Q4 2020 Matson Inc Earnings Call
94, 234 of our form 10-Q filed on November 2nd 2020, and in our subsequent filings with the SEC. Please also note that the date of this conference call is February 23, 2021, and any forward looking statements that we make today are based on assumptions as of.
The state 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 on.
I'll start with a quick recap of our fourth quarter and full year results. So please turn to slide three.
Max and capped off a strong year with continued solid performance and ocean transportation and logistics and despite the ongoing challenges from the pandemic and related economic effects.
The year over year increase and operating income for Ocean transportation and the fourth quarter was primarily driven by continued exceptional demand for both the CLEC and C. L X plus services.
And our other core trade lanes.
And we continued to see elevated demand for test and it's and home improvement goods and leading to higher year over year volume growth in Hawaii, Alaska and Guam.
Logistics operating income for the fourth quarter increased year over year as a result of elevated goods consumption and inventory restocking.
And tight supply and demand fundamentals and our core markets.
For the full year, 'twenty, and 'twenty Mattson and consolidated financial performance was strong and.
And Ocean transportation the contribution from D. C L Ax and Felix plus services was the primary driver of the increase in operating income year over year, and Hawaii, and Guam container volume approached the levels achieved in the year ago period, Despite the economic challenges from the pandemic.
And Alaska container volume was modestly higher than the level achieved in the full year 2019 low.
<unk> operating income for the full year, 'twenty and 'twenty was modestly lower compared to the levels achieved in the full year 2019, largely due to the pandemic impact on the business lines and the first half of the year.
Please turn to slide four.
I wanted to spend a few moments on our current priorities as we begin 2021 and continue to navigate our way through the pandemic and economic uncertainty.
Our first priority is to maintain our pandemic response efforts by continuing to safeguard the health and safety of our employees throughout the organization and to ensure consistency and the services, we deliver for our customers.
Without a doubt 'twenty and 'twenty was a significant year for us not only financially but operationally.
The initiation of the seal X plus services and important long term growth opportunity.
We fully intend to maximize the potential of our China service by maintaining CLEC and seal X plus as the fastest service and the Trans Pacific Trade Lane and to continue to invest and new equipment to support the growth from these activities.
We are investing $55 million and new containers and chassis, which not only supports the growth and the China service, but also the <unk> backhaul service, which we call the Alaska to Asia Express or a X.
Further the additional capacity helps us address continue and congestion and the ports and terminals and southern California and provides us flexibility and equipment repositioning throughout our network with a special focus of course on China.
With these new assets, we will maintain our high levels of service and meet the exceptional demand for our premium service.
We expect a quick return on these dollars and most cases the equipment is paid for and a couple of transpacific sailings, Joel will discuss our 'twenty and 'twenty, one capex and more detail later in this presentation.
We're focused on maintaining vessel schedule and integrity and positioning our domestic trade Lane services for continued economic recovery as the pandemic subsides.
We're also positioning our logistics business segment to continue to capture opportunities and rail and trucking from the ongoing chaotic conditions and congestion and southern California.
We also continue to evaluate organic and inorganic growth opportunities and we remain focused on maintaining our financial flexibility with an investment grade balance sheet Joel will go into more detail on our capital allocation strategy later in the presentation.
Now please turn to slide five.
Our Hawaii fleet renewal came to an end in December 2020, with the delivery of the Max Sony and the second kind of lower class vessel and fourth new vessel and the program. The total cost for the program was approximately $1 billion, including capitalized interest and owners' items.
These vessels along with the modernization at the Sand Island terminal and Honolulu are important investments and supporting a world class operation to Hawaii and.
Other lifeline economies that depend on our services.
I'll now move to our trade Lane services. So please turn to slide six.
Hawaii container volume for the fourth quarter increased 0.8% year over year.
The increase was primarily due to an additional westbound sailing and higher demand for sustenance and home improvement goods, partially offset by the continued negative impact from low tourism activity as a result of the pandemic.
The state's pre travel testing program that launched in the middle of October led to an uptick and tourist traffic and the fourth quarter versus the third quarter.
But the levels achieved in the fourth quarter remained well below the level achieved in the prior year period.
For the full year container volumes decreased 0.6% year over year, primarily due to the lower volume as a result of the pandemic and its effects on tourism, partially offset by volume from picture and the second quarter due in part to the dry docking of one of its vessels and higher demand for assessments and.
And home improvement goods.
I'll now go through the current business trends and our Hawaii service. So please turn to slide seven.
The Hawaii economy remains in a significant downturn and its recovery trajectory remains uncertain as tourism related businesses are operating and a difficult environment that will be extended for some time.
<unk> is projecting a 10, 2% decline in GDP and 2020 with near zero growth in 'twenty, and 'twenty, one and more pronounced growth and 2022 and tourism rebounds more meaningfully.
According to your hero visitor arrivals in 'twenty and 'twenty, one are expected to be 58% below the record level achieved in 2019, followed by an 85% increase and.
Visitors in 2022.
The timing and extent of the vaccinations across populations will have a direct impact on the recovery trajectory and tourism.
Unemployment and the state remains elevated and is projected to be well above 2019 levels for the next several years.
<unk> is projecting the unemployment rate for 'twenty and 'twenty, one and 'twenty 'twenty two to be 10, 9% and five 6%, respectively compared to two 7% and 2019.
One bright spot and the pandemic has been construction jobs, which grew 1% in 'twenty and 'twenty and is expected to be near flat to slightly up and the next couple of years supported largely by state and federal government spending projects with some pickup and <unk>.
Residential and nonresidential building.
