Q2 2021 Matson Inc Earnings Call
We undertake no obligation to update these forward looking statements I will now turn the call over to Matt. Okay. Thanks, Lee and thanks to those on the call.
I'll start with the quick recap of our second quarter results. So please turn to slide 3.
<unk> businesses across the Ocean transportation and logistics continued to perform well throughout the second.
Quarter as the U S economy further recovers from the pandemic.
The year over year increase in Ocean transportation operating income in the quarter was primarily driven by continued exceptional demand for both the CLEC and <unk> plus services and.
In our domestic trade lanes, we continue to see <unk>.
Proving demand as the local economies further reopen with meaningfully higher year over year volumes compared to the pandemic volume lows in the second quarter of last year.
Logistics operating income for the second quarter increased year over year as a result of continued elevated goods consumption and inventories.
The restocking in addition to favorable supply and demand fundamentals in our core markets.
The supply chain environment continues to be marked by widespread congestion and pressure points at critical junctions for both our ocean and overland transportation.
At Madison, we remain focused on what.
We do best which is maintaining reliable trade lane services, and helping our ocean transportation and logistics customers manage through this unique and difficult period of congestion.
We're also focused on developing new organic growth opportunities that fully leveraged the Madison brand and our customer relations.
<unk> ships.
Please turn to the next slide and I'll discuss a few of these in detail.
Since may of last year, we've added 3 new expedited services within our China business to leverage our fastest and service transit and off loading times in the port of long Beach, and our logistics network.
Inland.
This has considerable value to both new and existing customers, especially given the pain points in the supply chain.
The introduction of these new services is the product of cultivating the mattson brand in China for the last 15 in the half years by delivering a world class.
Liable service with enduring competitive advantages.
The results of been compelling and we're converting customers from other ocean carriers and from deferred airfreight.
In response to the overwhelming demand on the <unk> as a result of the pandemic last may we started our second.
Expedited Ocean service from China called the <unk>, plus which is of weekly service to long beach supported by 6 chartered vessels.
The <unk> plus is most of the unique features of the seal ex on the destination side, such as SSAT terminal operations dedicated chassis in.
<unk> rotary, leading cargo availability of shippers transport what.
What started as of short term service has turned into a permanent offering that is the second best service in the Trans Pacific after our own CLS Ax.
In August of 2020, we announced the introduction of the Alaska Asia Express.
In the 4 ex service that is of westbound seafood backhaul service on the <unk> plus from Dutch Harbor to China.
This helps the long term economics of the <unk>, plus and drives additional growth opportunities for our Alaska business.
Recently, we announced the third.
Expedited Ocean service from China called the China, California Express or Cc ex to operate on a seasonal basis to meet the current levels of extraordinary volume demand.
Our industry, leading seal ex and <unk> plus services the CTX as fast reliable and offers many of the same great.
<unk> features that make matson unique.
The first of all age from Shanghai is this week and demand is extremely high.
This service the parts from China and caused the Oakland first then cause long beach and berths that mats and dedicated terminals in both west coast ports.
We've replicated the key features of our.
Long Beach destination services in Oakland, which our SSAT operated exclusive use of terminal for immediate cargo operations.
Dedicated chassis for truckers to speed goods to customers and the use of shippers transport for cleared cargo to offer quick turn times with no required pick up.
Appointment of times.
To support the service were using both of the Con Aloha class vessels and activating 2 additional vessels 1 of the Ccs and 1 in the Hawaii service the <unk>.
<unk> will have departures from the China 3 out of every 5 weeks and with each vessel and the strength having capacity.
Proximately 1300 S of use.
And lastly, we initiated a new service at the end of the second quarter with our vessel the common QEP sailing from China to Auckland, New Zealand direct and what we're calling the China Auckland Express or see a ex this is currently the only.
Of our balloon the service in the parts of China about every 5 weeks, we're excited about its prospects and we will consider adding capacity is there. If there is enough long term demand.
In summary, we've initiated 3 new expedited service in the last 14 months within our China business by leveraging the Madsen brand.
The vessel and the success of the CLS.
