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.

As a reminder, to ask a question, press star 1 on your telephone keypad. Again, that is star 1 to ask a question. And we'll pause for just a moment to compile the Q&A roster. Your first question is from Jack Atkins with Stevens.

Okay, great. Good afternoon, and congrats on a great quarter. Thanks, Jack. So I guess, Matt, if I could, just kind of thinking about the Hawaii lane for a moment, you know, when we look at visitor arrivals, you know, they improved, I think, as we went through the summer until the more recent actions, but still down a good bit versus 2019. But overall volume levels in the Hawaii lane are obviously, you know, higher than 2019. We're seeing a lot of, you know, unusual freight flows across the U.S. more broadly, and I'm guessing that's what's going on in Hawaii, too, with inventory restocking and things like that. But, you know, I guess when you sort of think about the level of activity to Hawaii today, and you kind of think about that over the next kind of four to six quarters, you know, do you feel like that we can sustain this level of volume to Hawaii without, you know, a recovery rate from a visitor perspective back to 2019 levels and beyond. Just sort of curious if you could maybe talk about that for a moment.

Yeah, sure, Jack. My view is that I'm a little bit more bullish on Hawaii, Jack. First of all, I think we don't see much of a problem in sustaining our current level of freight volume moving forward. And I think my personal view in hearing and talking to our customers that this period in the fourth quarter, the slowdown associated with the Delta variant and the restrictions that the state put in place did indeed suppress travel. But I continue to be pretty optimistic that Hawaii will be seen as a relatively safe place to travel through the holiday season and into 2022. relative to international destinations to travel, which are still dealing with impacts related to the Delta variant. So I personally think that the overall environment in Hawaii is likely to improve and be relatively healthy going into 2022. So I think there's more of a risk to the upside than I don't feel much risk. I mean, absent, you know, it's like answers to a lot of questions. It's all about Delta or COVID. And to the extent that we begin to see not the elimination of COVID-19, but, you know, the gradual reduction as vaccines and treatments become more effective, I think will stand to benefit the economy in Hawaii.

Okay. No, that's great to hear. And I guess maybe kind of along that same line of thought, when we kind of think about your capacity utilization westbound to Hawaii from the west coast, I know you guys don't like to give specific utilization statistics there for obvious reasons, but I guess when you sort of think about sort of where you are with the current fleet deployment, you know, do you have a fair amount of excess capacity left to go? Because it kind of feels like we're getting back towards the 2016 levels. I know the fleet is different today than it was then, but just sort of curious if you could maybe comment on that.

Yeah, I'll comment generally on it, Jack. I would say that we have seen – we're satisfied with our – utilization, but we have capacity to be able to meet the Hawaii capacity as and when the economy recovers. So we're very comfortable both where we are now on a fleet utilization perspective into Hawaii, but also have sufficient capacity to grow with the economy as it recovers next year.

Okay. That's excellent. And last question from me, and I'll hand it over, but Could you maybe give us an update, Joel, maybe if this is more for you, but just an update on the charters that you guys were planning on working on with regard to the CLX Plus service, and I know some of those were coming up towards the end of this year, maybe early next year. Any update on that and sort of maybe how you guys are thinking about that capacity over a longer period of time?

Yeah, thanks, Jack. So yes, we had a couple vessels on charter coming up in early 2022, and then another vessel in the second quarter of 2022. So those are the three vessels that we were focused on here in the latter part of this year. And we're almost there. We have engaged in some new charters, and we believe we need one more vessel, and then we'll be in good shape to continue to have our core CLX-plus vessels on charter. The new development, Jack, that's probably important to note, Is not surprisingly vessel owners have really pushed for longer duration of terms. So as we looked at 2020 and in the first bit of 2021 we could find chargers that were sometimes 12 months or 24 months. That's the owners had moved that conversation to three years, four years, five years and really pushing for four and five years. For the most part, we've tried to keep ours down to three years or maybe a little bit more than three years. And that's what that's what you'll see as we roll these over. So you'll have some charters that go into 24 and 25. But we're in good shape as we look at our needs for the CLX-plus vessels heading into Q1 of next year, Jack.

