Q2 2020 Matson Inc Earnings Call
These risk factors are described in our press release and presentation and are more fully detailed under the caption risk factors on pages 24 to 34 of our form 10-Q filed on May six 2020, and then or subsequent filings with the FCC.
Please also note that the date of this conference call is August <unk> 2020, and any forward looking statements that we make today are based on assumptions as of the state we undertake no obligation to update each forward looking statement.
I'll now turn the call over Tonight.
Exactly and thanks for those on the call today.
I'd like to start with a quick recap of our second quarter results before I walk through our response to the 'cause it 19 environment and our current priorities should please turn to slide three.
That's an inch businesses performed well despite the challenges from the covert 19 pandemic and related economic effects.
Okay, and transportation had a very good quarter and was led primarily by strengthened our China service, including seven voyages in our supplemental service because steel X plus as well as year over year volume improvement in a regular CLX service.
And our Hawaii service, we are better than expected volume as we carried a portion of pictures falling due to a drydocking of one of its vessels.
And Alaska volume was better than expected that's a local economy gradually reopened in the latter half of Meg and into June which led to improved free demand.
And logistics sort of the business lines continued to be challenge by the coast at 19 pandemic.
The decline in operating income was led by lower contributions from transportation brokerage and freight forwarding both of which are lower retail related volumes because of the covert 19 environment.
Please turn to slide four.
On the first quarterly earnings call.
I discussed connection was responding to managing the business through this pandemic and period of economic uncertainty I want to spend a few minutes revisiting goes actions and where we stand today.
The operational and financial actions, we've undertaken in the last few months helped during this difficult period and let the opportunities one such opportunity the introduction of CLX plus service principally drove the year over year increase in the second quarter consolidated operating income.
Other initiatives executed during the second quarter, including shifting the Daniel Acadia No way one of our newest and largest vessels to the regular CLX service in late June.
Do you think the frequency of four calls in our Hawaii neighbor Island arch service.
Reducing maintenance spend and vendor costs.
Reducing or eliminating discretionary costs I.
I mean, instituting a hiring freeze and salary reduction plan.
We still have a number of initiatives under evaluation or in process, including a consolidation of our Seattle terminal operations into our Tacoma terminal, which we expect to complete in the third quarter.
We also have additional cost and revenue opportunities, we're evaluating as this period of uncertainty continues to evolve.
Bottom line. He said we remain on track well all the operational and management initiatives. We highlighted on the makes it the earnings call and we are actively pursuing additional opportunities for operating results improvement.
All taken together, we expect to exceed the high end of the 40 to 50 million dollar range operating results improvement.
Lastly for the third quarter of 2020, we expect consolidated operating income net income diluted EPS and EBITDA to exceed the results achieved in the third quarter of last year.
Please turn to slide five for a summary of our current priorities.
We remain vigilant safeguarding the health and safety of our employees throughout the organization guided by the processes on P.C. disinfecting, social distancing put forth by the coast Guard CVC and other government agencies.
We're also maintaining our position and working from home for those whose job functions allow them to do so.
Our second closely related priority is ensuring the consistency of our ocean transportation services. This means arriving at the truck terminal on time, making sure the cargos available to our customers as quickly as possible.
For the lifeline communities, we serve and our international customers with critical freight for U.S. West coasts. It's imperative that we maintain our best in class on time performance, particularly during these challenging times.
We also want to continue to deliver exceptional service for our Matson logistics customers as supply and demand conditions remain volatile.
Our third priority, it's maintaining cost and capital discipline in preparation for an extended downturn.
While the U.S. economy has improved from the depth to the second quarter. The trajectory remains highly uncertain as such we remain intensely focused on generating free cash flow and paying down debt.
We're continuing to defer or eliminate all capital spending not considered are essential or previously committed.
These include these committed capital projects, which I'll briefly go through in a moment include the Hawaii vessel renewal program.
The first phase of sand Island terminal upgrade and the successful scrubber program.
Our fourth priority.
Just to complete the final vessel in the four vessel Newbuild program for Hawaii service.
We christen that's Onea on July 2nd at the NASSCO shipyard in San Diego.
And the vessel remains on track for delivery in the fourth quarter of this year.
Our first priority is to complete the first phase of the Sand Island terminal project, we remain on track to complete the first phase later this year with the final modifications to the three existing older cranes that we plan to use that our regular schurz as well as the demolition of the last of our for end of life cranes.
Our last priority is to complete the scrubber program the fixed vessel in the six vessels program is currently in dry dock. The program remains on track for completion in the fourth quarter. This year.
For the install scrubbers are in service and working well.
I'll go through the second quarter performance and provide commentary on current business trends. Please turn to slide six.
Hawaii container volume for the second quarter decreased 4% year over year.
The freight volume declines primarily due to near zero tourism and the temporary closure of retail stores because of the stage Covidien 18 mitigation efforts.
Mark partially offsetting this decline was volume from patients due in part to the Drydocking of one of its vessels.
The western container market in the second quarter was down approximately 15% on a year over year basis I.
As you May recall, the state announced several orders in March to mitigate the spread of Kogut 19 on the islands. The 14 day quarantine order carry forward through the second quarter and materially affected tourism led to a precipitous decline and economic activity with unemployment hitting a historic high this.
Second quarter presented a difficult environment for tourism related businesses and many of them remained close throughout the quarter.
I will now go through current business trends in our Hawaii Tourism, Please turn to slide seven.
