2/23/2021

speaker
Operator

Ladies and gentlemen, thank you for standing by, and welcome to the fourth quarter 2020 financial results conference call. At this time, all participants' lines 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 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Mr. Lee Fishman. Thank you. Please go ahead, sir.

speaker
Lee Fishman

Thank you, Sidarius. Joining me on the call today are Matt Cox, Chairman and Chief Executive Officer, and Joel Winnie, 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 10Q filed on November 2nd, 2020 and in our subsequent filings with the SEC. Please also note that the date of this conference call is February 23rd, 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.

speaker
Sidarius

Thanks, Lee, and thanks to those on the call. I'll start with a quick recap of our fourth quarter and full year results, so please turn to slide three. Matt's been 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 Plus services. In our other core trade lanes, we continue 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, Mattson's consolidated financial performance was strong. In ocean transportation, the contribution from the CLX and CLX Plus 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. And 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. Please turn to slide four. 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 Plus service is an important long-term growth opportunity. We fully intend to maximize the potential of our China service by maintaining CLX and CLX Plus as the fastest service in the Trans-Pacific trade lane 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 Plus 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 Trans-Pacific sailings. Joel will discuss our 2021 CapEx in more detail later in this presentation. We're focused on maintaining vessel schedule integrity and positioning our domestic trade lane 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 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 five. Our Hawaii fleet renewal came to an end in December 2020 with the delivery of the Maxonia, 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 in owner's 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. I'll now move to our trade lane services, so please turn to slide six. 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 remained well below the level achieved in the prior year period. For the full year, container volumes decreased 0.6 percent 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 Patia 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. I'll now go through the current business trends in our Hawaii service, so please turn to slide seven. 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 percent decline in GDP in 2020, with near-zero growth in 2021 and more pronounced growth in 2022 as 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 extent of the 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 the 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 the first few weeks of February, we're seeing higher volumes year-over-year. In March, will begin to lap the first pandemic shelter in place in the initial rush for home goods and essential goods. Moving to our China service on slide eight, Matson's volume in the fourth quarter of 2020 was 139.1% higher year over year. The supply and demand dynamics in the Trans-Pacific 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 Plus 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&O way 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 Plus, 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 Trans-Pacific trade lane for the last 15 years. And our CLX Plus service is now the second best service in the trade lane 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 shipper's 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 nine. 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 trade lane, 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 two times the capacity of our CLX and CLX Plus 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 week-long holiday. This year was different. The slowdown was abbreviated and our vessels 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 Plus 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 Plus services, we're investing approximately $55 million in new containers and chassis to support the growth of the CLX Plus 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 trade lane 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 remain and continue to drive demand for our CLX and CLX Plus services. Lastly, with respect to the duration of the CLX Plus 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 sixth vessel sometime in the first half of this year. Turning to slide 10, in Guam, Maximum 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 is largely dependent on the recovery of tourism. For the month of January, our westbound container volume increased 1.8% year-over-year from primarily due to 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, Matt Simpson's painter volumes 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 volumes, 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 decline 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 of 2020 has carried into the early part of 2021. where we continue to see 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 the situation to only be a timing change in this fishing season and do not expect negative potential overall 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 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 of 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, most 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.

speaker
Lee

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 Plus 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 in the quarter was 25.2 million, excuse me, 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 a higher contribution from the China service, including the contribution from the CLX Plus service, and lower vessel operating costs, including the impact of one less vessel operating in 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 was 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 31st, 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 countbacks. $87.8 million on new vessel CapEx, including capitalized interest and owner's 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 1.7 times compared to 2.4 times 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 $28.2 million and capitalized interest of $1.8 million for total capitalized vessel construction expenditures of $30 million. Our final payment on Maxonia 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 was $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 to 60 million range annually. In light of our recent volume growth with CLX Plus, 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 percent, we now estimate our annual maintenance capex to be higher in the range of approximately 60 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 is 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 dockings and to maintain schedule integrity when the need arises. This 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 a 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 Plus 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 China and AAX services. In most cases, we expect the payback on these equipment investments to be relatively quick at just a couple of Trans-Pacific 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 Plus, we serviced the demand with our own equipment from the domestic trade lanes, 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 trade lane saw some recovery in volume. And given this increase, plus the equipment needs from the new CLX Plus 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 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 trade lands and in logistics continues to fluctuate in the pandemic environment. Like CLX Plus 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 leverage covenant at the end of the year finished at approximately 1.7 times, down from the peak of approximately 3.4 times 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 to these businesses. Overall, we remain disciplined in our review of opportunities with the key acquisition criteria we set out in our prior investor 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 or 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 the return of excess cash to shareholders in the form of share repurchases and or special dividends over time. With that, I'll now turn the call back over to Matt.

