Q4 2021 Matson Inc Earnings Call
We caution you to consider the risk factors that could cause actual results to differ materially from those in the forward looking statements in the press release, the presentation slides and this conference call.
These risk factors are described in our press release and presentation.
And are more fully detailed under the caption risk factors on pages 12 to 21 of our Form 10-K filed on February 26, 2021, and in our subsequent filings with the SEC.
Please also note that this conference call is February 17th 2022, and any forward looking statements that we make today are based on assumptions as of this date, we undertake no obligation to update these forward looking statements with that I'll now turn the call over to Matt.
Okay. Thanks, Lee and thanks to those on the call today.
I will start on slide three with a quick recap of our fourth quarter performance.
We finished off a strong year with continued improvement in economic and business trends in our markets driving overall solid performance in medicines Ocean transportation and logistics businesses.
The year over year increase in Ocean transportation operating income in the quarter was primarily driven by strong demand for our China expedited Ocean services.
In our domestic trade lanes, we continued to see strong demand with higher year over year volumes, including the benefit of a 50 <unk> week compared to the largely pandemic reduced volumes in the fourth quarter of last year.
Logistics operating income for the fourth quarter increased year over year. As a result of continued elevated good consumption inventory restocking and favorable supply and demand fundamentals in our core markets.
The supply chain environment remains the key issue in the Transpacific trade lane with a number of supply and demand factors at play that will take time to unwind I'll come back to this issue when we discuss our China service, but importantly, we remain focused on maintaining our fast reliable trade lane services and providing.
High quality customer service during this challenging period for our customers.
I'll now go through our trade Lane services. So please turn to the next slide.
Hawaii container volume for the fourth quarter increased 10, 4% year over year and was 11, 3% higher than the result.
Achieved in the 2019 period.
The increase year over year was primarily due to higher retail and hospitality related demand and the benefit of the extra week compared to the pandemic reduced volume in the year ago period excluding.
Excluding the benefit of the extra week volume in the fourth quarter of 2021 increased five 3% and six 2% compared to the levels achieved in the fourth quarter of 2020 and 2019, respectively.
Tourism and the Hawaii economy continued to rebound in the fourth quarter of 2021, despite the softening in airline passenger traffic early in the quarter due to the state's efforts to address the spread of COVID-19 Delta Varian.
For the full year 2021 container volume increased eight 2% year over year due to higher retail and hospitality related demand due to the reopening of the Hawaii economy compared to the negatively impacted volume in the year ago period, and the result of the pandemic and states COVID-19 mitigation efforts and the.
A benefit of an extra week in 2021 that was partially offset by volume associated with the dry docking of a competitor's vessel in the second quarter of 2020.
Excluding the benefit of the extra week in 2021 volume for the full year 2021 increased six 9% year over year.
Please turn to the next slide where I'll comment on the current business trends in Hawaii.
As the chart on the right shows 2021 was about a return of tourism and its effects on the Hawaii economy.
The rise in visitors travel driven predominantly by U S mainland visitors a resurgence in the tourism industry.
This led to a rebound in the state's economy.
And led to substantial improvement in the state's unemployment rate.
The Governor's request to defer nonessential travel to Hawaii as a response to the Delta in 19.
Delta <unk> led to a slowdown in tourist arrivals in the third quarter and the first few weeks of the fourth quarter.
But visitor traffic rebounded in early November through the first couple of weeks in December until the <unk> variant negatively impacted tourist arrivals.
Heading into 2022, we're cautiously optimistic on further economic recovery in Hawaii.
You Heroes December forecast for 2022, which accounts for the near term effects of the Omicron Varian shows further improvement in the unemployment rate and continued growth in GDP and construction jobs.
Tourism is also expected to continue to improve with an increase in contribution from international visitors later in the year.
Incremental waves of COVID-19 variance present, the possibility of further economic slowdowns or disruptions in tourism.
While the Hawaii economic recovery.
As occurred significantly improved significantly from the depths of the pandemic and hero continues to expect a full return to pre pandemic conditions may take several more years.
To give you a sense of the volume trend one month into the first quarter, our westbound container volume in January was approximately flat year over year.
Tourism to the state was negatively affected by the Omicron variant wave, which led to a softening in demand for retail and hospitality related goods. We're also seeing a sluggish trend in building materials. So we'll have to see how this and the tourism trends following omicron play out in the near term.
Moving to our China service on slide six medicines volume in the fourth quarter of 2021 was 32, 7% higher year over year, primarily due to the volume from the California, China Express or <unk> service and the benefit of an extra week.
The total number of eastbound voyages in the China service, including the impact of the extra week increased by nine year over year of which eight were from <unk> and one from CLS Ax.
Excluding the benefit of the extra week volume in the fourth quarter 2021 increased 24, 8%.
Freight demand in the quarter remained strong as we continued to see sustained and elevated consumption trends and low inventory levels drive increased demand for our expedited Ocean services.