Okay, excellent. Maybe if I could sneak one more in before I hand it over. But, you know, Matt, I'd be curious to get your take on Lunar New Year in 2022. You know, I know we didn't really see much of a Lunar New Year holiday in China in 2021 yet. um i i guess i there's a lot of debate on sort of what lunar new year 2022 could look like given the olympics and everything else kind of going on in china next year and there's zero zero covet policy so um just curious what you're hearing from your customers uh with regard to sort of their lunar new year holiday in 2022 do you think we're going to have a more normal lunar new year this year and just any sort of thoughts on that would be would be appreciated yeah it is early jack so i am i'll speculate just a little bit but um

You know, currently in China, they are dealing with Delta variant outbreaks, you know, throughout the country. And of course, the Chinese government is moving aggressively to limit the spread of COVID inside the country. And you also rightly point out with the Olympics, I think from a, and again, speculating, but from a Chinese public policy standpoint, having hundreds of millions of Chinese in the domestic transportation system going to their hometowns is not a good factor in terms of trying to limit the spread of the Delta variant of COVID. And so we expect a shorter Lunar New Year period, as many people decide for themselves or are discouraged from traveling. So again, I think we're going to see a more limited Lunar New Year or abbreviated Lunar New Year period And so while I think there will be a traditional slowdown, I think it will be shorter than people expect. That's my personal guess at this point.

Okay. Okay. Makes total sense. Thanks again for the time, guys. Really appreciate it.

Okay, Jack. Thanks. Thanks, Jack.

Your next question is from Ben Nolan with Stiefel.

Hey, guys. So I wanted to follow up a little bit on, Joel, what you were talking about with Jack there, in terms of you put some or now have in place some longer-term contracts because that's just the way the market is at the moment. But I was thinking of it from the other side. You guys offer a relatively scarce commodity or hard-to-get thing at the moment, especially from an expedited perspective. I'm curious if you've been able to leverage that yourself and in terms of signing your own customers up to longer-term contracts to maybe sort of help offset or mitigate a little bit the longer-term contracts that you're signing for the ships?

Yes, Ben, thanks for the question. In a nutshell, the answer is no. I mean, customers right now are very focused on their supply chain issues, delivery. There's not a lot of conversation around long-term contracts, as you know. the market has two basic types of customers, the annual BCO contracts, which are May 1 to April 30 for most of the major retailers, and then the freight forwarders that are really spot market that are booking out two, three, four weeks in advance. And really, I'd say in neither of those two customer segments broadly, is there any conversation or movement in the market for longer-term contracts?

Okay. Okay. And then, Matt, you'd mentioned that you're certainly thinking of potentially the new CCX business going perhaps into mid-year or however long this environment lasts, but you still aren't thinking of it as a permanent fixture in terms of how you're deploying your assets. I'm curious why. I mean, what makes you think that it's – that it's not going to be something that you are always doing? Yeah, it's a good question.

From our perspective, the CCX comprises vessels that are effectively all of our reserve vessels in the Hawaii service. And so at some point in the future, we were talking about For example, the need to take vessels out of service to do conversions to LNG or other routine dry dock matters will limit the ability for us to have a regular scheduled service at some point in the future. When into 2022 is not exactly clear, but eventually we may turn from a standardized CCX regular service into extra loaders, but the CCX service, as we know, at some point in 22 will end. That isn't to say, though, that when we get to our new normal, there may be opportunities for us to deploy other vessels and other expedited service once we get to the new normal, because as you point out, our brand has been really enhanced with regard to a company because of our wheeled operation, dedicated terminals, and all the other elements that allow us to stand apart from the competition. Market expectations in this segment that would prefer an expedited market has grown. So as things settle over the next few years, we're definitely going to be looking at ways in which we can focus on this expedited services as something that may have other opportunities. But it's not likely or will not be in the form of the current CCX past 2022.

I got you. So it's not a function of demand. It's a function of capacity. Correct. Other needs. Yeah. Right. Sure. Okay. All right. Well, that's helpful. I mean, I guess just lastly, this seems relatively obvious, but I might as well ask, you've made quite a bit headway on that buyback program. Is it fair to assume that subject to board approval or what have you, that as long as the market remains really elevated, that there's no reason that wouldn't be renewed and increased?

Yeah, Ben, I would definitely say we expect to be a steady return of capital, free cash flow generation company for a long time, as you know. So I would look at us as a steady, long-term focused return of capital company with share buyback being the primary way that we do that. So I think there's nothing changing in our story in that regard.

