Matson, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the first quarter 2020 financial results conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star then one on your telephone. Please be advised that today's conference has been recorded. If you require any further assistance, please press star then zero. I would now like to hand the conference over to your speaker for today. Lee Fishmans, Director of Investor Relations. You may begin.

Thank you, Tawanda. Joining me on the call today are Matt Cox, Chairman and Chief Executive Officer, and Joel Winnie, 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, 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 today, May 5, 2020, and in our subsequent filings with the SEC. Please also note that the date of this conference call is May 5, 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.

Thanks, Lee, and thanks to those on the call. In light of the unprecedented environment we're in, I wanted to begin the call with our current priorities before recapping our first quarter results, so please turn to slide three. We're executing a number of critical objectives to manage the business through this pandemic and period of economic uncertainty. Our companies responded and continue to respond to the reality of operating under COVID-19 pandemic. There are three areas in particular I want to highlight. Our top focus is safeguarding the health and safety of our employees by enhancing processes on the vessels to ensure crew safety, ensuring those working from our warehouses or terminals adhere to Coast Guard, CDC, and other government guidelines on PPE, disinfecting, social distancing, and requesting those whose job functions allow them to do so to work from home. We're also focused on ensuring the consistency of our ocean transportation service and making sure cargo is available to our customers as quickly as possible. Methods Culture is rooted in providing the highest quality service and best-in-class, on-time performance to its customers because we are the lifeline to these remote communities, and this has never been more important than the pandemic environment in which we operate today. This economic environment is unlike anything we've seen before, but we're no stranger to operating in difficult economic times. As you would expect, we are responding to the new reality and preparing for an extended downturn by managing the operational and financial aspects of the business heading into a downturn. As the COVID-19 situation evolved in early March, it became increasingly apparent that we had to ensure the company had balance sheet liquidity to manage through a sustained period of economic weakness. On March 31st, we executed the amendments to our bank facility and private notes to provide additional leverage covenant headroom through the end of 2021. Joel will go into more details on the amendments later on in the presentation. In early April, We initiated an operating and capital cost reduction plan to address the profitability challenges we expect to encounter as the economy weakens while the recovery remains uncertain. Some of the initiatives include resizing the network to lower freight volumes in our domestic trade lanes and increasing capacity in our CLX trade lane, reducing operating costs, and deferring or eliminating capital projects. I will go into more detail in the next slide, so please turn to slide four. I want to spend a few minutes on these three areas where we were managing the operations for the new reality and preparing for an extended downturn. First, we're evaluating a number of operational initiatives to increase efficiencies and better align capacity to volume demand. All of the operating initiatives we're evaluating or executing assume that we'll be in a weaker economic environment for at least the next 9 to 12 months. We've mentioned before that we are evaluating shifting Daniel K. Inouye from the Hawaii service to the CLX. We plan to make this move in late June to better align the CLX capacity with the demand given what we see in the Trans-Pacific Ocean and air cargo markets. Daniel K. Inouye is one of our fastest and largest vessels and is the sister ship to the Kaimana Hila which has been operating in the CLX since the third quarter of last year. There are a number of initiatives that we're evaluating or executing to reduce costs, some of which are on this slide. We're evaluating the Hawaii Neighbor Island Barge Network and the frequency of port calls. We're also evaluating the number of port calls to Kodiak in our Alaska service. We've reduced operating hours at select terminals and are evaluating other expense reductions at the terminals to increase operating efficiencies. We're evaluating maintenance cost reductions and deferrals, and we're looking to achieve cost reductions from our service providers during this difficult time. Second, we're managing our personnel costs in a number of areas. We have instituted a hiring freeze across the organization, and we announced today a salary reduction plan. The plan includes a reduction of 10 to 30 percent for the top highest 100 paid employees. The management team is at the high end of the range. The board of directors and I took a 30% salary and board cash fee reduction. This plan took effect on May 1st. We're also reducing or eliminating discretionary costs, and we're reducing or eliminating overtime across the company. We expect the fleet repositioning, operating changes, and cost management initiatives to approve operating results by 40 to 50 million in 2020, of which two-thirds is from fleet repositioning and other operational changes. However, the financial benefits from these actions will only partially offset profit declines in our businesses as a result of the COVID-19 situation and its economic effects. Please turn to slide five. The third and final area of focus is that we are deferring or eliminating all capital spending not considered essential or previously committed. We