Matson, Inc.

Good day, ladies and gentlemen, and thank you for standing by, and welcome to the Messem Inc. Fourth Quarter 2021 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After this week's presentation, there will be a question and answer session. To ask a question during the session, you will need to press the star, then the one key on your touch-tone telephone. Please be advised that today's conference may be recorded. If you recall all of your assistants, please press star, then zero. I would now like to end the conference over to your speaker host today, Lee Fishman. Please go ahead.

Thank you, Olivia. 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 12 to 21 of our form 10K filed on February 26th, 2021 and in our subsequent filings with the SEC. Please also note that the date of this conference call is February 17th, 2022 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. With that, I'll now turn the call over to Matt.

Okay, thanks, Lee, and thanks to those on the call today. I'll start on slide three with a quick recap of our fourth quarter performance. We finished off a strong year with continued improvement in economic and business trends in our markets, driving overall solid performance in Mattson's ocean transportation and logistics businesses. The year-over-year increase in ocean transportation operating income in the quarter was primarily driven by strong demand for our China expedited ocean services. In our domestic trade lanes, we continue to see strong demand with higher year-over-year volumes, including the benefit of a 53rd week, compared to the largely pandemic-reduced volumes in the fourth quarter of last year. Logistics operating income for the fourth 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 remains the key issue in the Trans-Pacific trade lane with a number of supply and demand factors at play that will take time to unwind. I'll come back to this issue when we discuss our China service, but importantly, we remain focused on maintaining our fast, reliable trade lane services and providing high-quality customer service during this challenging period for our customers. I'll now go through our trade lane services, so please turn to the next slide. Hawaii container volume for the fourth quarter increased 10.4% year-over-year and was 11.3% higher than the results achieved in the 2019 period. The increase year-over-year was primarily due to higher retail and hospitality related demand and the benefit of the extra week compared to the pandemic reduced volume in the year ago period. Excluding the benefit of the extra week, volume in the fourth quarter of 2021 increased 5.3% and 6.2% compared to the levels achieved in the fourth quarter of 2020 and 2019, respectively. tourism and the Hawaii economy continued to rebound in the fourth quarter of 2021, despite a softening in airline passenger traffic early in the quarter due to the state's efforts to address the spread of COVID-19 Delta variant. For the full year of 2021, container volume increased 8.2% year over year due to higher retail and hospitality related demand due to the reopening of the Hawaii economy compared to the negatively impacted volume in the year ago period and the results of the pandemic and state's COVID-19 mitigation efforts and the benefit of an extra week in 2021. That was partially offset by volume associated with the dry docking of a competitor's vessel in the second quarter of 2020. Excluding the benefit of the extra week in 2021, volume for the full year 2021 increased 6.9% year over year. Please turn to the next slide where I'll comment on the current business trends in Hawaii. As the chart on the right shows, 2021 was about a return of tourism and its effects on the Hawaii economy. The rise in visitor travel, driven predominantly by U.S. mainland visitors, powered a resurgence in the tourism industry. This led to a rebound in the state's economy and led to substantial improvement in the state's unemployment rate. The governor's request to defer non-essential travel to Hawaii as a response to the Delta 19 Delta variant led to a slowdown in tourist arrivals in the third quarter and the first few weeks of the fourth quarter. But visitor traffic rebounded in early November through the first couple of weeks in December until the Omicron variant negatively impacted tourist arrivals. Heading into 2022, we're cautiously optimistic on further economic recovery in Hawaii. UHERO's December forecast for 2022, which accounts for the near-term effects of the Omicron variant, shows further improvement in the unemployment rate and continued growth in GDP and construction jobs. Tourism is also expected to continue to improve with an increase in contribution from international visitors later in the year. Environmental waves of COVID-19 variants present the possibility of further economic slowdowns or disruptions in tourism. While the Hawaii economic recovery has occurred significantly, improved significantly from the depths of the pandemic, Uhiro 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 first quarter, our westbound container volume in January was approximately flat year over year. Tourism to the state was negatively affected by the Omicron variant wave, which led to a softening in demand for retail and hospitality related goods. We're also seeing a sluggish trend in building materials, so we'll have to see how this and the tourism trend following Omicron play out in the near term. Moving to our China service on slide six. Matson's volume in the fourth quarter 2021 was 32.7% higher year-over-year, primarily due to the volume from the Extra California-China Express service, or CCX service, and the benefit of an extra week. The total number of eastbound voyages in the China service, including the impact of the extra week, increased by nine year-over-year, of which eight were from CCX voyages and one from CLX. Excluding the benefit of the extra week, volume in the fourth quarter of 2021 increased 24.8%. Freight demand in the quarter remained strong as we continued to see sustained and elevated consumption trends and low inventory levels drive increased demand for our expedited ocean services. Mattson continued to realize a significant rate premium over the Shanghai Containerized Freight Index in the fourth quarter of 2021 and achieved average freight rates that were considerably higher than in the year-ago period. For the full year 2021, container volume increased 55.4% year-over-year, primarily due to the incremental volume on the CLX Plus, the addition of volume from the CCX, higher volume on the CLX as a result of increased capacity in the trade lane and the benefit of an extra week. The total number of eastbound voyages for the year, including the impact of an extra week, increased by 41 over the full year 2020, of which 20 were from the CLX Plus voyages, 13 from the CCX voyages, one from the CLX, and seven from extra loaders. Excluding the benefit of the extra week, volume for the full year 2021 increased 52.7%. I'll now comment on current business trends, so please turn to slide seven. For January 2022, eastbound container volume was lower year over year by approximately 20%, primarily due to the timing of sailings. As