We listened to our customers and quickly adapt to rapidly evolving marketplace and investing in equipment. So we'd never Miss a single piece of freight.
We've developed new relationships with customers looking for quick and reliable Ocean services and have grown with existing.
<unk>, whose businesses are running flat out to meet the challenges of e-commerce and other retail demand in this environment.
All of our China offerings provide an extremely compelling value proposition when compared to airfreight and other ocean freight services.
I believe our recent initiatives of set the.
Custom GAAP.
Very well for future growth in this trade lane.
I'll now go through our trade Lane services. So please turn to slide 5.
Hawaii container volume for the second quarter increased 9.9% year over year the.
The increase was primarily due to higher retail and hospitality.
Related demand due to the reopening of the Hawaii economy compared to pandemic lows in the year ago period as a result of the state's COVID-19 mitigation efforts, including restrictions on tourism I'd.
I'd like to note that the volume in the year ago period includes volume associated with the Drydocking of the competitor's vessel.
The company total container volume in the second quarter of 2021 was 5.6% higher than the result achieved in the 2019 period.
I will now go through the current business trends and our Hawaii service. So please turn to the next slide.
Domestic visitor traveled to the state is excel.
Accelerated since the beginning of the year and the local economy continue to reopen with COVID-19, vaccinations, leading to a sharp rebound in Hawaii's tourism industry and economy.
According to state statistics visitor arrivals in June we're at approximately 84% of the.
<unk> thousand 19 level compared to 21% in January.
Further improvements in the tourism statistics are expected in the second half of the year.
The material improvement in visitor numbers. This year is also driven improvements across a number of key economic metrics for example.
The unemployment unemployment rates since January has declined from 10, 3% to 7.7%, but remains elevated well above the 2.5% of an unemployment rate in 2019.
We're cautiously optimistic that further improvements in tourism and the reopening of businesses.
The 2 will continue to drive the economic recovery, but.
But we recognize it may be several years to achieve unemployment and GDP levels seen in 2019.
To give you a sense of the volume trend 1 month into the third quarter, our westbound container volume in July increased approximately 60.
16% year over year, primarily due to higher retail and hospitality related demand.
Moving to our China service on slide 7.
Matt since volume in the second quarter, 2021 was 59, 1% higher year over year.
The.
<unk> is the due to incremental volume from the seal ex plus service. In addition to higher volume in the CLEC service as a result of our income increased capacity in the trade Lane.
The total number of eastbound voyages in the China service increased by 9 year over year of which 6.
6 were from incremental <unk>, plus the wages and 3 from extra loaders.
Recall that we had 7 <unk> plus sailings in the year ago period.
Madison continue to realize the significant rate premium in the second quarter 2021, and achieved average freight rates that were considerably.
Primarily than the year ago period.
Volume demand in the quarter was driven by e-commerce garments and other goods, we continue to see sustained and elevated consumption trends and low inventory levels driving increased demand for our expedited Ocean services.
I'll now comment on.
Higher of business trends. So please turn to slide 8.
The key demand factors I mentioned for the second quarter continued into the third quarter with July 2021, eastbound container volume higher year over year by approximately 23%, including the benefit.
Fit of an extra loader.
Currently in the Trans Pacific Trade Lane supply chain congestion continues the consent of the consumption trends remain elevated.
Retail and e-commerce demand remains strong and it remains a very challenging inventory replacement replenishment environment, particularly for.
For retail.
We expect the supply chain and supply demand conditions to remain in place and lead to a high level of demand at least until lunar new year in the first quarter of 2022.
Consequently, we expect our vessels and the CLS seal ex plus and CCF.
Services to be operating at capacity at least until lunar new year next year.
Turning to slide 9.
In Guam Matson container volume in the second quarter 2021 increased 35, 7% year over year, primarily due to higher retail.
Of demand compared to the pandemic low in the year ago period as a result of the islands COVID-19 mitigation measures as well as volume attributable to of competitors schedule issues.
The volume in the second quarter was 18, 8% higher than the of choke the results achieved.
And the 2019 period.
The Guam economy is recovering slowly as tourism remains constrained.
Consequently, the economic trajectory remains uncertain.