Matson continue to realize the significant rate premium over the Shanghai containerized.
Yeah.
<unk> are you still there.
Hey, Tim.
Yes.
[noise] aerobatics I'll follow up on that.
This is Sean.
[noise] Rick's line disconnect.
Okay.
Hello, Jeremy.
Sure.
Hey, Gary.
Okay.
Beckman.
Okay.
Yes.
Yes.
We're just kind of confirm the operator is still there.
And again you are back in the call.
Yes.
Thanks, Eric operator.
Okay.
Yes.
Okay. Okay, let's continue on that on slide six just sorry.
Thanks.
Yes.
Okay great.
Operator on my backlog.
Yes, you bet.
Sorry for the.
Okay.
I'm going to move into my comments on slide six.
So moving on to our China service on slide six.
<unk> volume in the fourth quarter 2021 was 32, 7% higher year over year, primarily due to the volume from the extra.
California, China Express service or <unk> service and the benefit of an extra week.
The total.
A number of <unk>.
Eastbound voyages in the China service, including the impact of the extra week increased by nine year over year of which eight were from C. C.
Ex wages.
One from CLS Ax.
Excluding the benefit of the extra week.
Volume in the fourth quarter of 2021 increased 24, 8%.
Great demand in the quarter remained strong as we continued to see sustained and elevated consumption trends and low inventory levels drive increased demand for our expedited Ocean services.
<unk> continued to realize the significant rate premium over the Shanghai Containerized freight index in the fourth quarter of 2021.
Average freight rates that were considerably higher than in the year ago period.
For the full year 2021.
<unk> volume increased 55, 4% year over year, primarily due to the incremental volume on the <unk> plus the.
The addition of volume from the Cc X higher volume on the <unk> as a result of increased capacity in the trade lanes and the benefit of an extra week.
The total number of eastbound voyages for the year, including.
The impact of an extra week increased by 41 over the full year 2020.
Of which 20 were from the <unk> plus voyages 13 from the CTX voyages.
One from the CLS Ax seven from extra loaders.
Excluding the benefit of the extra week volume for the full year 2021 increased 52, 7%.
I'll now comment on current business trends. So please turn to slide seven.
For January 2022.
Spam container volume was lower year over year by approximately 20% primarily due to the timing of sailings as our sailing scheduled normalizes in February we expect volume in the first quarter to be higher year over year, primarily due to the contribution of the Cc ex service, which we do.
Did not have in the year ago period.
In January we experienced strong pre lunar new year demand for our expedited services and we expect a similar environment for our trade <unk> services in the post lunar new year period as larger factories in China returned to production earlier than a normal post lunar new year periods.
The Trans Pacific Trade Lane is currently experiencing supply chain congestion due to a combination of factors.
Consumption trends remain elevated and retail e-commerce demand remains strong.
Supply chain constraints remain at critical points for both Ocean and overland transportation as an example as of yesterday there were 72 container ships awaiting a birth at the ports.
Los Angeles, and long Beach down from the high of 109 in early January .
This recent decline in the number of vessels waiting per berth may be a function of how sleep suggested to yearend holiday and the lunar new year period.
While the slowdown is welcome it may be only temporary.
<unk> waved stress many key areas in the supply chain and it will take some time for the effects of this wave.
Of the pandemic subside.
Inventory replenishment continues to be very challenging, particularly for retail customers as evidenced by the trend in U S. Retail inventory sales ratio shown in the chart on slide.
We expect these supply chain congestion congestion to remain largely in place through at least the October 2022 peak season, and we expect elevated demand for all of our expedited Ocean services for most of the year.
As such we expect to keep the Ccs service in place until at least through October 2022 peak season.
Turning to slide eight.
In Guam Madsen's container volume in the fourth quarter 2021 increased 14% year over year, primarily due to higher retail related demand compared to the pandemic reduced level in the year ago period.
The volume in the fourth quarter of 2021 was $18, 8% higher than the result achieved in the 2019 period for.
For the full year 2021 container volume increased 15, 9% year over year, primarily due to the higher retail related demand compared to the pandemic reduced level.
In full year 2020.
Our 2022, we're cautiously optimistic on further economic recovery and Guam as we expect improvement in tourism traffic as the year progresses, but we also recognize the potential negative effects on visitor traffic and other economic factors that future COVID-19 variant ways could have on the <unk>.
<unk> recovery.
For the month of January our westbound container volume increased approximately 36% year over year, primarily due to the timing of a ceiling, which was approximately half of the year over year increase in the higher volume of retail and hospitality related goods compared to the pandemic reduced volume in the year ago period.
<unk>, which reflected COVID-19 travel restrictions.
<unk> began to loosen COVID-19 restrictions in the middle of January 2021, and further loosen them in February 2021, after which we saw significant improvement in volume trends in the year ago quarter.
Moving now to slide nine.