are at the tail end of a large capital expenditure cycle with three previously announced projects expected to be completed by year end. These committed capital projects include the Hawaii Vessel Renewal Program, where our fourth and final vessel is expected to be delivered in the fourth quarter, the first phase of the Sand Island Terminal Upgrade, and the Sixth Vessel Scrubber Program. We expect the deferral and elimination of CapEx to result in approximately $30 million in savings in 2020. While we have a rather limited ability to curtail CapEx in 2020 due to the committed projects I mentioned, we have more flexibility to contract the capital spending in 2021 and 2022 to the extent the depth or duration of the economic cycle is more pronounced. Without a doubt, This economic downdraft will present a number of challenges for us, but our experience in managing the company through prior recessions puts us on a relatively strong footing to adapt quickly and find opportunities. I will now briefly recap the first quarter results, so please turn to slide six. While it seems like a long time ago now, our business performed well in the first quarter despite the overhang of the COVID-19 situation. Consolidated operating intake came in better than expected, led by stronger than expected performance in ocean transportation. Consumption of home food and essential goods drove increased volume in our Hawaii, Alaska, and Guam trade lanes, and our CLX service returned to normal volume levels, slightly ahead of our expectations. Lastly, SSAT was challenged by canceled sailings resulting from the COVID-19 situation. which I'll comment on later in the presentation. Logistics operating income came in slightly below our expectation as some business lines were directly challenged by the COVID-19 situation and transportation brokerage and freight forwarding came in a little softer in March as a result of the shelter-in-place orders and retail store closures. On April 6th, we withdrew our full year outlook In light of the increasing economic uncertainties regarding the COVID-19 pandemic, in the absence of the outlook for the trade lanes, SSAT, and logistics, I will provide commentary on the current trends in business activity so far this quarter. And with that, please turn to slide seven. Hawaii container volume for the first quarter increased 1.7 year over year, primarily due to the consumption of home food and essential goods as a result of shelter-in-place orders to mitigate the spread of COVID-19. The State of Hawaii announced several orders in March to mitigate the spread of COVID-19 on the islands. These orders have materially affected tourism, which led to a precipitous decline in domestic visitor arrivals mid-March, so we did not see any material impact from this development in our volume in the first quarter. However, we are now seeing the effect of near-zero tourism, as well as the impact from the temporary closure of retail stores with April westbound container volume down approximately 12% compared to the April of last year. The westbound volume in the first half of April was slightly lower year over year, but then we saw materially lower volume in the second half of April with volume declining approximately 19% year over year. Based on the current volume trend, We believe we could see a decline in the mid to high teens percent in the second quarter compared to the prior year quarter. We expect the loss of tourism to directly and indirectly meaningfully impact the volume in the second quarter and the remainder of this year. Clearly, this economic situation is different from the last two recessions, but we believe history is a reasonable starting point. The worst quarterly volume declines we saw after 9-11 and during the Great Recession were 23% and 17%, respectively. I'd like to point out that despite the potential large decline in freight, a majority of the volume we carry will continue to flow in the form of recurring sustenance goods and some discretionary items. Please turn to slide eight. I want to spend a few minutes on the current general state of activity in Hawaii and provide some commentary based on the latest Uhiro forecast. The statewide stay-at-home order has been extended from the end of April through May 31st. There is virtually no tourism in the island despite some flights on schedule. As you can imagine, hotel occupancy has declined significantly and most hotels have closed temporarily. Like the mainland, big box retailers, pharmacies, and grocery stores remain open for residents to secure their day-to-day goods, but other essential businesses continue to operate normally. Some non-essential businesses are beginning to open with limitations. Temporary loss of tourism is going to have a significant impact on Hawaii's economic growth. It will lead to second and third-order effects on the economy, including loss of jobs and discretionary income, lower construction activity, and lower general spending in other industries. Yujiro's latest forecast captures the potential integrated effects. The state has seen a surge in unemployment claims in March and April. Nearly 35% of the workforce in Hawaii has filed for unemployment. UHERO is forecasting a 20% year-over-year decline in non-FARB jobs in the second quarter and nearly 14% unemployment rate for 2020, compared to 2.7% in 2019. Following the significant decline in tourism in March, Activities expected to remain near zero for most, if not all, of the second quarter. New Hero is projecting for the full year 2020 a nearly 41% decline year-over-year in both visitor arrivals and real visitor expenditures. The forecast implies improvement in tourist arrivals in Q3 and Q4, but still well below prior year levels. To put the 41% annual decline in visitor expenditures into perspective, In 2008 and 2009, the worst year-over-year quarter decline in that timeframe was roughly 21%. And the worst annual decline was 15%. The peak to drop decline from 2007 to 2009 was