Q1 2021 Matson Inc Earnings Call
We believe that our expectations and assumptions are reasonable.
We caution you to consider the risk factors that could cause actual results to differ materially from those and the forward looking statements and the press release and presentation slides and this conference call.
These risk factors are described in our press release and presentation and on more fully detailed under the caption risk factors on pages 12 through 'twenty one.
Our form 10-K filed on February 26.
2021, and and our subsequent filings with the SEC. Please.
Please also note that the date of this conference call is April 27, 2021, and any forward looking statements that we make today are based on assumptions as of this day, we undertake no obligation to update these forward looking statements and with that I'll now turn the call over to Matt.
Thanks, Lee and thanks to those on the call.
I'll start with a quick recap of our first quarter results. So please turn to slide three.
And it's off to a strong start to 2021 with continued solid performance and ocean transportation and logistics.
And year over year increase and operating income for Ocean transportation and the first quarter was primarily driven by continued exceptional demand for both the <unk> and <unk> plus services.
And our other core trade lanes, and we continued to see steady demand for <unk> and home improvement could lead to higher higher year over year volumes.
Logistics operating income for the first quarter of increase year over year. As a result of continued elevated goods consumption and inventory restocking. In addition to the favorable supply and demand fundamentals and our core markets.
And my nearly 40 years and the business I have not seen and environment like this with international trade lanes are operating at capacity and widespread supply chain congestion, leading to pressures U S ports terminals rail yards and warehouses at match and we remain focused on maintaining reliable trade Lane <unk>.
<unk> and helping customers and both ocean transportation and logistics and worked through this very challenging period.
I'll now go through our trade Lane and services. So please turn to slide four.
Hawaii container volume for the first quarter increased 0.6% year over year.
The increase was primarily due to higher demand for assistance and home improvement goods, partially offset by one less westbound sailing and the negative impact from low tourism activity as a result of the pandemic.
Volume demand and the quarter was influenced to some degree by the economic recovery across the state and the associated improvement and tourism data and employment.
The benefit of additional stimulus payments.
In March we lapped the first shelter in place and Hawaii, which resulted in a surge of home good and essential goods purchases.
I'll now go through the current business trends and our Hawaii service. So please turn to the next slide.
The Hawaii economic recovery is underway with continued improvement and the tourism.
Unemployment remains elevated and is expected to recover with improving tourism trends.
With east visitor travel restrictions and increased explanations on the mainland tourism to the Hawaiian Islands picked up and the first quarter and is expected to accelerate into the summer as vaccinations and become more widespread.
The continued recovery and tourism is expected to lead to gradually improving economic conditions and the state, but the economic recovery trajectory continues to remain uncertain.
Historically tourism has not been a driver of containerized freight demand, but it is possible that the rebound and tourism, coupled with an improving local economy may lead to modest containerized freight demand.
To give you a sense of the volume trend one month into the second quarter, our westbound container volume in April increased approximately 19% year over year, which included the benefit of and additional sailing.
Normalizing for the additional sailing April volume increased approximately 16%.
During the months, we continued to see elevated consumption and home improvement demand.
Call that last year at this time, our volume and Hawaii began to see the negative effects of the more widespread shelter and place orders near zero tourism.
And the effects of temporary retail store closures.
Moving to our China service on slide six.
And that since volume and the first quarter 2021 was $218, 6% higher year over year.
We experienced very strong pre and post lunar new year periods compared to last year, where we saw and elongated post lunar new year slowdown period due to China's COVID-19 mitigation efforts.
Our China services continued to realize a significant rate premium and the first quarter 2021, and achieved average freight rates that were considerably higher than the year ago period.
Volume demand and the quarter was driven by e-commerce and other high demand goods and a number of demand factors remain favorable including continued supply chain constraints continued consumption of goods and Louis services and the beneficial effects of additional stimulus payments.
The elevated consumption trends has led to relatively low levels inventory for retailers.
I will now comment on current business trends. So please turn to slide seven.
The key demand factors I mentioned for the first quarter continued into the second quarter with April 2021, east on container volume higher year over year by approximately 151%.
Significant supply chain congestion continues, particularly in and around the ports of California.