To give you a sense of the volume trend one month into the first quarter, our westbound container volume in January decreased approximately five 7% year over year due to the one less sailing than the year ago period normalizing for the one less sailing year over year growth would have been a decline of three point.
And 1% the westbound volume largely consistent of substance home improvement and retail goods.
So a soft start so a soft start in January but the first few weeks of February and we're seeing higher volumes year over year.
And March will begin to lap the first pandemic shelter in place and the initial rush for home goods, and a social and essential goods.
Moving to our China service on slide eight matches volume and the fourth quarter of 2020.
139, 1% higher year over year, the supply and demand dynamics and the Trans Pacific trade that we outlined in our prior earnings call remained favorable.
For the full year volume increased 85, 8% due to the introduction of the C. L X plus service and the second quarter.
And in addition to the increased capacity of the vessels and the CLEC string and.
As a reminder, at the end of June 2020, we moved the Daniel K and away into the sea elect service, which added approximately 500 containers and additional capacity for each voyage.
The demand for our expedited Ocean services from China chain.
Change throughout the year as the pandemic and its effects involved early in the second quarter of 'twenty and 'twenty, we saw outsized demand driven by P. P. E e-commerce working from home electronics and other high demand goods.
There were so not so much demand for the <unk> that we initiated a new service and May 'twenty and 'twenty called <unk> plus.
Which started as a few charters and subsequently became a weekly service working in concert with the seal acts to meet the increasing demand.
Late in the second quarter and into the third quarter, we saw a pick up and retail goods is locked down and subsided and stores reopened and.
And late in the summer and heading into the holiday period, we saw increasing levels of ecommerce goods as the pandemic drove more consumption of imported goods and Lou of services.
We also saw the need of manufacturers to replenish inventories depleted from the elevated consumption and the first few months of the pandemic and the Max and the manufacturers have been playing catch up ever since.
Our <unk> service has been the leader and expedited Ocean Transportation services and the Transpacific trade Lane for the last 15 years and our CLEC plus service is now the second best service and the trade lane behind the CLEC services.
Both services rely on our competitive advantages and our destination services, such as owning and controlling and I'm, sorry, owning and controlling our own chassis to help truckers save time and money.
And the unrivaled combination of SSAT terminal operation.
And our op dock facility shippers transport, which leads to industry low turn truck times and next day container availability.
These competitive advantages become more apparent and high volume peak periods as we avoid the congestion issues that others face.
I'll now comment on the current business trends. So please turn to slide nine.
Picking up where our fourth quarter ended January 2021, eastbound container volume increased 134% year over year the.
And the same key factors remain which are favorable supply and demand characteristics and the trade lane inventory restocking and elevated consumption of goods, including E Commerce and other high demand and commodities.
We also experienced a very strong free lunar new year period, and the peak week prior to lunar new year, which began in early February we saw demand and excess of two times and the capacity of our CLEC and C. L X plus vessels combined.
As many of you know the post lunar new year period is traditionally slow.
And factories idle and workers go on vacation during the public week long holiday.
This year was different the slowdown was abbreviated and our vessel sales and near full the week after lunar new year as there was a significant supply of free available at warehouses still waiting to be shipped throughout the holiday.
One of the underlying network benefits of the <unk> plus service is the ability to reposition and additional equipment to markets, where it's needed to take advantage of supply and demand imbalances. We remained committed to having ample equipment to meet the needs of our existing customers as well as potential new customers to this and.
Given the steady volume demand on the CLEC and Salix plus services, we're investing approximately $55 million and new containers and chassis to support the growth of the <unk> plus and a a X services.
And increase the availability of equipment across our network.
We continue to expect largely all of the supply and demand dynamics and the trade lane to remain favorable and the first half of 'twenty and 'twenty, one as the pandemic persists.
The pandemic is anticipated to subside with the widespread vaccinations, we expect some of the supply and demand factors. We're currently benefiting from to remain and continue to drive demand for our CLEC and <unk> plus services.
Lastly, with respect to the duration of the <unk> plus vessel charters, we've extended three of the six vessels into 'twenty and 'twenty, two and two into 'twenty and 'twenty three we expect her into enter into a new charter on a six vessel sometime in the first half of this year.
Turning to slide 10, and Guam, Matson container volume and the fourth quarter 2020 increased four 2% year over year, primarily due to higher demand for assessments and home improvement goods, partially offset by lower tourism activity as a result of the pandemic.
For the full year, 'twenty and 'twenty container volume decreased two 6%, primarily due to lower demand for retail related goods, resulting from the pandemic and its related effects.
The Guam economy remains in a downturn as tourism levels remain depressed and tourism related business activity remains very low.
Unemployment remains high and well above pre pandemic levels.
The economic recovery trajectory remains highly uncertain and is largely dependent on the recovery of tourism.
And for the month of January.
Our westbound container volume increased one 8% year over year, primarily due to higher volume of building materials.
And the near term, we expect to see stable a stable retail environment.
But we also expect tourism to make to remain challenged by the pandemic and have a negative impact on freight demand.
Moving now to slide 11 and.
And Alaska, Max instance, Cana volumes for the fourth quarter 2020 increased 18, 9% year over year the.
The increase was driven primarily by higher north bound volume due to two additional sailings and higher demand for sustenance and home improvement goods and.
And modestly higher southbound volume.
Excluding the positive impact from the two additional north bound volumes sailings container volume would have increased approximately.
11, 5%.
And year over year.
For the full year container volume increased four 6% year over year, primarily due to the higher northbound volume, including volume associated with the dry dock on the competitor's vessel and.
And one additional sailing partially offset by modestly lower southbound volume.