speaker
Sidarius

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.

speaker
Operator

As a reminder, if you would like to ask a question, you need to press star 1 on your telephone. Once again, that is star 1 on your telephone if you wish to ask a question. And your first question comes from a line of Jack Atkins with Stevens.

speaker
Jack Atkins

Great. Good afternoon, everyone, and congratulations on a great quarter, really a great year. Thanks, Jack. So, Matt, maybe if I could start at just a lot of different places to go here, but if we could maybe start with what's happening in the Trans-Pacific. I mean, it's just sort of extraordinary here. Just to start off the year, we've seen things accelerate even further from a rate perspective. And I guess as we're sort of heading into more of the traditional – you know, contract negotiation period here over the next, call it 60 to 75 days. You know, how do you think things shake out given just the elevated level of spot rates we've been seeing in the market? And, you know, how does that impact Madsen's ability to sort of drive higher contractual rates, not only on the legacy CLX business, but I would imagine you're going to want to put part of that CLX plus business under contract, too. in 2021. So can you help us think through that?

speaker
Sidarius

Yeah, I sure can, Jack. I would say that from a contracting perspective, just by way of context, Mattson had historically tried to operate at CLX Plus with a combination of spot freight or spot rate short-term cargo contracts and long-term annual contracts. And so as we've said, and as you know, Jack, we've been in the Trans-Pacific for 15 years, and that has changed over time. We sought a relative 50-50 balance in terms of our CLX Plus initially, and it has migrated more towards the spot market where we can command a premium to the market relative to contract rates, but we've always felt it was appropriate to have a mix of both. So in the middle or in April, May of 2020, we stood up CLX Plus, which was largely outside of the or after the contract period. So a lot of the freight on CLX Plus was spot freight, which served us well given what we saw happening with freight rates and was consistent with our view that that this environment would be well-suited to focus on the contract market. So I think over time, we're going to be looking at what the appropriate mix is. I think because it has changed over many market conditions over the 15 years, our approach will likely be to continue to focus on a mix of both with a higher weighting towards the spot market. I think it's almost certain that for customers who are looking, who operate under annual contracts, we'll see increases in the annual contracted freight rates, and our customers' goals will be to get as much committed capacity as they can at as low a rate level as they can, where the carrier's objectives, of course, would be different than that. And so that balance happens every year, but at the end of the day, those that are focused primarily on contract rate 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, you know, 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 Mattson's CLX and CLX Plus service are here to stay. uh, because of increased e-commerce and other factors, uh, in the marketplace that I think will, we feel really good about our long-term prospects for both of our China services. So maybe I've over-answered your question, but gave you a little color in addition.

speaker
Jack Atkins

No, that, that, that was very helpful, Matt. And I appreciate that. Um, I guess maybe, you know, just sort of following up, uh, here, here for a moment on, on CLX plus and sort of the additional CapEx investments there. Um, Could you maybe talk for a moment about that $55 million additional investment? What's that going to do for your broader network? You talked about increased availability of equipment. Will that let you move even more volume on your chartered ships and CLX Plus and your current CLX, the original CLX operations, or is this really just about purchasing equipment equipment off of lease and getting your own boxes to replace leased-in equipment?

speaker
Sidarius

Yeah, so the way we thought about it, and Joel talked about it in his comments earlier, which was when we started CLX Plus, there was a moment in time when, of course, we were still in somewhat of a downdraft related to the pandemic and how it was going to play itself out, and volumes fell in our core domestic markets as they did, you know, largely everywhere, which created an opportunity once we saw the opportunity with CLX Plus to use that equipment that was newly available to support the early stages of the CLX Plus. And we had a view earlier than I think the rest of the trade that the Trans-Pacific was going to be extremely busy. And our goal and mindset going into the CLX Plus 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 move quickly, so the combination of reduced demand in our Domestic Jones Act trades as well as being very quick moving on leasing equipment helped to sustain the early days of fulfilling our goal of not missing a single booking because we didn't have equipment. On the destination services side that we talk about as part of our advantage in L.A., We also had one of our key elements of service differentiating is that we own our own chassis, own or control our own chassis. And so as we had the CLX Plus, the same dynamic was at work there. Domestic shipments were off, which allowed us to take the chassis that we'd previously used, focusing on our domestic Jones Act services and redeploy them into the CLX Plus service. And over time, we did lease chassis, but what we want to be able to do, especially as the Jones Act trades normalize, and we hope begin to show modest signs of growth as we get to the backside of this pandemic, is to make sure we had enough equipment to maintain the service levels. The other point that Joel made, which is important to repeat, I think I said it too, that while the boxes and chassis are more expensive than they were historically, that 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 resizing our fleet for this tremendous opportunity and earnings that we've seen out of our up-sized CLX and CLX Plus 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.

