited Ho Chi Minh service offering as our second best-in-class service out of Vietnam with our Haiphong service from 2 years ago. While we don't know where our transshipment percentage will ultimately land given the various factors at play, we do believe in the long run that an increasing percentage of volume will originate from areas outside of China. We remain focused on supporting our customers in the region as they continue to shift their production capabilities, and we will look at opportunities to further expand our transshipment capabilities. Looking ahead, in the third quarter 2025, we expect lower year-over-year freight rates and volume compared to the elevated demand levels achieved in the third quarter last year and our expectation of a muted peak season this year. As I mentioned earlier, we saw a stabilization of volume in June and in July, we continued to see stabilized volume and rates, notwithstanding lower demand levels and continued pressure on the SCFI. As a result, our premium to SCFI widened, and we significantly outperformed the market relative to the SCFI due to our service differentiation and brand reputation. Assuming tariffs and global trade, regulatory measures, the trajectory of the U.S. economy and other geopolitical factors do not materially change from current conditions, we expect for the full year 2025 average freight rates and volume to be lower year-over-year. Please turn to the next slide. In Guam, Matson's container volume in the second quarter of 2025 decreased 2.2% year-over-year. In the near term, we expect Guam's economy to remain stable with a slow recovery in tourism, low unemployment rate, and some increase in construction activity. As such, for the full year 2025, we expect container volume to be modestly lower than the level achieved in the last year. Please turn to Slide 10. In Alaska, Matson's container volume for the second quarter of 2025 increased 0.9% year-over-year. The increase was primarily due to higher AAX volume, partially offset by 2 fewer northbound sailings compared to the year-ago period. In the near term, we expect continued economic growth in Alaska, supported by a low unemployment rate, job growth, and continued oil and gas exploration and production activity. As such, for 2025, we expect container volume to be modestly higher than the level achieved last year. Please turn to Slide 11. In the second quarter, our SSAT terminal joint venture contributed $7.3 million, representing a year-over-year increase of $6.1 million. The increase is primarily due to higher lift volume. For 2025, we expect the contribution from SSAT to be modestly higher than the $17.4 million achieved last year without taking into account the $18.4 million impairment charge at SSAT during the fourth quarter of 2024. Turning now to Logistics on Slide 12. Operating income in the second quarter came in at $14.4 million or $1.2 million lower than the result in the year-ago period. The decrease was primarily due to a lower contribution from transportation brokerage. For the third quarter 2025, we expect Logistics operating income to be comparable to the level achieved last year. And for the full year 2025, we expect operating income to also be comparable to the level achieved last year. And I will now turn the call over to Joel for a review of our financial performance.