I'll now go through the current trends and Alaska. So please turn to slide 12.
The Alaska economy continues to recover from the second quarter lows.
But the recovery trajectory remains uncertain and.
The jobs market remains challenging in the pandemic environment with with.
Employment and the state and in Anchorage down a little over 8% year over year for 2020.
Both E D C and the Alaska and department of Labor are projecting a rebound and employment growth, but the pace of jobs recovery will likely be dependent on further stimulus efforts during the pandemic.
<unk> virus and integrate patient efforts and the timing and extent of vaccinations across the state.
Population growth is similarly tied to the winning of the pend pandemic and its effects on the economy.
For 2021 E. D. C shows continued population decline and acreage.
The low oil price environment continues to negatively impact oil exploration and production, which has a direct and indirect impact on the state economy, but there is optimism that we'll see an uptick and development activity in 'twenty and 'twenty one from new projects.
And January North bound volume decreased 12, 4% year over year due to one less sailing.
Normalizing for the one less selling north bound volume would have increased two 9%.
The volume strength, we saw in the fourth quarter 2020 has carried into the early part of 'twenty 'twenty, one where we continue to see higher volume assessments and home improvement goods. The a fishing season and constantly our Alaska southbound volume and a X services is off to a delayed start.
Doing due to an outbreak of the virus at several fish processing facilities and Alaskans Aleutian Islands, we expect the situation to only be a timing change and the fishing season, and do not expect negative potential overall over time for seafood container volume.
Turning next to slide 13.
Our terminal joint venture SSAT contributed $10 $9 million and the fourth quarter, 'twenty, and 'twenty compared to $3 million and the prior year period.
The higher contribution was primarily a result of higher container lift volume.
S. H T volume benefited from the significant year over year increase and and pork volume into the U S West coast from China.
For the full year, 'twenty, and 'twenty, SSAT contributed $26 $3 million or $5 $5 million higher than the year ago period.
The increase was largely due to lower operating costs.
And January 'twenty, and 'twenty, one and throughout lunar new year period important volume from China into the U S. West Coast remains strong and we expect S. S E T to be a beneficiary from the elevated import volume.
Turning now to logistics on slide 14.
Operating income and the fourth quarter came in at $9 $6 million or $2 million higher than the result, and the year ago period.
The increase was primarily due it due to a higher contribution from transportation brokerage, where we saw elevated goods of consumption and inventory restocking, coupled with tight supply and demand fundamentals and our core markets.
For the full year operating income decreased $2 $8 million year over year to $35 $5 million. The decrease was largely due to a lower contribution from freight forwarding, but other business lines were also negatively impacted in the first half of the year by the pandemic.
And January 2021, we saw transportation brokerage continue to benefit from elevated container volumes and southern California in line with the trends and the U S West coast import volume.
Span, Alaska freight forwarding business remained steady and tracked our Northland volume trends and our Alaska Ocean business.
We continue to see steady business activity and warehousing and supply chain services in line with what we've seen throughout much of 2020.
Currently many of our business lines are actively helping customers navigate a fairly challenging environment. These are the effects of continued congestion and seller, California from the elevated import volumes and I spoke about a moment ago, but there's also a broad set of challenges with the rails and trucking companies as a result of winter storms most on.
And throughout most of the country last week historically during periods of disruption, we tend to perform better and helping our customers navigate the difficulties because we own the chassis and assets and have years of experience maintaining free and challenging times.
And with that I will now turn the call over to Joel for a review of our financial performance Joel.
Okay, Thanks, Matt and I want to our fourth quarter financial results on slide 15.
Ocean Transportation operating income for the fourth quarter increased $19 3 million and year over year to $108 1 million.
The increase was primarily due to a higher contribution from the China service and cleaning the contribution from our sales X plus service.
The timing of fuel related and the surcharge collections.
And a higher contribution from SSAT and a higher contribution from the Alaska service, partially offset by higher SG&A expenses.
The company's SSAT terminal joint venture investment contributed $10 9 million or $7 9 million more than the prior year period, the increase was driven by higher lift volume.
Logistics operating income for the quarter was $9 6 million or 2 million higher than the prior year period. The increase was due primarily to a higher contribution from transportation brokerage.
EBITDA for the quarter increased $95 3 million year over year to $156 3 million due to higher consolidated operating income of $92 3 million higher other income of $1 3 million and $1 7 million and higher depreciation and amortization, which includes dry dock ameren.
<unk>.
Interest expense for the quarter was $4 9 million and lastly, the effective tax rate and the quarter was $25 2 million excuse me 25, 2%.
For the full year 2020 Ocean transportation operating income increased $154 million year over year to 244 8 million and.
Increase was primarily due to a higher contribution from the China service, including the contribution from the <unk> plus service and lower vessel operating costs, including the impact of one less vessel operating and Hawaii service, partially offset by a lower contribution from the Hawaii service.
The company's SSAT terminal joint venture investment contributed $26 3 million or $5 5 million more than the prior year period. The increase was largely attributable to lower operating costs.
Logistics operating income for the full year, 2020 was $35 5 million or $2 8 million lower than the prior year period. The decrease was primarily due to lower contributions from freight forwarding.
Slide 16 shows how we allocated our trailing 12 months of cash flow generation and the lack.
Last 12 months ending December 31st we generated cash flow from operations of $429 8 million and received $14 3 million from sale leasebacks from which we used $198 3 million to retire debt.
And and $4 5 million on maintenance Capex and.
$87 8 million on new vessel, capex, including capitalized interest and owners' items and $23 million on on other cash outflows, including $18 5 million and financing costs related to the two type of 11 transactions and amendments to the debt agreement to our debt agreements and the first half of 2020 well on.