Okay. All right. This is Matt. One other comment I'd make, Ben, which is, We're gonna continue to, and you've heard us say this before but it's worth repeating, to our capital allocation strategy, we're gonna continue to look for ways to deploy capital either through acquisitions or organic growth initiatives. And in the absence of finding those that provide this double digit cash on cash return that we talk about as our threshold, will we be steady return of capital? But if we have opportunities to deploy capital profitably, we're certainly gonna continue to look for ways to do that.

Sure, yeah. All right. Well, and I, over the years, have asked plenty about the M&A aspect, so I think I have my hands pretty well, hopefully, at this point. But, all right, I appreciate it, guys. Okay. Thanks, Ben. Thanks, Ben.

Again, if you would like to ask a question, press star 1 on your telephone keypad. Again, that is star 1 to ask a question. We have no further questions at this time. I'll now hand the call back over to Matt Cox for closing remarks.

Okay. Thanks for listening in today. We look forward to catching up with everyone next quarter.

Aloha.

This does conclude today's presentation. You may now disconnect. Thank you. you Bye. Bye. So, you Good day and thank you for standing by. Welcome to the third quarter 2021 fiscal results conference call. At this time, all participant lines are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Lee Fishman, Senior Director of Relations. Please go ahead.

Thank you, Tina. Joining me on the call today are Matt Cox, Chairman and Chief Executive Officer, and Joel Winney, 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 12 to 21 of our Form 10-K filed on February 26, 2021, and in our subsequent filings with the SEC. Please also note that the date of this conference call is November 3, 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. Okay, thanks, Lee, and thanks to those on the call today.