our sailing schedule normalizes in February, we expect volume in the first quarter to be higher year over year, primarily due to the contribution of the CCX service, which we did not have in the year-ago period. In January, we experienced strong pre-Lunar New Year demand for our expedited services, and we expect a similar environment for our trade million services in the post-Lunar New Year period as larger factories in China return to production earlier than in normal post-Lunar New Year periods. The Trans-Pacific trade lane is currently experiencing supply chain congestion due to a combination of factors. Consumption trends remain elevated, and retail and e-commerce demand remains strong. Supply chain constraints remain at critical points for both ocean and overland transportation. As an example, as of yesterday, there were 72 container ships awaiting a berth at the ports of Los Angeles and Long Beach, down from the high of 109 in early January. This recent decline in the number of vessels waiting for a berth may be a function of how fleets adjusted to year-end holiday and the Lunar New Year period. While this slowdown is welcome, it may be only temporary. The Omicron wave stressed many key areas in the supply chain, and it will take some time for the effects of this wave of the pandemic to subside. Inventory replenishment continues to be very challenging, particularly for retail customers as evidenced by the trend in U.S. retail inventory sales ratio shown in the chart on the slide. We expect these supply chain congestion conditions to remain largely in place through at least the October 2022 peak season, and we expect elevated demand for all of our expedited ocean services for most of the year. As such, we expect to keep the CCX service in place until at least through October 2022 peak season. Turning to slide 8, in Guam, Mattson's container volume in the fourth quarter 2021 increased 14% year-over-year, primarily due to higher retail-related demand compared to the pandemic-reduced level in the year-ago period. The volume in the fourth quarter of 2021 was 18.8% higher than the result achieved in the 2019 period. For the full year of 2021, container volume increased 15.9% year over year, primarily due to the higher retail-related demand compared to the pandemic-reduced level in full year 2020. For 2022, we're cautiously optimistic on further economic recovery in Guam, as we expect improvement in tourism traffic as the year progresses, but we also recognize the potential negative effects on visitor traffic and other economic factors that future COVID-19 variant waves could have on the economic recovery. For the month of January, our westbound container volume increased approximately 36% year-over-year, primarily due to the timing of a sailing which was approximately half of the year-over-year increase and the higher volume of retail and hospitality-related goods compared to the pandemic-reduced volume in the year-ago period, which reflected COVID-19 travel restrictions. Guam began to loosen COVID-19 restrictions in the middle of January 2021 and further loosened them in February 2021, after which we saw a significant improvement in volume trends in the year-ago quarter. Moving now to slide nine, In Alaska, Mattson's container volume for the fourth quarter 2021 increased 10.2% year-over-year and was 31.1% higher than the results achieved in the fourth quarter 2019. The increase year-over-year was primarily due to the increase in AAX seafood volume and the benefit of an extra week and higher southbound volume. Excluding the benefit of the extra week, volume in the fourth quarter 2021 increased 6.3% and 26.4% compared to the level achieved in the fourth quarter of 2020 and 2019, respectively. For the full year 2021, container volume increased 7.7% year-over-year, primarily due to the increase in volume from the AAX service, higher northbound volume primarily due to the higher retail-related demand, compared to the pandemic reduced level in the year-ago period, higher southbound volume, and the benefit of an extra week. Excluding the benefit of the extra week, volume for the full year 2021 increased 6.7%. I'll now comment on the current business trends in Alaska, so please turn to the next slide. In the near term, we expect improving economic trends in Alaska, but the recovery trajectory continues to remain uncertain. The jobs market continued to improve off the pandemic low, and there are some bright spots for incremental gains in the near term, but there are also some long-term challenges ahead. There's an expectation for further employment growth in 2022, driven by a rebound in travel to the state and increased oil and gas activity from the majors as a result of higher oil prices. The federal infrastructure bill signed into law in November is also expected to lead to more employment growth though it may not be a meaningful driver in 2022. The challenges to employment growth are continuing signs of labor shortages with the combination of a declining working-age labor force and an unfavorable trend in net migration out of the state. In addition, the state fiscal position and the decline in federal pandemic relief payments present uncertainties for the trajectory of of the economic recovery in the near term. For the month of January, our northbound container volume was approximately 23% higher year-over-year. Approximately half of the year-over-year volume improvement was due to volume associated with the dry docking of a competitor's vessel. The balance of the year-over-year growth was primarily driven by elevated retail-related demand. Turning next to slide 11, Our terminal venture, SSAT, contributed $21.3 million in the fourth quarter 2021 compared to $10.9 million in the prior year period. The higher contribution was primarily a result of higher other terminal revenue and higher revenue per lift. For the full year 2021, SSAT contributed $56.3 million compared to $26.3 million in the full year 2020. The increase was primarily driven by higher lift volume as a result of the significant year-over-year increase in import volume on the US West Coast and higher other terminal revenue. And currently, we continue to see elevated import volume into the US West Coast, which we expect to translate into a relatively high contribution from SSAT. Turning now to logistics on slide 12, operating income in the fourth quarter came in at $14.8 million, or $5.2 million higher than the result in the year-ago period. The increase was primarily due to higher contributions 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. For the full year 2021, operating income was $49.8 million, or $14.3 million higher than the result in the full year 2020. The increase was primarily due to higher contributions from supply chain management, transportation brokerage, and freight forwarding. We're currently seeing continued elevated container volumes in Southern California, which will be a benefit to some of our lines of business. The contribution from our supply chain management business is expected to continue to track with the performance of our China service. I will now turn the call over to Joel for a review of our financial performance. Over to you, Joel.