Also returning $39 2 million to shareholders during the year and via dividends.
Turning to slide 17 for a summary of our balance sheet.
And note that our total debt at the end of the quarter with $761 million and our total net debt was $745 7 million.
During the quarter, we reduced total debt by $63 5 million.
At the end of the fourth quarter, our leverage ratio per the amended debt agreement was one seven times compared to two four times at the end of the third quarter.
And the outstanding revolver balance at the end of the quarter with $71 8 million.
Please turn to the next slide on Slide 18 for a review of our new vessel payments.
And hopefully the last time, we present the slide since the Hawaii fleet renewal was completed and the fourth quarter.
For the fourth quarter, we had new vessel cash capital expenditures of $28 2 million and Capa and capitalized interest of $1 8 million for total capitalized vessel construction expenditures of $30 million.
Our final payment on that Sonya was made and the fourth quarter. When we took delivery of the vessel cumulative vessel progress payments on all four vessels through the end of 2020 with $924 2 million.
Please turn to the next slide on page 19, where I'll spend a few minutes, giving an update on our capital expenditures.
Firstly, we have our annual maintenance Capex, which includes equipment and replenishment.
Historically, we have commented that we expected our maintenance capex to be and the $50 million to $60 million range annually.
In light of our recent volume growth with <unk>, plus as well as significant cost increases on containers chassis and other equipment, where we have seen price increases on many types of equipment on 50% to 150%.
We now estimate our annual maintenance capex to be higher and the range of approximately $60 million to $70 million.
This year, we also expect to make to make scrubber installation and payments of approximately $20 million, which includes payments on our seventh scrubber installation this year and carryover payments from the fifth and sixth scrubber installations, which started last year.
The sixth scrubber installation was actually completed in early February this year and that vessel is already back in service and <unk>.
Seventh vessel scrubber installation is scheduled to begin within the next month.
We continue to believe the long term scrubber economics remain compelling despite the low low oil prices and the narrowing of fuel spreads that occurred and the early months of the pandemic.
The additional vessel and discover program will also help us to be more operationally flexible for reserve capacity during necessary dry dockings and to maintain schedule integrity when the need arises.
And seven vessel will conclude our announced scrubber program.
Longer term, we continue to evaluate the use of LNG or scrubbers on our new Aloha and kind of Aloha class vessels, which are dual fuel capable and currently burn low sulfur fuel.
We will defer if fuel strategy strategy decision on these vessels until we near the first drydock and its dry docking of each vessel, which is five years from each vessels first and service date.
As Matt noted previously we expect to spend approximately 55 million and this year on new equipment to support the <unk> plus and <unk> services.
And 2020, we spent approximately $37 million on new equipment to support our organic growth initiatives to launch these two new services. This.
And this total equipment investment of approximately $92 million is a one time cost to support the significant demand levels and growth and the China and a extra services and.
Most cases, we expect that payback on these equipment investments to be relatively quick and just a couple of transpacific sailings.
This equipment, which has a life and at least 13 to 14 years can also be deployed across our broader network over time if needed.
And when we started to see Alex plus we serviced and demand with our own equipment from the domestic trade lanes, which we're experiencing significantly reduce volumes at the time due to the pandemic.
Over the summer and through the rest of the year the domestic trade line and saw some recovery in volume and given this increase plus the equipment needs from the new <unk>, plus and <unk> services, we decided to both lease additional equipment and order new equipment six months ago during the third and fourth quarters of last year.
Given on lead times for new equipment. Many of these equipment orders will now show up and our 2021 on Capex.
During this period, our goal was to remain well positioned heading into 2021 to support our customer volumes if demand remains strong which it has.
And lastly on our 2021 Capex, we expand we expect to spend approximately $25 million on a new neighbor island and flat deck barge and this new barge would be and Lou of inexpensive near end of useful life Drydocking on and older barge that is currently in service.
We expect the new barge to provide efficiency improvements to our Hawaii neighbor Island barge operations.
Adding it all up on this page the total amount of Capex for the higher amounts of the indicated range is on this page sums to approximately $170 million and 2021.
Looking into 2022, we expect to be at the maintenance Capex level I previously mentioned of $60 million to $70 million.
Please now turn to slide 20.
In light of our improved financial position I want to spend a few moments on our capital allocation strategy, which remains consistent with our prior approach.
Our uses of cash after funding, our ordinary dividend and maintenance Capex.
<unk> to be and no particular order.
Organic growth debt reduction.
Acquiring businesses and returning capital to shareholders.
I will briefly comment on each of these four areas.
With respect to organic growth, we continue to evaluate new opportunities and as demand across the ocean trade lanes, and and logistics continues to fluctuate and that pandemic and Dr environment.
Like <unk>, plus and <unk> organic initiatives tend to be low risk or lower risk higher return opportunities that require less upfront capital and typical M&A transactions and two.
2020 was clearly a strong year for us in this regard.
Which led to our total debt outstanding and declining by nearly $200 million during the year and our leverage covenant at the end of the year finished at approximately one seven times down from from a peak of approximately 3434 times at the end and the first quarter of 2020.
And 2021, we expect to continue to pay down and outstanding debt from free cash flow generation is.
It is important that we retain our financial flexibility and maintain a strong investment grade balance sheet, which we view as a competitive advantage and capitalizing on growth opportunities.
And 2020, we evaluated and acquisition opportunities and both Ocean transportation and logistics, but some of the businesses did not fit well with our existing operations and others were sidelined pending valuation and timing considerations and light of the pandemic impact to these businesses.
