Matson, Inc.

conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised, today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Justin Schoenberg. Please go ahead.

Thank you, Corinne. 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, a forward-looking statement in the meaning of the Federal Security Report providing expectations, predictions, projections, and 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 overlooking data, the press release, the presentation slides, and this column. These risk factors are described in our press release and presentation and are more fully detailed than the captured risk factors, pages 13 to 25, our form 1010, filed February 23rd, 2024, in our substance violence with the SEC. Please also note that the date of this conference is August 1st, 2020, and any forward-looking statements that we make today are based on assumptions as we undertake no obligation to forward-looking statements. I will now turn the call over to Dr. Mack.

Okay, Justin, thanks. Thanks to those on the call. Starting on slide three, Mattson's ocean transportation and logistics business segments performed well, higher year-over-year operating income in the second quarter. In ocean transportation, operating income increased year-over-year. Our China service saw significantly higher year-over-year freight rates and was the primary driver of the nation's consolidated operating income. We had higher year-over-year volumes in Alaska, primarily due to two additional sailings. Hawaii and Guam saw lower over year volume. In logistics, offering income each year over year on the strength of supply chain management. As a result of our performance in the second quarter and the expected strength of our China service in the back half of the year, we're raising our outlook in 24. Joel will go into more detail on our updated outlook later in the presentation. I'll now go through the second quarter performance of our trade lanes, SSAT, and logistics, so please turn to the next slide. Container volume in our Hawaii service decreased 3.6% in the second quarter year over year. The decrease was primarily due to lower general demand. Tourist arrivals in the second quarter were lower primarily due to significantly lower visitor traffic to Maui as a result of the wildfires last year. I will go through our full year outlook on the next slide, so please turn to slide five. According to UHERO's second quarter 2024 economic report, the Hawaii economy is projected to grow modestly in 2024, supported by a low unemployment rate and increasing construction activity. While we're encouraged by UHERO's longer-term forecast and some of the positive factors supporting that growth, our recent performance is reflective of a softer market. We expect volume in 2024 to be modestly lower than the level achieved last year, primarily due to continued challenges in population growth and lower discretionary income as a result of higher inflation and interest rates. Moving on to our China service on slide six, Matson's volume in second quarter 2024 was 3% higher year over year As we continue to see a high level of demand from the e-commerce and garment customers, we achieved average freight rates that were significantly higher year over year. Please turn to slide seven. Supportive economic and consumer demand environment in the U.S. coupled with tighter supply chain led to elevated freight rates during the quarter. The supply and demand dynamics we experienced in the second quarter were not consistent normalized operating environment. We outperform from a freight rate perspective. We expect our China service to continue to see elevated freight rates during the traditional peak season in the third and early fourth quarters. While we feel good about rate levels during the traditional peak season period, trajectory after the peak season is uncertain given several factors, including the strength of U.S. economy and interest rates, trans-Pacific supply, and the Red Sea situation and its related supply chain effects, the East Coast labor union negotiation, and the U.S. elections. Nonetheless, we expect freight rates to remain elevated as long as the underlying economic supply chain and geopolitical conditions persist. At some point, we expect rates to normalize, timing in which will likely depend on the duration and the degree to which these factors influence supply and demand dynamics in the trade lane. Regardless of the environment, we expect the ongoing shift from air freight to expedited ocean and the continued growth of e-commerce goods to drive long-term demand for our China service. I'm confident in our positioning with the two fastest and most reliable expedited ocean services in the Trans-Pacific trade lane and our unmatched destination services. Please turn to the next slide. In Guam, Massive container volume in the second quarter of 2024 decreased 6.1% year over year due to one less sailing compared to last year. In the near term, we expect continued improvement in the quantum economy underpinned by low unemployment rate. For 2024, we expect container volume to approach the level achieved last year. Please turn to the next slide. In Alaska, Essence container volume for the second quarter of 2024 increased 4.9% year-over-year due to two additional northbound sailings compared to last year. In the near term, we expect continued economic growth in Alaska, supported by a low unemployment rate, job growth, and lower levels of inflation. For 2024, we expect Alaska volume to approximate the level achieved last year. Please turn to slide 10. Our terminal joint venture, SSAT, increased $2.6 million year over year to $1.2 million. The higher contribution was primarily due to higher lift volumes. Although container volumes on the US West Coast have been particularly strong in the first half of the year, volume across SSAT terminals has not been as strong. In 2024, expect the contribution from SSAT to be modestly higher than 2023 due to an expected increase in lift volumes. Turning now to logistics on slide 11, operating income in the second quarter came in at $15.6 million, or approximately $1.3 million higher than the result in the year-ago period. The increase was primarily due to a higher contribution from supply chain management. Our supply chain management service includes purchase order management, origin operation, and destination services, and allows us to provide a comprehensive solution from factory floor to destinations across the US. For the third and fourth quarters of 2024, we expect operating income to approximate the level achieved last year. And with that, I will now turn the call over to Joel for a review of our financial performance.