In Alaska <unk> container volume for the fourth quarter 2021 increased 10, 2% year over year and was 31, 1% higher than the results achieved in the fourth quarter 2019.
The increase year over year was primarily due to the increase in a a X seafood volume and the benefit of an extra week and.
And higher southbound volume, excluding the benefit of the extra week volume in the fourth quarter 2021 increased six 3% and 26, 4% compared to the level achieved in the fourth quarter of 2020 and 2019, respectively.
For the full year 2021 container volume increased seven 7% year over year, primarily due to the increase in volume from the AA ex service higher northbound volume primarily due to the higher retail related demand compared to the pandemic reduced level in the year ago period.
Southbound volume and the benefit of an extra week.
Excluding the benefit of the extra week volume for the full year 2021 increased six 7%.
I'll now comment on the current business trends in Alaska. So please turn to the next slide.
In the near term, we expect improving economic trends in Alaska, but the recovery trajectory continues to remain uncertain.
The jobs market continued to improve off the pandemic low and there are some bright spots for incremental gains in the near term, but there are also some challenges longer term challenges ahead.
There was an expectation for further employment growth in 2022.
Driven by a rebound in travel to the state and increased oil and gas activity from the majors as a result of higher oil prices.
The federal infrastructure Bill signed into law in November is also expected to lead to more employment growth, though it may not be a meaningful driver in 2022.
Challenges to employment growth or continuing signs of labor shortages with the combination of the declining working age labor force and an unfavorable trend in net migration out of the state.
In addition, the state.
<unk> positioning and the decline in federal pandemic relief payments present, uncertainties for the trajectory of the economic recovery in the near term.
For the month of January our North bound container volume was approximately 23% higher year over year.
<unk> half of the year over year volume improvement was due to volume associated with the dry docking of a competitor's vessel the.
The balance of the year over year growth was primarily driven by elevated retail related demand.
Turning next to slide 11.
Our terminal venture.
SSAT contributed $21 3 million in the fourth quarter 2021.
Compared to $10 9 million in the prior year period.
The higher contribution was primarily result of higher other terminal revenue and higher revenue per lift.
For the full year 2021, SSAT contributed $56 $3 million.
<unk> to $26 $3 million in the full year 2020.
The increase was primarily driven by higher lift volume as a result of the significant year over year increase in import volume on the U S West coast and higher other terminal revenue.
And currently we continue to see elevated import volumes into the U S West coast, which we expect to translate into a relatively high contribution from SSAT.
Turning now to logistics on slide 12.
Operating income in the fourth quarter came in at $14 8 million or $5 $2 million higher than the result in the year ago period. The increase was primarily due to higher contributions from supply chain management and transportation brokerage, where we saw elevated goods consumption and inventory restock.
<unk> in addition to favorable supply and demand fundamentals in our core markets.
For the full year 2021, operating income was $49 8 million or $14 $3 million higher than the result in the full year 2020.
The increase was primarily due to higher contribution from supply chain management transportation brokerage and freight forwarding.
Currently seeing continued elevated container volumes in southern California.
A benefit of some of our lines of business.
The contribution from our supply chain management business is expected to continue to track with the performance of our China service.
I will now turn the call over to Joel.
A review of our financial performance over to you Joe.
Okay. Thanks, Matt please.
Please turn to slide 13 for a review of our fourth quarter and full year results for.
For the fourth quarter consolidated operating income increased $357 $8 million year over year to $475 5 million with higher contributions from both ocean transportation and logistics of $352 6 million and $5 2 million respectively.
The increase in the increase in Ocean transportation operating income in the fourth quarter was primarily due to a higher contribution from China, which was the result of considerably higher average freight rates and higher volume, partially offset by higher operating costs and expenses, primarily due to the <unk> service and higher incremental.
Costs associated with the CLS plus service <unk>.
The increase in volume was primarily due to volume from the <unk> service and the benefit of an extra 50 <unk> week.
The increase in logistics operating income was primarily due to higher contributions from supply chain management and transportation brokerage.
Interest expense for the quarter was $4 7 million $4 $4 million lower than the third quarter as a result of lower outstanding debt and a small amount of capitalized interest.
Lastly, the effective tax rate in the quarter was 16, 5% well below the fifth well below the 25, 2% recorded in the year ago period Mattson.
<unk> benefited from a deduction related to foreign derived intangible income or city under section 250 of the internal revenue code.
Any deductions available to U S corporations that generate income from services provided in foreign countries.
We expect to continue to record city deductions in 2022, and as such we expect our full year 2022 effective tax rate to be between 23 and 24%.
Turning to slide 14, we illustrate how we allocated our trailing 12 months of cash flow generation.
For the LTM period, ending December 31, we generated cash flow from operations of 984.
$1 million from which we used $131 1 million to retire debt.
$310 4 million on maintenance Capex, and other capex, including $117 3 million of early buyout and operating lease termination payments.