The Hawaii economy remains challenged by the near zero tourism due to the continuation of the Coven 19 mitigation efforts the stages extended its 14 day corn team for visitors through August 30, Onest and it would not surprise us to see the state further extend the opening date.
This is a very difficult environment for tourism related businesses, particularly hotels, where the majority of the top 270 hotels across the islands remain closed.
The unemployment rate remains elevated at 13.9%, although well down from the historic high of 23.5% in May.
The states economic recovery will be highly dependent on an reopening of tourism and the trajectory of tours and post reopening ESCO and making mitigation efforts to evolve.
To give you a sense of the volume trends in the third quarter, our western container volume in July declined approximately 2.4% year over year and that was pretty consistent week to week in the month.
The westbound volumes largely consistent assessments goods, but also included a modest amount of retail goods have some businesses that reopened.
We didn't carry any patient volume in July and we don't expect to carry any volume for patients beyond the second quarter.
Moving to our China service on slide eight Netcents volume in the second quarter 20, twinning was 68.1% higher year over year.
The increase in the quarter was primarily due to the introduction of the supplemental CLX plus service the seven chartered voyages.
We also saw an increase in volume on a regular CLX service with these vessels sailing at capacity.
We continued to see dislocation in the air freight market lead to strong demand from essence expedited service demand was so exceptionally strong in may that we embarked on the CLX plus opportunity, which I'll come back to in a few moments.
Demand for CLX until it plus was driven by PPD E Commerce working from home electronics and other high demand goods. We also saw modest rebounded retail goods as the U.S. West coast gradually reopened after the shelter in place.
As previously mentioned, we move the Daniel taking away into the regular CLX service at quarter end to better position capacity to demand. This vessel add roughly four to 500 additional containers for trip when fully utilized.
Please turn to slide nine.
I want to spend a few minutes on Winemaster introduced to seal X plus service in the second quarter.
As many of you know we've been in the Trans Pacific Expedited Ocean freight market for 15 years over this timeframe. Our CLX service has demonstrated a best in class on time freight availability.
Through this relentless focus on the liability we've developed a strong longstanding relationships with customers.
Our service has been interval in their growth.
During the quarter, a unique set of conditions provided mats and opportunity to start a regular.
Chartered vessel service running in concert with our regular CLX service.
Our CLX customers saw increased demand in the covert 19 environment for a variety of goods and they were looking for an additional expedited ocean capacity, particularly given the disruption in the transpacific airfreight and secondarily the ocean freight markets.
We also saw demand from new customers that had traditionally relied on air freight service due to the decline in global economic activity as a result of the pandemic vessel charter rates fell to very low levels and fuel costs were significantly lower than pre coaches levels.
What started as a week to week opportunity became a multi month opportunity for Matt.
We now plan to offer the weekly CLX plus business through peak season, which is late October or potentially longer as our customers needs dictate our goal is to make the CLX plus service a permanent one pending our customers' needs in the trajectory of the business and operating conditions.
Please turn to slide 10.
For the third quarter, we expect continued disruption and lots of capacity and the transpacific air cargo and Ocean freight markets. As a result, we expect continued demand for E commerce and other high demand to its customers, necessitating and reliable access, but I did ocean service.
We also expect.
Rebound in retail related goods, such as garments and apparel to continue as cobot 19 mitigation efforts east and inventories begin to build for the holiday season.
We expect to CLS and CLX plus vessels to be at capacity in the third quarter.
To give you a sense of the current volume trend our east on container volume in July increased 125.6% year over year led by the CLS less volume, but also higher volume on CLX due to the Daniel K in no way and the second of the Aloha class vessels to kind of on a HILA upper.
Rating in the CLX service.
Turning to slide 11.
In Guam maxims container volume in the second quarter 2020 decreased 12.5% year over year.
The volume decline was primarily result of lower demand for retail related goods discovered 19 mitigation measures remained in effect.
To a lesser extent lower tourism to the island's had a modest negative impact on the consumption of goods and freight demand.
For the month of July our western container volume increased 8% year over year, but it's important to note that July 2018 was an unusually soft month for the service.
In July 2020, we saw improvement in the retail related environment versus what we are experiencing in the second quarter has been assistance reopened with easing of covert 19 mitigation measures.
In the near term, we expect to see continued modest improvement in the retail environment, but we also expect tourism to remain challenged like opened 18 and have a negative impact on freight demand.
Moving now to slide 12 in Alaska methods container volume for the second quarter decreased 9%.
We saw lower year over year northbound volume due to lower demand for retail related goods as an effect of the state's covert. Thank team mitigation efforts, plus one less sailing compared to the year ago period.
Also saw modestly lower southbound volume.
Northbound volume came in better than expected versus our expectations in the first quarter earnings call due to the gradual reopening of the local economy in late May in early June which led to improved free demand.
Turning to slide 13.
Ill provide some thoughts on the current business trends in Alaska.
Despite the gradual reopening of the economy ahead of our other trade lanes, the residual negative effects from covered Nicking pandemic remain.
In addition.
The negative effects of significantly reduced tourism is expected to impact the local economy during the summer season, which we expect will impact freight demand.
This is activity in the state remains well below pre cobot 19 levels the unemployment rate in June was 12.4%.
Down from its high this year than this year in April 13.5%.
And the low oil price environment remains which presents challenges to oil exploration and production budgets in the near term.