Okay. Thanks, Matt. Please turn to slide 12 for review of our second quarter results. For the second quarter, consolidated operating income increased 27.9 million year-over-year to 124.6 million. Higher contributions from ocean transportation and logistics, 26.6 million and 1.3 million, respectively. The increase in ocean transportation operating income in the second quarter primarily due to significantly higher freight rates in China, partially offset by higher vessel operating costs, including fuel-related expenses and higher SG&A costs. The increase in logistics operating income was primarily due to higher contribution from supply chain management. In the quarter, we had interest income of $18.8 million, which includes $10.2 million of interest income earned on our 2025 The interest expense in the quarter decreased $0.8 million year-over-year due to the decline in outstanding debt in the past year. Debt income increased 40.1% year-over-year. Diluted earnings per share increased 46.5% year-over-year. The difference between the two due to a 4.2 million percent decrease in the diluted weighted average shares outstanding. Please turn to slide 13. This slide shows how we allocated our trailing 12 months of cash flow generation. The LTM period generated cash flow from operations of approximately $608.5 million, from which we used $41.7 million to retire debt, $206.9 million on maintenance and other CapEx, $40.3 million on new vessel CapEx, including capitalized interest and owner's items, $24.6 million in cash deposits and interest income in the CCF, net of withdrawals for milestone payments, $12.8 million on other cash outflows, while returning approximately $237.5 million to shareholders via dividends and share repurchase. Please turn to slide 14 for a summary of our share repurchase program and balance sheet. During the second quarter, we repurchased approximately 0.6 million shares for a total cost of $72.2 million, including taxes. Year to date, we repurchased approximately 1 million shares for a total cost of 121.1 million, including taxes. Since we initiated our share repurchase program in August of 2021 through June of this year, we have repurchased approximately 10.6 million shares or 24.4% of our stock for a total cost of approximately 877 million. As we have said before, committed to returning excess capital to shareholders and plan to continue to do so in the absence of any large organic or inorganic growth investment opportunities. Turning to our debt levels, our total debt at the end of the second quarter was $420.7 million, a reduction of $9.8 million from the end of the first quarter. Two other items to note. On April 19, 2024, Matson received a federal tax refund related to the company's 2021 federal tax return of $118.6 million, as well as $10.2 million in interest income earned on the tax refund. During the quarter, we also paid $35.8 million into the CCF related to a milestone payment on our new vessel program. With that, let me now turn to slide 15. and walk through our outlook for the third and fourth quarters of 2024 on the left-hand side of this page. We expect ocean transportation operating income in the third quarter of 2024 to be meaningfully higher than the $118.2 million achieved last year. In the fourth quarter of 2024, we expect operating income to be moderately higher than the $66.4 million achieved in the fourth quarter of 2023. We expect our China service to continue to see elevated rates during the traditional peak season third and early fourth quarters. For our domestic trade lines, we expect volumes to approach the levels in 2023, asking a significant change in the trajectory of the US economy. For logistics, we expect operating income in both the third and fourth quarters of 2024 to approximate the levels achieved last year. On the right-hand side of this slide, we expect the following outlook items for the full year. Appreciation and amortization to approximate $180 million, inclusive of $27 million for dry dock amortization. Interest income to be approximately $45 million. Interest expense to be approximately $8 million. Other income to be approximately $7 million. An effective tax rate of approximately 22.0%. And dry docking payments at approximately $35 million. Moving to slide 16. The table on the slide shows the CapEx projection for 2024. Compared to what we previously provided on our first quarter call in April, we increased our capital expenditure outlook for LNG installations and re-engineering projects by $15 million to $85 to $95 million because of higher parts and labor associated with the LNG installation on Mauna Kea. All other line items remain unchanged. Milestone payments for a new vessel construction are expected to be paid from the Capital Construction Fund, which already covers approximately 71% of the remaining obligations. I will now turn the call back over to Matt.

