Matson, Inc.

particularly given the seriousness of the COVID-19 Delta variant outbreak in the state. For the month of October, our northbound container volume was approximately flat year over year as retail-related demand remained elevated. Turning next to slide 10, our terminal joint venture, SSAT, contributed $13 million in the third quarter 2021 year. compared to $7.7 million in the prior year period. The higher contribution was primarily a result of higher lift volume as a result of the significant year-over-year increase in import volume into the U.S. West Coast from China. And currently, we continue to see elevated import volume into the U.S. West Coast, which we expect to translate into a high level of lift activity for SSAT. Turning now to logistics, On slide 11, operating income in the third quarter came in at $16 million, or $4.1 million higher than the result in the year-ago period. This increase was primarily due to higher contribution from supply chain management and transportation brokerage, where we saw elevated goods consumption and inventory restocking, in addition to favorable supply and demand fundamentals in our core markets. In October 2021, we saw supply chain management and 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. And with that, I will turn the call over to Joel for a review of our financial performance. Joel.

Okay. Thanks, Matt. Please turn to slide 12 for a review of our third quarter results. Consolidated operating income increased $279.5 million from $98.4 million in the year-ago period to $377.9 million, with higher contributions from ocean transportation and logistics of $275.4 million and $4.1 million respectively. The increase in ocean transportation operating income in the third quarter was primarily due to a higher contribution from China. The year-over-year increase in China was a result of significantly higher average freight rates and higher volume. The increase in volume was primarily due to the volume from the new CCX service and an extra loader. As Matt noted, the increase in logistics operating income was due primarily to higher contributions from supply chain management and transportation brokerage. I do want to point out that the year-over-year decline in logistics operating income margin from 8.1% to 7.7% was due primarily to the increase in transportation brokerage revenue and its relatively lower margin contribution. Interest expense for the quarter was 5.1 million or 0.4 million lower than the second quarter as a result of lower outstanding debt. Lastly, the effective tax rate in the quarter was 24.4%. Slide 13 shows how we allocated our trailing 12 months of cash flow generation. For the LTM period, we generated cash flow from operations of $742.3 million, from which we used $176.4 million to retire debt, $295.7 million on maintenance capex, which includes $95.8 million to terminate the monolith operating lease, $30 million on new vessel capex, including capitalized interest and owner's items, and $15.6 million on other cash outflows, while returning $159.1 million to shareholders via dividends and share repurchases. I would like to point out that Matson made net cash tax payments of $164 million and $86.9 million in the LTM period and third quarter respectively. Turning to slide 14 for a summary of our balance sheet, you will note that our total debt at the end of the quarter was $647.2 million and our total net debt was $571.3 million. During the quarter, we reduced total debt by $14.3 million. At the end of the third quarter, our leverage ratio was approximately 0.6 times, and we had no outstanding balance on Revolver. As we noted on the second quarter earnings call, we terminated the operating lease on the Montalay on July 7th and paid $95.8 million to acquire the vessel. This payment is captured in other capital expenditures line item on the cash flow statement. We continue to expect the transaction to be EPS accretive by 10 cents and 19 cents in 2021 and 2022 respectively. Lastly, regarding our share repurchase program, we repurchased 1.5 million shares in the third quarter for a total cost of 115.7 million. After the quarter end, And from October 1st through yesterday on November 2nd, we repurchased an additional 400,000 shares for a total cost of 33.1 million. As of November 2nd, yesterday, we have approximately 1.1 million shares remaining on our 3 million authorized share repurchase program. With that, I'll now turn the call back over to Matt.