We expect these conditions will mostly most likely persist through the second quarter and into the traditional peak season.
We also expect demand and the Trans Pacific Trade Lane to remain favorable with elevated consumption trends to continue beyond the second quarter and for retail and e-commerce demand to remain strong.
With retail inventories at relatively low levels and sales.
Our large retail customers are experiencing stock outs on essential goods and creating a just in time management environment.
To meet everyday consumer demand.
And as such we expect significant demand for our expedited CLS and CLS plus services to remain throughout the peak season into late October.
Max and continues to offer a highly differentiated fast and reliable set of transfer to Pacific Ocean services to help existing and new customers manage through this congested environment.
<unk> and <unk> plus services are the fastest and second fastest and the trade lane, respectively, and combined with our competitive advantage and destination services makes it extremely compelling value proposition when compared to airfreight and other ocean freight services.
Our competitive advantages include having their own and owning our own equipment.
And have an unparalleled combination of SSA Cte terminal operations, and the <unk> facility and shippers transport for industry, leading truck turn times and next day container availability as.
As we discussed on our fourth quarter earnings call since the summer of last year, we embarked on our capital plan to purchase containers and chassis to meet the elevated container volume demands throughout all of 2021, So we're well prepared to meet our customer needs. If the congested environment. We're currently and continues to be on the peak sees.
Turning to slide eight.
And Guam masses container volume and the first quarter 2021 increased 2% year over year, primarily due to higher demand for sustenance and home improvement goods, partially offset by lower tourism activity as a result of the pandemic.
The Guam economy remains in a downturn as tourism levels remain depressed and tourism related businesses activity remains incredibly low and the economic.
Recovery trajectory remains uncertain and is largely dependent on.
On the recovery and tourism.
For the month of April our westbound container volume increased approximately 25% year over year, where we saw the continued elevated consumption and home improvement demand and April of last year volume was impacted by reduced tourism and the temporary closure of retail stores during the pandemic.
Moving on now to slide nine.
And Alaska masses container volume for the first quarter 2021 decreased four 9% year over year.
The decrease was driven primarily by lower northbound volume due to one less sale and this year and volume related to total drydocking and the year ago period, and lower southbound volume, partially offset by the <unk> volume.
Normalizing for one less northbound sailing and this year and the total dry dock volume last year.
Last day volume increased approximately two 5% year over year.
I'll now go through the current trends and Alaska. So please turn to slide 10.
The Alaska economy continues to slowly recover from the pandemic lows, but remains challenged until the pandemic subsides and the unemployment rate improves.
The state's unemployment rate is slightly higher than the national average.
The jobs recovery has been negatively impacted by the slow return of retail business, where our retail was the hardest hit industry and the pandemic.
So although the economy is in recovery mode and recovery trajectory remains highly uncertain.
Tourism will continue to remain challenged and the near term with no cruise tourism activity. This summer.
There's been a modest pick up and oil production and exploration activity with the improvement and oil prices.
And any improvement in this area is expected to have a direct and indirect positive impact on the state economy.
With respect to our SaaS bound trade lane and the <unk> services.
On a fishing season had a delayed start and the first quarter of 2021 due to an outbreak of the virus at several large fish processing facilities, and Alaska's Aleutian islands, but activity ramped up and the last month of the first quarter and is extending into the second quarter.
And April north metal container volume increased approximately 11% year over year, where we continue to see higher volume assessments and home improvement goods and recall that in April of last year volume and the first half of the month was relatively steady and gateway to materially weaker demand and the second half of the month due to the <unk>.
Temporary closure of retail stores during the pandemic.
Turning next to slide 11.
Our terminal joint venture SSAT contributed $9 $2 million and the first quarter of 2021 compared to $4 million and the prior year period.
The higher contribution was primarily a result of higher lift volume.
T lift volume benefited from the significant year over year increase and in port volume into the U S West coast from China.
We continue to see strong import volume into the U S West coast and expect SSAT to be a beneficiary of this elevated and volume.
Turning now to logistics on slide 12.
Operating income and the first quarter came in at $6 1 million or $1 million higher than the result, and a year ago period.
