Matson, Inc.

and to help the economy recover. Please turn to slide five. On the supply side, the constraints in the Trans-Pacific air and ocean markets are expected to remain for some time. On the second quarter call, we discussed the dislocation in Trans-Pacific air freight markets due to the loss of passenger plane belly capacity. Although some Trans-Pacific passenger routes have been reinstated in the last few months, according to IATA, global passenger plane belly space capacity, which is approximately 50% of the global air cargo capacity, is unlikely to see pre-COVID levels until 2024. Complicating the air freight picture is the means by which a vaccine and related injection supplies will be handled and distributed. According to IATA, providing a single dose of the vaccine to 7.8 billion people would fill 8,747 cargo airlift at a time when freighter utilization is already operating at a high level. DHL recently noted that delivering 10 billion doses over the next two years would require 25,000 flights, about 2,000 pallet and container moves, I'm sorry, 200,000 pallet and container moves, and 15 million cooler boxes. This is an enormous logistical effort that will strain the air cargo resources further. Turning to capacity of the ocean transportation market, there are a couple of points I want to make regarding capacity. One, several trans-Pacific ocean carriers have fully deployed capacity in the trade lanes in recent months to manage the elevated import volumes. And the order book for new container ships is at its lowest level since 2003 due to a number of factors, including global economic uncertainty. So at least in the short to medium term, the ability for ocean carriers to add additional capacity in the trade lane is limited. And two, industry consolidation in the last decade and the formation of alliances in the last three years should lead to better alignment of capacity to avoid over-tonnaging the markets. Ten years ago, there were 21 international ocean carriers, and today there were 12. The three alliances that most of the remaining 12 operate in control approximately 85 percent of the capacity across the Trans-Pacific. Today, it's much easier for these alliances to balance market demand by adding small increments of capacity across their constituencies. And lastly, on the supply fundamentals, there is significant equipment demand and port congestion in the U.S. West Coast. These two factors are an incredibly important governor on the growth capacity in the trade lane, particularly during peak volume periods such as the one we're experiencing now. As container volume ramped in the second and third quarters this year to meet the elevated consumer demand, demand for containers and chassis was exceptionally high. Many inbound containers were being trucked and sent on rail to the interior without paying return trip, thereby stranding a supply of available containers. The increase in intermodal volume led to congestion at the rail yards in Southern California and also led to delays in the delivery and return of equipment. Warehouses on the West Coast were taking on more and more volume given the demand, with many containers sitting on chassis in the warehouse slots. In the ports, with increased volume comes increased time to offload and increased turn times at the terminals. This has also had an impact on the availability of equipment. It's also led to birthing delays of vessels. According to the Pacific Merchants Shipping Association, the PMSA, in September 2020, 21.2% of the containers at the ports of LA and Long Beach stayed on the terminals for five or more days before getting picked up. In September 2019, it was 2.8%. Every ocean carrier is undertaking a massive effort to reposition containers to Asia to meet the elevated demands. We don't expect the equipment demand and the port congestion factors to change in the near future. So the supply side trends are quite favorable given the capacity constraints in the ocean and air freight markets, as well as the outsized demand for equipment and the issues that come from increased volume and congestion at the West Coast ports. Our CLX Plus service has proven to be the second best service in the Trans-Pacific trade lane behind our CLX service. Both services rely on the same competitive advantages at the destination end. We own and control our own chassis. This is an important differentiator for us given the terminal congestion and equipment availability challenges in Southern California that I just described. We avoid the issues with chassis pools that our competitors rely on, and by providing the chassis ourselves, we help the truckers to save time and money. We also have a great combination of SSA terminal operation and the shipper's transport off-dock facility. SSAT is the best terminal operator on the West Coast with its efficient operations, and the shipper's transport facility is a unique, off-dock, bonded facility that is difficult to replicate. Taken together, our competitive advantages in destination services drive industry-leading turn times and provide next-day cargo availability for our customers that is simply unrivaled. We also avoid the congestion issues that other carriers face during these peak periods. In summary, I am confident we can make the CLX Plus permanent. We have 15 years of experience operating an expedited service in the trade lane, offering unparalleled destination services that our customers value. Our customers' businesses are growing to meet the challenge of this time, and so are we. We seek opportunities to improve the long-term economics of the service. The AAX service is one such opportunity that not only helps lower the break-even economics, but also drives additional customer engagement on a new service offering. And we have the backdrop of favorable demand and supply fundamentals that are unlikely to dissipate anytime soon. Our expedited ocean services and air freight are perfectly suited for the demands of an increasing e-commerce world but given the constraints in the air cargo markets, we expect demand for our expedited service to remain elevated. With all this said, a number of demand and supply factors could change that may alter our views, but as we sit here today, this is how we see it and are planning for into 2021. I will now move on to slide six. I want to spend a few moments on our current priorities as we continue to navigate our way through this pandemic and period