Q3 2020 Matson Inc Earnings Call
On pages 24 to 34 of our form 10-Q filed on November 2nd 2020, and in our subsequent filings with the FCC.
Please also note that the date of this conference call is November 2nd 2020, and any forward looking statements that we make today are based on assumptions as of this date, we undertake no obligation to update these forward looking statements I will now turn the call over to Matt.
Thanks, Lee and thanks to those on the call.
I'm going to start with a quick recap of our third quarter results. So please turn to slide three.
That's it's businesses continued to perform well despite the ongoing challenges from the COVID-19 pandemic and related economic effects Ocean transportation had a very strong quarter and it was led primarily by our China service, which included a full quarter of the CLX plus service as well as year over year volume.
The improvement in our regular CLX service as a result of increased capacity.
Volumes in Hawaii, Alaska in Guam improved from levels achieved in the second quarter as freight demand improved with the reopening of local economies.
Volumes in Alaska in Guam were higher year over year, and Hawaii volume approached the level in the third quarter last year.
Logistics had a good quarter as their continued reopening of the U.S. economy led to improved performance in all business lines.
In the fourth quarter, we expect our businesses to continue to perform well and to generate strong financial results.
Before moving onto our current priorities in the current trends, we see in our business I want to spend a few minutes on the CLX plus service and why we believe we can make it permanent.
Please turn to slide four.
There are three main reasons, we're confident we can make to see electric plus schervish permanent.
First Matt.
That's it has a 15 year track record of operating the industry, leading expedited China to long Beach service. Our CLX service has demonstrated a best in class on time freight availability and through our relentless focus on reliability weve developed strong longstanding relationships with customers where service.
She has been integral in their growth.
Many of our long term customers are riding on both the CLS and CLX plus given the outsized growth in their volumes, which they've experienced this year.
The introduction of the Alaska to Asia Express service or X service as the West bound seafood backhaul from Dutch Harbor to China is expected to help the long term economics of the CLX plus service and third the demand and supply dynamics in the Transpacific trade Lane, which I'll go into.
To in a moment had been favorable and we expect those favorable trends to continue.
So let me spend a few minutes on the key demand and supply factors in the trade Lane.
Since the start of the pandemic in the U.S. in early March there has been a seismic shift in E commerce activity and we expect the key drivers behind the shift to remain for some time.
It is estimated that at least four to six years worth of ecommerce sales growth was pulled forward into 2020 for.
For the second quarter of 2020, the U.S. Commerce Department estimated that one dollar out of five spent on retail was purchased online that's both retailers and consumers adapted to the new environment.
With the east for which an ecommerce transaction can take place.
And the time saved in the process.
Commerce growth is expected to remain robust even as COVID-19 restrictions become less stringent overtime.
And lastly, E commerce wants and needs and expedited transit.
Consumer spending on services, such as travel and leisure shifted to home improvement home appliances, and electronics and other discretionary and non discretionary items.
Early on independent there was outsized demand for refrigerators and freezers.
The store perishable items and electronics to support the working from home experience.
Demand for key household items, such as dishwashers refrigerators washers and dryers has been so strong since the pandemic Kid there are key shortages in many models and those shortages are expected to last into 2021.
And demand for household appliances continue to remain strong for three reasons, one family sheltering in place in many working from home or using their appliances, more frequently and thereby reducing the replacement cycle time.
To the housing market has been and remains strong as many residents in cities opted to move out to more suburban and rural settings with increased turnover of homes comes an upgrade cycle in household appliances and three many homeowners have opted to improve their surroundings, given the amount of time their spending in their homes.
I would do it yourself and professional home improvement projects.
As service businesses continued to reopen we expect some consumer dollars to migrate back, but with consumers adapting to less spend on services homeownership in relatively high demand and companies embracing the work from home environment as a part time or full time solution, we expect demand from.
For home improvement appliances, and other home electronics to remain elevated relative to preach pandemic levels.
I briefly touched on this in a moment ago and shortages in appliance, but a significant amount of inventory restocking across many industries as needed to keep pace with the elevated consumption trends and manage through any further disruptions.
Inventories were depleted shortly after the pandemic hit and companies have been playing catch up ever since.
To avoid disruption this fall and winter from any coated related lockdowns manufacturers are moving quickly to ensure enough inventory is on hand in warehouses in the U.S.
Beyond the risk of further cover disruptions. Many manufacturers are expected to evolve their inventory management to increase inventory of fast moving items in the end markets, where the consumption is likely the greatest.
The pre covered just in time inventory managed model is giving way to a more resilient inventory model.
Lastly on demand.
We ended this pandemic, maybe gradual and could potentially take several years until it ends there were many unknowns on the timing of the vaccine whether herd immunity it could be achieved.
And the distribution of the vaccine and the general response to a vaccine.
Lets economy has rebounded sharply from the second quarter Lockdown aided by government stimulus, but the recovery going forward is likely to be slow and may require further government support efforts to assist those businesses and individuals negatively impacted by the pandemic.