The increase was primarily due to higher contributions from transportation brokerage and supply chain management, where we saw elevated good consumption and inventory restocking and addition to tight supply and demand fundamentals and our core markets.
And April 2021 we saw transportation brokerage continued to benefit from elevated container volumes and southern California in line with the trends and the U S West coast and pork volume.
Span Alaska, our freight forwarding business remained steady and tracked our northbound volume trends and our Alaska Ocean business.
Widespread slot supply chain congestion at ports and terminals rail yards and warehouses has created a very challenging environment and.
And many of our business lines are actively helping customers manage through the chaos.
As I've said before historically during periods of disruption, we tend to perform better and helping our customers navigate the difficulties because we own and control the assets and have years and experiencing managing freight and challenging times.
And with that I will now turn the call over to Joel for a review of our financial performance Joel Great. Thanks, Pat now onto our first quarter financial results on slide 13.
Consolidated operating income increased from $13 million and a year ago period to $122 million with higher contributions from both ocean transportation and logistics.
The increase and the increase and Ocean transportation operating income and the first quarter was primarily due to a higher contribution from the channel service and a higher contribution from SSAT, partially offset by a lower contribution from the Alaska service and higher depreciation.
The year over year increase and the China service contribution was the result of significantly higher average freight rates and higher volumes and the CLEC services and the contribution of the <unk> plus service.
As you May recall, we initiated the <unk> plus service and mid May of last year.
The increase in volumes and a select service is primarily due to the strong pre and post lunar new year periods compared to last year, which was negatively impacted from the COVID-19 mitigation efforts and China, which Matt previously discussed.
The year over year increase and capacity <unk> strength with the addition of the Daniel K anyway and June of last year.
And year over year increase and SSAT equity income was primarily due to higher risk volume.
The lower contribution from the Alaska service is primarily due to lower north bound volume due to one less selling this year and volume related to total drydocking and the year ago period.
The year over year increase and depreciation was due primarily to the mat Sonya entering service and the fourth quarter last year and to a lesser extent the depreciation of scrubbers and install on vessels that occurred last year.
Interest expense for the quarter was $7 3 million or $1 $2 million higher than the fourth quarter and the increase was driven by one time expenses associated with the previous debt and amendments on our revolving credit facility and note purchase agreements.
Lastly, the effective tax rate and the quarter was 23, 7%. The first quarter tax rate is lower than the fourth quarter rate and the range, we provided and a preliminary earnings release on April 15th due to discrete items.
Slide 14 shows how we allocated our trailing 12 months and cash flow generation and the last 12 months ending March 31, we generated cash flow from operations of $484 1 million from which we used 226 million to retire debt $116 9 million on maintenance Capex 78.
7 million on new vessel, capex, including capitalized interest and owners' items and $31 3 million on other cash outflows, including $15 4 million and financing costs related to the two tied 11 transactions and the second quarter of 2020.
All of these things, while returning $39 $8 million to shareholders via dividends.
Turning to slide 15 for summary of our balance sheet, you'll note that our total debt at the end of the quarter with $698 9 million and our total net debt was $687 1 million.
During the quarter, we reduced total debt by $61 2 million.
At the end of the first quarter, our leverage ratio per the recently amended debt agreements was 125 times the outstanding revolver balance at quarter end was $25 million.
Regarding the debt amendments on March 31, 2021, we maintained our $650 million facility size and returned to LIBOR and margin grid to what we had in 2017, but with an increase and the base leverage level to three five times and our maximum leverage level for <unk>.
Zero times from mergers and acquisitions.
On the private notes, there's a 25 basis point coupon step up if the leverage ratio is between three to five and 350 times.
All in all of these amendments are a positive outcome and reflect mats and strong financial position and cash flow profile and provide us ample capacity to make growth and message and to make growth investments moving forward.
Lastly on Capex, we are focused on the reliability of our operations and providing the quickest cargo availability to our customers and this current congested environment.
To sustain these high service levels, and our China service and throughout our entire network, we expect a moderate increase and the 2021 equipment capital expenditures from what I outlined on our last quarterly earnings call with that I'll now turn the call back over to Matt.