Overall, we remain disciplined and our review of opportunities with the key acquisition criteria, we set out and our prior investment community and in our prior Investor Communications, which are the following.
The acquisition opportunities from us firstly have and enduring competitive advantage or economic moat and be difficult to replicate by others.
Second and need to be a good strategic or comp and complementary fit to our existing operations into our network.
Thirdly, they need to generate a cash on cash return in excess of 10% initially and have the financial means to independently grow organically thereafter, and fortunately they need to be a good cultural fit.
Lastly on capital allocation and the absence of organic growth or acquisition opportunities, we will consider it and return of excess cash to shareholders and the form of share repurchases and or special dividends over time.
With that I'll now turn the call back over to Matt.
Thanks Joel.
To wind it up as I reflect on <unk> operational and financial performance and 2020, I'm proud of our accomplishments amidst the difficult environment.
And a year debt, we will long remember as far from normal.
And its employees adapted on the job and at home and the face of extraordinary conditions, we moved quickly to seize organic opportunities and to drive exceptional financial performance throughout much of 2020.
Across Ocean transportation and logistics and we did what we've always done for 138 years.
<unk> exceptional customer service and on time delivery to meet our customers' needs.
2021 will be far from normal as well, but our mindset hasn't changed we remain focused on moving freight better than anyone and uncovering new opportunities for long term growth growth to drive shareholder value.
And with that I will turn the call back to the operator and ask for your questions.
Yeah.
And as a reminder, if you want to ask a question you will need to press star one on the telephone and once again that and star one on your telephone if he wants to ask a question.
And your first question comes from a line of debt Jack Atkins with Stephens.
Great.
Good afternoon, everyone and congratulations on a on a great quarter, a really a great year.
Thanks, Jeff.
Matt maybe if I could start it and just a lot of different places to go here, but if we could maybe start with what's happening on the transpacific I mean, it's just sort of extraordinary here just to start off the year, we've seen things accelerate even further from a rate perspective and.
I guess as we're sort of heading into more of the traditional.
You know contract negotiation period here over the next call. It 60 to 75 days.
How do you how do you think things shake out given the just the elevated level of spot rates, we've been seeing and the market and you know.
How does that impact madsen's ability to sort of drive higher contractual rates not only on the legacy <unk> business, but I would imagine youre going to want to put part of that C. O X plus business under contract two and 2021. So can you help us think through that.
Yeah, I sure can Jack I would say debt from a from a contracting perspective, just by way of context Matson had historically tried to operate at <unk> plus with a combination of spot freight for spot rate short term cargo on.
Tracks and long term annual contracts and so.
As we've said and as you know Jack we have been in the transpacific for 15 years and.
And that has changed over time, we saw a relative 50 50 balance in terms of our <unk> plus initially and it has migrated more towards the spot market, where we can command a.
Premium to the market relative to contract rates, but we've always felt it was appropriate to have a mix of both.
And in the middle or in April may of 'twenty, and 'twenty, we stood up and <unk>, plus which was largely outside of the or after the contract period. So a lot of the freight on <unk> plus was spot free which served us well.
And what we saw happening with freight rates and was consistent with our view that this environment, we'd be well suited to focus on on the contract market. So I think over time, we're going to be looking at what the appropriate mix is I think.
Because it has changed over many market conditions over the 15 years.
Our approach will likely be.
To continue to focus on a mix of both with the higher weighting towards the spot market I think it's almost certain that for customers, who are looking who operate under annual contracts, we will see increases and the annual contracted freight rates and.
And.
The our customers' goals will be to get as much committed capacity as they can.
And as low a rate level as they can where the carriers objectives of course would be what would be different.
And then that and so that balance happens every year, but at the end of the day. Those that are focused primarily on contracted freight are going to see significant increases and in that contract capacity.
Our contract rate and I think as we see the world now, we see the supply and demand elements.
That are in place continuing through the middle of the year.
And the freight rate environment to remain relatively elevated.
Elevated and then as the pandemic subsides, we'll get into what the new normal is but we really don't Jack have a view of when that would happen and what the new normal looks like although we do feel comfortable debt match and <unk> plus service are here to stay.
Because of increased e-commerce and other factors in the marketplace that I think we feel really good about the long term prospects for both of our China services. So maybe I'm over answered your question, but give you a little color and in addition.
And that was very helpful. Matt and I appreciate that I guess, maybe just sort of following up here from here for a moment on on <unk>, plus and sort of the additional cash capex investments there.
Could you maybe talk for a moment about that $55 million additional investment.
What do you what do you what is that going to do for your broader network. You you you talked about increased availability of equipment.
Well that lets you move even more volume on your charter chips, and Felix plus and your currency.
The original seal its operations or is this really just about purchasing equipment off of lease and and and you're getting your own boxes to replace leaks and equipment.
Yeah. So the way, we thought about it and Joel talked about it and his his comments earlier, which was when we started <unk> plus there was a moment in time when the of course.
And there was we were still and somewhat of a downdraft related to the pandemic and how it was going to play itself out and up.
Volumes fell in our core domestic markets as they did mostly every largely everywhere.
And created an opportunity once we saw the opportunity with <unk> X plus two use that equipment debt.
Debt that was newly available to support the early stages of the <unk> plus and we had a.
We had a view earlier than I think the rest of the trade debt the trans Pacific was going to be extremely busy.
And our goal and mindset going into the <unk> plus was we need enough equipment to not Miss a single slot booking availability and.
And so we were aggressive in basically leasing every available blocks in the market.
And that was in China, which is most of that most of the equipment and the world.
Or two before other carriers.