Okay, thanks, Matt. Please turn to slide 13 for a review of our fourth quarter and full year results. For the fourth quarter, consolidated operating income increased $357.8 million year-over-year, to $475.5 million, with higher contributions from both ocean transportation and logistics of $352.6 million and $5.2 million respectively. The increase in ocean transportation operating income in the fourth quarter was primarily due to a higher contribution from China, which was the result of considerably higher average freight rates and higher volume, partially offset by higher operating costs and expenses primarily due to the CCX service and higher incremental costs associated with the CLX Plus service. The increase in volume was primarily due to volume from the CCX service and the benefit of an extra 53rd week. The increase in logistics operating income was primarily due to higher contributions from supply chain management and transportation brokerage. Interest expense for the quarter was $4.7 million or 0.4 million lower than the third quarter as a result of lower outstanding debt and a small amount of capitalized interest. Lastly, the effective tax rate in the quarter was 16.5%, well below the 25.2% recorded in the year-ago period. Matson benefited from a deduction related to foreign derived intangible income, or FDII, under Section 250 of the Internal Revenue Code. The FDII deduction is available to U.S. corporations that generate income from services provided in foreign countries. We expect to continue to record FDII deductions in 2022, and as such, we expect our full year 2022 effective tax rate to be between 23 and 24%. Turning to slide 14, We illustrate how we allocated our trailing 12 months of cash flow generation. For the LCM period ending December 31st, we generated cash flow from operations of $984.1 million, from which we used $131.1 million to retire debt, $310.4 million on maintenance CapEx and other CapEx, including $117.3 million of early buyout and operating lease termination payments. $14.9 million on new vessel CapEx, including capitalized interest and owner's items, and $15.5 million on other cash flows, while returning $244.2 million of two shareholders via dividends and share repurchase. On slide 15, we provide a summary of our share repurchase program and year-end balance sheet. We announced a $3 million share buyback program in late June 2021, and we began repurchasing shares on August 3rd. During the fourth quarter and full year 2021, we repurchased approximately 1 million shares and 2.5 million shares for a total cost of 84.5 million and 200.1 million respectively. As noted in footnote one on the slide, the total share repurchase cost figures include 1.8 million in settlement payments related to share repurchasing at year end. From January 3rd, 2022 through yesterday, Matson repurchased an additional approximately 300,000 shares for a total cost of 30.5 million. So to add it all up, as of yesterday, we had repurchased approximately 2.8 million shares for a total cost of approximately 230.6 million. And lastly, on share repurchases, three weeks ago on January 27th, we announced that the board approved the addition of 3 million shares to the existing share repurchase plan. Turning to the balance sheet, our total debt at the end of the quarter was 649 million, and our total net debt was 346.6 million. Moving to slide 16, this table shows our four key areas of capital expenditures in 2021. We made payments of 117.3 million to acquire assets under operating leases, As we first noted on our second quarter call last year, we paid $95.8 million to terminate the operating lease on the vessel Model A. In addition, we spent $21.5 million on the lease buyout of the barge, Monoloa, and other equipment, which was primarily containers. During the year, we spent $121.1 million on new equipment to support our four new trade lane services, specifically the CLX Plus, the AAX, CCX, and the CAX services. In 2021, we made commitments to purchase approximately $159 million of equipment to support these four new trade lanes and to maintain equipment availability across our entire network. The payback on these equipment purchases has been only a few months given the present high demand market conditions. Moving to the next category, we also made payments of $14.9 million on the new Hawaii Neighbor Island Flat Deck Barge. The total estimated cost of the barge has increased a couple of million dollars to approximately $25 million, and we expect the remaining payments to be made as the barge is completed and delivered in the first half of this year. And lastly, we spent $72 million on maintenance and other capital expenditures, which is within the range we provided on the fourth quarter call last year. During the year, we continued with our work on phase two of the Sand Island Modernization Project as we upgraded our systems in preparation for expanding into the rest of Sand Island when PACIA shifts to the Kapalama Container Terminal in a couple of years. Turning to slide 17, the table on the slide shows our CapEx outlook for the next two years. Starting with maintenance and other capital expenditures, we expect to spend 80 to 90 million in 2022 and approximately $75 million in 2023. These figures are higher than our annual maintenance cap x range of $60 to $70 million as they include additional equipment lease buyouts and ongoing Sand Island Phase II work. Our Phase II work at Sand Island is expected to be completed within the next three years and includes improvements to existing backup systems and other important upgrades at the terminal. We expect to spend $55 to $60 million on new equipment to support our new trade lane services, the majority of which we committed to purchase in 2021 and has spilled over into 2022 due to long lead times for new equipment. As I mentioned a moment ago, we expect to complete the flat deck barge for the neighbor islands in Hawaii in the first half of 2022, and the remaining payments are approximately $10 million on that barge. And lastly, we expect to spend $15 to $20 million in 2022 and $55 to $65 million in 2023 on the LNG installations on existing vessels, which we discussed on our third quarter earnings call last November. As a reminder, we plan to install LNG equipment on the Daniel K. Inouye starting in the first quarter of 2023. The installation is expected to last approximately five months with a total estimated cost of approximately $35 million. We also plan to re-engine Monokai to operate on LNG and both LNG and conventional fuels. The installation will start after the Daniel K. Inouye work is completed, and we expect the installation to last on the Monolay about 12 months and cost approximately $60 million. So in total, We expect capital expenditures of $160 to $180 million in 2022 and $130 to $140 million in 2023. As we mentioned on our last earnings call, these CapEx figures do not include any spending associated with the replacement of the three Alaska vessels or the costs associated with additional LNG installations we are actively considering for the Kamanahela, the Lorraine, and the Mattsonian. of which the total installation cost for all three of these vessels is currently estimated to be approximately $115 million. And we continue to review options for refleeting the Alaska vessels later in this decade, which we are in the midst of planning and may get a head start on this year with funding into the Capital Construction Fund. We are exploring the idea of moving older vessels into the Alaska service and ordering new LNG-ready Aloha-class vessels for the China service but no decision has been made yet. An Aloha-class vessel has about 500 more containers in capacity than each of the three older vessels currently operating in the CLX service. So three new Aloha-class vessels would add meaningful capacity and growth for our successful CLX service. With that, I'll now turn the call back over to Matt.