nearly 30%. So the COVID-19 economic effects from tourism are forecast to be far worse than what we saw in the last recession. New Hero forecasts construction jobs to fall by nearly 3% in 2020. Current projects in construction are expected to continue to completion, but those in the planning phases are likely to be postponed. GDP for 2020 is forecast to decline 7.7% year-over-year. This would be the worst GDP growth rate in UHERO's recorded history dating back to the 60s. To put this depth of the forecast into perspective, the largest year-over-year quarterly GDP decline in the 2007 to 2009 timeframe was approximately The depth and duration of this economic cycle remains unclear, and the economic effects from the loss of tourism will be significant in the second quarter and the rest of the year. However, again, the majority of our Hawaii service volume consists of highly recurring sustenance goods, and we expect to maintain a good level of demand for this type of volume in this pandemic environment. Moving on now to our China service on slide 9. Mastin's volume in the first quarter of 2020 was 6.5% lower year-over-year, but we achieved average freight rates that approximated the level achieved in the year-ago period. China's COVID-19 mitigation efforts elongated our traditional post-Lunar New Year volume lull by affecting factory production, factory report infrastructure logistics, and our customers' inventory sourcing to produce goods. The ramp up in volume from the post-Lunar New Year lull to normal levels in March was slightly ahead of what we expected in our fourth quarter earnings call. For the month of April, our CLX service eastbound volume increased by 4% year-over-year compared to the prior year period. Demand for the CLX service has been very strong, as our differentiated expedited service remains an attractive offering amidst the disruption and loss of capacity in the Trans-Pacific air cargo and ocean freight markets. Historically, the CLX has carried a higher percentage of garments, footwear, and other items in tight supply chains. Apparel and footwear retail volume has declined significantly as a result of shelter-in-place orders and the temporary closure of U.S. retail stores. The reduction of retail volume is being infilled by other high-demand volumes, For example, our ships have been carrying masks, sanitizer, and personal protection equipment, as well as other critical supplies, including electronics, to support growth in the work-at-home environment. We're also seeing much more e-commerce volume as some ocean carriers have canceled sailings, and a reduction in air cargo capacity has shifted this type of traffic to our service. Please turn to slide 10. I want to spend a few minutes on what we see in the Trans-Pacific trade lane for the balance of the year, and how we are positioning our CLX service. We think the disruption in the Trans-Pacific air freight market will continue in the near term and we believe our CLX service will experience good demand from this. A substantial loss of capacity from passenger jet belly space is difficult to replace immediately and it is unknown when this capacity will return to normal. The loss of air cargo capacity has led to historically high air freight rates, almost two to three times previous records. And we've said this before, but our premium expedited service is an attractive alternative to deferred air freight given the significantly lower cost per box with only a five-day longer service. We expect unsettled conditions in the Trans-Pacific trade lane to remain for the balance of the year. Already this quarter, there have been a large number of canceled sailings in the trade lane. As I mentioned earlier, we plan to move one of our fastest and largest vessels, the Daniel K&OA, from the Hawaii service to the CLX service in late June. This vessel will add roughly 500 containers per trip when utilized. For the balance of the year, we expect to infill volume where we can, and we know that at some point, retail stores in the U.S. will open up again, and those volumes will return. We believe that our initiatives will continue to keep the ships full for the rest of the year. Lastly, we will continue to evaluate opportunities to increase capacity in the CLX string in light of the supply-demand dynamics we see. For example, next week, we've chartered a vessel for one voyage to sail opposite the smallest of our CLX vessels to supplement our capacity given the extremely strong demand for our expedited service offering. Turning to slide 11. In Guam, Max's container volume in the first quarter 2020 decreased 3.9% year-over-year, primarily due to typhoon relief-related volume of the year-ago period. partially offset by higher volume due to increased demand of essential goods and home food as a result of COVID-19. In April, our Westbound container volume declined approximately 4% compared to April 2019. We saw progressively weaker volume throughout the month as the loss of tourism and the temporary closure of retail stores negatively impacted volume. We believe we were in the early innings of volume decline in the trade lane and expect further volume loss in May. Looking back at the Westbound volume impact in the Great Recession period of 2008-2009, the worst quarterly year-over-year decline was nearly 15%. And while the ultimate trade decline will likely be significant, we expect the majority of volume we saw last year to flow in the form of recurring sustenance goods and items. Moving now to slide 12. In Alaska, abstinence container volume for the first quarter 2020 increased 11%, primarily due to greater demand from home food, food, and essential goods as residents shelter in place due to COVID-19, as well as volume associated with the dry docking of a competitor's vessel. Approximately one-third of the volume increase in the quarter was attributable to the competitor's vessel dry docking. Southbound volume in the quarter was modestly lower than the level achieved