Okay, thanks, Joel. In closing, Matt's performed well in the first half of the year. For the remainder of the year, we expect higher year-over-year financial performance, driven largely by elevated freight rates in the China surface. At some point, we expect supply and demand activity in the Trans-Pacific trade lane to trend towards normalized operating conditions. And while we acknowledge a number of factors in China's service outlook remain uncertain, we remain confident in our ability to respond to changing market conditions to serve our customers at an extremely high level. And with that, I will turn the call back to the operator and ask for your questions.

Thank you. At this time, we will conduct the question and answer session. As a reminder to ask a question, you will need to press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from Ben Nolan of Stifle. Your line is now open. Thanks.

Good quarter, guys. I've got a couple. Can I do three? Is that allowed?

Sure. Sure, Ben. Okay.

I appreciate it. So, first of all, it was breaking up a little bit, but, Matt, did you say that SSAT, while there was a lot of volume moving through the West Coast, SSAT did not have as much as some of the other ports? Is that what you'd say? Yeah. Yeah, Ben, I did say that. Can you maybe explain that a little bit?

Yeah, sure. So we operate a portfolio of eight terminals along the U.S. West Coast, that is the SSAT Joint Venture does, and two of those are in L.A. Long Beach, two are in Oakland, with the balance being in the Pacific Northwest, both our Tacoma operation and three terminals in Seattle area. And what we saw as the volumes increased generally in the Trans-Pacific, that cargoed historically, and in this case the same, generally fill up in Southern California first and then migrate north to Oakland and lastly go to the Pacific Northwest. And it's really in the Pacific Northwest is where most of that volume really did not appear and has not yet appeared. And so that was the explanation for why we didn't see the averages move up given the portfolio and the geographic location of those terminals.

Okay, that's very helpful. Appreciate it. And then Sort of in the same vein, it's been interesting to see what's happening on the freight side, and I think you guys would probably be really well-positioned to talk to it, but we've seen a lot of freight coming into the ports, but the trucking market's not been great. The domestic logistics market's not been great. I've talked to a lot of people who just don't know what's happening to all this freight. It doesn't seem like it's building up in inventories. can maybe talk through what you're seeing, what the type of freight that's moving is, where is it going, anything that can maybe help demystify this a little bit?

Yeah, I'll try. It's a complicated question, Ben. But I think what we're seeing – let me first comment on the market more generally before we go to maps and specific customer sets and dynamics, which we think are a little bit different. But I agree with you. that it's interesting to see how the international freight markets are performing much better than the U.S. domestic markets and trade. What we're hearing from customers have probably been some of the same things you're hearing, and you mentioned it in your question, which is, you know, there don't appear to be surplus inventories, and our customers are continuing to take very close or pay very close attention to their inventory levels. And so we're not seeing – other than seasonal getting ready for peak season changes in inventory levels. So that remains pretty steady. I think the parts – if you look at the consumer, as we know, the consumer is hanging in there, and consumer spend has held its own. And so broadly we're seeing a pretty good level of demand that supports the increase in imports – What has been interesting is really the changes around excess of supply on the trucking side and other things that are holding down some of the pricing mechanisms in the domestic trades. We're seeing it in our intermodal brokerage as well. So we're seeing the same thing, and there has been a lot of downward pressure on rates because of that surplus capacity. But beyond that, I can't give you much more insight – generally into the trade. But I can say the matching story is a little bit different. And as it has been, we have been and we seek to and have been consistently the fastest and most reliable on the service for the e-commerce, for, you know, last-minute orders, for late production, for all of the reasons why someone would be willing to pay a premium to get their particular cargo to market, the congestion, air freight. All of those things are point to very strong demand in the expedited market, and in particular, very strong demand for the massive services. So that's only half an answer, Ben, but it's probably the best I can give you.