Consumption trends are likely to remain intact and possibly supported by government efforts. During this unprecedented time until the vaccine is effective and distributed.
So the demand picture remains favorable given current consumption trends relatively low inventory levels and manufacturers trying to get ahead of the elevated demand and the possible need for further government support to eight individuals and businesses greatly impacted by the pandemic and to help the economy recover.
Please turn to slide five.
On the supply side the constraints in the Transpacific Air and Ocean markets are expected to remain for some time.
On the second quarter call, we discussed the dislocation in Trans Pacific Airfreight markets due to the loss of passenger plane belly capacity, although some trans Pacific passenger routes have been reinstated in last few months. According to IMS data global passenger plane belly space capacity, which is approximately 50 per.
I said the global air cargo capacity is unlikely to see pre coated levels until 2024.
Complicating the airfreight picture is the means by which a vaccine and related injection supplies will be handled and distributed according to IMS data, providing a single dose of the vaccine to 7.8 billion people would feel 8747 cargo airlift.
At a time when freighter utilization is already operating at a high level.
DHL recently noted that delivering 10 billion doses over the next two years would require 25000 flights about 2000 palette and container moves.
Sorry, 200000, Paladin container moves and 15 million cooler boxes. This is an enormous logistical effort that will strain the air cargo resources further.
Turning to capacity.
Of the Ocean transportation market. There are a couple of points I want to make regarding capacity one so.
Several trans Pacific Ocean carriers have fully deployed capacity in the trade lanes in recent months to manage the elevated import volumes and the order book for new container ships is at its lowest level since 2003 due to a number of factors, including global economic uncertainty. So.
So at least in the short to medium term the ability for ocean carriers to add additional capacity in the trade Lane is limited.
And to industry consolidation in the last decade, and the formation of alliances in the last three years should lead to better alignment of capacity to avoid over tonnage in the markets.
10 years ago, there were 21 international Ocean carriers and today there were 12.
The three alliances that most of the remaining 12 operated and control approximately 85% of the capacity across the Trans Pacific.
Today, it's much easier for these alliances to balance market demand by adding small increments of capacity across their constituencies.
And lastly on the supply fundamentals there was there a significant equipment demand and port congestion in the us West coast.
These two factors are incredibly important governor on the growth capacity in the trade lane, particularly during peak volume period, such as the one we're experiencing now.
As container volume ramped in the second and third quarters. This year to meet the elevated consumer demand demand for containers and chassis EPS was exceptionally high.
Many inbound containers were being trucked and sent on rail to the interior without paying return trip without paying return trip, thereby stranding a supply of available containers. The increase in intermodal volume led to congestion at the rail yards in Southern California, and also led to delays in the delivery and return of equipment.
Warehouses on the West Coast, we're taking on more and more volume given the demand with many container sitting on chassis is in the warehouse slots.
In the ports with increased volume comps increased time to offload and increased turn times at the terminals. This has also had an impact on the availability of equipment.
It's also led to birthing delays of vessels.
According to the Pacific merchants Shipping Association, the Pms say in September 2020, 21.2% of the containers at the ports of La and long Beach state on the terminals for five or more days before getting picked up.
In September 2019, it was 2.8% every ocean carrier is undertaking a massive effort to reposition containers to Asia to meet the elevated demands we.
We don't expect the equipment demand and the port congestion factors to change in the near future.
So the supply side trends are quite favorable given the capacity constraints in the ocean and air freight markets as well as the outsized demand for equipment and the issues that come from increased volume and congestion at the West coast ports.
Our CLX plus service has proven to be the second best service in the Transpacific trade Lane behind our CLX service both services rely on the same competitive advantages at the destination and.
We own and control our own chassis. So this is an important differentiator for us given the terminal congestion and equipment availability challenges in southern California that I just described.
We avoid the issues with that with chassis pools that our competitors rely on and by providing the chassis.
Ourselves, we help the truckers to save time and money.
We also have a great combination of SSH terminal operation and the shippers transport off dock facility.
Safety is the best terminal operator on the West coast with its efficient operations and the shippers transport facility is a unique off dock bonded facility that is difficult to replicate.
Taken together, our competitive advantages and destination services drive industry, leading turn times and provide next day cargo availability for our customers that is simply unrivaled.
We also avoid the congestion issues that other carriers face during these peak periods and.
In summary, I am.
I'm confident we can make the CLX plus permanent.
We have 15 years of experience operating an expedited service in the trade lane offering unparalleled destination services that our customers value.
Our customers businesses are growing to meet the challenge of this time and so are we.
We seek opportunities to improve the long term economics of the service the A. ICT services, one such opportunity that not only helps lower the breakeven economics, but also drives additional customer engagement on a new service offerings.
And we have the backdrop of favorable demand and supply fundamentals that are unlikely to dissipate anytime soon.
Our expedited Ocean services and airfreight are perfectly suited for the demand has been increasing ecommerce world, but given the constraints in the air cargo markets, we expect demand for our expedited service to remain elevated.