speaker
Jack Atkins

Okay, that's great, Matt. I guess one last question, and then I'll jump back in queue. But this is for Joel, I guess. These are kind of a multi-part question. But, Joel, of the $760 million in in debt at the end of the quarter. How much of that can you prepay without penalty? I know that obviously the $72 million under the revolver makes sense. Is there anything beyond that that you can prepay this year with cash flow if you wanted to? That's part one. Part two is on the cash flow, free cash flow side, are there any sort of puts and takes when we think about 21 versus 22 from a cash flow perspective, whether that's cash tax requirements or anything like, you know, CARES Act benefits that don't repeat in 21 that was there in 2020. I just want to make sure we're thinking through the puts and takes on the cash flow side. Thank you.

speaker
Lee

Thanks, Jack. And I always love the cash flow questions. Thank you. So the first part is, yeah, $71 million to revolver. That's the first thing that we've can be paid down, and all the rest of the debt is either Title XI debt or long-term private placements that are not prepayable without penalty. However, they do amortize, and they have amortization schedules. And so the amortization of that long-term fixed debt over the next three years, three to five years, is between $60 million and $65 million each year. So that's the debt that we're paying down with free cash, along with the $71 million, $72 million on the revolver. On the puts and take question, you touched upon the biggest one, which is now we've utilized all of our tax attributes, NOLs and AMTs, and through the end of 2020, we were not the 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 operationally capitalized for the company. It's 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 operations as you look forward. We don't expect any other kind of changes in our working capital. You see a big increase And working capital investment receivables in 2020, that was just related to the stand-up of the TLX Plus 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'll see an increase in receivables. Investment on our working capital by 2021, that should actually be levelized now. And no big changes on the payable side. SSAT, you've seen a couple years in a row where distributions have been a little bit higher than annual reported income. So over time, we tell investors, 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 will be 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.

speaker
Jack Atkins

Okay, that's helpful, Joel. Thanks very much for the time, guys.

speaker
Lee

Okay, thanks, Jack.

speaker
Operator

Your next question comes from the line of Ben Nolan with Stiefel.

speaker
Ben Nolan

Hey, guys. Good quarter. Since Jack had three, I'll have three. And starting clearly with CLX, I mean, 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 yet, you know, 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 in that that I'm not seeing?

speaker
Sidarius

No, I think you've got the premise of your question is the right one. I mean, year over year we saw a significant volume increase in China and a significant rate increase year over year. Historically, Matson, because of our differentiated service offering, charges a premium to the market, and that was also true even in the elevated market environment in the Trans-Pacific. We continued to earn a premium on both the CLX and CLX Plus services. So those were all factors, and so even when you look at the CCFI or SCFI or other indexes that are out there in the trade, we continue to earn a premium. healthy premium to the market, given our service advantages.

speaker
Ben Nolan

Right. And I guess my question really was, it looks like that premium went up. Am I reading that correctly?

speaker
Sidarius

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 they're 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. So just to give you a little bit of color there. Okay. Okay.

speaker
Ben Nolan

And then with respect to volumes, obviously, again, sort of last quarter was record levels, and that, what was it, 40,000 containers that were moved. Is that sort of... Peak, like absolute, you know, nothing else can fit on a ship, and that's sort of as much as it can be. And maybe tying into that question, I know that, Matt, you talked about you'd re-up charters on several, five of the six ships, and you're doing a sixth. But I know that, Joel, in the past you've talked about the possibility of actually increasing the size of the ships that you're chartering a little bit if you wanted to do more volume. So my question is, is that still in play? Are you considering maybe increasing the size of your CLX Plus capacity, or is that kind of 40,000 number that you hit here, is that sort of what we should expect if utilization is full going forward?

speaker
Sidarius

Yeah. So I would say five of our six ships have been chartered through 2022, and And so I would expect over the near term that the capacity that we have at the CLX Plus service, also attached to our Core Jones Act CLX service, the capacity isn't going to change significantly over the near term. And I would say to part of your earlier question about the fourth quarter and the volumes that I mean, effectively, every slot was filled. We didn't lose a single container or load because we didn't lack container equipment. And so that is a pretty good profile. There will be times when we have what we call extra loaders, which is a vessel being dry docked that can be put into, you know, filled in the eastbound direction on its 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.