Okay, thanks, Joel. After our performance in 2021, many investors may be focused on what will Mattson's profitability look like when we get to the other side of the supply chain congestion and the environment finally normalizes. I don't know yet what the new normal will look like, and I suspect the path to normalization may not be linear and may be longer than some realize. But when we do get to the new normal, I remain confident that the secular tailwind of e-commerce adoption and our unique positioning in the Pacific with an expanded network and superior service offerings will result in a sustainable, higher levels of cash generation than we anticipated a year ago and meaningfully higher than our pre-pandemic 2019 base. Throughout Max's long history, we've won new business and grown with our customers through uncertain times by having the fastest, most reliable services and having control over of great assets to quickly adapt to changes. To this end, we remain focused on maintaining the reliability of our services and working closely with our customers in ocean transportation and logistics to manage through this difficult environment. The capital allocation plan for 2022 is to stay the course. Joel reviewed our key maintenance and other CapEx expenditures we intend to make in the next two years. We're strategically positioned well. and we'll continue to look for opportunistic areas of organic growth to leverage off our recently expanded services in the Pacific. We're also on the lookout for acquisitions that meet our key criteria, but we will remain disciplined in our approach. We will continue to reduce our outstanding debt through scheduled amortization of our long-term instruments. Lastly, in the absence of organic growth and acquisition opportunities, We will consider the return of excess cash to shareholders in the form of share repurchases and or special dividends. And with that, I will turn the call back to the operator and ask for your questions. Thank you.