With all this said a number of demand and supply factors could change that may alter our views, but as we sit here today. This is how we see it and are planning for into 2021.
I will now move on to slide six.
I want to spend a few moments in our current priorities as we continue to navigate our way through this pandemic and period of economic uncertainty.
Our first priority, we recognize we continue to safeguard the health and safety of our employees throughout the organization guided by processes on pp disinfecting and social distancing put forth by the coast Guard CDC and other government agencies, we're also maintaining our position and working from home.
For those whose job functions allowed them to do so.
Our second priority is ensuring the consistency of our ocean transportation services and delivering exceptional service for our Matson logistics customers.
Within Ocean transportation, we're focused on maintaining our best in class on time performance.
Ensuring quick turn times at the terminals.
And providing the quickest cargo availability for our customers.
For our logistics customers.
We continue to provide the highest quality customer service and execution for our customers as the supply and demand conditions remain volatile.
Our third priority is to find new opportunities in this evolving pandemic environment and drive organic growth.
The organic opportunities tend to be low risk and.
Hi investment returns given the low capital outlay.
On our second quarter call, we went into greater detail on one such opportunity the CLX plus service, which is a key contributor to our year over year improvement in financial results.
Obviously, we announced the introduction of the Act service that isn't backhaul service on the satellites plus from Alaska to China.
Our fourth priority is maintaining cost and cash excuse me our fourth priority is maintaining cost and capital discipline. During this period of economic uncertainty.
Since we amended our debt agreements in the early days of the pandemic in March Weve been intently focused on free cash flow generation, and reducing leverage and I'm happy to say that our leverage under those amended debt agreements is now approximately 2.4 times versus 3.4 times at the end of the first quarter.
Since the end of 2019, we've reduced our total debt by nearly $135 million.
On our first quarter earnings call, we outlined the operational changes and management initiatives to address the challenges of the pandemic we.
We meaningfully exceeded the high end of the $40 million to $50 million range that we provided with the introduction of the CLX plus as the largest contributor to this effort.
With respect to capital expenditures, we continue to be selective in our investments we are investing in new equipment to support the China service and X, which is approximately $30 million as well as some equipment that weve leased to support these efforts.
We're also completing our committed capital projects that are coming to an end this quarter, namely the first phase of the sand Island terminal renovation and the last new vessel in Hawaii service, which are the next two priorities for shell Skus.
The final vessel at a four vessel new build program for the White service is expected to be delivered at the end of this quarter Matt.
Matt Sony answer rival will Mark the end of a major achievement for us and it's nearly 930 million dollar program that will have taken eight years to complete from the design stages through delivery.
We are coming to an end of the work on the first phase of the sand Island terminal in Honolulu.
We completed the last major items in this space earlier this quarter and will begin to wrap up the smaller items by the end of this year.
We expect to begin work on the second phase in 2021.
We have indicated before that we expect to trend on our maintenance capex level of between $50 million to $60 million per annum. Following the completion of the Hawaii New build program.
As I noted a few moments ago, we're investing approximately $30 million in new equipment to support the growth of our China service at a acts to maximize the opportunities for us. So we expect to be higher than the maintenance levels in 2021 in light of this equipment investment.
And our last current priority is to complete the scrubber program, which means which remains on track the last vessel in the six vessel program is currently in dry dock and is expected to be back in service early next year.
Ill now turn the through the third quarter performance and provide commentary on current business trends. Please.
Please turn to slide seven.
Hawaii container volume for the third quarter decreased 0.8% year over year and the west on container market declined modestly year over year.
The west bound container market benefited from the reopening of the local economy. Following the shelter in place and temporary retail store closures in the second quarter and it also benefited from government stimulus efforts, but.
But these benefits were outweighed by the continued negative impact from the states COVID-19 mitigation efforts, including the restrictions on tourism and a second shelter in place that took effect in August the.
The second shelter in place had a modest negative impact on volume in September.
Lastly, we did not carry any patient volume during the quarter.
I will now go through the current business trends at our Hawaii service. So please turn to slide eight.
The Hawaii economy remains in a significant downturn challenged by the near zero tourism in the last half year.
Travel restrictions to Hawaii were eased on October 15th with the pre travel testing program. However in the near term the levels of tourism are expected to remain low and to have a meaningfully negative impact on Hawaii's economy.
The economic recovery trajectory in Hawaii remains highly uncertain, given the low levels of tourism.
The difficult business environment for tourism related businesses and the uncertainty with government stimulus in support efforts for the businesses and individuals deeply impacted by the pandemic and its related economic effects.
You heros latest economic projection shows GDP growth in 2020, and 2021 of minus 11.8% and 1.2% respectively.
Unemployment in the state remains elevated and is projected to be well above 2019 levels for the next several years.
September unemployment rate for the state was 15.1% the highest in the country.
New hero is projecting the unemployment rate for 2020, and 2021 to be 12.4% and 9.7% respectively. These levels are well above the 2009 unemployment rate of approximately 2.7%.