Joel M. Wine, CFO

Thanks, Matt. Please turn to Slide 13 for a review of our second quarter results. For the second quarter, consolidated operating income decreased $11.6 million year-over-year to $113 million with lower contributions from Ocean Transportation and Logistics of $10.4 million and $1.2 million, respectively. The decrease in Ocean Transportation operating income in the second quarter was primarily due to lower volume in China, partially offset by higher freight rates in China and the timing of fuel-related surcharge collections. As Matt noted, the decrease in logistics operating income was primarily due to a lower contribution from transportation brokerage. We had interest income of $8 million in the quarter compared to $18.8 million in the same period last year. As you may recall, second quarter 2024 included $10.2 million in interest income earned on the federal tax refund related to our 2021 federal tax return. Interest expense in the quarter decreased $0.4 million year-over-year due to the decline in outstanding debt in the past year. Net income decreased 16.3% year-over-year to $94.7 million and diluted earnings per share decreased 11.8% year-over-year to $2.92 per share. Note the $10.2 million in one-time interest income earned on our federal tax refund I just mentioned contributed $0.24 in the earnings per share in the year-ago quarter. Lastly, diluted weighted average shares outstanding decreased 5.3% year-over-year. Please turn to Slide 14. This slide shows how we allocated our trailing 12 months of cash flow generation. For the LTM period, we generated cash flow from operations of approximately $617.9 million, from which we used $39.7 million to retire debt, $199 million on maintenance and other CapEx, $161.5 million on new vessel CapEx, including capitalized interest and owners' items, $30.3 million in cash deposits and interest income in the CCF, net of withdrawals for milestone payments, $14.5 million on other cash outflows, while returning approximately $284.4 million to shareholders via dividends and share repurchase. Please turn to Slide 15 for a summary of our share repurchase program and balance sheet. During the second quarter, we repurchased approximately 0.9 million shares for a total cost of $93.7 million, including taxes. Year-to-date, we repurchased approximately 1.4 million shares for a total cost of $162.9 million, including taxes. Since we initiated our share repurchase program in August of 2021 through June of this year, we have repurchased approximately 12.5 million shares or 28.8% of our stock for a total cost of approximately $1.1 billion. As we have said before, we are committed to returning excess capital to shareholders and plan to continue to do so in the absence of any large organic or inorganic growth investment opportunities. Turning to our debt levels. Our total debt at the end of the second quarter was $381 million, a reduction of $9.8 million from the end of the first quarter. Lastly, on July 23, we entered into a new 5-year revolving credit facility with commitments aggregating $550 million. We reduced the size of our credit facility from $650 million to $550 million due to the nearly fully funded status of the new Aloha Class vessel build program and our expected lower level of capital needs for the remainder of the decade due in part to our next Jones Act build cycle not anticipated until the mid-2030s. In connection with the new revolver, we also amended the existing private placement debt to match the covenants and terms of the new revolving credit facility. Please turn to Slide 16. I'm going to walk through our outlook, starting with the third quarter of 2025 on the left side of the slide. Based on the outlook trends Matt mentioned earlier, we expect Ocean Transportation operating income to be meaningfully lower than the $226.9 million achieved in the third quarter of 2024. For Logistics, we expect operating income in the third quarter of 2025 to be comparable to the level achieved last year. As such, we expect consolidated operating income in the third quarter to be meaningfully lower than the prior year.

Matthew J. Cox, CEO

Thanks, Joel. In closing, we believe we are well positioned in our trade lanes and in logistics as we manage through the period of market uncertainty and volatility. It is during uncertain times like these that Matson demonstrates its unique capabilities and service qualities across our organization. With our China service, we are focused on maintaining the fastest and most reliable transpacific services. We're also focused on being there for our customers, looking for additional opportunities to support them with world-class services and customer support as they diversify their manufacturing base and grow in an evolving marketplace. And with that, I will turn the call back to the operator and ask for your questions.

Operator, Operator

And our first question comes from the line of Jacob Lacks from Wolfe Research.

Jacob Gregory Lacks, Analyst

So you discussed expectations for lower volumes in 3Q. I think you had a couple of extra sailings a year ago. So is this just reflecting lapping those extra sailings? Or is there a bit of a utilization headwind that we should be keeping in mind as well?

Matthew J. Cox, CEO

Yes. I believe there are three or four factors at play here, Jake. First, we noted that last year there was some additional demand, which led to extra sailings and a strong freight rate environment. While we are focusing on volume, the other main factor is that although the consumer is holding up reasonably well, retail sales remain stable. We understand that many of our customers are in good shape with their inventory, with some leveraging these pauses to negotiate early inventory deliveries with their manufacturers. Therefore, we anticipate a peak season, although it may be relatively subdued. These are some of the considerations influencing our thoughts on year-over-year comparisons for Q3.

Jacob Gregory Lacks, Analyst

Got it. That's helpful. It seems like we keep seeing new expedited services emerging. Are these affecting your position in the market? Do you believe these new services will have lasting appeal in a consistently weaker market?

Matthew J. Cox, CEO

Yes, that's a good question. At this point, our main focus is on maintaining our positions as the fastest and second fastest carriers. There are about three or four other carriers in the expedited segment that we have mentioned before, such as CMA, ZIM, and Heda, among others. We are observing their activities as they try to establish themselves in various markets, aiming for a tier just below our expedited services. Your observation is correct; we expect that if the SCFI spot rates stay relatively low, it will be challenging to maintain these expedited services since they are expensive and hard to sustain if we are only receiving rates close to the spot rate. Therefore, it wouldn't surprise us if, similar to past down cycles, these expedited carriers reconsider the viability of their services.