We expect our north bound volume to be negatively impacted in the third quarter for the month of July our north and container volume declined 5.1% year over year.
Good luck to point out that the seafood season. This summer is in the off season in this natural two year cycle as a result.
We expect southbound volume to be lower year over year.
So while Alaska is further along than most states and its reopening plans, we expect the Alaskan economy to be challenged in the near term with too much uncertainty regarding the trajectory of the local economic recovery.
Our terminal joint venture SSH key contributed $3.7 million in the second quarter 2020 compared to $900000 in the prior year period, the year over year improvement was primarily due to the absence of additional expense related to the early adoption of the lease accounting standard and the.
Second quarter of last year, partially offset by lower lift volume.
The lower lip volume is due to the significant number of transpacific Blake sailings during the quarter as a result of the cobot vaccine pandemic.
We expect an improvement in SSH key lift volume from the second quarter with some transpacific ocean capacity reinstated this quarter. The total active capacity remained below normal levels.
As we've said before we expected recovery and lip volumes that SSH to be SSH key to be closely tied to the speed and recovery of the U.S. economy.
Both of which remain unclear at the moment.
We also expect no further impacts SSH keys results this year related to the lease accounting standard adopted last year.
Turning now to logistics on slide 15.
Operating income in the second quarter came in at $8.9 million were $2.4 million lower than the results in a year ago period.
The decrease was primarily due to lower contributions from transportation brokerage and freight forwarding both of which continued to be impacted by lower retail related volumes as a result of coping 19 mitigation efforts and related economic effects.
Within transportation brokerage lower year over year import volume on the U.S. closed us West coast impacted our intermodal business and the temporary closure of retail stores negatively impacted our highway business.
Free forwarding business to Alaska was negatively impacted in the first half of the quarter by the temporary closure of retail stores under cope with 19 mitigation efforts.
The gradual reopening of the local economy in late May early June and saw a pickup in volume.
In the near term, we expect cobot 19 pandemic to continue to negatively impact transportation brokerage and freight forwarding a year over year basis, particularly as it relates to retail related volume.
However, many of our business are seeing improving conditions since late may and I'll give you a little color on this we think transportation brokerage intermodal volumes picked up in June and it's been steady through July inline with the improving trend of us West coast in pork volume. Most recently, we've seen payout of conditions for an.
Model and highway in southern California, due to congestion on the rails, which is driving significantly higher trucking rates. These truck conditions are likely to remain volatile in the near term historically, a transportation brokerage business have performed well in volatile volatile environments such as this.
And Alaska, our freight forwarding business. The weakness we saw in April in early May do to covert making mitigation efforts reverse course in late May as this has reopened in Alaska.
Throughout July span Alaska is businesses has remained relatively steady although lower than last July im sorry than July of last year. Lastly, we continue to see steady business activity and warehousing and supply chain services on par with the activity. We saw in the first few quarters of the year.
I'll now turn the call over to my partner Joel for a review of our financial performance and recent capital structure updates Joel Thanks, Matt.
Now onto our second quarter financial results on slide 16.
Ocean Transportation operating income for the second quarter increased 22.6 million year over year to 42.3 million.
The increase was primarily due to a higher contribution from the China service, including the contribution from the sale X plus service.
Lower operating lower vessel operating costs, including the impact of one less vessel operating in Hawaii service and the timing of fuel surcharge related collection.
Partially offset by lower contribution from the Hawaii service.
The company's SSH key terminal joint venture investments contributed 3.7 million or 2.8 million more than the prior year period. The increase was primarily due to the absence of additional expense related to the early adoption of the lease accounting standard in the second quarter of 2019, partially offset by the lower lip volume due to cancel transpacific sale.
During the second quarter this year that Matt mentioned.
Logistics operating income for the quarter with 8.9 million or 2.4 million lower than the prior year period. The decrease was due primarily to lower contributions from transportation brokerage and freight forwarding.
EBITDA for the quarter increased 21.3 million year over year to 86.2 million due to higher consolidated operating income of 20.2 million higher other income of point $7 million and point 4 million of higher depreciation and amortization, which includes dry dock.
Amortization.
Interest expense for the quarter was 8.2 million or point 4 million lower than the first quarter of 2020.
I will comment further on our interest expense run rate later in the presentation.
Lastly, the effective tax rate in the quarter was 26.3%.
On a year to date basis Ocean transportation operating income increased 21.1 million year over year to $50.2 million. The increase was primarily due to a higher contribution from the China service, including the contribution from the CLX plus service.
And lower operating costs lower vessel operating costs, including the impact of one less vessel operating in Hawaii service, partially offset by lower contribution contribution from the license.
The company's SSH key terminal joint venture investments contributed 7.7 million or 1.7 million less than the prior year period. The decrease was larger largely attributable to lower lip volume.
Logistics operating income on a year to date basis was 14 million or 5.4 million lower than the prior year period. The decrease was due primarily to lower contributions from transportation brokerage and freight forwarding.
Slide 17 shows how we allocated our trailing 12 months of cash flow generation.
For the LTM period, we generated cash flow from operations of 281.2 million.
Borrowed 45.5 million on a net basis and received 14.3 million from sale leasebacks from which we used 86.8 million on maintenance Capex.
205 million, our new vessel, capex, including capitalized interest and owner owners items.
And 21.2 million on other cash outflows, including 18.5 million and financing costs related to the to tighten 11 transactions and amendments to the debt agreements in the first half of 2020.