To give you a sense of the volume trend one month into the fourth quarter, our west bound container volume in October decreased approximately 0.3% year over year and was consistent week to week in the month.
West bound volume largely consistent assistance home improvement in retail goods in advance of the holiday season.
Moving to our China service on slide nine Max.
Maximize volume in the third quarter, 20 point was 124.7% higher year over year.
Approximately 85% of the year over year volume increase was driven by the CLX plus with the remaining approximately 15% related to increase in volume on a regular CLX service.
The capacity of the CLX service increase year over year due to the addition of one of our larger vessels the Daniel canned away at the beginning of the third quarter. In addition to its sister vessel the time on a healer towards the end of the third quarter last year we.
We continue to see dislocation in the air freight markets lead to strong demand for Batson's expedited service with those CLX and CLX plus vessels sailing at capacity in the third quarter.
Demand for the CLX and CLX plus was driven by E commerce and other commodities as a result of tight inventories in the us and continued consumption of imported goods in lieu of services.
To give you a sense of the current volume trend our east on container volume in October increased to 148.6% year over year led by the Seattle plus service, but also higher volume on CLX due to the Daniel K. underway and the service.
The volume strength, we saw in the third quarter continued through October.
Throughout the month, we saw increasing customer demand to get on our CLX NCL X plus services as a means to avoid us west coast Port congestion.
Please turn to slide 10 10.
On August 26, we announced the introduction of the Alaska to Asia Express or acts as a backhaul service on the CLX plus the first voyage took place on September 29 from Dutch Harbor.
The Ay Ax will serve as an important route for Alaska seafood exports to Asia, consisting of dry and frozen fish volume.
We will provide connecting service from Anchorage, and Kodiak from our domestic Alaska service that is served by three vessels we.
We expect the X. service to be a modest contributed contributor to the Alaska volume and not a material contributor to consolidated operating income for the full year 2020.
We're excited to provide the service for the upcoming a fishing season in the beginning of 2021.
Turning to slide 11 in Guam, Maxim container volume in the third quarter 2020 increased 2.1% year over year, primarily due to increased demand for home improvement and government cargo volume.
Volume in the quarter benefited from the reopening of the local economy. Following the shelter in place in the second quarter and it also benefited from government stimulus efforts the.
The local government issued a shelter second shelter in place order in August to mitigate spread of code 19, which had a minimal impact on our volume.
Similar in many respects to the Hawaii economy, the quantum quantum economy isn't a downturn as tourism levels remain depressed and tourism related business activity remains incredibly low.
Unemployment remains elevated and well above pre pandemic levels.
The economic recovery trajectory remains highly uncertain.
For the month of October our west on container volume decreased 1.5% year over year with modest negative impact from COVID-19 restrictions and partially offset by higher government cargo in the near term, we expect to see a stable retail environment.
But we also expect tourism to remain challenged like over 19 and have a negative impact on freight demand.
Moving now to slide 12 in Alaska.
Since container volume for the third quarter of 2020 increased 1.5%.
Despite this summer seafood season being in its off season, and our expectations for lower volumes we.
We saw higher southbound volumes year over year as a result of a stronger seafood volume compared to the prior year.
This increase in southbound volume was partially offset by modestly lower northbound volume north bound volume in the quarter benefited from the reopening of the local economy follow following the shelter in place and temporary retail store closures in the second quarter.
And it's also benefited from government stimulus efforts, including the early issuance of the permanent fund dividend.
The Alaska economy continues to recover from the second quarter lows, but the recovery trajectory remains highly uncertain.
Unemployment remains elevated above pre crisis levels.
The Alaska government paid its permanent fund dividend early in July versus typically in October, which may impact customer spending in the fourth quarter.
And the continued low oil price environment has negatively impacted and is expected to continually.
Continued to negatively impact oil exploration and production.
Northbound volume in October 2020 increased 12.1% year over year, driven primarily by higher volume assessments goods and home improvement in advance of the holiday and winter period.
Turning next to slide 13.
Our terminal joint venture as a t. contributed $7.7 million in the third quarter of 2020 compared to $8.4 million in the prior year period.
The lower contribution was primarily a result of lower lift volume assets.
Let's just say Ts lift volume was impacted by black sailings from the larger ocean carriers in the first half of the quarter. It was close to flat year over year in September.
Deployed capacity in the Transpacific trade lane is higher than last year to manage through the elevated demand. During this peak season, we expect SSH key to be a beneficiary through the elevated import volumes.
Turning now to logistics on slide 14.
Operating income for the third quarter came in at $11.9 million or 600000 higher than the operating results in the year ago period.
The increase was primarily due to improved performance and all other business lines driven by the continued reopening of the us economy.
In the near term, we expect the elevated consumption of E commerce and other high demand goods in inventory restocking trends to could to benefit most of the business lines within transportation brokerage, we continue to see increasing intermodal volumes in line with the trends in the U.S. West coast import volume within.