Jacob Gregory Lacks, Analyst

Makes sense. For my final question, I appreciate that the current environment is quite uncertain. Can you help us understand how you anticipate the second half of the year will shape up in relation to your annual earnings guidance? Do you expect the seasonality between Q3 and Q4 to resemble what we have seen in recent years?

Matthew J. Cox, CEO

Yes, I would say so. I would say we don't expect this year to be as peaky given the starting position of our customers' inventory levels. We will see cargo that will move. We expect to see a strong Q3 sequentially or related to the quarter then usually sometime in October, we start to see most of the inventory that's going to be put into our customer supply chains for the holiday season to be on the water. And so we'll likely see a fall down in October in a more traditional sense. So yes, that's our expectation.

Operator, Operator

And our next question comes from the line of Daniel Imbro from Stephens Inc.

Daniel Robert Imbro, Analyst

I want to start a little higher level. Maybe just on the developments happening in Southeast Asia. I think last quarter, you talked about the Vietnamese service doubled pretty quickly. I'm sure it grew here further in 2Q. Just as you're seeing the catchment basin develop, like what kind of infrastructure investments are needed in those markets? I guess what does the path forward look like as we figure out whatever this post-tariff or new tariff world is and how Matson can continue to maintain its leadership in that Southeast Asia part of the world?

Matthew J. Cox, CEO

It's an important question. Our approach to these markets involves first listening to our customers to understand where they plan to relocate their production, especially if their aim is to shift a larger portion of their manufacturing out of China. We want to know their next destinations. Our long-term strategy is to provide the fastest and most reliable services across various countries, not only from our main destinations in Shanghai and Ningbo but also from other origins. We are closely examining opportunities to collaborate with feeder partners that already have services or are willing to develop new ones. We will assess each country's services to identify the fastest options to the West Coast and determine if we can outperform them. Our objective is not to offer an average service but to be exceptionally quick. After gathering feedback from our customers and ensuring we can offer a competitive transit time, we will seek partners in different markets to provide differentiated services. Additionally, we are observing cargo movement in our Vietnam services, including land transport from neighboring countries like Cambodia. This means it's not just about direct services but also about proximity and cross-border connections. Overall, we aim to become the most reliable and fastest provider from each of these origins as we progress.

Daniel Robert Imbro, Analyst

That's helpful. And then maybe for a follow-up, just a couple of financials thinking about the back half of the year. You mentioned to Jake's question that SCFI has moderated here in the third quarter. I know you're not going to guide, but directionally, would you expect your China rates to follow suit on a sequential basis? And then ocean operating margin in 2Q was stronger than expected. I know we'll get the full expense detail on the 10-Q, but did you take any cost reduction actions during the quarter that should continue through the back half and into next year? Just trying to figure out what's happening on the expense side there.

Joel M. Wine, CFO

Okay, Daniel. Regarding the expense question, we took some actions in early April following the initial tariff announcements to tighten our spending and implemented some general and administrative measures. These actions are still in effect, and we expect them to carry on throughout the year. This was part of the reason for the operating margin you observed in Q2. Additionally, year-over-year pricing has been strong this year compared to the same quarter last year. It's important to note that last year, our international transpacific rates began increasing about halfway through the quarter, reaching higher levels later on. These are the two key impacts affecting the year-over-year comparison for the second quarter. As for your inquiry about guidance for Q3 and Q4, it aligns with what Matt mentioned earlier. We believe that the domestic markets are holding up reasonably well. In the China market, however, we're seeing lower freight rates and volumes, which suggests a more subdued peak season that we have factored into our third quarter outlook.

Operator, Operator

And our next question comes from the line of Omar Nokta from Jefferies.

Omar Mostafa Nokta, Analyst

Good update. Obviously, things have progressed quite a bit better than initially expected, at least relative to, say, 3 months ago. I did want to maybe just follow up a little bit on how things are progressing here quarter-over-quarter. I understand it's a little too short term. But just maybe in general, there's been a lot of volatility this year, especially in 2Q where things started slow, they ramped. You mentioned initially last quarter that April volumes were down 30% from China. They ended up being down 14.6%. Obviously, we know 3Q, as you said, is going to be lower on a year-over-year basis. But given that you're seeing so far a muted peak season, can we assume that the run rate volumes for China in this coming quarter are going to be somewhat similar to the run rate that we saw for the final 2 months of this past quarter?