Thank you. Ladies and gentlemen, if you'd like to ask a question at this time, you will need to press the start and the 1 key on your touch-tone telephone. To remove yourself from the game, you may press the pound key. Please stand by while we compile the Q&A roster. Now, first question coming from the lineup. Ben Nolan with Steeple. Your line is open.

Hey, Joel, Matt, good talking to you. Another good quarter here. I've got a couple. I first wanted to maybe ask about the Hawaii side. The volumes were pretty good, and you talked about the first quarter or at least maybe being a little flatter or Omnicron, all that kind of thing. Just kind of trying to get my head around how full that westbound trade lane is. You know, if the Hawaiian economy continues to recover, given your current mix of assets that are serving that business, what's the capacity to actually do more volume than what you're doing right now?

Yeah, we have sufficient excess capacity with the delivery of our products. four newest ships in the current deployment as we envision keeping the CCX in our current deployment, we have plenty of sufficient capacity to be able to handle a return to pre-pandemic 2019 or above, given the delivery of this extra capacity. So we have plenty of capacity to address market growth.

Okay. That's helpful. Good to know. Glad that was an easy one. So I got another one for you. You talked about acquiring additional equipment, some of that had spilled over into this year. I assume that's primarily containers and chassis. Can you maybe talk through a little bit about where you stand? I mean, I know it's one of the hallmarks of what you do, that you control your own equipment in that respect, but you're doing a lot more volume right now. And all we hear is about, you know, people not being able to get chassis or other things. How are you positioned at the moment with respect to that part of the business?

Yeah, it's a good question. And you're right. And Joel mentioned in his comments that some of the CapEx we're mentioning with regard to equipment is really just a spillover because of the significant backlogs and and getting equipment manufactured and delivered. You'll recall early on in this cycle, we took a step to basically grab every piece of equipment we could get our hands on because we really believed that this was going to be something that was going to be sustained. And so we have effectively dramatically expanded our container fleet ordered a significant amount of new chassis and leased those when available as well. So the equipment that you're referring to is primarily dry containers and refrigerated containers. Those are the two main. And also chassis where, you know, there's a significant backlog. But we started from a position of relative strength because Matson has a wheeled operation. We had a relatively large amount of chassis in our fleet. which gave us a significant advantage and a sustained advantage. The other part I would make with regard to the equipment, and then I'll turn it over to Joel, is in this current environment, and you've heard us say this before, the incremental return on a single voyage, or said differently, without a box on a single voyage, you can effectively pay for the entire piece of equipment in one or two voyages. So being short of equipment is the economics are so compelling and returns are so short that we definitely didn't want to and have not up to this point run out of equipment in our fleet. And then I'll turn it over to Joel to comment on a few of the other items.

Yeah, the only other thing, Ben, on the timing point, this extra equipment that we purchased as we expanded our services, especially the most recent one of CCX, We expect that all to come in by the second quarter, through the course of the second quarter. So any equipment coming after that is part of our normal annual replenishment of retiring old equipment, new equipment coming in. So we don't have that many more months to go here before all the extra growth-oriented equipment will be online for us.

Okay, perfect. And I've got one more if I can. I was... I was pretty shocked by the SSAT contribution. It almost doubled from where it was in the third quarter. I know you talked a little bit about the increased level of volume, but I guess my question is, is there anything else fundamentally there, whether it's margin or whatever, that has some staying power such that what we're seeing now, not only for the next however long all of this lasts, but even going beyond this, I mean, is there a reason to think that maybe SSAT is structurally more profitable than what it had been in the past, or is this just a sign of the times here?