Crease freight demand and terminal congestion in southern California comes rail congestion and a chaotic truck conditions, which historically has benefited our transportation for brokerage business at span Alaska, our freight forwarding business performance steadily improved since the second quarter LOE and is tracking similar.
Early with the northbound volume trends in our Alaska Ocean business, we continue to see steady business activity and warehousing and supply chain services in line with what we've seen in the first three quarters of the year.
And with that I will turn the call over to Joel for a review of our financial performance Joel.
Okay. Thanks, Matt.
Now onto our third quarter financial results on slide 15.
Ocean Transportation operating income for the third quarter increased $42.6 million in year over year to 86.5 million. The increase was primarily due to a higher contribution from the China service, including CLS plus.
Lower vessel operating costs, including the impact of one less vessel operating in Hawaii service and the timing of fuel related surcharges surcharge collections part.
Partially offset by a lower contribution from the high service and higher general and administrative expenses.
The company's SSH key terminal joint venture investment contributed 7.7 million 4.7 million less than the prior year period. The decrease is primarily due to lower lip volume.
Just six operating income for the quarter was $11.9 million or point 6 million higher than the prior year period.
The increase was due primarily to a higher contribution from transportation brokerage.
EBITDA for the quarter increased $45.6 million year over year to 137 $134.7 million due to higher consolidated operating income of $43.2 million and higher other income of 2.9 million, partially offset by $5.5 million and lower depreciation and amortization.
And which includes Drydocking, Brazil.
Interest expense for the quarter was $5.7 million or 2.5 million lower than the second quarter of 2020.
Lastly, the effective tax rate in the quarter was 25.4%.
On a year to date basis Ocean transportation operating income increased $63.7 million year over year to $136.7 million.
The increase is primarily due to a higher contribution from the China service, including CLX, plus and lower vessel operating costs, including the impact of one less vessel operating in the Hawaii service, partially offset by lower contribution from Hawaii service.
The company's SSH key terminal joint venture investment contributed $15.4 million or $2.4 million less than the prior year period the.
The decrease was largely attributable to lower lift volume.
Logistics operating income on a year to date basis was 25.9 million or 4.8 million lower than the prior year period. The decrease is primarily was due primarily to lower contributions from transportation brokerage and freight forwarding.
Slide 16 shows how we allocated our trailing 12 months of cash flow generation for the LTM period, we generated cash flow from operations of $339.2 million.
And received $14.3 million from sale leasebacks from which we use $59.4 million to retire debt 80 million on maintenance capex $168.2 million on new vessel, capex, including capitalized interest and owners items and $21.9 million on other cash outflows.
Including 18.5 million and financing costs related to the two type of 11 transactions and amendments to the debt agreements in the first half of 2012 while.
While returning $38.6 million to shareholders via dividends.
Turning to slide 17 for a summary of our balance sheet you will note that our total debt at the end of the quarter was 823.6 million and our total debt net of cash and cash equivalents was 810.9 million.
During the quarter, we retired $66.4 million of debt.
At the end of the third quarter, our leverage ratio for the amended debt agreements with 2.4 times compared to 3.03 times at the end of the second quarter.
No for on this page shows the total debt and EBITDA as defined in the amended debt agreements.
The revolver balance at quarter end was $123 million and our available borrowings is approximately 519.
Please turn to the next slide.
On slide 18 for a review of our new vessel payments for the third quarter, we had new vessel cash capital expenditures of 39.3 million and capitalize interest of $2 million for total capitalized vessel construction expenditures of $41.3 million.
The table on the right hand side of the slide shows the cumulative and remaining new vessel progress payments as of September Thirtyth.
Final payment on that Sonya will be due upon delivery and as Matt said, we expect the vessel to be delivered by the end of the quarter.
Pictured on this slide is isn't that Sony on her way to sea trials from the NASSCO shipyard in San Diego and Thats. Only is currently 99% complete with that I will turn the call back over to Matt.
Thanks Joel.
There's been no shortage of uncertainty in 2020 for us, but mattson and its employees adapted to the extraordinary conditions and fostered organic growth opportunities to drive exceptional financial results in the third quarter.
I'm proud of our accomplishments year to date, but we are heads down to finish off a good year and prepare for 2021 and the evolving challenges during this unprecedented time.
As key supply chain provider to lifeline economies, and a leading provider of expedited Ocean services to the US West Coast, we're focused on what we do best.
Providing exceptional customer service and on time delivery to meet our customers' needs and with that I will turn the call back to the operator and ask for your questions.
At this time, if you'd like to ask a question. Please press Star then the number one on your telephone keypad.
Your first question comes from the line of Joe.
At Cannes Jack Your line is open.
Okay, great. Thank you operator and guys congratulations on another great quarter here.
Thanks, Jeff.
So I.
I guess, maybe we could start with the outlook I noticed that this quarter you guys sort of didn't provide your normal line item guidance and I certainly understand.
Given all the uncertainty out there right now it's just tough tough to predict I guess I would just sort of curious if.