We're off to a very good start to 2021 and both of our business segments. There is no shortage of disruptive activity at key points and the supply chain infrastructure, but we are focused on what we can control and do best and that's ensuring the reliability of our services and working with customers to help manage true.
And this difficult environment.
And with that I will turn the call back to the operator and ask for your questions operator.
As a reminder to ask a question please sorry.
And number one and you touched on.
And then solid selling is your question.
And that has been answered or you wish to remove some from thank you ladies and gentlemen.
Thank you first question comes from the line of Ben Nolan from Stifel. Please go ahead.
Thank you.
Hey, Joe and Matt.
So I have a couple of questions here.
The first relates I guess to the.
The charter business for C L X plus.
And maybe actually three different questions as it relates to that.
Obviously been seeing the charter rates coming up a lot and people are paying $40000 a day for for patent narrow beam panamax ships that a year ago only cost eight.
And having to do so for two and a half or three years.
Can you talk a little bit about where your coverage is there and and how much.
Cost inflation do you think there might be.
And then and then also sort of along with that are you still running six yet.
Having six ships for the five ship deployment.
Okay, and then I'll take a crack at the first couple of almost there and Matt will supplement. So I think your main question was around the trend and that we're seeing and and charter market and how much coverage we have and.
And no doubt all equipment, not just vessels, but all equipment across supply chain and have increased in terms of demand given how congested things are so what youre seeing and charter market is not does not unprecedented in terms of increase and cost relative to the other.
Equipment items for us as well, but I would say from an overall cost perspective.
Biggest cost is terminal handling and two.
And our additional strength from China and fuel is also a larger cost and the charter itself. So it does matter certainly if the charter rate goes up but we still have very very profitable sailings, even with these higher vessel charter rates that youre seeing and the market today.
That's from a overall coverage and profitability perspective.
In terms of availability, we think it's we think it's really important to have that six vessel the normal voyage for our sales plus when everything's working swiftly would be 35 days, but to have an additional six vessels just in case, we need that to make sure that we have our departures on time and scheduled I leave out and Shanghai is really important to us So I think <unk>.
Look look for us to continue with that philosophy, and having six vessels for that for that for that service and as I think we've reported to you and talked about at this point and time all six of those vessels are chartered into early 2022 and early 2023.
Okay.
I appreciate that Joe.
And the next.
And I guess on my questions here are.
And when we think about and Matt you talked about and the congestion and and it's been talked about from all over the place and on the West coast and really all over the place but.
You do have the sort of advantage of your own terminal space and on a lot of other things, but are you guys experiencing any level of.
Issue yourselves in terms of your own assets and your own fleet as a function and that congestion are you able to add a 100% sort of bypass it.
Yes.
I would not say, 100% bypass it.
And what I would say.
Is that.
We have the ability to control as you pointed out our network.
We got out early on ordering additional container equipment and chassis and other things kind of before everyone else realized the potential strength of this market and we have been acquiring additional containers and chassis and to other equipment ahead of when we needed it and.
And that has put us in really good shape, because because of this and many other cases, you see ocean carriers and the transpacific trade.
Not again being able to take bookings are taking bookings, but not have containers to be able to fill or to to fill their shifts.
And lots of containers are in the wrong places that is are struggling to get back.
Two the origin markets in China to fill up again, we also see other international Ocean carriers are continuing to have to blank or cancel sailings because they can't literally can't get their vessels back on time for that next loading and a deployment.
We have faced we have not lost a single booking because we've not had a container and nor have we had a voyage that we've missed since the beginning of the pandemic. So while we've had some of the same issues of congestion, we're much better positioned to management and its resulted in a standout.
Between our Ocean services and everyone else's.
Alright, and I appreciate it and then and then last real quick for me and I'll turn it over and maybe get back.
And normally and June you guys have like Clockwork increased your dividend by a penny.
The world's a little different now in terms of actually for you guys being a whole lot better any and I appreciate that it's a board level decision, but any thoughts at all as to sort of how youre thinking about the dividend and maybe capital deployment and general.
And yes. Thanks for the question, so im not going to I'm not going to comment specifically on the dividend and of course, we'll have something to say and that in June. After we had our board meetings, but the big picture and I have read.