While returning overall 30.1 million to shareholders via dividends.
Please turn to the next slide on 18, I want to spend a few moments on cash flow generation in the second quarter.
Our LTM cash flow from operations remained strong with second quarter cash flow from operations of 72 million.
Our first quarter call I mentioned that under the cares Act, we would be able to reclaim the remaining amount of our AOMT receivable.
The second quarter, we did and indeed received the full 22.9 million of our and AMTI tax receivable, which can be found in the prepaid expenses and other assets line item and our cash flow statement.
The chart on this slide shows the bridge from LTM EBITDA to LTM cash flow from operations and enough and and on an LTM basis, EBITDA and cash flow from operations were approximately equal with the AMC tax receivable inflow of 22.9 million a meaningfully positive contributor in the LTM period.
Turning to slide 19 for a summary of our balance sheet, you'll note that our total debt at the end of the quarter was 890 million and our total debt net of cash and cash equivalents was 870.5 million.
In accordance with GAAP accounting rules deferred loan fees related to the new type of 11 debt and recent private placement debt and revolving credit facility amendments are shown as a reduction to long term debt on the balance sheet as noted in the footnote on this slide.
Deferred loan fees included approximately 15.7 million in guarantee and other payments, we made as part of the two tied to 11 transactions we executed during the quarter.
Going forward, though we plan to continue to show in the earnings release earnings presentation, and the notes to our financial statements aligned representing total debt, excluding the deferred loan fee balance to make that clear to investors.
I also want, especially among us our capital structure and leverage on on slide 20, as there were a number of important capital structure changes that took place during the quarter first off we executed two successful tighter 11 transactions for approximately 325 million in aggregate at a weighted cash interest rate of approximately one.
0.28%.
Each tranche has a 25 year final maturity date and have a straight line amortization schedule over that period.
Secondly to our two of our higher coupon private notes, which mature in 2044 in 2045 were redeemed for approximately 170 million and one private notes mature for 3.5 million.
And third we reduced our revolver borrowings by $179 million from cash flow generation and proceeds from the title 11 transactions.
Net of these capital structure actions, we reduced our total debt by 34.9 million and significantly lowered the weighted average interest rate on debt outstanding.
Based on the outstanding principal amount of debt at the end of the second quarter. The weighted average interest rate is now approximately 2.7% or or a follow up 100 basis points lower than it was at the end of the first quarter, assuming a rate of 3.25% on the revolving credit facility on June 30.
The annualized cash interest expense based on the interest rates in outstanding principal at the end of the second quarter is approximately 2 million per month or 24 million annually, which is approximately $10 million last on an annual basis than our interest run rate at the end in the first quarter. This year.
So overall, we made substantial progress this quarter in reducing our interest expense run rate [noise].
[noise] significant progress was also made on the leverage ratio, which was 3.03 times at quarter end compared to 3.4 times at the end of the first quarter per our amended debt agreements.
Available borrowings to the allowable leverage ratio of 4.5 times at quarter end was approximately 433 million compared to approximately 164 million.
At the end in the first quarter.
As a reminder, EBITDA, we reported our press release and this presentation is different and lower than the EBITDA calculated under our debt agreements.
As Matt mentioned previously one of our current priorities is to reduce our leverage ratio in preparation for an extended downturn.
Over the last couple of years, we have said that we want to reduce our leverage ratio to the low twos following our nearly $1 billion new vessel build program.
Given the uncertainty of the environment, we're in we want to reiterate and reducing our leverage ratio to look to the low twos remains an important priority.
Moving to slide 21.
On our first quarter earnings call I walked through the title 11 transaction that we that we executed neighbor on the Daniel K anyway.
This slide lists some of the details of that transaction and also the second tied 11 transaction, we executed in the quarter on the come on a halo.
Turning to slide 22 for review of our new vessel payments for the second quarter, we had new vessel cash capital expenditures of 5.7 million and capitalized interest at $1.7 million for total capitalized vessel construction expenditures of $7.4 million.
The table on the right hand side of this slide shows the cumulative and remaining new vessel progress payments as of June 30.
Following the quarter close we paid a 35.3 million milestone payment in July after after the launch of the Matt Sanyo.
Thats all I am so as of today, we have only one the milestone payment remain upon the delivery of the vessel in the fourth quarter for approximately $25.3 million. The fixed on the slide is of the mats Sonia and its christening on July 2nd at the NASSCO shipyard in San Diego and the Max Sony is currently 91% complete with that.
I'll now turn the call back over to Matt.
Thanks Joel.
Every day, we're reminded by the uncertainty. This pandemic has presented us there's uncertainty in the timing and staging of reopening plans in each of the local economies, we operate in as mitigation efforts of all.
It's difficult to know what's going to happen with the broader economy.
Recovery trajectory in the ultimate impact than they have on our businesses.
There is also a lot of political uncertainty as we head towards election day in the us.
Despite the sea of uncertainty surrounding us Mattson school is simple.
Remained focused on exceptional customer service and on time delivery to meet our customers' needs. We're also focused on finding new businesses and opportunities like our CLX plus service.
To build new relationships and drive current and future lines of profitable business as the pen debt does depend demick evolves.
Our strategy since public inception in 2012 has been to broaden the portfolio of businesses and diversify the revenue streams across geographies and services, which is healthy risk our cash flows to weather times like these while also providing a strong foundation to grow.
And make no mistake, we will look for opportunities created by the recession that we're now in the middle of.