We could maybe talk about some high level.
Directional trend sequentially.
Sequentially typically we see earning let's talk about the Ocean transportation segment down now.
Anywhere between 30, and 50% from an operating income perspective sequentially.
Sounds like volume is actually ramping sequentially you guys, though so can you kind of help us think about how we should be thinking about normal seasonality.
And how the business is going to be trending third quarter to fourth quarter.
Yes, Jack I'll do the best I can it's difficult to forecast in this environment, we've had conversations with our customers and and they're they're doing as best they can to meet this demand that they are seeing throughout their networks.
And it's really again I would say some of the things we're seeing in our Jones Act end markets.
And what we're seeing in Matson logistics, what frankly, including China is the.
Very strong demand were seeing.
In the U.S. associated with.
Express the items that we discussed in the call around.
The work from home experience inventory stocking.
The benefits of stimulus and all of the factors that are.
That are making it.
Creating this very robust freight.
Freight demand environment.
We are pleased that we have seen the improvement that we've seen in Hawaii, and Guam and Alaska.
And it's hard to know.
We might have predicted it or we might.
Might have guessed earlier in the year, let's say in March and April that we would not have seen the levels of demand that we ended up seeing and again I think it's a combination of the same factors its stimulus spending.
We tend to provide essentials.
There have been and and those.
Those are just some of the factors that go into it so.
Beyond that how long Jack this remains is partly a question of macroeconomics is there going to be a second stimulus.
As the us economy in recovery.
What's the how will depend demick progress.
What's the election cycle look like when does a vaccine available. So the others again, it's difficult for us to know what's happened I would comment that some of our normal seasonality. It's just really hard to tell where we go from here, but we're pleased to be in a position, where we're able to serve our end markets I'm really proud of the fact that we were able to be there.
Sure and stand up our second expedited China string.
But a lot of our end markets are performing better than we would have expected in March or April. So that's all I can really say Jack.
Without without being too specific because we ourselves aren't quite sure where the economy is going from here.
No no that I understand I, just wanted to kind of get your additional thoughts on that Matt. So thats helpful. Thank you and maybe just a couple of other ones for me.
Okay.
I know that you guys undertook this year to two to supported improved financial results. You said, you're well ahead of the $40 million to $50 million.
Initial expectation, obviously because of the wild success.
CLX Clos.
But we think about that.
Is that 40 to 50 million number.
Going into next year, how much of that is tied to cost that you guys are maybe taken out temporarily that would maybe.
Feathered back in next year can you kind of.
Maybe quantify that for us as we think about 2021.
Jack It's Joe I'll take that one so.
As we said in our last call. It's a mixed bag. There are a number of cost initiatives and some revenue initiatives as biggest revenue initiatives. This course, the CLS plus so we've talked.
Weve talked at length about how we see the supply demand elements, there and that continuing in 2021.
The remaining the cost items, it's really we can't give a lot of guidance I mean, it really depends upon each market and when volumes come back and a lot of those markets, where we have to reintroduce some additional cost it really around typically around our terminals in the gate hours in our Irish operation, where as you have more cargo flying through you reintroduce some of those costs. So it will be.
Function of the volumes returning a lot of those Jones Act markets is the way to think about it.
Okay, but youre with volume kind of back to flat in Hawaii.
Looks like growth again, and Guam, and Micronesia, and Alaska, I mean would you say that those costs have kind of come back into the model now or no.
Some of them have but not not all of them. So it depends on the different sub markets within each of those markets.
And so some of those have come back with a lot of us a lot of those have not yet so and then I should also say Jack there will be some piece of that that will be from some of that will be from Matt sure.
But a lot of that more than half of the remainder that's not revenue will be dependent upon volumes in those markets.
Okay Thats helpful. Maybe one last one I'll turn it over just something about the logistics segment for a moment.
Obviously, a lot of dislocation in the domestic supply chain as well.
Corporate space side.
You know I guess, you guys did a really great job just.
Just in terms of maintaining your operating margin there this quarter, we didnt, we saw others not do is nearly as well how are you guys thinking about logistics business as we head into 2021, where you should get some relief on the revenue margin side, and obviously underlying demand trends and pricing trends are obviously.
Pretty positive.
Yes, I am.
I think the way I would answer that is.
First of all our logistics business is all of them are performing well and you know as the president of our logistics business Rusty role says.
That logistics business tends to thrive and pay offs and so there has been a lot of dislocation.
Were small nimble organization, we've responded well to those markets.
And if we are in the beginning of the grinding and slow economic recovery, we expect what we're not going to give guidance, but we expect that the good performance to continue but again I think it's more subject to where the US economy is in macro but if there is more congestion on the rails, if if more congestion at ports and terminals the better off we do.
Okay that makes sense. Thanks for the time guys congratulations.
Thanks, Jeff.
Your next question comes from the line of Ben.
No Lynn.
Ben Your line is open.
Thank you operator.
Good quarter Guy I want to start a little bit and you.
Mass down a whole lot of time it was very helpful about thinking through the permanency are permanent.