Joel M. Wine, CFO

Yes. Omar, it's Joel. Yes, that's a fair assumption. We do have a slightly different number of vessels in capacity this year versus last year. So there's a little bit of each weekly departure capacity that we offer compared to last year. But the overall trend of what we're calling this third quarter that we continue to see here in July is consistent with the last, call it, 6 weeks or so from mid-May through June in terms of the demand that we're seeing. So yes, I think that's a fair way to look at it.

Omar Mostafa Nokta, Analyst

Okay. You mentioned in your opening remarks that Vietnam volumes have increased to 21% of the China figures in the second quarter, up from 13%. It might be challenging to provide an accurate projection, but could you remind us what it was in the second quarter last year? Also, do you have any updates on their progress so far this quarter?

Joel M. Wine, CFO

Yes. Matt will elaborate on the trends in Vietnam. Last year, the volumes were increasing sequentially in the high single-digit range. They were at such a low level that we emphasized our growth in that market. Once we introduced the second service in Ho Chi Minh in early April this year, and considering the impact of tariffs and other factors at that time, we began to provide the investment community with clearer insights into those volume figures.

Matthew J. Cox, CEO

And then, Omar, this is Matt. Moving forward into Q3 and potentially beyond, we expect to see a similar low 20% mix of non-China origins as we approached the end of the second quarter. I anticipate this trend to continue. However, as conditions stabilize, two factors will shape our long-term sourcing strategies from China versus other regions. First, it's evident that our customers are seeking to reduce their dependence on sourcing from China, looking to diversify into multiple regions closer to end markets globally. This consideration will play a significant role in their long-term planning. In the medium term, the variances in tariffs between countries will also be a critical factor. For example, if Vietnam maintains a 20% tariff while the U.S. or China imposes a 30% tariff, this 10% difference could influence our customers' decisions regarding the advantages and disadvantages of sourcing from different locations. While we recognize that there will be a gradual shift away from China in the long run, we also believe that China will continue to be a dominant force in manufacturing capacity for the foreseeable future, with an increasing proportion of cargo sourced from other places. Although these viewpoints may seem contradictory, that is our perspective on future developments.

Omar Mostafa Nokta, Analyst

Okay. And maybe just one final one for me. This is perhaps just a bit big picture, but clearly, there's a growing chorus of building ships in the U.S. And so far, it seems to be a lot of talk. And maybe at some point, that starts to turn into physical ordering. You mentioned earlier in the call that you've got these 3 ships they'll deliver here in a couple of years. You don't really need to do anything until the mid-2030s. Just maybe out of curiosity, maybe a bit early, but are you getting a sense at all that you may need to lock up a slot sooner rather than later if there starts to really become a competition for the small number of shipyard slots available here?

Matthew J. Cox, CEO

Yes. I think at this point, you make a couple of observations in your question. Matson supports the Trump administration's efforts to try to renew and revive shipbuilding in the U.S. We see those as different than Jones Act carriers in the past. The cost to build in the U.S. for international trades is still quite large. So the question will there be additional support in providing construction differential subsidies or other types of things to make U.S. construction for international trades relatively comparable to whether it's Korea or Japan or China as an alternative place to build. That's, I think, yet to be determined. But at this point, it's way too early for us to be worried about trying to fill in a slot. We do our planning. We'll likely 2 or 3 years before being looking at getting into a contract. Obviously, if those lead times look longer, that may accelerate our thinking. But at this point in time, we feel like we have plenty of time before we need to make any firm decisions in those regards.

Operator, Operator

This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Matt Cox for any further remarks.

Matthew J. Cox, CEO

Okay. Well, thanks to everyone. I would just make one other remark before I wish everyone well for the next quarter. And it's just to repeat a point I made before the Q&A section, which is that it is encouraging for us to see how well we've held up in a very dislocated market. It is, to us, clear that our customers have placed a lot of trust in us when they need to keep production lines moving; they need to keep items on the store shelves, and we're grateful for their trust in us, and we expect that to continue. So with that, we look forward to catching up with everyone on next quarter's call. Thank you.

Operator, Operator

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