Right our capital allocation philosophy, it is important to us to maintain our equipment and our core capital expenditures. So that we never can disappoint customers as Matt just talked about always had availability and make those internal investments. We're looking for continued organic growth and mass investments, we're looking for M&A investments and if those things don't happen and any kind of.
Material size, we will focus on paying down debt and if there is excess capital on top of that we will look at dividend increases and we'll look at share buybacks and he and the special dividend. So you've heard us say that for a while and I just wanted to I want you to hear US continue to say that that's our core philosophy and I think we're going to stick with it.
Alright.
Good enough and surprise surprise I guess.
Alright, I appreciate it guys.
And we are steady if nothing.
[laughter].
Thanks, Dan.
And your next question comes from the line of Steve O'hara from Sidoti and company. Please go ahead.
And just moving to.
And the commentary about April can you just kind of remind me I know.
On April and just kind of a big month in terms of the <unk>.
Changes that happened and the market.
Is that.
Is there a weighted normalize the thinking in terms of what you're seeing now for the quarter.
And we just assume that April was kind of a big dip across the board maybe.
Beside from China, but is there a way to think about how that normalizes through the quarter.
Yes, it's a good question Steve This is Matt.
Our views of course, we're lapping some of the bad news early.
And the second quarter and so so obviously, the second quarter and Russell likely some favorable comps, but mostly due to lapping the bad news and are up from the domestic trades our expectations are that we're at the beginning of a recovery.
And that the stimulus the progress of the vaccinations and in the U S continued good progress towards getting back.
Back to a normal I think is going to create an environment for growth and our domestic trade. So I think again, our expectation is is that that growth will be relatively modest, but we're still encouraged by the combination of the stimulus and people ready to get out and travel and the.
Travelling international is especially with some of the outbreaks and different parts of the world and.
Many countries not being as far along and their vaccination programs as the U S that the U S.
Yes.
Hawaii, and Alaska and other places will be relatively safe places to go before people are ready to travel internationally. So again, we like the macro but we're being cautious a little bit Steve on how much that additional tourism translates exactly into additional freight volumes and this part of the cycle.
Okay.
And then maybe just on.
China.
I think you guys go to rate negotiations or rates get renewed around may and I'm just wondering.
Is it the same process for <unk> and <unk> plus.
And.
Is there any early thinking on that.
What youre hearing from customers and things like that.
Yeah, So yeah, you're right.
The beneficial cargo owner or Bcl contracting cycle typically goes from sort of May one to April 30 of those conclusions.
And are largely done at this point.
And that's and realized a significant increase and that portion of our business.
That is <unk>.
And for the non <unk>.
Total operating common carriers more and more quarterly.
Or monthly changes and pricing.
And those have been those are well over half of our overall book of business and those go up and down on on.
The.
Market supply and demand fundamentals so we've seen.
Relatively large increases and.
And that piece of business. So both both sides of the <unk> and the NGO sides of our businesses have been.
Have been taking rate increases and we're pleased with the.
And with the progress that we've made there.
Okay.
And then just maybe on some.
And then just to make sure I understand so I mean in terms of the day rates that were in place.
You know kind of last year.
Could you talk about what on the.
The kind of rate force.
Portion or rate negotiated portion of their business on.
And those were relatively stable so of negotiated the right kind of ahead of things.
Kind of coming apart.
<unk>.
The the shipping environment.
Would those rates have stayed.
Really the same or would there have been any benefit during the year I guess I'm just wondering.
Was that a benefit as well last year on that portion of the business or was that more muted and then maybe you see a bigger benefit this year given that renegotiation yes.
So the first thing I would say is the annual contracted freight is.
Quite a bit less and half of our overall market today and.
Last year as well I would say typically the dynamic you saw and it was up and you take the medicine, but typically of course, we honored the freight rates that we that we put in place last April.
It's often the case that our customers contract for less and all of the free that they have and their possession and when our customers who had annual contracts offered to give us more than the minimum quantity commitments embedded on our contract we politely declined.
And and either directly to them too and mgo.