For the month of July our westbound container volume increased approximately 18%.
And year over year.
Moving now to slide 10 in.
In the Alaska Madsen's container volume for the second quarter of 2021 increased 15, 2% year over year.
The increase was due to higher northbound volume, primarily due to higher retail related demand compare.
Impaired to the pandemic low in the year ago period, as a result of the state's COVID-19 mitigation efforts higher southbound volume and the addition of volume from the Alaska Asia Express service, partially offset by 1 less northbound sailing.
We continue to see improving economic.
Trends in the state as businesses reopen but the economic recovery trajectory continues to remain uncertain.
For the month of July our north bound container volume increased approximately 4% year over year, primarily due to higher retail related demand.
Turning next to slide 11.
Our terminal joint venture SSAT contributed $12.8 million in the second quarter 2021, compared to $3.7 million in the prior per your period.
The higher contribution was primarily result of higher.
Economics, the volume as a result of the significant year over year increase in import 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 volume.
Turning now.
<unk> listed on slide 12.
Operating income in the second quarter came in at $12.9 million or $4 million higher than the result in the year ago period.
The increase was primarily due to higher contributions from transportation brokerage free.
Forwarding the supply chain management, where we saw.
Elevated good consumption and inventory restocking in addition to favorable supply and demand fundamentals for our core markets.
In July 2021, we saw of transportation brokerage continued to benefit from elevated container volumes in southern California in line with trends in the U S West.
<unk> in pork volume.
At span Alaska, our freight forwarding business remained steady and tracked slightly better than the north bound volume trends in our Alaska Ocean business.
Ongoing supply chain congestion at ports terminals rail yards and warehouses continues to fuel of disrupt.
The coast of environment in many of our business lines of actively helping customers manage through the chaos.
Historically, our businesses have performed well in times like this owing to our many years of experience in managing free during turbulent periods and also that we own and control our own assets.
And with that I will now turn the call over to my partner Joel for a review of our financial performance Joel Okay. Thanks, Matt.
Now onto our second quarter financial results on slide 13.
Consolidated operating income increased $162.7 million from $51.2.
In the year ago period to $213.9 million with higher contributions from Ocean transportation and logistics of $158.7 million and $4 million respectively.
The increase in Ocean transportation operating income in the second quarter was primarily.
Millions of the higher contribution from the Hawaii, and China services, and a higher contribution from SSAT, partially offset by higher vessel operating costs higher terminal handling costs and higher depreciation.
The year over year increase in the China services contribution was the result of significantly.
Due to higher average freight rates and higher volumes in the select service.
And of higher contribution from the sale of <unk> plus service due to higher average freight rates and 6 incremental of wages.
We also had 3 incremental extra loaders compared to the year ago period.
The year over year increase.
And SSAT equity income was due primarily to higher lift volume, which Matt previously discussed.
The higher vessel operating costs was due primarily to increases in overhead costs and the cost of operating extra loaders.
The higher terminal handling costs was due primarily to the increases in volumes.
<unk>, including the volume from extra lawyers and also annual cost increases.
The year over year increase in depreciation was due primarily to mansonia entering the service in the fourth quarter of last year and to a lesser extent a full year of depreciation of scrubbers installed on the Salix vessels last year.
Increase in logistics operating income was due primarily to higher contributions from transportation brokerage freight forwarding and supply chain management I do want to point out that the year over year decline in logistics operating income margin was due primarily to the increase in transportation brokerage revenue, which has a lower relative.
Houston margin than freight forwarding.
Interest expense for the quarter was $5.5 million or $1.8 million lower than the first quarter. This year due to lower debt outstanding during the second quarter versus the first quarter and onetime expenses in the first quarter associated with the debt amendments on the revolving.
On the credit facility and note purchase agreements that were completed during the first quarter.
Lastly, the effective tax rate in the quarter was 22, 6%.
Slide 14 shows how we allocated our trailing 12 months of cash flow generation the.
The last 12 months ending June 30.
Concho generated cash flow from operations of $528 million from which we used $228.5 million to retire debt.
$171.8 million on maintenance Capex of <unk>.
$71.3 million on new vessel, capex, including capitalized interest and owners' items and 15.