$14 9 million on new vessel, capex, including capitalized interest and owners' items and $15 $5 million on other cash flows.
While returning $244 $2 million of <expletive> to shareholders via dividends and share repurchase.
On slide 15, we provide a summary of our share repurchase program and year end balance sheet.
We announced the 3 million share buyback program in late June 2021, and we began repurchasing shares on August 3rd.
During the fourth quarter and full year 2000, 22021, we repurchased approximately 1 million shares and $2 5 million shares for a total cost of $84 5 million and 200, $200 1 million respectively.
As noted in footnote one on this slide the total share repurchase cost figures include $1 8 million in settlement payments related to share repurchasing at year end.
From January <unk> 2022 through yesterday, Mattson repurchased an additional approximately 300000 shares for a total cost of $30 5 million.
So if you added all up as of yesterday, we have repurchased approximately two 8 million shares for a total cost of approximately $230 6 million.
And lastly on share repurchases three weeks ago on January 27th we announced that the board approved. The addition of 3 million shares to the existing share repurchase plan.
Turning to the balance sheet, our total debt at the end of the quarter with 200 with $649 million and our total net debt was $346 6 million.
Moving to slide 16.
This table shows our four key areas of capital expenditures in 2021.
We made payments of $117 3 million to acquire assets under operating leases.
As we first noted on our second quarter call last year, we paid $95 8 million to terminate the operating lease on the vessel modeling.
In addition, we spent $21 5 million on the lease buyouts.
Lease buyout of the barge on Aloha and other equipment, which is primarily containers.
During the year, we spent $121 1 million of new equipment to support our four new trade Lane services, specifically, the CLEC plus the Aaas, the CTX and the <unk> services.
In 2021, we made commitments to purchase approximately $159 million of equipment to support these four new trade lines and to maintain equipment availability across our entire network.
The payback on these equipment purchases has been only a few months given the present high demand market conditions.
Moving to the next category. We also maintained months of $14 9 million on our new Hawaii neighbor Island flatbed barge. The total estimated cost of the barge has increased a couple of million dollars to approximately $25 million and we expect the remaining payments to be made as the largest completed and delivered in the first half of this year.
<unk>.
And lastly, we spent $72 million on maintenance and other capex capital expenditures, which is within the range. We provided on our fourth quarter call last year.
During the year. We continue we continued with our work on phase two of the sand Island modernization project as we upgraded our systems in preparation for expanding into the rest of the sand island when patients when patients shifted the koppel AMA container terminal in a couple of years.
Sure.
Turning to slide 17, the table on the slide shows our Capex outlook for the next few years.
Starting with maintenance and other capital expenditures, we expect to spend $80 million to $90 million in 2022, and approximately $75 million in 2023.
Figures are higher than our annual maintenance capex range of $60 million to $70 million as they include additional equipment and lease buyouts and ongoing sand island phase two work.
Our phase II work at Sand Island is expected to be completed within the next three years and includes improvements to existing backup systems and other important upgrades at the terminal.
Yes.
We expect to spend $55 million to $60 million on new equipment to support our new trade Lane services. The majority of which we committed to purchase in 2021 and has spilled over into 2022 due to long lead times for new equipment.
As I mentioned, a moment ago, we expect to complete the <unk> the flat deck barge for the neighbor Islands in Hawaii in the first half of 2022 and the remaining payments are approximately $10 million on that orange and.
And lastly, we expect to spend $15 million to $20 million in 2022, and $55 to $65 million in 2023 on the LNG installations on existing vessels, which we discussed on our third quarter earnings call last November .
As a reminder, we plan to install LNG equipment on the Daniel K Inouye, starting in the first quarter of 2023.
Installation is expected to last approximately five months with a total estimated cost of approximately $35 million.
We also plan to Reengine Monica to operate on LNG and both both LNG and conventional fuels.
The installation will start after the Daniel K Inouye is work is completed and we expect the installation to work.
Last on the modeling about 12 months and cost approximately $60 million.
So in total we expect capital expenditures of $160 million to $180 million in 2022, and $130 million to $140 million in 2023.
As we mentioned on our last earnings call. These capex figures do not include any spending associated with the replacement of the three Alaska vessels or the costs associated with additional LNG installations, we are actively considering.
Come on a hela lean in then that Sonya I wish the total installation costs for all three of these vessels is currently estimated to be approximately $115 million.
And we continue to review options to re fleeting the Alaska vessels later in this decade, which we're in the midst of in the midst of planning and they get a head start on this year with funding into the capital construction fund.
We are exploring the idea of moving older vessels into the Alaska service and ordering new LNG ready Aloha class vessels for the China service, but no decision has been made yet.
Aloha class vessel is about has about 500 more containers and capacity in each of the three older vessels currently operating in the CLEC service. So the three new three new Aloha class vessels.
Add meaningful capacity and growth for our successful CLEC service.