in the first quarter 2019. For April, northbound volume declined approximately 3% compared to April 2019. We saw continued strength in home food and essential goods volume in the first half of April, but then we saw materially weaker volume in the last couple of weeks of the month, with volume declining at approximately 14% We believe we could see volume decline in the mid-teens in the second quarter compared to prior year. Looking back at the northbound volume impact in the Great Recession period of 2008-2009, the worst quarterly year-over-year decline was a little over 8%. So a mid-teens percent volume decline in the second quarter would be nearly twice the percent decline seen in the last recession. Turning next to slide 13. I want to spend a few moments on the current state of activity in Alaska and provide some commentary based on the latest economic information. Similar to Hawaii, Alaska is under a statewide shelter in place. The state initially mandated the closure of all nonessential businesses, but recently allowed select industries to reopen subject to limitation, including restaurants and retail stores. The state ordered a more aggressive travel ban with no flights, into and within the state, and in early April, the major cruise line operators announced they are canceling their summer trips. The precipitous fall in oil prices to extremely low levels prompted some producers to curtail production and reduce rig workers on site as a result of the COVID-19 mitigation efforts. There's currently a lot of focus on protecting the fishing industry and the surrounding communities during the upcoming salmon season. Protocols on worker safety on the fishing vessels and at the commercial fisheries have been put into place to mitigate the spread of the virus. The economic toll from COVID-19 and the fall in oil prices is likely to be significant. In a report issued on April 6th by the Alaska Department of Revenues, state revenue for 2020 is forecasted to decline by approximately 40%, which will necessitate budget and possibly other measures to address the shortfall. Unemployment is expected to increase significantly, even with the limited reopening of some non-essential businesses. The Alaska Department of Labor and Workforce Development noted recently that in the last six weeks, over 14% of the Hatham Lane working-age population in the state filed for unemployment benefits, with accommodation and food services industries hit the hardest. Although the tourism season in Alaska is short, It's an important contributor to the state's economy. The cancellation of cruise tours will have a negative effect on the economy, and it remains to be seen what will happen with other tourist-related activities. In the oil industry, we expect some production will be deferred due to lower oil prices in the near term, and some development projects will likely be delayed. The depth and duration of this economic cycle remains unclear, and the economic effects within the state will be significant in the second quarter and the rest of the year. However, the majority of our Alaska service northbound consists of highly recurring substance goods, and we continue to expect a good level of demand for this type of volume in this pandemic environment. Further, we have little direct exposure to the oil activity in the state, including projects on the North Slope, so we anticipate little to no direct impact from the sector. We also have no direct exposure to the cruise industry, and related to tourism activity as most of the cruise lines go to the southeast Alaska and our operations cater to the Rail Belt area near Anchorage. We expect southbound volume to remain steady, but we want to remind everyone that this year's summer catch is an off year in the two-year fishing cycle. Turning to the next slide, 14, our terminal joint venture, SSAP, contributed $4 million in the first quarter of 2020 compared to $8.5 million in the prior year period. The decline year over year was primarily due to the additional expense related to the lease accounting standard adopted in the second quarter 2019 and lower lift volume due to canceled Trans-Pacific sailings. In April, SSAP experienced volume loss from additional canceled Trans-Pacific sailings. We expect U.S. West Coast import volumes in the near term to remain challenged with reduced consumer demand due to ongoing shelter-in-place orders and canceled trans-Pacific sailings. We expect the recovery in lift volumes at SSAT to be closely tied to the speed and recovery of the U.S. economy. Both at this point remain unclear. Turning now to logistics on slide 15, operating income in the first quarter came in at $5.1 million, or $3 million lower than the result in the year-ago period. The decrease was primarily due to lower contributions from transportation brokerage and freight forwarding, both of which experienced a softer march as a result of shelter-in-place orders and retail store closures. COVID-19 had a direct negative impact on our international, intermodal, and supply chain service businesses. In April, our transportation brokerage and freight forwarding businesses continued to be negatively impacted by the COVID-19 mitigation efforts and the economic effects. Within transportation brokerage, lower import volume on the U.S. West Coast impacted our intermodal business and the temporary closure of retail stores negatively impacted our highway business. The temporary closure of retail stores in Alaska, many of which are small to medium sized businesses that use less than container load forwarding services, negatively impacted our freight forwarding business and we anticipate the reopening of some non-essential businesses to provide a modest lift to the volume in the near term. We expect the majority of our logistics businesses to face challenging conditions for the balance of the year. I will now turn the call over to Joel for a review of our financial performance and recent capital structure updates. Joel.