Yeah, I think it's a combination of both. Clearly, the economic model of these joint ventures are you pay relatively fixed costs to port authorities to operate these terminals, And the more volume you put over them, there's an outsized incremental return. So the most basic fundamental part of this is it's very sensitive to changes or increases in volume to the extent that these volumes are sustained or sustained when we get to the new normal at somewhat lower levels. It depends on your view of the future. We do expect, as in a number of our businesses, for these to subside from their current levels when we get to the new normal. But I think these are the other thing that I would say about this, and we've believed this for a long time, is having control of your own terminals, and that's in exclusive terminals, and working with the best operator on the West Coast with SSAT creates really long-term sustained value for the company. And that has proven itself in down markets, but especially in these up markets. These are extremely valuable properties. and we have really competent operators. And it's part of the things that differentiates our services relative to our competitors. So whether that translates into dollars and cents, it's hard exactly to say, but we feel really good about our positioning, including our joint venture terminal.

Okay. All right. Thank you, Matt. Thanks, Joel.

Okay.

Thank you. Thanks, Ben.

And so my ladies and gentlemen, to ask a question, please press star 1. Our next question coming from the line of Jack Atkins from Stevens, Inc. Your line is open.

Okay, great. Good afternoon, and congrats on a great quarter and a great year. Thank you. So, Matt, I guess maybe going back to Ben's first question around the capacity available to you in the Hawaii westbound lane to sort of accommodate and grow with Hawaii over the next couple of years as the economy fully recovers. If I go back and look at the last, what I would call peak year for Hawaii volume, which was probably 2016 or so, did about 162,000 or so containers. In 2021, if I normalize for the extra week, you did about 4% or so below that. You know, I know you've had changes to the fleet. A lot of different things kind of going on. I know you don't like to comment on utilization and utilization rates. And so is there a way to maybe kind of talk to kind of asking Ben's question a different way? You know, how much available capacity do you have, you know, left in the westbound lane, you know, just given how much stronger volumes have been here over the last, you know, 18 months or so? I know it's a rambling question, but I hope it makes sense.

Yeah, no, yeah, and what I would say, again, is we are not pressed in capacity. We've received these four brand-new ships, which are step function higher in capacity, and currently both of these four ships go through California. In one case, the CCX, it goes through Oakland, and then it goes through Long Beach, and in the other case, The other vessels are connected to the CLX service, so they go two and five weeks through Long Beach to Honolulu. And those are step function larger capacities than we had. And so we don't envision needing to add more ships to the fleet as we see a recovery in the Hawaii service. So we have plenty of headroom, and we're very comfortable with the capacity as the market grows without having to add sufficient – any additional vessels into the foreseeable future.

Okay. Okay. That's helpful. It makes sense. Maybe shifting gears to the Trans-Pacific Lane for a moment and your services there. You know, if I go back to, I think last week, Maersk had some comments around how they thought the year would sort of play out, first half versus second half, and rates, you know, kind of beginning to soften, maybe too strong a word, but just kind of begin the normalization process. as we kind of go through the year. Your comments are that we're going to have a strong market through at least peak season in October. Is there a way to maybe think about, and I understand the market's very unpredictable, but is there a way to maybe think about how you're contemplating first half of the year versus second half of the year? Do you think that we're going to have maybe a little bit of softening the second half of the year, albeit rates still staying at very elevated levels, or Is it just too early to make that call?

Yeah, I think it's too early, but I can give you some color on our thinking about this. And part of this is, Jack, generally with regard to the sort of industry-wide supply and demand fundamentals that are going to affect everyone, but then the others are those that are unique to MAPS and in our service model. And so our view generally is that there's going to be only a slow addition of vessel capacity of new builds that are going to be entering the trade globally, and some are going to be deployed in the trade lanes in the Trans-Pacific. We see a continued elevated demand. We're hearing from our customers that they're expecting this – Most of our discussion is with customers and their own thoughts about their planning cycles and therefore seeing continued strong demand through most of 2022. But I would say also, Jack, tactically, and you pointed to the questions about the seasonal nature, historically at least, seasonal nature of these trades. So the things that I think are going to drive first half performance, there's always a question about what happens at Lunar New Year. And we're seeing a very shallow Lunar New Year period and short. And we're already seeing factories ramp back up and their demand is, according to the customers in China, are very strong. And there continues to be very strong growth in e-commerce. People have money to spend and are spending it. And so the other thing that I think happens in the first half, at least from talking to some of our customers, is They are aware of the ILWU contract renewal, and many of our customers look to find other gateways or, as best they can, position inventory in the market. And we're not predicting any – it's difficult to predict what the outcome of the ILWU contract renewal. So we're not saying we do expect an issue, but many of our customers in their supply chain planning are trying to continue to sustain volumes as best they can given that uncertainty. And then when we get into the second half of the year, we get into the traditional peak season and holiday period. And so all of that gave us a general feeling that this is going to be sustained. But in particular, given the lack of air freight, given the – we're sort of in a new phase where these rapid antigen tests are being manufactured by the millions – And a lot of that is going air freight again. And so there really is not significant air freight capacity. And, of course, with China being very strict in reopening its borders, given its approach to managing the pandemic, we don't really see a lot of belly freight coming anytime soon. So those are just some of the factors that gave us confidence that we should see sustained volume through the peaks.