With that I'll now turn the call back over to Matt.
Okay. Thanks Bill.
After our performance in 2021, many investors may be focused on what will maximize profitability look like when we get to the other side of the supply chain congestion and the environment Finally normalizes.
I don't know yet what the new normal will look like and I suspect the path to normalization may not be linear and maybe longer than some realized.
But when we do get to the new normal I remain confident that the secular tailwind of e-commerce adoption and our unique positioning in the Pacific with an expanded network and superior service offerings will result in a sustainable higher levels of cash generation.
We anticipated a year ago and meaningfully higher than our pre pandemic 2019 base.
Throughout <unk> long history, we have won new business and growing with our customers through uncertain times by having the fastest most reliable services and having control of great assets to quickly adapt to changes to this end we remain focused on maintaining the reliability of our services and working closely.
<unk> with our customers and ocean transportation and logistics to manage through this difficult environment.
The capital allocation plan for 2022 is to stay the course.
<unk> reviewed our key maintenance and other capex expenditures, we intend to make in the next two years.
Were strategically positioned well and we'll continue to look for opportunities opportunistic areas of organic growth to leverage off our recently expanded services in the Pacific.
We're also on the lookout for acquisitions that meet our key criteria, but we will remain disciplined in our approach.
We will continue to reduce our outstanding debt through scheduled amortization of our long term instruments.
Lastly, in the absence of organic growth and acquisition opportunities, we will consider the return of excess cash to shareholders in the form of share repurchases or special dividends and with that I will turn the call back to the operator and ask for your questions. Thank you.
Thank you ladies and gentlemen, you guys ask a question at this time you will need to press. The Star then the one key on your touch from telephone.
To move you saw from Makena press the pound key.
Standby, while we compile the Q&A roster.
My first question coming from the line of Ben Nolan with Stifel. Your line is open.
Hey.
Matt Good talking to you and have a good quarter here.
I've got a couple.
The.
First I wanted to maybe ask about the Hawaii side.
The volumes are pretty good and you talked about the first quarter or at least.
Maybe being a little flatter on the comment on that kind of thing just kind of trying to get my head around what.
How full that westbound trade lane is.
If if the Hawaiian economy continues to recover given your current.
Our mix of assets that are serving that business.
What's the capacity to actually do more volume than what Youre doing right now.
Yes.
We have sufficient excess capacity with the delivery of our four newest ships to even in the current deployment as we envision keeping the <unk> in our current.
Deployment, we have plenty of sufficient capacity to be able to handle.
A return to pre pandemic 2019 or above given the delivery of this extra capacity. So we have plenty of capacity to address market growth.
Okay.
Good to know.
Glad that it was an easy one.
If we're in the.
You talked about the acquiring additional equipment some of that had spilled over into this year I assume that's primarily containers and chassis can you maybe talk through a little bit about where we're at.
Stan I mean, I know, it's one of the.
The hallmarks of what you do that you control your own.
<unk> in that respect but.
Youre doing a lot more volume right now and always hear is about people not being able to get chassis or other things.
How are you positioned at the moment with respect to that part of the business.
Yeah. It's.
Good question, and you're right and Joel mentioned in his comments that some of the Capex.
Mentioning with regard to equipment is really just a spillover because of the significant backlogs and getting equipment manufactured and delivered.
Youll recall early on in this cycle.
We took a step to basically grab every piece of equipment, we could get our hands on because we really believe that we were this was going to be something that was going to be sustained.
And so we have.
We have effectively drill.
A dramatically expanded our container fleet.
Ordered significant amount of new chassis and at least those weren't available as well. So the equipment that you are referring to is primarily dry containers and refrigerated containers. So those are the two main.
And also chassis, where theres a significant.
Backlog, but we started from a position of relative strength, because mattson has a wheeled operation we had a relatively large amount of chassis in our fleet, which gave us a significant advantage in a sustained advantage.
Other part I would make with regard to the equipment.
I'll turn it over to Joel.
In this current environment and you've heard us say this before.
The incremental return.
On a single voyage or said differently without a box on a single voyage you can effectively pay for the entire piece of equipment and one or two voyages. So.
Being short of equipment is the economics are so compelling and returns are so short.
We definitely didn't want to and have not up to this point run out of equipment in our fleet and then I'll turn it over to Joel to cover those of your the other items.
Yes, the only other thing venues on the timing point.
This extra equipment that we purchased as we expanded our services, especially the.
Most recently one of Ccs, we expect that all to come in by the second quarter through the course of the second quarter. So any any equipment coming after that as part of our normal annual replenishment of retiring the old equipment, new equipment coming in so we don't have that many more months to go here before we we all the all the extra growth oriented equipment will be online.
For us.
Okay, Perfect and then I've got one more if I can.
<unk>.
I was pretty shocked by the SSAT.
Contribution was almost doubled from where it was in the third quarter I know you talked a little bit about the increased level of volume.