I'm aware of what became more obvious later move quickly. So the combination of reduced demand and our domestic Jones Act trades as well as being very quick moving on leasing equipment helped to sustain the early days of fulfilling our goal of not missing a single booking because we didn't have.
<unk>.
The other on the on the destination services side that we've talked about as part of our advantage and L. A we also had one of our key.
Elements of service differentiator is that we own our own chassis own or control our own chassis and so as we had the <unk> plus the same dynamic was at work there domestic shipments were off which allowed us to take the chassis that we previously used focusing on our our domestic Jones Act services and redeploy them into the <unk>.
<unk> service.
And over time, we did leave chassis, but what we want to be able to do especially as the Jones Act trades normalize and we hope begin to show modest signs of growth as we get to the back side of this pandemic is to make sure we had enough equipment to maintain the service levels and the other point that Joel made which is important too.
To repeat repeat and I think I've said it to that.
And while the boxes and chassis are more expensive than they were historically.
Debt the payback on the margin of having a box versus not having a box pays for itself and one or two voyages and so we wanted to not put ourselves in a position where we couldnt fill every slot and take care of as many customers as we could which let ourselves to re sizing our fleet for this.
Tremendous opportunity and and earnings that we've seen out of our Upsized <unk> and Salix plus service. So this is really just more normalizing for.
And the catch up that we're playing on on <unk>.
Getting equipment containers and chassis is into the fleet.
Okay, that's great Matt I guess, one last question and then I'll jump back in queue, but I. This.
And this is for Joel I guess these are kind of a multipart question, but but Joel on the 600, excuse me up with 760 million and and debt at the end of the quarter.
Much of that can you prepay without penalty.
And obviously, the 72 million on the revolver and makes sense.
Is there anything beyond that that you can prepay this year with cash flow. If you wanted to and that's part one part and part two is on the on the cash flow free cash flow side are there any sort of puts and takes when we think about 'twenty one versus 'twenty two.
From a cash flow perspective, whether that's cash tax requirements or see any.
Anything like that.
Cares act benefits that don't repeat in 'twenty.
One that was there and 2020 I just want to make sure we're thinking through the puts and takes on the cash flow side and.
Thank you thank.
Thanks, Jack and I, we love the cash flow questions. Thank you.
So the first part is yes $71 million revolver, that's the first thing and it can.
Can you pay down and all the rest of the debt is either tied on 11 debt or long term private placements that are not pre payable without penalty. However, they do amortize and they've amortization schedules and.
So the amortization of that long term fixed debt over the next three years three to five years is between 60 and 65 million each year. So that's the debt that would pay and that would free cash flow along with the 70 $172 million on the revolver.
On the puts and take question you touched upon the biggest one which is now and we expect that we've utilized all of our tax attributes Nols and and Ts and from the end of 2020, we were not a cash taxpayer, we actually did receive NOL accelerated refunds, which helped the cash flow and the last two years.
So the biggest difference.
And just kind of operationally cash flow wise from the company, it's flipping from getting some accelerated A&P credits, which were positive to now and 2021 and beyond and we expect to be a cash taxpayer. So I would say that's probably the biggest difference and cash from operations as you look forward.
We don't expect any other kind of changes and our working capital you see a big increase and working capital investment and receivables and 2020 that was just related to the stand up on the <unk> plus service, which is a big new services for us with lots of receivables outstanding some of those some of those customers are on cash, but overall that was the main draw.
<unk>, which is why you'll see an increase in receivables and that's been on our working capital by 2021 that should that should actually be a lot less now and no big changes on the payable side.
<unk> seen a couple of years in a row and distributions and then a little bit higher than annual reported income so that over time, we we we tell investors expect us to be much closer together and if you look back five years ago that the distributions and three phases, a little bit lower than reported income so that makes it a little bit of change there potentially over time.
But that's really it Jack the rest of it is going to be.
And I think comparable as we head into 'twenty, one and 22 versus prior years.
Okay. That's helpful. Joel Thanks, very much from the time guys.
Okay. Thanks Jack.
Your next question comes from the line of Ben Nolan with Stifel.
Hey, guys.
Good quarter.
I have since Jack had three I'll have three.
The <unk>.
And starting clearly with C L Ax and army. So that's at this point probably.
And the biggest.
And Oh driver, but it but ultimately and sort of the biggest question mark on from a longer term go forward basis.
And <unk>.
The part that I think was interesting, though as I was sort of looking at.
The implied rate per box across the company and it stepped up quite a bit even with the higher volumes.
And and I have to assume that that came from Cielo X because that's where the day rate volatility comes and <unk> from <unk>.
Looking at the index it Didnt GAAP up quite as much as what it looked like your.
Rates did is that entirely just sort of you guys have a better service and everybody else and and so you can charge more for it or is there something else and that that I'm not seeing.
No I think you've got that the premise of your question is the right. One I mean year over year, we saw a significant volume increase and China and a significant rate increase year over year, historically mentioned because of our services differentiated service offering charges, a premium to the market and that was.
Also true even in the elevated market environment and the transpacific, we continued to earn a premium on both the <unk> plus services. So those were all factors.
And as is.
And so even when you look at the <unk>.
You see a fire sapphire other indexes that are out there on the trade we continue to earn.
Healthy premium to the market given our service.
Advantages.
Right and.
And I guess my question really was and it looks like that premium went up and my and my <unk>.
And reading that correctly.
Well I think the way, we think about it as it expands and contracts so.
And environments and.
It's actually maybe counterintuitive, but when when rates have been at Lowe's, We command very large premiums that can narrow when rates are at all time highs, but theres still a significant.
Advantage of premium relative to the market. So it expands and contracts with the market cycle, where the premium can actually contract and Super high markets, but.