of economic uncertainty. Our first priority, we continue to safeguard the health and safety of our employees throughout the organization, guided by processes on PPE, disinfecting, and social distancing put forth by the Coast Guard, CDC, and other government agencies. We're also maintaining our position on working from home for those whose job functions allow them to do so. Our second priority is ensuring the consistency of our ocean transportation services and delivering exceptional service for our maps and logistics customers. Within ocean transportation, we're focused on maintaining our best-in-class on-time performance, ensuring quick turn times at the terminals, and providing the quickest cargo availability for our customers. For our logistics customers, We continue to provide the highest quality customer service and execution for our customers as the supply and demand conditions remain volatile. Our third priority is to find new opportunities in this evolving pandemic environment and drive organic growth. The organic opportunities tend to be low risk and high investment returns given the low capital outlay. On our second quarter call, we went into greater detail on one such opportunity, the CLX Plus service, which is a key contributor to our year-over-year improvement in financial results. In August, we announced the introduction of the AAX service that is a backhaul service on the CLX Plus from Alaska to China. Our fourth priority is maintaining cost and capital discipline during this period of economic uncertainty. Since we amended our debt agreements in the early days of the pandemic in March, we've been intently focused on free cash flow generation and reducing leverage. And I'm happy to say that our leverage under those amended debt agreements is now approximately 2.4 times versus 3.4 times at the end of the first quarter. Since the end of 2019, we've reduced our total debt by nearly $135 million. On our first quarter earnings call, we outlined the operational changes and management initiatives to address the challenges of the pandemic. We meaningfully exceeded the high end of the $40 to $50 million range that we provided with the introduction of the CLX Plus as the largest contributor to this effort. With respect to capital expenditures, we continue to be selective in our investments. We are investing in new equipment to support the China service and AAX, which is approximately $30 million, as well as some equipment that we've leased to support these efforts. We're also completing our committed capital projects that are coming to an end this quarter, namely the first phase of the Sand Island Terminal renovation and the last new vessel in the Hawaii service, which are the next two priorities, which I'll discuss. The final vessel and a four-vessel new build program for the Hawaii service is expected to be delivered at the end of this quarter. Matsonia's arrival will mark the end of a major achievement for us in this nearly $930 million program that will have taken eight years to complete from the design stages through delivery. We're coming to an end of the work on the first phase of the Sand Island Terminal in Honolulu. We completed the last major items in this phase earlier this quarter, and we'll begin to wrap up the smaller items by the end of this year. We expect to begin work on the second phase in 2021. We have indicated before that we expect to trend on our maintenance CapEx level of between $50 to $60 million per annum following the completion of the Hawaii New Build program. As I noted a few moments ago, we're investing approximately $30 million in new equipment to support the growth of our China service at AAX. to maximize the opportunities for us, so we expect to be higher than the maintenance levels in 2021 in light of this equipment investment. And our last current priority is to complete the scrubber program, which remains on track. The last vessel in the sixth vessel program is currently in dry dock and is expected to be back in service early next year. I will now go through the third quarter performance and provide commentary on current business trends. Please turn to slide seven. Hawaii container volume for the third quarter decreased 0.8% year over year, and the westbound container market declined modestly year over year. The westbound container market benefited from the reopening of the local economy following the shelter-in-place and temporary retail store closures in the second quarter And it also benefited from government stimulus efforts. But these benefits were outweighed by the continued negative impact from the state's COVID-19 mitigation efforts, including the restrictions on tourism, and a second shelter-in-place that took effect in August. The second shelter-in-place had a modest negative impact on volume in September. Lastly, we did not carry any patient volume during the quarter. I will now go through the current business trends in our Hawaii service So please turn to slide eight. The Hawaii economy remains in a significant downturn, challenged by the near zero tourism in the last half year. Travel restrictions to Hawaii were eased on October 15th with the pre-travel testing program. However, in the near term, the levels of tourism are expected to remain low and to have a meaningfully negative impact on Hawaii's economy. The economic recovery trajectory in Hawaii remains highly uncertain given the low levels of tourism, the difficult business environment for tourism-related businesses, and the uncertainty with government stimulus and support efforts for the businesses and individuals deeply impacted by the pandemic and its related economic effects. UHERO's latest economic projection shows GDP growth in 2020 and 2021 of minus 11.8% and 1.2% respectively. Unemployment in the state remains elevated and is projected to be well above 2019 levels for the next several years. September unemployment rate for the state was 15.1 percent, the highest in the country. And UHERO is projecting the unemployment rate for 2020 and 2021 to be 12.4 percent and 9.7 percent, respectively. These levels are well above the 2009 unemployment rate of approximately 2.7%. To give you a sense of the volume trend one month into the fourth quarter, our westbound container volume in October decreased approximately 0.3% year over year and was consistent week to week in the month. The westbound volume largely consisted of sustenance, home improvement, and retail goods