Or agreed for any anything amounts the minimum amounts and our contract period.
It's Adam.
And at higher rates. So there was to your point some.
Some benefit of that was realized.
And in the previous year and the previous contract cycles. So we will see it increase and.
<unk>.
So and of course customers were looking for larger.
Volume commitments and the annual contracted process and we took a pretty cautious approach to expanding that portion of our overall book of business. So we do expect to see pretty healthy increase year over year compared to last year or going into the second quarter and beyond.
Okay, alright, thanks ill jump back in queue.
Thanks Keith.
Once again, if you would like to ask a question. Please press star one on low Touchstone telephone.
We have a follow up question from the line of Ben Nolan from Stifel. Please go ahead.
I wanted to ask this earlier, but I didn't want to monopolize thing.
Just quickly talking about <unk> and the logistics business and there was some commentary on there that the span Alaska business and it should be.
Spirit and seeing some of the similar volume increased relative to the first quarter.
And as the whole Alaska market does.
And I'm trying to think through what that might mean for the logistics portion of your business and can you remind me what how much.
Net of the logistics and let's say.
Operating income comes from span vs.
And the traditional brokerage business.
And so it's about roughly roughly half is fine and it's not it's not meaningfully different between operating income and EBITDA.
Okay. That's helpful. And then and then again sort of sticking with the logistics side of the business and focus a little bit more on the truck and intermodal brokerage I mean, obviously things are pretty it's the wild west at the moment.
Can you maybe talk through what you're thinking there from <unk>.
And.
Corporate and strategic standpoint, I mean is that an area where.
You guys are trying to gain share or increase your exposure or.
Or maybe vice versa.
How do you how do you think about that part of the business from a long term perspective.
Yes first of all we see it as highly complementary to our Osha and service business and.
A portion of our business is that which is handled by matson logistics that moves that cargo to the west coast.
Two Hawaii, Guam, Okinawa, and then similarly that portion of our China freight that is destined for intermodal inland location, Chicago, Memphis and Atlanta.
And is carried on biomass on logistics, so that first of all that benefit.
And if it both sides. They also.
And new benefit is as we grow in Alaska, and the north slope Matson logistics handles all the lower 48.
Logistics and hand, it off to Mats and Ocean transportation services and Docomo. So lots of network synergies. There. We've also seen tremendous growth organically.
We've been able to bid successfully into lots of new business.
And that has just said it has helped us grow and we tend to be more nimble and our logistics business that a lot of our competitors and are able to find solutions, especially in congested environment and you've heard US say this that our president of massive logistics, Rusty Ralph and I will say and chaotic environments, we tend to stand out and.
Find solutions for our customers that set us apart. So we like the return on invested capital elements of the business, we want to grow the business, we want to grow organically, we'd like to grow via acquisition as long as we were able to find.
Businesses at reasonable valuations and multiples were not going to overpay, but we really have.
Good long term belief and growth the growth prospects of logistics overtime.
Okay. That's helpful and and then lastly from me and this is the honest to goodness last one I'm.
I might have missed it.
Did you give any any color as to sort of what you're expecting for S. S E T and the second quarter.
I don't think we said anything with regard to the second quarter, but we did say that we expect at the very.
Very busy environment.
And volume to continue to benefit the joint venture obviously.
<unk> is a business with relatively large fixed cost and the more volume and you can put over those terminals and it has.
It's a very healthy impact to the margins and so we're expecting that business to perform well.
Implied that message business was going to stay busy through the lunar new year.
Towards the middle to late October at least.
And we expect SSAT to perform well over that same time for a period for the same reasons.
Alright so.
Implicitly at least as good as you did and the first quarter is that fair, yes, we didn't put a number on it but we think it'll performed well.
Okay I appreciate it thanks.
Okay. Thank you you bet.
I'm showing no further questions at this time I would now like to turn the conference Bob and Mr. Matt Cox Chairman and CEO. Please go ahead Sir.
Okay. Thank you for participating in today's call, we look forward to catching up with everyone at our second quarter earnings call. Please stay safe Aloha.
This concludes today's conference call. Thank you for your price participation.
On a wonderful day you may all disconnect.
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