speaker
Ben Nolan

Okay. And in terms of maybe upping the size, that's great. not really going to be happening at least in 2021. Is that fair?

speaker
Sidarius

That's right. Yeah. With the profile of the charters and the duration of where they're expecting. And, you know, size is important, but the speed is more important. You know, so there's, you know, we could go charter some very large ship that is, you know, can't make the speed and those kinds of things. We're not interested. So we're looking for a fast ship that, you know, can get in and out of the terminal relatively quickly that has a profile that We think our current charter chips are good, you know, 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 renewal is open that we wouldn't look at it. For sure we would, but it's primarily speed that defines what works for us in our environment.

speaker
Ben Nolan

Okay, that's helpful. And then the last one for 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 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.

speaker
Lee

Yeah, it's Joel. Just really just year-end accruals, year-end reconciliations, year-end true-ups, things like pension and other items that just take a few weeks to get the data to the middle of end of January. So nothing new. Nothing really unusual in the business. It's just all the urine and counting items.

speaker
Ben Nolan

All right. Cool. Nice quarter. Thanks, guys.

speaker
Lee

Thanks, Ben.

speaker
Operator

Your next question comes from the line of Steve O'Hara with PsyDotty and Company. Hi. Good afternoon. Thanks for taking the question.

speaker
Steve O'Hara

Hi, Steve.

speaker
Steve

Hi. I guess, you know, just going to the you know, talk about the first half and you expect some of the factors to continue after the pandemic ends. I mean, if you think about the, you know, the importance of the factors that continue versus the ones that you expect to abate somewhat in terms of, you know, earnings, production, revenue, things like that. I mean, you know, is it, how do you frame that in terms of, you know, that may be you know, first half versus second half, and then is that, you know, kind of timeline that you're talking about, is that due to more just, you know, kind of, hey, look, we're kind of comfortable with a six-month outlook, or is there something happening out there that, you know, is kind of, you know, more concrete that you see kind of on the horizon?

speaker
Jack Atkins

Thanks. Yeah.

speaker
Sidarius

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. I think what we are seeing is when we said first half, before we put a specific time frame on it, and we said we think the current conditions that where there's 30 ships at anchor in L.A. Long Beach and 10 ships at anchor in Oakland and supply chains are congested and turn times are slow and labor is not available and, you know, this sort of really, you know, frothy and difficult environment for our customers to remain through that period. But when we took a step back, we said, really, we're in a period where because of the pandemic and consumer behavior changes that we've seen and we're in a very frothy, congested timeframe, at some point that's going to unwind and it's likely going to be connected in some way to the post-pandemic world whenever that occurs, when a majority of Americans are vaccinated that want them. And, you know, we emerge from our caves and start venturing around or whatever and go back to work for those that are working remotely today. And so at that point, we also would see this super congested lack of equipment, lack of, you know, ships that are available. Every ship in the world is chartered. to return to a more normal level. And so for us, there's sort of the current environment and the new normal, whatever the new normal is. And when we looked at it, Steve, we said, okay, and we mentioned this on the last couple of earnings calls, what's happened? We see the return of the air freight markets to be a significantly delayed item, really for a couple of reasons. We talked about air freight being used to provide the billions of doses of the vaccine around the world, which will take two or three years or longer before everybody in the world, not just in the U.S., can get access to a vaccine. The second thing is I think there will be only a gradual return to international travel even when it becomes a little bit more open within the U.S. to be one of the first countries that has most of its population who wants it vaccinated. And so I think a delay to strong international traveling is also going to be a factor in keeping air freight volumes down. That's one factor. The other factor is, of course, we've talked about this, the significant acceleration of e-commerce that's here to stay. It's this pull forward of demand. People like having things dropped at their doorstep instead of venturing out. And I think consumers will do what's easy. And e-commerce is easy. And we think that will remain the And as we said before, e-commerce wants to move in an expedited fashion. The business model for e-commerce is to be delivered the next day or as soon as possible, which requires more speed in the supply chain than the traditional model of, you know, manufacturing tons of stuff, putting it on a slow ship, putting it in a huge distribution center, and eventually finding its way onto a store shelf. We think that's different. We also see the consolidation of international ocean carriers that are operating within the three alliances. So we're going to land on this new normal, and this new normal, we believe, is going to sustain Matt's core CLX service and the CLX Plus service because of the air freight, e-commerce, other demands. We've had a lot of air freight customers who were new customers this year who like the relative pricing compared to air freight and availability. So all of those things give us a feeling of, you know, that there's something here to stay. Now, with regard to when is the pandemic going to end and when is the new normal going to be in place, we don't have any better insight than anybody else, but at least we're saying we think through the middle of the year we're going to see a very frothy environment and then a relatively healthy environment for Matson after that, whenever that is. So that's our thinking there, Steve.