$8.8 million on other cash outflows, while returning $43 million to shareholders via dividends.
I'd like to point out that Mattson made approximately 75.
Million in cash tax payments in the second quarter, which which you will see at the bottom of the cash flow statement and our 10-Q filing.
We turning to slide 15 for a summary of our balance sheet. You will note that our total debt at the end of the quarter was $661.5 million and our total net debt was $644.1 million.
During the quarter, we reduced total debt by $37.4 million.
At the end of the second.
Our leverage ratio per the recently amended debt agreements was approximately <unk> 9 times and we had no outstanding balance on the revolver.
On July 7th we terminated the operating lease on the modeling and paid approximately $95.8 million, which we funded with.
The combination of cash on hand, and borrowings on the revolving credit facility.
As a result of this transaction, we reacquired the vessel and we expect approximately $6 million and lower cash operating costs in the second half of 2021, and we expect the transaction to be EPS accretive by <unk> 10.
In 19.
In 2021 and 2022, respectively.
On slide 16.
We have an update of our capital expenditures for 2020 for 2021, where we wanted to update a few key items given our use of cash in the last 2 quarter.
Quarters, and what we see for the balance of the year.
There is no change in the maintenance capex of $60 million to $70 million and scrubber installation payments of $20 million that we previously provided.
We expect an increase of $50 million and new equipment, such as the chassis dry containers.
And refers to support our new trade Lane services, like <unk>, plus <unk> and CTX and to increase the availability of equipment across our entire network.
We expect $5 million of payments from the new neighbor Island barge to slipped from 2021 into 2022 and lastly, we expect.
So the $125 million in lease termination payments to acquire assets in 3 main buckets first the $96 million is related to the Monterey, which I already mentioned.
Second $15 million is related to the mono low of barge that we paid in the second quarter and thirdly about 14 million.
As related to the buyout of other leased equipment in our network.
On our fourth quarter earnings call in February. We also indicated that we expect to be at the maintenance level of capex of $60 million to $70 million next year in 2022.
Our capex needs next year in 2020.
2 maybe elevated as the result of some payments on the equipment spend in 2021 trickling into calendar year, 2022, and our efforts to sustain high levels of equipment availability, if the congested environment persist longer than expected.
With that Capex update I will now turn the call back over to Matt.
Thanks, Joe mentioned.
I mentioned the businesses had a solid first half of the year, we're focused on ensuring our new and existing ocean services maintain reliability and that we are engaging with our customers and ocean transportation and logistics to manage through the complexities of the current environment.
We remain vigilant on finding new opportunities either organic or through acquisition.
As the post pandemic environment continues to evolve and.
With that I will turn the call back to the operator and ask for your questions.
As a reminder to ask a question you will need the press star 1.
We're also telephone to withdraw your question Chris.
Please standby, while we compile the Q&A roster.
Our first question is from Ben Nolan with Stifel.
Alright, great.
Hey, guys congratulations on another good quarter here.
I've got a few.
On here, so bear with me for a minute.
First 1 the talk a little bit about the evolution of some of the China business specifically the most recent edition of the Ccs ex going in the Oakland.
Yes.
It is an area of it I think we've thought about before and you know maybe expand.
Some of the footprint beyond simply long beach.
Can you maybe talk through a little bit about what you're hearing from your customers in Oakland and maybe the demand for that and I know that initially.
You sort of outlined that it's.
Youre doing it through the new year button.
The the.
<unk> the <unk>.
Ex pluses of initially only a temporary thing to do.
Point do you think.
The customer demand or what you're hearing from your customers to give you the confidence to be able to.
Half of that.
The <unk> be something a little bit more permanent as well.
Sure.
So.
How should we approach clearly there is a lot of pressure in the the transpacific trades and frankly all of the global Ocean trades right now in effectively every ship.
In the World that's available is in use and deployed carrying.
Cargo of somewhere in the world and so Matson had a couple of reserve vessels, but for us.
Part of the construction of our services.
We have of criteria that they have to be highly differentiated and if possible have to leverage <unk>.