I'm going to start on slide three with a quick recap of our third quarter results. We had a solid performance in MAPS's ocean transportation and logistics businesses as strong economic and business trends in the second quarter continued into the third quarter. The year-over-year increase in ocean transportation operating income in the quarter was primarily driven by continued strong demand for our expedited ocean services, including the new China-California Express, or CCX. In our domestic trade lanes, we continued to see strong demand with higher year-over-year volumes compared to the largely pandemic-reduced volumes in the third quarter of last year. Logistics operating income for the third quarter increased year over year as a result of continued elevated goods consumption, inventory restocking, and favorable supply and demand fundamentals in our core markets. The supply chain environment continues to be one of widespread congestion at many key points within ocean and overland transportation. We remain focused on what we do best, which is maintaining fast, reliable trade lane services and helping our ocean transportation and logistics customers manage through this difficult period of congestion. Lastly, towards the end of the presentation, I'll review our sustainability strategy in light of our recent release of our supplement to the sustainability report, which can be found on our website. There are a number of key items in the report that I wanted to walk through, some of which have financial considerations. And with that, I'll now go through our trade lane services, so please turn to the next slide. Hawaii container volume for the third quarter increased 11.5% year over year and was 10.6% higher than the results achieved in the 2019 period. The increase year over year was primarily due to higher retail and hospitality related demand due to the continued rebound in tourism and the Hawaii economy compared to the pandemic-reduced volume in the year-ago period. Domestic visitor travel to Hawaii remained strong throughout much of the third quarter, 2021, until the end of the quarter when the state's efforts to address the spread of the COVID-19 Delta variant, including the governor's request in late August to defer travel plans, led to a softening in airline passenger traffic. As a result, we experienced a modest negative impact in freight demand late in the quarter. Please turn to the next slide while I'll comment on the current business trends in Hawaii. The chart on the right shows visitor arrivals and the unemployment rate from the beginning of the year through September. The significant increase in visitor travel to the state, driven predominantly by U.S. mainland visitors, has powered a resurgence in the tourism industry and consequently in the state's economy and led to a decline in the state's unemployment rate. In the near term, the Hawaii economy may experience a brief slowdown as a result of the state's response to the COVID-19 Delta variant and the related impacts on tourism trends. In July 2021, Total visitor arrivals was approximately 12% lower than in July 2019, and in August and September, this gap widened to 22% and 31%, respectively, as an effect of the governor's plea to visitors in late August to defer travel plans. On October 19th, the governor announced that non-essential travel to Hawaii can resume on November 1st. So there's an expectation that tourism activity should increase heading into the holiday season. UHERO's latest forecast captures the near-term negative effects of the state's response to the COVID-19 Delta variant and impact on tourism as well as other macroeconomic factors. As compared to UHERO's forecast in May, The current forecast shows a modestly lower GDP growth trend and an unemployment rate for 2021 and 2022 that are 100 and 200 basis points higher, respectively. UHERO continues to expect that a full return to pre-pandemic conditions may take several more years. To give you a sense of the volume trend, one month into the fourth quarter, Our westbound container volume in October increased approximately 2% year-over-year, primarily due to higher retail and hospitality-related demand. Year-over-year growth was muted by the pullback in tourism as a result of the governor's request to defer nonessential travel. Moving to our China service on slide six, Maxson's volume in the third quarter 2021 was 21.7% higher year-over-year primarily due to the volume from the CCX service and volume from an extra loader. The total number of eastbound voyages in the China service increased by six year over year, of which five were from the CCX voyages and one from the extra loader. Matson continued to realize a significant rate premium in the third quarter of 2021 and achieved average freight rates that were considerably higher than the year-ago period. Volume demand in the quarter was driven by e-commerce, garments, and other goods heading into peak season. We continue to see sustained and elevated consumption trends, and low inventory levels drive increased demand for our expedited ocean services. I'll now comment on the business trends, so please turn to slide seven. For October 2021, each bound container volume was higher year over year by approximately 11%, due to the addition of CCX volume partially offset by one less CLX-plus sailing this October as a result of timing. Currently, in the Trans-Pacific trade lane, we're seeing supply chain congestion due to a combination of ongoing elevated consumption trends, inventory restocking, and bottlenecks at critical points for both ocean and overland transportation. Retail and e-commerce demands remain strong, And it continues to be a very challenging inventory replenishment environment for retail, in particular, as evidenced by the trend in U.S. retail inventories to sales ratio, as shown in the chart on this slide. With respect to retail and e-commerce, we're seeing a high level of demand for our China Ocean Services to expedite freight to the U.S. West Coast for Black Friday, Cyber Monday, and late holiday shipping. We're also seeing some customers plan ahead for freight delivery before the Lunar New Year period. All elements of the supply chain infrastructure, from origination in China to the distribution points in the U.S., are in chaos, and we're working very hard to help our customers navigate through this exceptionally difficult period. We're also intensely focused on maintaining our industry-leading ocean transportation transit times and fast cargo availability of our CLX, CLX Plus, and CCX services. Looking ahead, we expect elevated consumption demand and inventory restocking to remain largely in place at least through mid-year 2022. As we work towards a new normal, we'll have the CCX in place for as long as this peak supply chain demand environment remains in place, which may be until the middle of 22, but we don't believe the CCX will be a permanent service for Matson. We will continue to adapt all of our ocean expedited services to the demand from our customers and be prepared to move on opportunities to drive further organic growth. Turning to slide eight. In Guam, mass and container volume in the third quarter of 2021 increased 14.6% year over year, primarily due to the higher retail related demand compared to the pandemic reduced level in the year ago period. The volume in the third quarter was 17 percent higher than the result achieved in the 2019 period. The Guam economy is recovering slowly as tourism remains constrained. Consequently, the economic recovery trajectory remains uncertain. For the month of October, our westbound container volume increased approximately 11 percent year over year. Moving now to slide nine, in Alaska, Matson's container volume for the third quarter 2021 increased 10.7% year-over-year. The increase was due to the addition of volume from the Alaska Asia Express, higher northbound volume primarily due to an additional sailing, and higher retail-related demand and higher southbound volume. In the near term, we expect improving economic trends in Alaska, but the recovery's trajectory continues to remain uncertain 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 of 2021 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 vessels. 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 report 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 I'd 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 percent 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 Contoloa-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 K. Inouye 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 refleeting 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 commercially 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 goal. 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 will 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.

As a reminder, to ask a question, press star 1 on your telephone keypad. Again, that is star 1 to ask a question. And we'll pause for just a moment to compile the Q&A roster. Your first question is from Jack Atkins with Stevens.

Okay, great. Good afternoon, and congrats on a great quarter. Thanks, Jack. So I guess, Matt, if I could, just kind of thinking about the Hawaii lane for a moment, you know, when we look at visitor arrivals, you know, they improved, I think, as we went through the summer until the more recent actions, but still down, you know, a good bit versus 2019. But overall volume levels in the Hawaii lane are obviously, you know, higher than 2019. We're seeing a lot of, you know, unusual freight flows across the U.S. more broadly, and I'm guessing that's what's going on in Hawaii, too, with inventory restocking and things like that. But, you know, I guess when you sort of think about the level of activity to Hawaii today, and you kind of think about that over the next kind of four to six quarters, you know, do you feel like that we can sustain this level of volume to Hawaii without, you know, a recovery rate from a visitor perspective back to 2019 levels and beyond. Just sort of curious if you could maybe talk about that for a moment.