I'll take it. I appreciate it. All right. And then last, I appreciate you hanging in with me for this. So this is the first time that I remember you guys calling out your supply chain management business. I could be not remembering, but is that – Is that, would you say, as you're thinking about your logistics business, an area of increased focus? If so, you know, are you looking to expand on that either organically or inorganically? Or can you maybe just talk me through how that fits as part of the puzzle and where you think it's headed? Sure.

Yeah, happy to. And you're right. I believe it's the first time we've called it out. And, you know, I would also just note for qualification that the The changes in profit for logistics are very small, so it tends to amplify things that, you know, typically are not part of our core story. But it does highlight the synergies between Mattson Logistics and Mattson's Ocean businesses with regard to our China service. Mattson Logistics operates in multiple locations inside of China. It also, as you know, moves the intermodal cargo once it arrives in our Long Beach terminals and to the final destinations in Chicago and Memphis and Dallas and other locations. But the supply chain services we called out are those services that we provide to customers in China that are less than container load that would be consolidated, moved onto a Mattson container and onto Mattson's expedited service offering. And that has been sort of a very slow and steady organic growth build over the last – well, I mean, it's been – really accelerated since the pandemic and is now approaching the radar again with the acknowledgement that the numbers are relatively small in the logistics business in terms of its relative change in profitability. So that's the story there, Ben.

Okay. And just to round that out, how do you think about sort of the trajectory of it?

I see it like many of our other businesses continuing to grow organically. We have an unbelievable brand in China. And for customers that have three-and-a-half container loads of cargo, they want to have that last half of a container loaded into an LTL box consolidated by Matson and delivered, and we're going to continue to see growth in that segment as our China businesses, you know, continue to perform well.

All right, perfect. I appreciate it. Thanks for putting up with me. Okay, no problem, Beth. Thanks.

Thank you. Our next question will be coming to us. from Jake Lacks of Wolf. Your line is now open. Hey, guys. Thanks for your time.

Sure, Jake.

So, a couple on the guide. I just wanted to see if you could give a little more perspective on the degree of outperformance in ocean EBIT you're thinking when you say meaningfully. I know it's a little more specific than you typically get, but we've seen a pretty big spike in rates. So, any thoughts here would be helpful as we just think about recalibrating our models.

Yeah, Jake, I mean, you've got to take meaningfully – we're just saying meaningfully higher. So I can't really elaborate on that. Just use your best estimate based upon that. I would say, though, that this quarter we just had is meaningfully higher than last year's second quarter. But we're just going to leave it with the language we've chosen, meaningfully higher.

Got it. Okay. And then in 4Q, are you assuming a pretty full rate normalization there?

Yeah, I think at this point – Jake, we're expecting a more traditional peak period, meaning after the first week or so of October when we get into our traditional peak period, we start to see the normal market adjustment factors of peak season surcharge to subside and, you know, as we get second half of the fourth quarter, return to a more post-peak season environment. So it's really more of a traditional return to a seasonal pattern. subject to all the qualifications about other external events that may impact that. Got it.

Thanks. And then one more for me. You guys spoke about long-term demand growth and conversion from air for your expedited ocean service. How close or how far are we from demand being there for, you know, to reintroduce sort of a third expedited service?

Okay, I got it. Thanks, Jake. Yeah, it's a good question. We certainly – it's on our long-term planning radar. I would say it's unlikely that we would see the demand in this time horizon. If the market opportunity presents itself, we certainly – we have a track record of being able to respond to those changes to be able to take advantage of it. vessel charter. There aren't a ton of vessels on charter available to put together a service that would need six vessels or something like that, but in the Trans-Pacific trade lane. But our view is that it remains an option to us under different market conditions, but not likely expected to be under the current conditions is where we're thinking about it.