Proud of the work our company's achieved year to date and managing in this challenging environment, but there continues to be a lot more more work ahead of us to navigate through this unprecedented time.
And with that I will turn the call back to the operator and asked for your questions.
Thank you ladies and gentlemen, if you have a question at this time. Please press Star then the number one key on your touched on telephone if you would like to be removed from the Q you make press the pound.
We have our first question.
Coming from the line of Steve O'hara from Sidoti and company. Your line is open.
Hi, good afternoon, and thanks for taking my questions.
Okay.
Hi.
I guess on CLX plus.
You talked about.
No you said you're committed to I think through peak season in October.
And then kind of.
See what happened at that point.
How quickly can you pivot in this business too.
If you make a decision in October to continue.
Going forward, how quickly can you scale that back.
I would think don't Pan out and then maybe can you talk about.
This is different than kind of the CLX to that used to have in place years ago.
Yeah look good questions.
I'd say to the first part of the first question you asked.
Basically what we have a from a vessel chartered six vessels to operate the service and we've also at least additional equipment from traditional equipment less source and have accelerated some of our capex spending for regular container purchases to allow for us to ramp up effect.
I believe doubling or more than a doubling of our China service that's all happened.
Fairly easily.
If it let me also be clear.
I said in my comments, but I think it bears repeating our goal is to continue the CLX plus if we're able to do it and that means of our customers continue to see value and and book cargo to our vessel. Our desire is to make this a permanent fixture, but the some of the fundamental economics of.
Vessel chartering in fuel and most importantly, whether the cuts our customers will continue to support us and potentially different market environment will dictate whether we continue but having said that weve charter. These successful they are relatively short duration. So unwinding. These these vessels will be relatively simple if we choose.
To do that secondarily.
We have the ability to off hire leased equipment and.
The worst thing that happens on our Capex is that we're really just pulling forward some of our normal capex that we would spend.
As replacement capital anyway over time, so the exit costs are really low and sensible and again, that's not where our heads up but it's a relatively straightforward exit in the second question around CLX.
Two.
Which for those who were not part of our investors and method at the time.
A number of years ago. After we started CLX, which cover central China, Shanghai, Ningbo and Chum in at the time, we tried to create a second service into South China, Hong Kong MTN.
And the servers was also chartered vessels, but it was a time in which we saw effectively an economic collapse.
Relatively shortly after driving consumer demand down.
I think so Steve the way I would say because there are some similarities and there were some differences the differences as we see them now are.
First of all this is in our core market. So it's we are personal it now 15 years into it we are recognized as a service leader Shanghai Ningbo shown in.
This is in the same market that exist today.
We also know that a significant amount of the freight that is coming onto the services dislocated airfreight.
Yeah I added the International Air Transport Association for example last week.
Effected not a recovery from Shanghai air market into the United States until 2024.
Mostly owing to the lack of passenger air travel likely to recover to normal for which about half of the air freight that comes out of that market exists. So there are reasons to believe.
This has legs.
The sector that's of interest is.
That I don't think that's different than happened at the last economic cycle that around CLX too is the international Ocean carriers are significantly more consolidated than they were at the time that CLX was ceiling to surface was introduced in that.
There has been a remarkable.
Discipline by the alliances for which the remaining carriers operate in adding service or blanking sailings to manage.
The vessel capacity to them that which the market demands and as a result of that have been able to keep freight rates.
In the international Ocean side.
At levels that we get frankly not seen in decades in fact.
The Shanghai.
International freight index actually a fight.
Which is measuring cargo out of Shanghai to various global destinations.
Last week hit a 10 year high and so the underpinnings that caused some of CLX too.
Two.
Require us to pull out we think are different this time, we're not declaring victory, we're going to wait and see how the market unfolds, but again, we will remain focus if the customers.
Require us to do so and of course would like to do so so I totally over answered your question Steve but.
No that's very helpful that that's good color.
And maybe just as a follow up you're looking at your other markets today and I understand this maybe a sensitive topic, but.
You are all your market still makes sense in a post co good world.
Longer term you think.
Yeah, I mean, it's a good question and I think it's a good time for every business operator to look at their portfolio of businesses to see whether they make sense and the short answer is yes, all of them are making money.
All of them or are are poised for recovery whenever that occurs from a planning standpoint, Steve we're trying to be relatively conservative on how quickly. Some of the core Jones Act markets are going to come back and frankly, we are not depending on a quick recovery in those markets to allow mattson to continue to thrive.
And was partly the reason why we took advantage of the market opportunity as we saw the significant dislocation in the China freight markets, but.
That's allowed us to stand up the CLX service, but I think all of our business are good there solid.
We've got we've we've done what we needed to do and taken our medicine on recycling, our networks and overtime hours and all kind of hundreds and hundreds of individual projects to to size our businesses for the new environment, but we feel each is fundamentally sound.
And part of our portfolio and frankly, we're on the look out for more businesses Steve.
Okay. All right. Thank you very much I'll jump back in Q.
Your next question is from Jack Atkins Stephens. Your line is open.
Hey, great good afternoon and.
Congratulations on a phenomenal quarter given all the.
All the volatility of the two phases, so great job mix.
Thanks, Jeff.
So I guess just to kind of go back to feel X plus broke for a moment and I do have some other things I'd like to talk about but I think that to me. The most exciting thing when we kind of look forward into 2021 beyond I guess can you kind of walk through.
The decision tree.