That makes sense, Matt, and I really appreciate that. That really helps add a lot of color there. Maybe kind of following up a bit, if I think back what you guys have sort of told us about CLX Plus and some of your other services in the Trans-Pacific is that you're kind of skewing that capacity, or at least you have been skewing that capacity over the last year, year and a half, more towards the spot market than the contractual side. As we sort of enter 2022 and go through the contract negotiation period here over the next couple of months, several months, You know, as you're thinking about, you know, contract versus spot mix changing at all as you look forward, can you maybe help us think through that? Yeah.

And I think looking back is a good place to start. I mean, we've been at this, as you know, Jack, for 16 years with our expedited Trans-Pacific service. And we have always skewed towards the spot market. And the reason for that is that there is a significant premium that we can achieve over the contracted rates. And we have confidence after all these many years that while we can't exactly predict where the customer demand will come from, what is clear is that every customer at some point has a production problem, has a late order, has something that happens in their supply chain that causes them to need an expedited treatment. So You know, if you fast forward that into today's context, what we can say now is that even with the expected higher annual contracted rates that are being achieved or talked about, that is still significantly below where our spot contracts are. So we're really comfortable that we're positioned well and have been for, again, a long time. we're trading a little bit of uncertainty for a significant, significant rate premium that we think is worth it and appropriate.

Nope. Okay. No, totally makes sense. Thank you for that, Matt. So I guess maybe shifting gears here, well, staying with China just for a moment, I'm just kind of curious, as we sort of think forward, you know, bunker fuel prices are higher here with oil moving up. You know, the demand on charter assets has been high, but I know you guys have done a great job securing, you know, those leased-in assets or chartered-in assets under longer-term commitments. I'm just sort of curious how we should be thinking about broadly the economics and maybe the margin profile of, you know, CLX and CCX as we sort of kind of move into 2022. Not asking for a specific trade lane margin profile, obviously, but You know, do those factors sort of maybe impact the profitability of those services on a year-over-year basis, or is that just, you know, kind of overthinking it?

Yeah, I mean, I guess what I could say, Jack, and I'm not sure this is exactly answering your question, and maybe, Joel, you could comment as well, is that right now we operate the three fastest services in the Trans-Pacific. All three of our services are rated one, two, and three in terms of you know, where people go to. And as I said, that translates into a significant premium. And our goal really is to sustain these three services until the market normalizes. And, you know, so we have confidence going, extending the CCX until we set October. And if the market still is looking for that level of service, we may extend beyond 2022 into 2023. We'll see. We'll see where the demand is there. And we've already said our goal and our belief is that the CLX Plus is permanent. And, of course, that complements our core CLX product. So we're feeling really good about where we are. We're getting, again, significant premiums to the markets. And our goal is to make sure these are the three fastest services. And we have confidence in our ability to do so. But what would you add to that, Joel?

Yeah, Jack, I just add that the rate impact and whatever the market rates are is going to have a much, much greater impact than where those charter rates are. The charter rates are important, and yes, they have gone up. So the cost will be higher in 2022 and 2023 because we extended duration on a number of vessels out two, three years because that's what the market required. So those will be higher costs. It's something actually we pay very close attention to. But those will be very small factors compared to wherever rates have gone and where they might go in the future. So it continues to be a market where the profitability and the margin is going to be vastly determined by where rates settle out. Does that help you?

No, it absolutely does. Maybe just a couple more questions and I'll turn it back over. But just kind of thinking about the timing of a potential order for some additional Aloha-class vessels, obviously that would be very exciting in terms of the ability to add capacity and some of your capacity-constrained lanes and obviously refresh the fleet to some degree in Alaska. Just sort of curious, you know, do you think that decision is more of a 2022 decision? And is there any way to kind of think about, you know, roughly speaking, you know, how much of the cost of a new build Aloha class vessel gone up, you know, over the last, you know, six, seven years since you, since you placed those orders in 2015.