The CLX plus service and sort of how things are different.
Now at this time.
But I wanted to maybe see if theres a tie in here between some of the chaos that.
Thats happening and congestion issues and everything else in the West coast.
Are you being able to leverage your expedited service to maybe.
When more long term business or or alternatively have.
Have you seen any expansion and the premium that you get there as people are grappling for spots is there anything you're doing to sort of leverage that.
That position at all.
Yes, I mean.
From from our perspective, having been at this for 15 years, we've developed a really good base of customers who have.
Who as their businesses expanded weve been able to accommodate that growth and so the way I see the market today than is that obviously, we're seeing some very busy hectic.
Congestion on the us West coast Theres, a lack of MP equipment, not matching but in the market. There is a lack of chassis is there are shortages of labor there.
Often disruption of rails is very property for that part of it is temporary.
And I can't say when that will end. It may end in two weeks. It may not end until after the lunar new year, it's really hard to know where that part ends, but we're not relying on any of that cargo to impact our belief on the continuity of.
Our CLX plus service a lot of our thinking around CLS, plus we outlined and we went into quite a bit of detail, but the the among the more important factors. This is growth in E commerce and the way in which cargo is being shifted and E commerce launch an expedited transit and together.
Together with a more orderly container supply demand the air freight all of those things separate from the congestion we're seeing right now.
Gives us confidence and not not the least of which is to have identified and are in the execution stage of identifying a backhaul.
In the A.X. to give us somewhat dual head haul economics are all factors that give us that confidence that we that we described.
And we we always look for.
Balancing leveraging the opportunities in the short run with me.
Making sure we're maintaining enduring customer relationships that go year in and year out. So there are some markets, where we could charge a lot more.
And other markets.
Then other other times of market, but I can just give you as a data point.
We are turning away each week more cargo on our CLX until X plus service than we are carrying to give you a sense of the demand right now and again, we don't expect that Super high demand to continue but we expect enough demand to continue to make this we think long term success.
Okay, and I guess and that's.
What I would have expected.
My I guess I was asking and maybe maybe you answered no. But is there is there a way to turn that that leverage that you have with the really unique product and to saying, Okay. I'll I'll update you in here, but I want to know that.
Going to have 10 boxes that we from you for the next year or something like that or is that not part of the breadth.
Right.
That conversation has been going on for 15 years, where we know everybody wants to get on the ship in the peak season, right, which customers can give us those containers every week 52 weeks a year right. So it is it is an ongoing element so that we might in peak season, forgo the highest cargo because.
People can give us cargo 40.
40 weeks, a year and so we're balancing the seasonal impact with the year round customer contribution. Yes. So that is just that's a core part of how we approach the market and have for a long time.
Okay No that's helpful.
And then.
Maybe for per barrel or both of you.
Deleveraging I think it's happening a lot faster than any of its thought that would.
And you did walk through your capital allocation hierarchy I appreciate that but.
To the extent that let's.
Hoping that.
Some of this.
Today, the level of cash flow continues to.
<unk> continues to be here for a little while and you do de lever really quickly are there things as you look out in the future maybe capital projects or re fleeting, Alaska or anything else, where you say, okay well.
Got this was maybe five years away or something else, but now we're in a position where we can maybe pull that forward or is that not even necessary.
The timeline isn't timeline it is.
It's not a function of capital.
Yes, Don.
Ben Thanks for that question. So I'd say, we do we do very much think long term and everything that we do so we do have a view of when we're going to need Alaska vessels and other major investments as well and all that was really baked into what we've been describing for the last couple of years in the overall plan of de leveraging when we're finished with this vessel side.
So what we're going to continue to stick with that plan because we did look at all those long term needs as you put that plan together. It just so happens that this is all happening at the in this very uncertain time of the pandemic.
Where weve seen some businesses opportunities really expand for us. So the de leveraging has definitely accelerated because of this performance, but it hasn't changed our view that we still stick with this plan and the capital allocation hierarchy.
It's something that we feel very good about it's very appropriate so look for us to continue to focus on deleveraging and any kind of organic growth for other types of investments.
That is still going to be subject to our normal discipline. The kind of return thresholds that we see so were really the overall message is we're sticking with that plant okay.
Okay I appreciate it and then last for me and I'll turn it over.
I am still I scratch my head at like the Hawaii volumes, given unemployment and everything else and and it's great for you guys, but how much of that.
And particularly Hawaii, but maybe also Alaska and Matt you mentioned, a little bit about stimulus and a and a perpetual payment Alaska and so forth.
How much of that do you think is the cargo is.
Emulate.
Specific or at least linked to stimulus that might be at risk if.
If those payments don't continue so how are.
Are you at all concerned that there might be a little bit of a volume at some point.
Yeah, I mean, I said in all three of the Jones Act markets that this has come back faster than we expected and I think in part it's the same package on the us mainland right I mean this this demand for.
Work from home and.
Home improvement and.