Over the course, the next couple of months as you sort of thinking about making that service more more permanent I mean, what do you need to see whether it's in terms of market rates or customer commitments to commit to that service into 2021, because I mean, I would imagine with airfreight shortage will be around for awhile.
I mean I think.
Jack the the way we're thinking about it is that.
It's a business that was desperately needed.
There were so much friction around who is going to get to get out our core CLX service that when we stood up the second chartered service. They immediately got full so part of this we understood was an opportunity to get started but what we're seeing now from the even just from when we started the service Chuck.
We saw it you can imagine lots of PE and lots of.
Lot of governments around the world.
We're caught flat footed on pp another supplies and so there was a big big chunk of demand initially, but that has given way to lots of other businesses like.
Customers, reducing their air freight spend in the middle of the recession.
Theme and acceleration in E commerce that requires an expedited product.
And so we've seen more and more and new and different slices of customers that there are various economic reasons makes sense to move it on an absence expedited service so.
I think as we move forward.
What we do expect is of course, we're in the middle of peak season down. So our vessels are full this is our troops everyone's traditional peak season.
Yes.
Although we're in again times that are difficult to forecast.
We expect after peak season, there's less market demand for all products Mats and as you know has managed to remain relatively full in our CLX service all year round, even after peak season.
But without going into the economics of how we look at it at the margin we are willing to talk tolerate less profitable times.
During the slower months and expect this business too.
Make less sort of contribution in the fourth and first quarters, and then positioned itself for very busy second and third quarter. So.
But the point and what we're going to find out is can we tolerate a lower level of profitability in the slower months.
What is that level of profitability and what's the level of support and freight but if the freight was there we're going to keep this business going.
Okay. That's that's great I think that would be.
Hi, its asset for the longer term story about where the kids. So that's great to hear.
We shift gears and maybe talk about in Hawaii for a moment you have got hold the July update was was pretty encouraging given the fact that there's still no tourism going on in the state.
Do you feel like the down low single digit.
You know westbound level of activity is that reflective of the current economic outlook or do you think there's some sort of inventory restocking that's happening in Hawaii, just how do we think about the July run rate relative.
Sort of what's happening there from up from an economic level.
Yes, I mean, I'll speculate a little bit I think what and I mentioned this in my prepared notes on Theres been a.
A more recent outbreak.
In Hawaii to over 100 cases, a day of new reported cases, which is causing.
The governor and the layers to consider reimposing, some further restrictions to limit.
Activity and so we think it's unlikely that we're going to see September 1st reopening in fact that they haven't made any announcements and I'm speculating I don't have any insight knowledge, but our expectation is that they're going to be very cautious about opening the market, while there while they're dealing with the mini outbreak that exist today, but having said that.
I think our view is at least our thinking is that.
As the economy will open up at least for travel within the state for as businesses of reopened partially that is sort of high single digit down market feels about right to us it could be 10%, but 7% to 10%.
There was a tiny bump at the end of July around due to the people stock up for the hurricane season, but I doubt that was more than a percent or too.
So there may be an element of that but I think I think 7% to 10% feels right for us while we're in this phase and I think we'll be in the space for a while this is kind of our thinking now.
In Hawaii, Okay. Okay. Okay. That's helpful.
Well I guess, one last question and I'll jump back in queue, but.
The $40 million to $50 million in sort of cost and operating initiatives and you guys have done a great job executing on that.
How do we think about how that 40 to 50 million breaks out in terms of I guess two different way supplies that how much about as related if any to.
Yes, the CLX plus service.
And then how much of that is really tied to temporary versus more permanent cost reductions across the business.
Jack as Joel.
So the first thing on the 40 to 50, we reiterated that we think will exceed that feel like Scott is included in that so it's not just sashes cost initiatives. It also as revenue and growth initiatives as things that we've all done to respond to the coven world over end.
The CLX plus is the biggest piece, but there are many many other pieces to it as well.
Also in and we believe a lot of those on the cost side can be permanent some of those are reflection of lower volumes coming through our network in our businesses and so we're able to without impacting customers and a negative way reduce of our.
Cargo handling costs and when volumes come back we'll have to reintroduce some of those costs as we expand our gate hours in terminal hours and things like that but a number of them can be permanent as well.
The CLX plus is the biggest piece evolve that we also have compensation numbers in there too so depending how comp plays out another gionee categories that are more formulaic those will go up and down as the business perform so it's a mixed bag of whether those costs are going to permit or not and Thats. One thing that will give will give updates as we head into the ended this year next year on some of.
Those items.
Okay, Great may be required to think good one last quick question Joel for you on Capex for second half a year I know you guided to $62 million and progress payments related to vessels.
Slug of that's already been paid in July well, what's your total capex outlook for the second half of the year.
We're not we're not give an outlook Jack we withdrawn that as you now, but the capex for the first six months was 34 million and I think the two big projects that we've talked about besides the vessels that will continue that are committed are the scrubber projects and the sand island projects. So those will continue.
Those are significant the overall six scrubber program is 10 million first forever. So about half of that will fall into the calendar year. This year and so far only about a third of is in the $34 million a capex. This year, so you're going to you're going to see the number just because of the scrubbers and because of the sand Alan items, we've talked about being the name.
We are ahead of what we had for the first six months. The other thing, though that Matt alluded to the work that we're evaluating is because of the growth in our volumes in the China, and let's say like plus service, we may need more equipment and we typically we're always buy increment throughout the year and we may accelerate some of the equipment that we would've bought in 2021.