Thanks, Joel. Before moving to the Q&A, I want to spend a few minutes on several key aspects of our sustainability strategy, which are detailed in our inaugural Sustainability Republic published in February and most recent supplement published this week. Max and Zoe have been committed to advancing responsible, sustainable, and ethical practices throughout the company and would like to review a few important and new goals for all of our stakeholders. I'll start with the environmental stewardship. We recognize that climate change is the most pressing environmental challenge facing the world and we believe we have a responsibility to significantly reduce our impact on climate change by lowering our greenhouse gas emissions. To this end, we introduced four new state-of-the-art vessels that included multiple environmental features designed to help reduce greenhouse gas emissions, allowing us to replace seven steamships that were older and less efficient. The two Aloha-class vessels entered service in 2018 and 2019, and the two Kanaloa-class vessels entered service in 2020. We've responsibly recycled six of the seven steamships at U.S. facilities that comply with international ship recycling standards, and we plan to recycle the final steamship in a similar manner this year. We're now announcing medium and long-term goals that reflect Matson's commitment and contribution in helping the world decarbonize and limit climate change. The goals are as follows. Reduce scope one greenhouse gas emissions from our own fleet by 40% by 2030, using 2016 as a baseline, and achieve net zero scope one greenhouse gas emissions from our fleet by 2050. To achieve our medium-term 2030 goal, we aim to improve the fleet and operational efficiency. I'll come back to this in a few minutes. Our 2050 goal is particularly ambitious as there's currently no known commercially available fuel that is carbon neutral and can be used for ocean-going container ships. To help accelerate development of zero-carbon fuels and technologies, Mattson, along with 16 members of the World Shipping Council, signed an open letter to the International Maritime Organization, or IMO, advocating for action to achieve the IMO's climate goal and proposed a new $5 billion industry-funded R&D program. We will need to access to transformational fuels and technology to achieve our 2050 goal, but in the meantime, we will continue to drive projects to lower emissions, improve efficiency, and modernize our terminal operations. Lastly, on environmental stewardship, we intend to report our climate risks and opportunities in accordance with the Task Force on Climate-Related Financial Disclosures, or TCFD, those recommendations in 2022. Moving to people and places, that's as culture and values are rooted in decades of living and working in the communities that we serve. As we've experienced in our geographic reach and the business service over the years, We haven't lost sight of the connection and responsibility we have to the communities as well as to the people who make up our company. We're focused on providing a safe and healthy work environment. We work to minimize the inherent risks of moving freight on the water and in terminals and warehouses with the goal of zero lost time incidents and fatalities. And in the COVID-19 environment, we've been vigilant in ensuring that our workforce has access to PPE, and that all of our offices, terminals, warehouses, and vessels are regularly sanitized. Our vision for Matson to be a great place to work for all employees, we're committed to improving diversity, providing equal pay for equal work, and fostering an inclusive culture. We want to foster career pathways for future leaders while planning for the loss of retiring employees. And community is a big part of our Pacific culture, so Matson and its employees play an active role in supporting our communities. And last but not least, on corporate integrity, Matson's committed to upholding the highest ethical standards. This means acting with respect, candor, and honesty in everything we do. This is the ethos, is the foundation of our business and the basis of our approach to strong governance, including our board of directors' engagement in environmental, social, and governance matters. It also drives our long-standing commitment to communities and customers who depend on us to deliver critical supplies needed to power their local economies. Please turn to the next slide. As I mentioned earlier, Matson set a medium-term goal of 2030 to reduce Scope 1 greenhouse gas emissions from our own fleet by 40%. In order to meet this goal, we will need to pursue different approaches, and it's imperative that we maintain optionalities as these new technologies and tools emerge. And of course, whatever choices we make to meet this goal will need to make economic sense and fit within the company's larger strategy. So with that in mind, let me touch on a few items. We plan to install tanks, piping, and cryogenic equipment on the Daniel KNOA, our first Aloha-class vessels, to operate on liquefied natural gas, or LNG. The installation is currently scheduled to begin in the first quarter of 2023 and to last approximately five months. The estimated total cost for this installation is approximately $35 million. As a reminder, the engines in our Aloha-class and Kanaloa-class vessels are dual-fuel capable, meaning the engines can run on both conventional fuels and LNG. We are actively considering LNG installations on the Kaimana Hila and the two Kanaloa-class vessels, the Lurleen and Matsonia. The current estimated cost to install LNG capability on the Kaimana Hila is approximately $35 million, and on the two Kanaloa-class vessels is approximately $80 million, or $40 million each. Next, we plan to re-engine Monokai to operate on both LNG and conventional fuels. The cost to re-engine this vessel is approximately $60 million, and the conversion will begin after the LNG installation on the Daniel KNOA. We will begin procuring long lead time items on the Daniel KNOA and Monokai, such as the tanks and Monokai's new engine this quarter. To maintain flexibility, the new tanks for these vessels will be designed to accommodate future carbon neutral fuel when they become commercially available. As we consider our options for the reflating of the three Alaska vessels later this decade, any new vessels we commit to are expected to be designed with state-of-the-art characteristics and efficiency including the consideration of any new fuel technologies that may be commercial available at that time. Another option for us, and one that we have not made a decision on, would be to move three of our older vessels into the Alaska trade lane and order three new LNG-ready Aloha-class vessels for the China service. And lastly, there are a number of other strategies and initiatives to help increase fleet efficiency and lower emissions. These approaches can be found in the sustainability report supplement. Please turn to the next slide. One point I want to make clear for investors is that in order to achieve our 2030 goal, we currently believe that we will need to have eight vessels operating on LNG by the end of the decade. The eight vessels would be both of our Aloha-class vessels, both of our Kanaloa-class vessels, the re-engined Monokai, and three new LNG-ready vessels. We've spent considerable time evaluating the fuel alternatives and LNG availability via bunker barges on the U.S. West Coast. West Coast seems more likely in the coming years. We believe LNG is an important bridge fuel as we evaluate other fuel types and technologies that will allow us to achieve our 2050 climate goals. In summary, we've built a reputation for our deep commitment to environmental stewardship, being a trusted and reliable employer and community partner, and operating our business with integrity. In keeping with that tradition, we're working collaboratively in our industry to promote positive change and mitigate environmental impacts associated with our business operations. We will chart our progress with the annual sustainability report and we'll keep investors regularly informed of the financial impact and plans to meet our goals. To wrap things up for the quarter, we performed well in the first nine months of the year. We're focused on maintaining the reliability of our ocean services and working closely with our customers in ocean transportation and logistics to manage through this difficult period for our customers. And with that, I will turn the call back to the operator and ask for your questions.