Okay. So I'll take, I'll take the timing part of that first and then I'll, I'll hit the cost point check. So, um, we, first of all, let's focus on the vessels that were, that we need to replace, uh, are the Alaska vessels, which turned age 40 starting in 2026 and 2027. And we said, uh, There's no bright line. Sometimes you want to replace assets before they turn 40 of age or potentially longer. So we've always felt like maybe on the early side, 2025 delivery or 26 delivery and the later side, 27, 28 delivery. And generally it's about three years and sometimes three and a half years from when you sign a contract to when the vessel would get delivered. So the answer is if we want something delivered towards the end of 2025, then that would be a 2022 decision. So the way we're progressing is doing the work, talking to shipyards so that if we want to make a decision, we can make a decision in the second half of this year to move on that timetable. We may decide not to move on that timetable, but our attitude is let's get ready and be prepared and then make the decision when it's optimal to us. So we will be prepared and have done the work we expect to be able to make that decision later this year if that's what we choose to do or we might defer. From the cost perspective, I can't tell you what the exact, you know, what inflation costs have gone up. That'll all be dependent upon pricing and shipyard capacity and those sorts of things. But what I can tell you is just remind everybody what we paid for the last set of vessels, which was $250 to $270 in that range per vessel. And remember, we didn't outfit those four vessels, the two Alohas and the two Conaloa-class vessels, with the final tanks and pipes for LNG installation. That's what we're doing now. And as we said, that's about a $35 to $40 million cost per vessel. So if you look at what we paid plus those installations back on a five-year-ago cost basis, it would be $300 million or slightly above that. So that gives you a ballpark of what the full installation costs would have been for vessels in the past of this size. So we'll see where the new cost comes out for new vessels if we decide to build a LAHA class.

Okay. Okay. Thanks for all that context, Joel. Really appreciate that. Last question, and I'll hand it back over. But as it relates to – I don't know if you want to look at this from a potential M&A perspective or if you want to just maybe talk about this in terms of just the strategic direction of your logistics business more broadly, but You guys obviously have a lot of cash flow that's coming in and that has come in and that will be coming in over the next couple of years at least and beyond from the strength of your business and the limited CapEx requirements that you have. When I think about your logistics segment, we don't really talk about your intermodal business within that very often. But, you know, I know it's a non-acid-based business. There seems to be some shifts taking place in the market that will sort of prefer and preference the acid-based IMCs kind of moving forward. Would you guys have any interest in whether it's acquiring or really sort of scaling up your owned container fleet within your intermodal business and logistics segment? How do you think about that? Because it feels like there may be some opportunities to make some purchases there on the M&A side that could maybe accelerate that. I'll just kind of leave it open-ended and would love to get your thoughts. Yeah, okay.

Great, Jack. I think the – and you know, Jack, we have a fleet of 753-foot dry van or intermodal boxes that operate in the U.S. rail network today. And as you can imagine, those are performing really well. Part of our decision to do that some years ago was – we wanted to put ourselves in a position with the railroads and with customers who prefer to deal with asset owners themselves and not strictly through brokers. So we've addressed that with many large customers by investing over time in this 53-foot fleet. The question is, would we consider expanding that? The answer is yes, we certainly would. I would be in discussion with the railroad to determine whether whether or not the terms and conditions would be favorable to allow us to earn a return. And you know this well, Jack, the domestic markets right now, logistic markets, there's a lot of money that are chasing deals as a result. In our deal flow, we're seeing a lot of elevated prices and prices that I would just say are fully priced or overpriced. and we've maintained a discipline that we're just not going to overpay for an asset at the peak of the market because everything has to go right and nothing can go wrong, and that's not the way the real world works. But having said that, we're going to stick to niche businesses. We're going to look to grow organically. There could be a tuck-in acquisition, those kinds of things, but we are not going to, buy an airline because, you know, we have money to do it. I mean, a freight cargo airline. We're going to stick to our knitting. We're going to stick to what we know. We're going to look for logical extensions, organic growth opportunities, but we're going to keep our feet on the ground. And so, you know, we may get outbid or we may not find things where we meet on, you know, valuations, and that's just fine with us. So, you know, we've shown our ability to grow over time, and part of this return and approach we have Maybe we missed one or two deals, but we do not make mistakes and we do not overpay. And that's not going to change.

Well, that makes a lot of sense. And you guys have done a great job building shareholder value over time, no doubt about that. So I'll hand it back. Thanks again for the time, guys. Okay, Jack. Thank you.

And as a reminder, to ask a question, please press star 1. And I'm showing no further questions at this time. I would now like to send a call back over to Mr. Matt Cox for closing remarks.

Okay. Great catching up with everyone. Sorry about our technical difficulties. I was first thinking it might have been Ukraine or Russia, but I don't think so. But I hope everyone stays safe, and we'll look forward to catching up with everyone next quarter. Thanks. Aloha.

Ladies and gentlemen, that is the conference for today. Thank you for your participation. You may now disconnect.