On to allow for us to be well positioned from an equipment perspective for the C. Plus service. So if you see a little bit uptick.
In our Capex and catering Q4 would only be because it related growth initiatives, but the rest of it we what you've seen so far this year with a continuation of a scrubber program and the sand Island infrastructure program.
Okay, great. Thanks again for the time.
Thanks, Chad Thanks, Jack.
Once again, ladies and gentlemen, if you would like to ask a question you May Press Star then the number one on your Touchtone telephone. Your next question is from Ben Nolan Stifel. Your line is open.
Hey, Matt Joel.
Not as well.
Okay.
Yeah good.
So I am most I have a lot maybe I'll have to get back in queue seems like thats. The the formula for today I'm not going on but.
To start with the CLX flies I know I believe Hcl and then have both also introduced a sort of expedited China. The West Coast services can you maybe compare and contrast from a service perspective.
What would you guys do versus what they do.
Yes, sure I mean, I think that.
First of all Hcl, who has had an expedited service for three or four years. So this is an exit service that they competed against us out of.
Central China checking both markets.
And.
They had essar in connection with seeing the same dislocated expedited air market had upsize some of their vessels to be able to provide additional capacity. So.
So they fit a participant in the market.
And as Jim.
Who is.
Hey, it's operating expedited service out of South China, Hong Kong MTN.
To la so it's it's not directly in competition with maps and service, we drew some freight from home the south China market onto our CLX or sale, it's plus service, but its nominal the amount of of impact and so what I would let my understanding is that Jim is relatively full and south China.
And my understanding is is that Elvis also relatively full where the difference is come in Ben is.
It could they can charter ships they can run them if that higher speeds in next step part what would they can't do.
He is.
When it gets to the L.A. long Beach area.
Moving their cargo through their terminals as quickly as we can and make them available at this bonded facility at shippers transport.
And so there are days of advantage in service.
Associated with from from shipping till availability.
Some of those are focused on the southern California for complex, where we Havent untouchable service as it relates to that that creates transit advantages. So.
The way I think about this is when mattson ships are full then they call a PDL and that's kind of been the way it's been I don't need to be too on flattering to a competitor, but and they put a good they've done a good job.
And then they continue to before but there continue to be advantages and there maybe others. This the mark to market Thats expedited, but we have 15 years of the track record we have a brand in China, where people if something needs to move in the markets, whether it's a lake order, whether it's a rush shipment, whether it's an ecommerce or whatever.
They know after 15 years to call massive and so there were the first choice in this market.
Okay that and Dave difference I got two three whatever but that that kind of gets to my next question.
Obviously, the competitive advantage here or a primary competitive advantage infrastructure that you have that nobody else.
Has or even could have.
At the same could be said about open for instance, or Seattle.
In the long term Big Pictures, there do you think any opportunities to maybe replicate what you're doing currently on the sale X plus.
And two other geographies or you have distinct competitive advantage.
Yes, it's a good question.
The answer to this shortly in the long read anything is possible, but the warehouse infrastructure the trucking rail capacity infrastructure. The local market wants to go to La that's worth this cargo wants to go that's where the airfreight infrastructure is that's where the forward as our that's where the millions and millions of square feet of just.
Fusion centers are.
Yeah, there's a fraction of those in Seattle Tacoma or in Oakland.
So there could be some individual customers that want to want to set there their infrastructure, but the market is in southern California, because that's where it all wants to go.
Okay, well and just through to flip that I mean would you think about or is it possible to add maybe more port calls and I don't know.
Southern China Korea.
Pan anything like that.
Well, okay. So today, what we what we see is a lot of cargo that's on our seal exits helix plus service is actually cargo that originates in Thailand and Vietnam.
And in Japan, and Korea, and other places that will either go by error into Shanghai to be put on our vessel. So called see air program or are on.
We have customers large a large brand name electronics company.
That is moving card just as an example that is moving cargo out of Thailand that team truck across the China border to our CLX service in Shanghai or see NCL X plus so there's lots of that cargo that has found its way to us over the last 15.
In years that are part of their see air or truck air programs and so.
Should we would we look at an additional port we could.
But what we want to do is remain focused on providing an outstanding service to the Shanghai and Ningbo market.
And.
Ningbo has exploded with E commerce and.
It's just.
Phenomenal growth, we've seen in the larger region for which support of Nimbo serves.
That is focused on ecommerce so I, we could I don't our current thinking is we won't have to and our current focus is keeping our service simple. So the reliability in the speed is there I probably over to answer your question, Ben but no now that I'm aware of.
Right now that's helpful. And then lastly from me and I'll turn it over and maybe get back down but.
When thinking about over the course of last quarter and even currently a airfreight, obviously build out into the fee and.
And airfreight.
Pricing just when crazy, although it's come in a lot.
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When you guys are pricing, you're afraid and appreciate we don't break it out specifically what have you, but when you're pricing. Your great has there been any fluctuation in terms of how your pricing in or is this.
Here's the price and it's all about just the extra volume that you're able to get out of it.
Yeah, I mean, it's clear that as you point out beyond that.
Initial.
Stand about the sale X plus was just because of the huge amount of dislocated freight. There was just know airfreight capacity or was so significantly curtailed and that which was available was reserve by national governments, because they recover their past down on pp around the world. So there really wasn't much available.
That market has become more orderly now.