Great. Thanks for the time.

Okay. Thank you.

Thanks, Jake.

Thank you. Our next question will be coming from Daniel Imbrow of Stevens Inc. Your line is now open.

Yeah, thanks. Good evening, guys. Joel, I want to follow up maybe on that guidance. I think you guys talked about expecting pricing to stay strong through peak season, but how are you thinking about volume through the upcoming peak season? Maybe with some of the strength in 2Q, a pull forward, do you still think we'll see a normal kind of growth sequentially? Just curious how you're feeling about the volume growth side as you talk to your customers for the back half.

Yes, thanks, Daniel. We expect to be full. I mean, as you know, pretty much year-round, CLX and MAX were full other than off periods around holidays, Lunar New Year, et cetera. So we expect to be full here in the third quarter and also into the early – the end of the peak season, as we said, early fourth quarter.

Helpful. And then on the balance sheet, I think you took up CapEx Guide a little bit here for this year. I guess is that just a pull forward from some of the investments from next year? And then as you think about the windfall of cash with stronger pricing – How do you think about deploying that cash between growth, buyback, any other investments you're looking at?

Really, no change in all that, Daniel, to be honest. So, the only thing we changed was because of actual costs that are coming through on our Monokai project, our LNG reengineering project. We bumped up that lot item by $15 million just due to that one specific project. So, really, it's not a pull forward of CapEx from one period to another, things like that. And Last quarter, we gave numbers for 2025 and 2026, and we've made no change to that either. So, overall, the CapEx picture I would describe as unchanged, other than just some higher costs on one specific project.

Helpful. Let me have a third one for me, just to come back near term. I know, hard to give too much color on 3Q, but did I hear you right? You described the 2Q growth as meaningful. Is that the decent bogey when you guys think about meaningful growth?

Yeah, if you compare last year's, you know, we talk about operating income performance for each of the segments and consolidated. And, yeah, clearly this year's second quarter for Ocean and then, therefore, consolidated as well were meaningfully higher than last year's second quarter. So I'm not saying it's going to be – that's not – don't read that as we're saying it's the exact amount, but it qualifies as meaningfully higher.

great and then one more follow-up when you think about adding the new string of ships whether it's south china or north vietnam i guess would you be looking to add company on ships could you lease ships like you do with the max line would that make it easier to do financially just think about what are the considerations or how long would you need to see this growing demand to decide it is worth setting up a new string of six ships yeah daniel this is matt i'll answer that one i think our view is um and as i said

It's not right on our radar at the moment, but if we were to add it to the third string, they would very likely be chartered vessels, foreign-built chartered vessels, like we have with our MAX service. Those are comprised of chartered vessels that we would do it that way. And some of the factors that, of course, would go into it are the, as I mentioned a moment ago, the availability of chartered ships, and you'd need to charter six of them to be able to have a weekly service. But the other factors are In each of these markets, especially the growing markets like Vietnam and in other places, the question is not so much whether there's a demand for Mattson's product, but is there enough demand that would be willing to pay a premium price that would allow us to operate that service at a level of profits that would make sense for us to do? And so it's not that there isn't cargo there, but in some of these smaller markets, there's a smaller segment. So, for example, in Vietnam, We have a regular service at a Haiphong, which connects with one of our trusted feeder partners that move a couple hundred loads a week out of Vietnam, Haiphong in particular, that meets up with our line haul ships on the COX and MAX. And so, you know, we need to be confident that those markets would be able to accommodate a much greater percentage of the capacity to make those voyages profitable.

Great.

Thanks for all the comments. Okay. Thank you, Daniel. Thank you, Daniel.

Thank you. This concludes the question and answer session. I would now like to turn it back to Matt Cox, CEO, for closing remarks.

Okay. Well, thanks for being on the call today. We look forward to catching up with you on the third quarter call. Thanks. Aloha.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.