Yeah, sure, Jack. My view is that I'm a little bit more bullish on Hawaii, Jack. First of all, I think we don't see much of a problem in sustaining our current level of freight volume moving forward. And I think my personal view in hearing and talking to our customers that this period in the fourth quarter, the slowdown associated with the Delta variant and the restrictions that the state put in place did indeed suppress travel. But I continue to be pretty optimistic that Hawaii will be seen as a relatively safe place to travel through the holiday season and into 2022. relative to international destinations to travel, which are still dealing with impacts related to the Delta variant. So I personally think that the overall environment in Hawaii is likely to improve and be relatively healthy going into 2022. So I think there's more of a risk to the upside than I don't feel much risk. I mean, absent, you know, it's like answers to a lot of questions. It's all about Delta or COVID. And to the extent that we begin to see not the elimination of COVID-19, but, you know, the gradual reduction as vaccines and treatments become more effective, I think will stand to benefit the economy in Hawaii.

Okay. No, that's great to hear. And I guess maybe kind of along that same line of thought, you know, when we kind of think about, you know, your capacity utilization, you know, westbound to Hawaii from the west coast, you know, I know you guys don't like to give specific utilization statistics there for obvious reasons, but I guess when you sort of think about sort of where you are with the current fleet deployment. Do you have a fair amount of excess capacity left to go? Because it kind of feels like we're getting back towards the 2016 levels. I know the fleet is different today than it was then, but just sort of curious if you could maybe comment on that.

Yeah, I'll comment generally on it, Jack. I would say that we have seen we're satisfied with our utilization. but we have capacity to be able to meet the Hawaii capacity as and when the economy recovers. So we're very comfortable both where we are now on a fleet utilization perspective into Hawaii, but also have sufficient capacity to grow with the economy as it recovers next year.

Okay, that's excellent. And last question from me, and I'll hand it over, but Could you maybe give us an update, Joel, maybe if this is more for you, but just an update on the charters that you guys were planning on working on with regard to the CLX Plus service, and I know some of those were coming up towards the end of this year, maybe early next year. Any update on that and sort of maybe how you guys are thinking about that capacity over a longer period of time?

Yeah, thanks, Jack. So yes, we had a couple vessels on charter coming up in early 2022, and then another vessel in the second quarter of 2022. So those are the three vessels that we were focused on here in the latter part of this year. And we're almost there. We have engaged in some new charters, and we believe we need one more vessel, and then we'll be in good shape to continue to have our core CLX Plus vessels on charter. The new development, Jack, that's probably important to note, Is not surprisingly vessel owners have really pushed for longer duration of terms. So as we looked at 2020 and in the first bit of 2021 we could find chargers that were sometimes 12 months or 24 months. That's the owners had moved that conversation to three years, four years, five years and really pushing for four and five years. For the most part, we've tried to keep ours down to three years or maybe a little bit more than three years. And that's what that's what you'll see as we roll these over. So you'll have some charters that go into 24 and 25. But we're in good shape as we look at our needs for the CLX-plus vessels heading into Q1 of next year, Jack.

Okay, excellent. Maybe if I could sneak one more in before I hand it over. Matt, I'd be curious to get your take on Lunar New Year in 2022. I know we didn't really see much of a Lunar New Year holiday in China in 2021. um i i guess i there's a lot of debate on sort of what lunar new year 2022 could look like given the olympics and everything else kind of going on in china next year and there's zero zero covet policy so um just curious what you're hearing from your customers uh with regard to sort of their lunar new year holiday in 2022 do you think we're going to have a more normal lunar new year this year and just any sort of thoughts on that would be would be appreciated yeah it is early jack so i am i'll speculate just a little bit but um

Currently in China, they are dealing with Delta variant outbreaks throughout the country. And of course, the Chinese government is moving aggressively to limit the spread of COVID inside the country. And you also rightly point out with the Olympics. I think from a, and again, speculating, but from a Chinese public policy standpoint, Having hundreds of millions of Chinese in the domestic transportation system going to their hometowns is not a good factor in terms of trying to limit the spread of the Delta variant of COVID. And so we expect a shorter Lunar New Year period, as many people decide for themselves or are discouraged from traveling. So again, I think we're going to see a more limited Lunar New Year or abbreviated Lunar New Year period And so while I think there will be a traditional slowdown, I think it will be shorter than people expect. That's my personal guess at this point.