So just to give you a little bit of color there.
Okay.
And then with respect to volumes.
And obviously again sort of last quarter was.
Record levels.
And that what was it 40 and 40000 containers that were moved.
Is that sort of peak like absolute and.
Nothing else can fit on a ship and that sort of is as much as it can be and maybe tying into that question and I know that Matt and you talked about.
Rehab charters on several five and a six ships and theyre doing a fixed but I know that Joel and the past you've talked about the possibility of actually increasing the size of the ships that you are chartering a little bit and maybe if you wanted to do more volume.
And so my question is are you is that still in play is it or are you considering maybe increasing the size of your <unk> plus capacity or is that kind of 40000 number that you had here or is that sort of what we should expect if utilization is pool going forward.
Yeah. So the I would say five of our six ships have been chartered through 2022.
And so I would expect over the near term debt the capacity that we have at <unk> plus services.
Also attached to our core Jones Act CLEC service, the capacity isn't going to change significantly.
Over over the near term and.
And I would say.
And of your earlier question about the fourth quarter and the volumes I mean effectively every slot.
Still we didn't lose a single container.
Our low too because we didnt lack container equipment.
And so that is a pretty good profile there will be times, when we have what we call extra loaders, which is a dry dock and vessel being dry docked that can be put into filled and the eastbound direction on its return to the domestic trades there were times when.
And there are there are also sort of one off and wages and and those kinds of things, but I would say that the fourth quarter is a good proxy for what we're likely to see which was every slot that was available was filled.
Okay, and and in terms of maybe upping the size that's.
Not not really going to be happening at least in 'twenty and 'twenty. One is that is that fair. That's why yeah with the profile of the charters and the duration of where theyre expecting and.
Size is important but the speed is more important. So there's there is we could go charter and some very large ship that is debt can't make the speed and those kinds of things. We're not interested so we're looking for a fast ship that can get in and out on the terminal relatively quickly that has a profile. We think our current charter chips are good.
Fit well with our service model.
Not to say that if we can find a vessel that it meets the speed requirements thats, a little bit bigger that can carry three or 400 more containers when the charter renewals open that we wouldn't look at it for sure we would but it's primarily speed that defined what works for us and our environment.
Okay. That's helpful and then and then the last one from me.
And this is just more curiosity than anything else. So you guys had pre announced a few weeks ago and you came in meaningfully above sort of of that pre them out and the high and other pre announced range.
And I'm curious sort of what what moved.
And in terms of the numbers over the last day.
Few weeks that maybe you didn't know about initially.
And it's just really just year end accruals year, and reconciliations yearend true ups things like pension and other items and just take a few weeks to get the data to the middle or end of January so nothing nothing really unusual on the business as is all of the year and accounting items alright.
Alright, cool and nice quarter. Thanks, guys.
And then.
Your next question comes from the line of Steve O'hara with Sidoti and company.
Hi, good afternoon, thanks for taking the question.
Great.
Hi.
Yes.
Going to the.
Talk about the first half and you expect some of the factors to continue.
After the pandemic ends and.
And if you think about the.
The importance of the factors that continue versus the ones that you expect to abate somewhat.
In terms of.
Earnings per auction revenue and things like that.
Is it and how do you frame that in terms of.
And that maybe.
First half versus second half and then is that and.
Timeline that you're talking about is that due to more just.
Hey, look we're kind of comfortable with the six month outlook or is there something happening out there that it was kind of.
More concrete that you see kind of on the horizon.
Yeah.
And our Crystal ball is a little cloudy, but let me give you some of the thinking and approaches and I can try to answer your question and domestic and so I think what we are seeing is when we said first half.
Before before we put a specific timeframe on it and we've said we think the current conditions that where theres 30 ships at anchor and L. A long beach and 10 ships at anchor and Oakland and supply chains are congested and turn times of slow and labor is not available and this sort of really frothy and difficult environment for our <unk>.
Customers to remain through that period, but when we took a step back we said really.
We're in a period where.
And because of.
The pandemic and and consumer behavior changes that we've seen debt and we're in a very frothy.
Adjusted timeframe at some point, that's going to unwind and this likely you're going to be connected at some and some way to the post pandemic world whenever that occurs when a majority of Americans are vaccinated that want them and we emerged from our caves and start venturing around or whatever and.
Go back to work for those that are working remotely today.
And so and.
Debt at that point, we also would see this super.
Congested lack of equipment lack of.
Chips that are available every shift and the world is chartered to return to a more normal level and and.
And so for us there.
Sort of the current environment and the new normal whatever the new normal as and when we looked at it Steve We said okay.
And we've mentioned this on the last couple earnings calls what's happened.
We see the return of the airfreight markets to be.
A significantly delayed item really for a couple of reasons, we've talked about are free.
Used to provide the billions of doses of the vaccine around the world, which will take two or three years or longer before everybody and the world not just in the U S can get access to a vaccine and the second thing is I think there will be only a gradual return to international travel even win.
It becomes a little bit more open within the U S to be one of the first countries that has most of its population.
Who wants it vaccinated and so I think.
A delayed too strong international traveling it's also going to be a factor in keeping airfreight volumes down and Thats, one factor and the other factor is of course, we've talked about this the significant acceleration of E. Commerce. That's here to stay it's as pull forward of demand people liked it.
And having things dropped at their doorstep and instead of venturing out and I think consumers will do what's easy and ecommerce is easy and we think that will remain and as we've said before e-commerce wants to move and an expedited fashion and the business model for ecommerce is to be delivered the next day or as soon as possible, which.
Requires more speed and the supply chain than the traditional model of.