But I.
I guess my question is is there anything else fundamentally there.
Whether its margin or whatever that.
It has some staying power.
Is that what we're seeing now and not only.
For the next however, long this all of this mass, but but even going to on this I mean is there a reason to think that maybe SSAT is structurally more profitable than what it had been in the past or or this is just a sign of the times here.
Yes, I think it's a combination of both.
Clearly.
The economic model of these joint ventures are you pay relatively fixed costs to port authorities.
To operate these terminals.
And the more volume you put over them.
Outsized incremental returns so the most basic fundamental part of this is very sensitive to changes or increases in volume to the extent that.
These volumes are sustained or a sustained when we get to the new normal at somewhat lower levels. You know it depends on your view of the future we do expect as.
A number of our businesses.
For these two subside from their current levels, when we get to the new normal.
But I think these are the other thing that I would say about this and we believe this for a long time.
Having control of your own terminals.
That's an exclusive terminals and working with the best operator on the West coast with SSAT.
Creates really long term sustained value for the company.
That has proven itself in.
Down markets, but especially in these markets. These are extremely valuable properties and we have really competent operators and it's part of the things that differentiate differentiates our services relative to our competitors, so whether that translates into dollars incentives hard exactly to say, but we feel really good about our positioning including our joint venture terminal.
Okay.
Alright, Thank you, Matt and thanks, Joe.
Okay. Thank you.
Thanks, Dan.
And ladies and gentlemen to ask a question. Please press star one our next question coming from the line of Jack Atkins.
Stephens Inc. Your line is open.
Okay, great good afternoon, and congrats on a great quarter and a great year.
Thank you. So so Matt I guess, maybe going back to Ben's first question around.
The capacity available to you in the Hawaii.
Westbound lane to sort of accommodated grow with Hawaii over the next couple of years as the economy recovers.
If I go back and look at.
Just sort of the last what I would call peak year for Hawaii volume, which was probably 2016 or so did about 162000 or so containers.
In 2021, if I normalize for the extra week, you did about 4% or so below that.
I know you've you've had changes to the fleet a lot of everything is kind of going on I know you don't like to comment on utilization and utilization rates and so is there a way to maybe kind of talk to.
Kind of asking <unk> question, a different way how much available capacity do you have.
Laughter and the westbound lane, just given how much stronger volumes have been here over the last 18 months or so I hope that I know, it's a rambling question I hope it makes sense yeah no yeah.
What I would say again is.
We are not pressing capacity.
We received these four brand new ships, which are step function higher in capacity.
Currently both of these.
Four ships.
Go through California in one case, the Ccs who goes through Oakland.
Then it goes through long beach and the other case the other vessels are connected to the CLEC services, though they go.
Two in five weeks through lumpy to Honolulu, So and those are step function larger capacities that we had.
So.
We don't envision.
Needing to add more ships to the fleet.
As we see a recovery in the Hawaii service. So we have plenty of headroom.
And we're very comfortable with the capacity as the market grows without having to add.
Any additional vessels into the foreseeable future.
Okay.
That's helpful makes sense, maybe shifting gears to.
To the Transpacific Lane for a moment and your services there if I go back to I think last week Maersk had some had some comments around how they thought the year would sort of play out first half versus second half and rates kind of beginning to.
Softens, maybe too stronger word, but just kind of begin the normalization process as we kind of go through the year.
Your comments are.
We're going to have a strong market through at least peak season in October .
Is there a way to maybe think about.
And I understand the market's very unpredictable, but is there a way to maybe think about how your.
Contemplating first half of the year versus second half of the year do you think that we're going to have maybe a little bit of softening in the second half of the year, albeit rates still staying at very elevated levels or is it just too early to make that call.
Yes, I think it's too early but I can give you some color on our thinking about about this and part of this is Jack.
Generally with regard to that.
Sort.
Sort of an industry wide supply and demand fundamentals that are going to affect everyone.
But then the others are those that are unique to Madison and our service model.
And so our view generally is that there's going to be only a slow addition of vessel capacity.
New builds that are going to be entering the trade globally.
Some are going to be deployed in the trade lanes and the transpacific.
We see a continued elevated demand here.
Hearing from our customers that they are expecting this.
Most of our discussion is is with customers in their own thoughts about their planning cycles.
Therefore, we are seeing continued strong demand through through most of 2022.
But I would say also object tactically.
And you pointed to the questions about the seasonal nature historically at least seasonal nature of these trades.
The things that I think are going to drive first half.
Performance here, it's always a question about what happens with lunar new year.
And we're seeing a very shallow lunar new year period, and short and we're already seeing factories ramp.
Rent backup in their demand.
The customers in China are very strong and there continues to be very strong growth in e-commerce .
People have money to spend and they're spending it.
And so the other thing that I think happens in the first half at least from talking to some of our customers is.
They are aware of the <unk> contract renewal.