The unique strengths in controlling assets, both the ports and be able to birth on arrival do we have adequate equipment chassis delay of access to off docker container facilities. So that we're not just putting out a generic service, but that 1 that truly differentiates itself in.
In the marketplace and so our Ccs was of a result of that we have our own dedicated burst in Oakland, We will have the fastest transit time from.
Shanghai and Ningbo into Oakland, we will have the zero waiting on arrival and be able to get access to it.
When as soon as it arrives and as a result will be a super highly differentiated service. So our goal is to avoid just chartering a bunch of shifts to produce of market level of service, but something thats truly differentiated which we think has enduring value to customers. We have seen a very warm reception.
Yes.
2.
Our Oakland offering.
Have significantly oversubscribed relative to the demand on the first of all age and we think that will be sustained.
With regard to the question.
Then that you asked about.
The duration of the CTX I mean, I think our.
Perception is that this service can be extended beyond lunar new year of 2022, if the market demand requires.
Requires it and so what we're saying is that based on what we're hearing from customers our own understanding of the macro economy additional stimulus.
Thinking the inventory ratios all of the metrics, we think at least through lunar new year, but if the market wants it needs. It longer we can do that so those are just a couple of thoughts to your questions answered.
Okay.
Along those lines.
And certainly appreciating now all of your spare or or effect.
Effectively all of your spare ships or utilize its really expensive to get third party assets.
For the moment.
Or are you kind of tapped out in terms of being able to add.
New services or <unk>.
Creative innovative.
Distinctive businesses for the moment.
Yes, I think the answer to that is.
The sales until the Mark of the charter market changes and as you as you pointed out then the charter market charter rates are extremely elevated given to the strong demand.
And effectively all of the medicines vessels are effectively deployed that isn't to say that if other vessels become available at some point in the future.
As you advocate conditions change, we won't reevaluate that.
But at this moment of time other than lets say extra loaders.
For dry dock return voyages or chartering others vessels on a 1 off basis, but effectively just puts all of medicines existing owned and chartered fleet to use.
Okay.
<unk>.
And Joe Let me, let me shift of U.
1 of the 1 of the things that I hear a lot and I suspect that you do to US okay, great things are good but.
Where do we go from here.
Yeah.
I'm sure you guys have have some thoughts on this but.
The business is somewhat.
So it used to be you have all of these the Chinese expedite of businesses that will very likely keep volumes at much higher elevated levels than they were in the past there was a lot of moving parts.
Can you maybe walk me through what you think sort of the free cash flow might look like.
Andre.
A normal rate environment, but with the elevated volumes.
Just sort of stair step me through sort of what's different.
But with more more free.
Yes.
It's gonna be proportionately to what Youre seeing right now.
Arms of if you look at our second quarter I would just make.
The different innovation Theres, nothing unusual about our cash flow and the cash flow of generating therefore, the free cash flow generated we're paying cash taxes announced we've talked about that.
We are dry docking schedule and outflows for Drydocking is nothing unusual that's pretty regularly fluctuate a little bit based on a number of ships, but not nothing dramatic we did have.
The big increases in working capital, which is consistent with the growth of companies growing adding new service lines and higher revenue levels, you'll see more investment required in cash and working capital to fund those receivables, which grow more than your payables sales.
The cash outflows right now and things stabilize on a rate level in volume level and then the cash.
The outflows as working capital will normalize you'll get a little bit of benefit.
So in other words as we launch the CTX here 1 of the investments you'll see us negative working capital to fund those receivables in Q3, so there'll be some positives.
But the big picture as far as that EBITDA.
We're not giving outlook on EBITDA, but it still will be the biggest.
It's driver of determining our free cash flow will be what is that EBITDA generation level, but all of the day docs for working capital type of items other cash taxes, the sorts of things, which should really be pretty similar to what youre seeing here on a proportional basis, Ben and then and then the question towards the Capex and Thats why we actually took time to really detail that capex and give.
Giving you a fulsome update here in this deck from this quarter of what to expect this year and what we should be getting close to that maintenance Capex flat next year, except for some of the investments that will spill over from this year in the next year on equipment purchases and or some of the scrubber projects and things like that but the overall so all of those are the regulatory.