Put it manufacturing tons of stuff, putting it on a slow shift putting in and huge distribution center and eventually finding its way way on to a store shelf and we think that's different.
We also see the consolidation of international Ocean carriers that are operating within the three alliances. So we're going to land on this new normal and this new normal we believe it's going to sustain match's core select service and the <unk> plus service because of the airfreight and E. Commerce. Other demands we've had a lot of airfreight customers, who were new customer.
This year, who like the relative pricing compared to airfreight and availability. So all of those things give us a feeling of.
There's something here to stay now with regard to when is the pandemic going to and and when is the new normal going to be in place. We don't have any better insight than anybody else, but at least we're saying we think through the middle of the year, we're going to see a very frothy environment, and then relatively healthy environment for mats and after that whenever that is so that's our thinking there Steve.
And.
Okay, No that's very helpful.
And then just on.
And maybe the CLEC and <unk> plus.
Positivity and the fourth quarter and the first quarter.
I mean is there a way to think about.
Maybe the factors that you outlined.
How important are each of those for your continued success in that business and or is it a matter of if you continue to execute.
Kind of when more of the traffic over time.
And I'm just curious if you are.
And maybe talking I mean I know.
Obviously, Amazon has a dedicated error free fleet now and I'm just wondering if there is.
Conversations going on and the market that you've heard about along those lines on the ocean side.
Yes.
So with regard to your questions I would say that.
The environment. When we said, we think that Kurt frothy environment, it's going to remain through the first half of the year.
And I you know implies that we see really strong demand for medicines.
Services and so the question is about how much capacity, we have and at least through lunar new year was extremely strong we see an abbreviated post lunar new year period. So we do we do see a continuing environment of very strong demand.
Over the longer term.
And the most important factor for mats and in this new normal is to maintain the fastest service and the transpacific and the second fastest service and the transpacific other carriers have.
Created some other niche offerings and other markets.
But because of our destination services, they cannot equal our sale to availability, so and the market knows that every customer who is looking to move their freight knows that mats and services are the fast and and <unk>.
So operationally our priorities, whether it's a new equipment or sailing or other.
Great joint venture with SSAT.
Our around making sure that mats and services remained the fastest and the second fastest and the market I think that long term will be the thing that determines the viability and of course, we are doing this a very long time and we have confidence that we will continue to.
Two to be the <unk>.
First and second fastest services. So I don't know if there was another part of the question that I missed it but those are closer to my thoughts about that.
No. That's helpful. All right I'll jump back in queue. Thank you.
Thanks, Steve.
And as a reminder, if you want to ask a question and you will need to press star one on your telephone and once again that is star one on your telephone if you wish to ask a question.
And we'll pause for just a moment.
And you have a question on from the line of Ben Nolan from Stifel.
Well, if nobody else was I guess.
Taken and.
I wanted to follow up and.
Matt you and I talked a little bit about this asset.
And our conference was in line.
Last week two weeks ago with.
You were just talking about.
How how mission critical is to have the fastest speed and everything else. What we're hearing from a lot of other people is that they are under intense pressure to reduce emissions and.
And that the easiest and most expedient way to do that is to go slower.
Which is pretty counterintuitive to sort of the value proposition that you guys have can you maybe just talk through how you're how you're balancing.
And the need to reduce your emissions, but also have that competitive advantage of speed.
Yeah.
And it's an important question, it's going to become more important as the.
I am 2030 guideline around towards the long term 2050 of significantly reducing the carbon impact in the ocean transportation business. So this is here to stay we understand it and so on but I would say two things I would say.
There are.
It is true that one of the ways to meet your carbon emission reductions as by slowing down.
But what for many.
Ocean carriers don't exactly say is that if you want to maintain schedule and news flow your ships and you need to add more vessels to your stream to be able to make the like if you went from five ships and the service to six shifts or seven ships as you slow down to reduce emission and I have one or two other.
Vessels that are operating and emitting carbon so.
Partly you have to look at it as a big picture.
And so I would say the other thing to keep in mind as at least as we see on.
Our model.
The question could be asked do we see ourselves as a relatively higher carbon emitting.
Operator compared to <unk>.
Carrier Thats moving around 20000 Teu ships on a per seat.
Per container basis, the answer is yes.
Might be slow steaming, but when you compare it to airfreight.
We are a fraction and 5% or 10% or whatever of the carbon emission relative to air free air freight, which is a market that we're pulling we know are pulling.
Cargo from.
And as a result, our significantly reducing carbon emissions.
Free that would otherwise go there so.
Yes.
Does match and have responsibility to reduce its carbon footprint absolutely are we making investments to do so absolutely I think longer term and we're hearing one of the benefits of the four new ships. For example that we have are very large spaces to accommodate what we thought initially might be LNG, but to the extent.
And there are net carbon zero carbon fuels like hydrogen or other.
Ammonia and other things bio gases.
And those things can also be used on our vessel to lower our cotwo footprint over time are not yet commercially available, but I think theres a lot of investment and interest and.
And these alternative fuels, which we think have the ability for us to reduce our footprint. Further so we're mindful of it I think it's still a bit early in the and the game to pick the winners and.
And anyway. Those are those are my thoughts about how we're going to be approaching this.
And I appreciate it thanks, Matt.
Sure.
Yeah.
And at this time there are no other questions in queue I'll turn it back to.
Matt.
Okay. Thanks, operator, thanks for.
And your participation today and thanks for your continuing interest and mats and we look forward to catching up with everyone at the at the end of the first quarter. So please stay well and safe and we'll look forward to speaking with you then thank you.
This concludes today's call Ya man and disconnect.