speaker
Steve

Okay, that's very helpful. And then just on, you know, maybe the CLX and CLX Plus positivity in the fourth quarter and the first quarter. I mean, is there a way to, you know, think about, you know, maybe the factors that you outlined? You know, how important are each of those for your continued success in that business? Or is it a matter of, you know, if you continue to execute, you know, you'll kind of win more of the traffic over time? And I'm just curious if you're You know, maybe talking, I mean, I know, you know, obviously Amazon has a, you know, dedicated air-free fleet now, and I'm just wondering if there's, you know, conversations going on in the market, you know, that you've heard about along those lines on the ocean side.

speaker
Sidarius

Yeah, I mean, so with regard to your questions, I would say that the environment, when we said we think the current frothy environment it's going to remain through the first half of the year, you know, implies that we see really strong demand for Mattson's services. And so the questions about how much capacity we have, you know, at least through Lunar New Year was extremely strong. We see an abbreviated post-Lunar New Year period. So, you know, 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 Trans-Pacific and the second fastest service in the Trans-Pacific. Other carriers have created some other niche offerings in other markets, but because of our destination services, they cannot equal our sale to availability. And the market knows it. Every customer who's looking to move their freight knows that Matson's services are the fastest and second fastest. So operationally, our priorities, whether it's in new equipment or sailing or 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've been doing this a very long time, and we have confidence that we will continue to – to be the first and second FASA services. So I don't know if there's another part of the question that I missed, Steve, but those are my thoughts about that.

speaker
Steve

No, that's helpful. All right, I'll jump back to you. Thank you. Okay, thanks, Steve.

speaker
Operator

As a reminder, if you would like to ask a question, you will need to press star 1 on your telephone. Once again, that is star 1 on your telephone if you wish to ask a question. And we'll pause for just a moment. And you have a question from the line of Ben Nolan from Stiefel?

speaker
Ben Nolan

Well, if nobody else was, I guess I'll take advantage. I wanted to follow up. Matt, you and I talked a little bit about this at our conference. It was 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're hearing from a lot of other people is that they're under intense pressure to reduce emissions and that the easiest and most expedient way to do that is to go slower, which is pretty counterintuitive to sort of the value proposition that you guys have. Can you maybe just talk through how you're balancing the need to reduce your emissions but also have that competitive advantage of speed?

speaker
Sidarius

Yeah, and it's an important question. It's going to become more important as there's an IMO 2030 guideline around towards a long-term 2050 of significantly reducing the carbon impact in the ocean transportation business. So this is here to stay. We understand it and so on. But I would say two things. I would say there are – It is true that one of the ways to meet your carbon emission reductions is by slowing down. But what for many ocean carriers don't exactly say is that if you want to maintain schedule and you slow your ships down, you need to add more vessels to your string to be able to make the – like if you went from five ships in the service to six ships or seven ships as you slowed down to reduce your emission – you now have one or two other vessels that are operating and emitting carbon. So, you know, it's partly, you know, you have to look at it as a big picture. And so I would say the other thing to keep in mind as at least as we see our model, the question could be asked, do we see ourselves as a, you know, 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, you know, 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 air. cargo from and, as a result, are significantly reducing carbon emissions for that freight that would otherwise go there. So, you know, does Matson have a responsibility to reduce its carbon footprint? Absolutely. Are we making investments to do so? Absolutely. I think longer term, you know, we're hearing one of the benefits of the four new ships, for example, that we have are very large spaces to accommodate cargo what we thought initially might be LNG, but to the extent there are net carbon, zero carbon fuels like hydrogen or other ammonia, other things, biogases, those things can also be used on our vessel to lower our CO2 footprint over time are not yet commercially available, but I think there's a lot of investment and interest in these alternative fuels, which we think have the ability for us to reduce our footprint further. So we're mindful of it. I think it's still a bit early in the game to pick the winners. And anyway, those are my thoughts about how we're going to be approaching this. All right.

speaker
Ben Nolan

I appreciate it. Thanks, Matt.

speaker
Matt

Sure. Sure. And at this time, there are no other questions in queue. I'll turn it back to CEO Matt.

speaker
Sidarius

Okay. Thanks, Operator. Thanks for your participation today, and thanks for your continuing interest in Matson. We'll 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.

speaker
Matt

This concludes today's call. You may now disconnect.

Disclaimer

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