Regulatory drivers of the free cash flow and I think I think they're going to stay relatively proportional depending upon our growth.
Okay. So maybe let me come at that a slightly different way.
When you look at your current EBITDA, how much of that would you attribute to rates that are elevated versus as youre, saying just sort of hey. This is this is the.
The new normal.
Yeah.
Would this be beyond what we disclosed with respect that range as you know Ben So I mean, you look at our our LTM EBITDA of 706, that's the number and obviously has been a rising rate environment over the last 12 months, but we can't comment any with any more precision on the rate impact.
Fact of that.
Okay.
Alright, So then.
I told you out of a few for you, but now I.
I wanted to address sort of the.
What I was getting to a little bit ago, and making a lot more money than you were really ever have.
The share price is kind of flat lined a little.
Here despite numbers rising.
And the business growing and et cetera.
Right.
A month ago, or so you announced the 3 million share buyback program can you maybe talk me through sort of how you think about that I know in the past you. All you had said that you were you know it was.
Just going to be serious.
Linear.
The previous buyback program it wasn't going to be sort of aggressive it was just.
You know.
Part of normal the normal normal course of business.
Is there of pointing where you say well you know.
We have money to spend here.
We feel like our shares of.
And we're just going to go at it.
Yeah, I'd say that well.
Where we're at now is really sticking with our plan. So I think that's the most important message, it's just happening a little bit earlier than we thought we thought we'd be probably buying shares back in 'twenty..2 'twenty 3 are looking at various methods of returning capital to shareholders.
And that type of I mentioned happened earlier because of the really strong performance of the business from the growth opportunities that we've had but our overall plant is not changing of sits accelerates as we sort.
So for instance than on share buyback of our approach will be subject to market conditions in the the judicious about it but we do want to get at returning this capital package.
So the overall philosophy of that is not changing it's just been accelerated from the timing perspective, I think it's the best way to think about it.
Okay.
And then last 1 this is I'm asking on the behalf from someone else on this 1.
Hopefully there's no 1 else in the queue behind me, but the.
A question that came in to me was as of the airfreight began or as as people begin to travel a little bit more and I realize that.
We're still not back to normal by any means but.
The more belly pain belly capacity becomes available on.
The on passenger airlines and.
The share has been some additions to airfreight.
At what point do maybe some of the people who had switched over from air freight to your expedited business switch back in I guess the question is.
Uh huh.
How confident or how comfortable are you that that the supply chain have permanently.
And the lifted and even when it becomes a little bit more available it doesn't go back.
Yeah, It's a great question Ben this is Matt.
I think the way we're thinking of it now is.
How we had before there there's an element here now of extreme congestion and frustration on behalf of our.
The <unk> trying to get their supply chain and products move to their end markets for retail consumption.
And.
Every airplane in the world Airfreight or in the World is full every as I mentioned earlier every vessel is full there is congestion on the U S rail network congestion.
Cost of the time of rail network, there's insufficient.
Insufficient labor to the man warehouses through our customer supply chains and trucking all of the elements I think that this gradually aver.
Eventually the better word gets unwound.
I don't know when that is there aren't any really clear signs of that's.
On the thing of anytime soon but of course, obviously eventually it will.
But I think what we're left with is a changed environment, where we see customers re assessing the amount of inventory and stocking and safety stock I think you'll see customer.
It's happened to her behavior changing with regard to the explosion of E Commerce and importantly, the expectation of a quick delivery of products into those end markets, which favors expedited services and so we remain convinced that when we get to the new normal first of all of its not going to be like the old normal.
And it's going to favor matching service offerings, and where we ended up there and when exactly is unclear and in the meantime, we're just working we're working hard to help our customers navigate this highly frustrating supply chain environment.
Alright, well I appreciate it thanks guys.
Okay, Ben Thank you thanks Ben.
I will now turn the call back over to Matt Cox, the CEO for closing remarks.
Okay, well, thanks, everybody for listening and we look forward to catching up with everyone on the third quarter call Aloha.
Thank you again for joining US today. This does conclude today's conference call you may.
Now disconnect.
Okay.
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