Many of our customers look to find other gateways or as best they can.
Position inventory in the market.
And we don't we're not predicting any.
Difficult to predict what the outcome of the ASW contract renewals. So we're not saying, we do expect an issue, but many of our customers and their supply chain planning are trained to continue this sustained volumes, especially they can given that uncertainty and then when we get into the second half of the year, we get into the traditional peak season and holiday period.
So all of that gave us.
Yeah.
A general feeling that this is going to be sustained but but in particular.
Given the lack of air freight given.
Given the.
Sort of in a new phase, where these rapid antigen tests are being.
Manufactured.
By the millions.
Lot of that is going airfreight again, and so there really is not significant airfreight capacity and of course with China being very strict in OPE reopening its borders given its approach to managing the pandemic, we don't really see a lot of belly freight coming anytime soon so those are just some of the factors that gave us confidence that.
We should see sustained volume.
Through that.
And that makes that makes sense, Matt and I really appreciate that that really helps out a lot of color there maybe kind of following up a bit.
If I think back what you guys are sort of told us about CLEC plus and some of your other services the trans Pacific is that.
It kind of skewing that capacity released you had been skewing that capacity over the last year year, and a half more towards the spot market than the contractual side.
As we sort of enter 2022 and go through the.
The contract negotiation period here over the next couple of months several months.
No.
Youre thinking about contract versus spot mix changing at all as you look forward.
Could you maybe help us think through that.
Yes.
I think looking back this is a good place to start I mean, we've been at this as you know Jeff for 16 years with our our expedited Transpacific service.
And we have always skewed towards the spot market and the reason for that is that.
There is a significant premium.
That we can achieve over the contracted rates and we have confidence after all these many years that while we can't exactly predict.
Where the customer demand will come from what is clear is that every customer at some point has a production problem has a late order.
Has some something that happens in their supply chain.
That causes them to meet an expedited treatment so.
If you fast forward that and to date today's context.
What we can say now is that even with the <unk>.
The expected higher.
Annual contracted rates that are.
Being achieved or talked about that is still significantly below where.
Our spot contracts are so we're really comfortable that we're positioned well and have been for again, a long time, we're trading a little bit of uncertainty for a significant significant rate premium that we think its worth of inappropriate no. Okay totally makes sense.
Thank you for that Matt So I guess, maybe shifting gears here.
With China, just just for a moment I'm just kind of curious.
As we sort of think forward bunker fuel prices are higher here with oil moving up.
The demand on charter assets, it's been high but I know you guys have done a great job securing.
Those those are leased and assets retarded and assets under longer term commitments.
I'm just sort of curious how we should be thinking about broadly the economics and maybe the margin profile of.
Yeah.
<unk> as we sort of.
Kind of move into 2022, not asking for specific trailing margin profile, obviously, but.
Those factors sort of maybe impact.
The profitability of those services on a year over year basis or is that just.
Kind of over thinking it.
Yes.
What I could say Jack and I'm not sure. This is exactly answering your question and maybe Joe you could comment as well.
Is that right now we operate the three fastest services in the Trans Pacific All three of our services are rated one two and three in terms of where people go to.
As I said that translates into a significant premium.
And our goal really is to sustain these three services until the.
The market.
Normalizes and.
So we have confidence going extending the <unk> until we said October .
If the market still.
Is looking for that level of service, we may extend beyond 'twenty.
<unk> 2022 into 'twenty, three we will see we'll see what where the demand is there.
We've already said, we are our goal and our belief is that the <unk> plus is permanent and of course that complements our core CLEC products. So we're feeling really good about where we are we're getting against significant premiums to the markets and our goal is to make sure. These are the three fastest services and we have confidence in our ability to do.
So, but what would you add to that.
Yeah, Jack I would just add that the rate impact and whatever the market rates are is going to have a much much greater impact than where those charter rates are the charter rates are important and yesterday have gone up so the cost will be higher in 2022, and 2023, because we extended duration on a number of vessels out to three years.
Because that's what the market required so those will be higher cost is something absolutely we pay very close attention to but those will be very small factors compared to wherever rates have gone and where they might go in the future. So it continues to be a market that where the profitability and the margin is going to be vastly determined by where <unk>.
Somewhat.
As you know we know it.
Absolutely Doug.
Maybe just a couple more questions and I'll turn it back over.
But just kind of thinking about the timing of a potential order for some additional aloha class vessels.
Obviously that would be very exciting in terms of the ability to add capacity in some of your capacity constraint lanes in and obviously refresh the fleet and.
To some degree in Alaska.
Just sort of curious do you think that decision is more of a 2022 decision and is there any way to kind of think about.
Roughly speaking.
How much of the cost of a newbuild Aloha class vessel gone up over the last six seven years since you since you place those orders in 2015.
Okay. So I'll take I'll take the timing part of that first and then.
I'll hit the cost point Jack so.
First of all let's focus on the vessels that we need to replace.