Okay. Okay. Makes total sense. Thanks again for the time, guys. Really appreciate it.

Okay, Jack. Thanks. Thanks, Jack.

Your next question is from Ben Nolan with Stiefel.

Hey, guys. So I wanted to follow up a little bit on, Joel, what you were talking about with Jack there, in terms of you put some or now have in place some longer-term contracts because that's just the way the market is at the moment. But I was thinking of it from the other side. You guys offer a relatively scarce commodity or hard-to-get thing at the moment, especially from an expedited perspective. I'm curious if you've been able to leverage that yourself and in terms of signing your own customers up to longer-term contracts to maybe sort of help offset or mitigate a little bit the longer-term contracts that you're signing for the ships?

Yes, Ben, thanks for the question. In a nutshell, the answer is no. I mean, customers right now are very focused on their supply chain issues, delivery. There's not a lot of conversation around long-term contracts, as you know. The market has two basic types of customers, the annual BCO contracts, which are May 1 to April 30, for most of the major retailers. And then the freight forwarders, they're really spot market that are booking out two, three, four weeks in advance. And really, I'd say in neither of those two customer segments broadly, is there any conversation or movement in the market for longer-term contracts?

Okay. Okay. And then, Matt, you'd mentioned that you're certainly thinking of potentially the new CCX business going perhaps into mid-year or however long this environment lasts, but you still aren't thinking of it as a permanent fixture in terms of how you're deploying your assets. I'm curious why. I mean, what makes you think that it's – or that – you know, that it's not going to be something that you are always doing? Yeah, it's a good question.

But from our perspective, the CCX comprises vessels that are effectively all of our reserve vessels in the Hawaii service. And so at some point in the future, we were talking about For example, the need to take vessels out of service to do conversions to LNG or other routine dry dock matters will limit the ability for us to have a regular scheduled service at some point in the future. When in 2022 is not exactly clear, but eventually we may turn from a standardized CCX regular service into extra loaders, but the CCX service, as we know, at some point in 2022 will end. That isn't to say, though, that when we get to our new normal, there may be opportunities for us to deploy other vessels and other expedited service once we get to the new normal, because as you point out, our brand has been really enhanced with regard to a company because of our wheeled operation, dedicated terminals, and all the other elements that allow us to stand apart from the competition. Market expectations in this segment that would prefer an expedited market has grown. So as things settle over the next few years, we're definitely going to be looking at ways in which we can focus on this expedited services as something that may have other opportunities. But it's not likely or will not be in the form of the current CCX past 2022.

I got you. So it's not a function of demand. It's a function of capacity. Correct. Other needs. Yeah. Right. Sure. Okay. All right. Well, that's helpful. I mean, I guess just lastly, this seems relatively obvious, but I might as well ask, you've made quite a bit headway on that buyback program. Is it fair to assume that subject to board approval or what have you, that as long as the market remains really elevated, that there's no reason that wouldn't be renewed and increased?

Yeah, Ben, I would definitely say we expect to be steady return of capital, free cash flow generation company for a long time, as you know. So I would look at us as a steady, long-term focused return of capital company with share buyback being the primary way that we do that. So I think there's nothing changing in our story in that regard.

Okay.

All right.

This is Matt. One other comment I'd make, Ben, which is, We're gonna continue to, and you've heard us say this before but it's worth repeating, to our capital allocation strategy, we're going to continue to look for ways to deploy capital either through acquisitions or organic growth initiatives. And in the absence of finding those that provide this double-digit cash-on-cash return that we talk about as our threshold, will we be steady return of capital? But if we have opportunities to deploy capital profitably, we're certainly going to continue to look for ways to do that.

Sure, yeah. All right. Well, and I, over the years, have asked plenty about the M&A aspect, so I think I have my hands pretty well, hopefully, at this point. But, all right, I appreciate it, guys. Okay. Thanks, Ben. Thanks, Ben.

Again, if you would like to ask a question, press star 1 on your telephone keypad. Again, that is star 1 to ask a question. We have no further questions at this time. I'll now hand the call back over to Matt Cox for closing remarks.

Okay. Thanks for listening in today. We look forward to catching up with everyone next quarter.

Aloha.

This does conclude today's presentation. You may now disconnect.