Getting money into the hands of the unemployed and the PPP loans, keeping small businesses afloat at all of the the really timely.
Federal government response to the pandemic has all helped.
But we remain cautious because we were our point is it's unclear whats going to happen next target is to be the delivery of the vaccine going to bridge and additional stimulus bridge us into a.
Into a lasting recovery will there be an air pocket in any of our trades. Those are those all are really hard to forecast.
And so again, we feel well and the other thing.
There's been a lot of our business is grocery store business right. It's it's going to to our long time customers, who are selling the basics and so we know there is a certain floor level of demand.
And that will continue so it's better than we expected.
It's it's not crystal clear whether it continues although we hope it will that's why it's really difficult for us to to talk about exactly what's going to happen. So.
It's as much about the macro is as it is about about any of our end markets in particular.
All right I appreciate that man Joel I appreciate the time and congrats again on a fantastic quarter and looks like it the the second of of a number so good work.
Thanks, Matt.
Your next question comes from the line of Steve O'hara, Steve Your line is open.
Thanks, Thanks for taking the questions Jeff.
Hi, Steve.
Hi, I guess first just on the talk about.
Confidence in Ceocs, plus being a long term initiative.
Does that mean that you are kind of in the process of taking maybe a longer term.
Capacity.
Position or anything like that.
You chartered capacity in that market, but.
And have those charters going out in time more than.
Maybe previously.
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Yes, so Steve we.
We are indeed, weve six chartered vessels in the service.
We don't envision purchasing any vessels we continue to.
We continue to think the best way to address this market is chartering and you may know that for example, the international Ocean carriers.
Charter or operate about 50% of their capacity is chartered so its a normal way in which have an operator would have a portfolio of owned and chartered assets. So we feel it feels normal to us to have that combination we expect that to continue.
Our confidence going into 2021 and mix CLX a permanent service.
Well as these charters expire we will be renewing them.
And so that in due course, I don't think were going to do a five year charter or whatever but these will be rolled over and kind of six to 12 month terms and those will be negotiations with the charter owners as we as we go but we're definitely keeping our feet on the ground here.
I have a lot of confidence in them, we're confident we're going to be able to charter vessels to be able to continue to serve us.
And we will be to sort of balancing the renewals with the with the owners intentions, there, but it's hard to be real specific about it.
Okay.
Helpful and then.
Maybe.
Is there a way to think about pricing within CLX Unseal X plus in terms of.
Maybe where rates are versus.
Previous time periods and what the.
The impact of this.
Maybe other methods of shifting come back over time.
With that pricing looks like and relative to what it is today.
Yes, I mean I.
I can I mean.
Our and you know this is Steve that our service commands a premium to the spot market and it has for a long time and the same is true in this environment for both our CLX and Salix plus vessels as the fastest and second fastest service in the transpacific and owing to the fact that we have returned turning away more cargo.
Then we're carrying we can be we can be selective in the cargo that we continue to carry and that commands a market premium.
And so I would say if you look at the Cfive the Shanghai Containerized freight index as one that it said, it's at an all time high and.
And so we're not we're not giving.
Specific rate guidance, but our rates are.
Are doing very well and Thats just at one one market data point, the EPS cfives at a record high we command a premium to the to the.
To the spot market and have so.
We're feeling good about where we are on the pricing.
Okay.
And then.
Just on the comments I guess around October.
Specifically within the China market.
It is.
I mean is that.
With the way the peak season works and.
Is there a kind of a a falloff typically.
In November or December is kind of.
Peak season ends or is usually kind of done by.
In October or.
I guess I'm just wondering is the.
The expectation that that May continue that very strong performance in October could get to.
Thank you for the entire quarter or is it kind of typically step down would that be kind of the normal expectation that it will kind of step downs from October to November to December yeah.
Yes, I mean, I think I think your point about is what happens typically what happens typically that sort of by the end of October you start to see things. Both most of what is going to make its way into the holiday season shopping cycle will have arrived.
That's not what we're seeing right.
We're seeing.
Significant congestion in Asia.
Cargo that this is not maps in the cargo that wants to get on a ship thats being rolled we're seeing the other international Ocean carriers put in additional extra loaders. So this is not a typical season, we're seeing a more extended season because there are there is such a demand for cargo.
Are there many of our customers.
Can't keep up with the demand and cargo is back ordered and for all of those reasons, we're expecting to see the season extended to win is the big question I mean, there this could end.
And in a few weeks and it could continue all the way into February lunar new year, Nobody really knows exactly how and when this this ends but.
But.
At least through now we're seeing we're seeing very strong demand.
Okay. All right. Thank you very much for the time.
Okay Thats the thanks.
Again, if youd like to ask a question. Please press Star then the number one on your telephone keypad.
And there are no further questions at this time I'll turn the call back over to Mr., Matt Cox Okay.
Okay, well thanks for your interest in the call I hope everyone has a safe.
Holiday season, and we'll look forward to catching up with everyone at the year end call. Thanks very much.
Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation you may now disconnect.
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