in advance of the holiday season. Moving to our China service on slide nine, Matson's volume in the third quarter 2020 was 124.7% higher year over year. Approximately 85% of the year over year volume increase was driven by the CLX Plus with the remaining approximately 15% related to increase in volume on a regular CLX service. The capacity of the CLX service increased year over year due to the addition of one of our larger vessels, the Daniel Kandaway, at the beginning of the third quarter, in addition to its sister vessel, the Kaimana Hila, towards the end of the third quarter last year. We continue to see dislocation in the air freight markets lead to strong demand for Mattson's expedited service with both CLX and CLX Plus vessels sailing at capacity in the third quarter. Demand for the CLX and CLX Plus was driven by e-commerce and other commodities as a result of tight inventories in the U.S. and continued consumption of imported goods in lieu of services. To give you a sense of the current volume trend, our eastbound container volume in October increased 148.6% year over year, led by the CLX Plus service, but also higher volume on CLX due to the Daniel K. and OA in the service. The volume strength we saw in the third quarter continued through October. Throughout the month, we saw increasing customer demand to get on our CLX and CLX Plus services as a means to avoid U.S. West Coast port congestion. Please turn to slide 10. On August 26, we announced the introduction of the Alaska to Asia Express, or AAX, as a backhaul service on the CLX Plus. The first voyage took place on September 29th from Dutch Harbor. The AAX will serve as an important route for Alaska seafood exports to Asia consisting of dry and frozen fish volume. We will provide connecting service from Anchorage and Kodiak from our domestic Alaska service that is served by three vessels. We expect the AAX service to be a modest contributor to the Alaska volume and not a material contributor to consolidate operating income for the full year 2020. We're excited to provide this service for the upcoming A fishing season in the beginning of 2021. Turning to slide 11, in Guam, maximum container volume in the third quarter 2020 increased 2.1% year over year, primarily due to increased demand for home improvement and government cargo. Volume in the quarter benefited from the reopening of the local economy following the shelter-in-place in the second quarter, and it also benefited from government stimulus efforts. The local government issued a second shelter-in-place order in August to mitigate the spread of COVID-19, which had a minimal impact on our volume. Similar in many respects to the Hawaii economy, the Guam economy is in a downturn as tourism levels remain depressed and tourism related business activity remains incredibly low. Unemployment remains elevated and well above pre-pandemic levels. The economic recovery trajectory remains highly uncertain. For the month of October, our westbound container volume decreased 1.5% year over year with modest negative impact from COVID-19 restrictions and partially offset by higher government cargo. In the near term, we expect to see a stable retail environment, but we also expect tourism to remain challenged by COVID-19 and have a negative impact on freight demand. Moving now to slide 12, in Alaska, Madison's container volume for the third quarter of 2020 increased 1.5%. Despite the summer's seafood season being in its off season and our expectations for lower volumes, We saw higher southbound volumes year over year as a result of a stronger seafood volume compared to the prior year. This increase in southbound volume was partially offset by modestly lower northbound volume. Northbound volume in the quarter benefited from the reopening of the local economy, following the shelter-in-place and temporary retail store closures in the second quarter, and it's also benefited from government stimulus efforts, including the early issuance of the permanent fund dividend. The Alaska economy continues to recover from the second quarter lows, but the recovery trajectory remains highly uncertain. Unemployment remains elevated above pre-crisis levels. The Alaska government paid its permanent fund dividend early in July versus typically in October, which may impact customer spending in the fourth quarter. And the continued low oil price environment has negatively impacted and is expected to continually continued to negatively impact oil exploration and production. Northbound volume in October 2020 increased 12.1% year over year, driven primarily by higher volume of sustenance goods and home improvement in advance of the holiday and winter period. Turn next to slide 13. Our terminal joint venture, SSAT, contributed $7.7 million in the third quarter of 2020 compared to $8.4 million in the prior year period. The lower contribution was primarily a result of lower lift volume. SSAT's lift volume was impacted by blank sailings from the larger ocean carriers in the first half of the quarter and was close to flat year-over-year in September. Deployed capacity in the Trans-Pacific Trade Lane is higher than last year to manage through the elevated demand during this peak season. We expect SSAT to be a beneficiary through the elevated import volumes. Turning now to logistics on slide 14, operating income in the third quarter came in at $11.9 million, or $600,000 higher than the operating result in the year-ago period. The increase was primarily due to improved performance in all of the business lines driven by the continued reopening of the U.S. economy. In the near term, we expect the elevated consumption of e-commerce and other high-demand goods and inventory restocking trends to benefit most of the business lines. Within transportation brokerage, we continue to see increasing intermodal volumes in line with the trends in the U.S. West Coast import volume. With increased freight demand and terminal congestion in Southern California comes rail congestion and chaotic truck conditions, which historically has benefited our transportation brokerage business. At Span Alaska, our freight forwarding business performance steadily improved since the second quarter low and is tracking similarly with the North Valley 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 in the first three quarters of the year. And with that, I will turn the call over to Joel for a review of our financial performance. Joel.