Air freight rates as you pointed out were astronomical they've come back a month ago to more historic norms, but over the last month, we've seen air freight rates on the rise again and on the margin.
I think what it does.
It is too so one of the factors for US is we're not unmindful of the air freight rate market. We're also not unmindful of where the ocean freight markets are because where this hybrid product and we have.
As shown our ability to produce pricing that allows us to fill our ship.
But week by week, we continue to have more cargo even with the CLX plus.
Capacity, then we have the capacity to carry it and so obviously, we'll take advantage of that in terms of pricing and market adjustment factor is one of things to price that allows us to earn a good return, especially in very busy times.
Okay. So.
Maybe put it another way you'd said in July your CLX was up 125% or so.
We should not expect that on an aggregate basis or a specific basis that.
Yes, airfreight pricing came in at 125% should be materially less from a from a pricing perspective than some of the pricing you were able to experience in the second quarter.
I wouldn't say that.
Okay, I would say either we we said we expect to make more money in this third quarter.
Then we did in the third quarter last year.
I would say we've seen healthy freight rates.
Continuing to see healthy freight rates.
All right I appreciate it thank you got.
Okay. Thanks, Thank you Ben.
Okay. So we have another question from Jack Atkins Stephens. Your line is open.
Hey, guys. Thanks, taking my follow up you could get rid of me that easy.
No problem.
So I just kind of wanted to go back I think you guys have said a couple of different sides through the course of this call that you guys are evaluating other opportunities to maybe.
You know take advantage of dislocations in markets and I know you want to be sensitive in talking about that in a public conference call and.
I know your competitors, who are listening to this call as well, but perhaps if you could maybe give us.
In broad strokes on sort of maybe a little bit where do you feel what you're talking about their these organic opportunities maybe acquisition opportunities are these them for Joe that claims are these maybe in other parts of.
Asia to the United States I know been was asking about that to some degree, but just maybe a little bit more color on what you mean by bought by some of those.
Reference as you are making earlier I think it'd be very helpful. Okay.
Okay, Yes.
I want to say at this point Jack that we.
Mattson.
It is traditionally been a pretty strong cash flow producer.
I think managing ourselves reasonably well so far through the recession, we're paying down our debt. The were also positioning ourselves for.
What I think it's becoming pain in this economic cycle, which we havent seen yet.
Traditionally mattson has been able to find investments in down markets at reasonably priced valuations that are businesses that are consistent with our service delivery model that would allow us to continue to grow into markets that so the way. So what is that okay. What traditionally has that been and if you've looked at us since we separated from Alexander and Bob.
And what have we done we've grown into adjacent markets organically, we have done acquisitions.
Of Jones Act in other businesses.
And so and we've we've again, taking advantage of opportunities and I do think there is going to be a coming cycle, there's going to be opportunities I can't say exactly what they are.
But we're not jumping in our foxhole, putting our helmets on and waiting until the end of this recession I mean, we needed to take our medicine on costs and our service initiatives and I think we've done that we're on a good trajectory towards paying down our debt and we don't want to have and we want to be under lookout for those types of deals I'm going to estriol to comment as well yes.
That's exactly right Jack in one week, one also way to think about it and communicating about it is we love to grow with our customers I mean, what's your to what we did with CLX plus growth our customers, we had customers who want to get our ship and we would and they were oversubscribed. So we're always looking for ways to grow with our customers in existing markets or a new markets and.
Of course were network business. The other piece of it is we're constantly looking at our network and where we go today and how we can leverage off our network into new adjacent markets that really leverage our infrastructure and what we do so so that's kind of two dimensions growth with customers and leveraging our existing network.
The majority of what we look at everything but the Jordan. We look we look at falls into those categories and they do fonda organic opportunities and what you would call traditional M&A opportunities.
Okay that makes I know that make you had no. It's always good I appreciate that.
Last question for me is on the logistics segment.
I think it when we sort of think about the trajectory of the brokerage market I guess in the in the U.S. here over the course of the next several quarters I would anticipate.
After a pretty tough July things are going to be getting incrementally better in August September and obviously the trucking anecdotes continue to be extremely positive in the third quarter.
How do you guys see the next several quarters playing out with regard to your.
Truckload and intermodal brokerage businesses I know, it's a smaller piece the pie, but obviously that theres a cycle implication that appears to be happening would just be curious to get your take on that.
Yeah.
I think are feeling in our domestic was just as businesses. So.
And if you look at our warehousing unit, although small has been a consistent earner.
If you look at the brokerage businesses they have been off but your comments about truck pricing.
Improving we're seeing the same thing.
So I think we're feeling like we're well placed and of course the.
What happens in the independent Mic and what happens with the broader economy in the stimulus and all of it all the other uncertainties that we've talked about.
To predict but we do seeing field see things getting sequentially better in our logistics businesses. So we're encouraged by that's really tough to declare victory because you know who the heck knows what's going to happen.
We are encouraged by some of the trends that you that you point out in your question.
Okay, great. Thank you again.
Thanks, Jeff Thanks, Jack.
Thank you speakers I'm showing no further questions at this time I would like to turn the conference back to Mr., Matt Kohnke CEO. Sir. Please go ahead.
Okay, well, thanks, everybody for listening in I hope everyone space, It is safe and well and we'll look forward to catching up with you on the third quarter call. Thanks.
The speakers, ladies and gentlemen. This concludes today's conference call. Thank all for joining you may now disconnect.
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