The Alaska vessels, which churn age 40, starting 2026 and 2027 and we said there is no bright line, sometimes you want to place assets before they turned 40 of age or potentially longer. So we've always felt like maybe on the early side 2025 delivery of 26 delivery and the later side 27 28 delivery.
And generally it's about three years sometimes.
Sometimes three and a half years from when you sign a contract to the vessel will get delivered so the answer is if we want something delivered towards the end of 2025, then that would be at 2022 decision. So the way. We are progressing is doing the work talking to shipyards. So that if we want to make a decision we can make a decision.
In the second half of this year to move on that timetable, we may decide not to move on that timetable, but our attitude is let's get ready and be prepared and then make a decision when its optimal to us. So we will be prepared and had done. The work. We expect we will make that decision later this year. If that's what we choose to do where we might differ.
From a cost perspective, I can't tell you what the exact what inflation costs have gone up that will all be dependent upon pricing in shipyard capacity and those sorts of things, but what I can tell you is just remind everybody. What we paid for the last set of vessels, which was $2 50 to $2 70 in that range per vessel and.
We didnt outfit those four vessels to a low of.
In the <unk> class vessels with the final tanks.
Pipes for LNG installation Thats, what were doing now and as we said that's about a 35% to $40 million cost per vessel. So if you look at what we paid plus those installations.
Back on five year year ago cost basis, it would be $300 million slightly above that so.
<unk>.
Gives you a ballpark of what the full installation cost would have been for vessels in the path of this size. So we'll see we'll see where the new cost comes out for new vessels. If we decide to go to law costs. Okay. Okay. No. Thanks for all that context, Joe really appreciate that last question.
I'll hand, it back over but.
As it relates to I don't know if you want to look at this from a potential M&A perspective, or if you wanted to just maybe talk about this in terms of just the strategic direction of your logistics business more broadly but.
Obviously have a lot of cash flow, that's coming in and that has come in and they will be coming in over the next couple of years at least and beyond from from.
The strength of your business and the limited Capex requirements that you have.
Yeah.
When I think about your logistics segment, we don't really talk about your.
Intermodal business within that very often.
But.
No. It's a non asset based business there seems to be like be some shifts taking place in the market.
<unk> and preference the asset based IMC is kind of moving forward would you guys have any interest in whether it's acquiring or really sort of scaling up your owned container fleet within your intermodal business in logistics segment, how do you think about that because it feels like there may be some opportunities.
To make some purchases there on the M&A side that could maybe accelerate that.
Just kind of leave it open ended and would love to get your thoughts.
Yes, okay great.
I think the.
You know Jack we have a fleet of 753 foot dry van intermodal boxes that operate in the U S rail network today.
And as you can imagine those are performing really well part of our decision to do that some years ago was.
We wanted to put ourselves in a position with the railroads and with customers who prefer to deal with asset owners themselves and not through primarily.
Strictly through brokers so.
We've addressed that with many large customers by investing overtime and this 53 foot fleet.
The question is would we consider expanding that the answer is yes, we certainly would be in discussion with the railroads to determine.
Whether or not the terms and conditions will be favorable to allow us to earn a return.
And this well Jackie.
The domestic markets right now logistic markets Theres a lot of money that are chasing deals as a result.
And our deal flow, we're seeing a lot of elevated prices and prices that.
I would just say our fully priced or overpriced.
And we've maintained that discipline that we're just not going to overpay for an asset at.
At the peak of the market.
Because everything has to go right and nothing can go wrong and Thats not the way the real World works.
But having said that we're going to we're going to stick to niche businesses, we're going to look to grow organically there could be a tuck in acquisition those kinds of things but.
We are not we are not going to buy an airline because we have money to do it.
Freight cargo airline, we're going to stick to our knitting, we're going to stick to what we know we're going to look for logical extensions of organic growth opportunities, but we're going to keep our feet on the ground.
<unk>.
We may get outbid or we may not find things that we need on the VAT.
Evaluations and that's just fine with us so we've shown our ability to grow over time in.
Part of this return an approach we have maybe we missed one or two deals, but we do not make mistakes and we do not overpay and thats not going to change.
That makes a lot of sense and you guys have done a great job building shareholder value over time, no doubt about that so I'll hand, it back thanks again for the time guys.
Okay, Jack Thank you.
And as a reminder to ask a question. Please press star one.
And I'm showing no further questions at this time I would now like to turn the call back over to them.
For closing remarks.
Okay.
Great catching up with everyone, sorry about our technical difficulties.
I was thinking it might have been Ukraine, or Russia, but I don't think so but I hope everyone stays safe and we'll look forward to catching up with everyone next quarter. Thanks Hello.
Ladies and gentlemen that does go conference for today. Thank you for your participation you may now disconnect.
[music].
Yes.
Sure.
[music].
Yes.
[music].
Yes.
Yeah.
[music].
[music].
[music].