Okay, thanks, Matt. Now on to our third quarter financial results on slide 15. Ocean transportation operating income for the third quarter increased 42.6 million year-over-year to 86.5 million. The increase was primarily due to a higher contribution from the China service, including CLX Plus. Lower vessel operating costs including the impact of one less vessel operating in the Hawaii service and the timing of fuel-related surcharge collections, partially offset by a lower contribution from the Hawaii service and higher general and administrative expenses. The company's SSAT terminal joint venture investment contributed $7.7 million or $0.7 million less than the prior year period. The decrease was primarily due to lower lift volumes. Logistics operating income for the quarter was $11.9 million, or $0.6 million higher than the prior year period. The increase was due primarily to a higher contribution from transportation brokerage. EBITDA for the quarter increased $45.6 million year-over-year to $134.7 million due to higher consolidated operating income of $43.2 million and higher other income of $2.9 million, partially offset by $0.5 million and lower depreciation and amortization, which includes dry dock amortization. Interest expense for the quarter was $5.7 million or $2.5 million lower than the second quarter of 2020. Lastly, the effective tax rate in the quarter was 25.4%. On a year-to-date basis, ocean transportation operating income increased $63.7 million year-over-year to $136.7 million. The increase was primarily due to a higher contribution from the China service, including CLX Plus, and lower vessel operating costs, including the impact of one less vessel operating in the Hawaii service, partially offset by lower contributions from the Hawaii service. The company's SSAT, Terminal Joint Venture Investment, contributed $15.4 million, or $2.4 million less than the prior year period. The decrease was largely attributable to lower lift volumes. Logistics operating income on a year-to-date basis was $25.9 million or $4.8 million lower than the prior year period. The decrease was due primarily to lower contributions from transportation brokerage and freight forwarding. Slide 16 shows how we allocated our trailing 12 months of cash flow generation. For the LTM period, we generated cash flow from operations of $339.2 million and received $14.3 million from sale leasebacks, from which we used $59.4 million to retire debt, $80 million on maintenance capex, $168.2 million on new vessel capex, including capitalized interest and owner's items, and $21.9 million on other cash outflows, including $18.5 million in financing costs related to the two Title XI transactions and amendments to the debt agreements in the first half of 2020. while returning $38.6 million to shareholders via dividends. Turning to slide 17 for a summary of our balance sheet, you will note that our total debt at the end of the quarter was $823.6 million, and our total debt net of cash and cash equivalents was $810.9 million. During the quarter, we retired $66.4 million of debt. At the end of the third quarter, our leverage ratio per the amended debt agreements was 2.4 times compared to 3.03 times at the end of the second quarter. Footnote 4 on this page shows the total debt and EBITDA as defined in the amended debt agreements. The revolver balance at quarter end was $123 million, and our available borrowings was approximately $519 million. Please turn to the next slide. On slide 18, the review of our new vessel payments, for the third quarter, we had new vessel cash capital expenditures of $39.3 million, and capitalized interest of $2 million for total capitalized vessel construction expenditures of $41.3 million. The table on the right-hand side of the slide shows the cumulative and remaining new vessel progress payments as of September 30th. Our final payment on Matsonia will be due upon delivery, and as Matt said, we expect the vessel to be delivered by the end of the quarter. The picture on this slide is of the Matsonia on her way to sea trials from the NASCO shipyard in San Diego and Maxonia is currently 99% complete. With that, I'll turn the call back over to Matt.

Thanks, Joel. There's been no shortage of uncertainty in 2020 for us, but Maxon and its employees adapted to the extraordinary conditions and fostered organic growth opportunities to drive exceptional financial results in the third quarter. I'm proud of our accomplishments here to date, but we are heads down to finish off a good year and prepare for 2021. and the evolving challenges during this unprecedented time. As key supply chain provider to lifeline economies and a leading provider of expedited ocean services to the U.S. West Coast, we're focused on what we do best, providing exceptional customer service and on-time delivery to meet our customers' needs. And with that, I will turn the call back to the operator and ask for your questions.