Q4 2022 Matson Inc Earnings Call
And in our subsequent filings with the SEC.
Please also note that the date of this conference call is February 21, 2023, and any forward looking statements that we make today are based on assumptions as of this date.
We undertake no obligation to update these forward looking statements I'll now turn the call over to Matt. Okay. Thanks, Lee and thanks to those on the call.
Start on slide three for.
For the fourth quarter matching is differentiated.
<unk> service performed well in a difficult business environment.
Matches in a solid financial position with low leverage and currently $622 million in cash deposits and our CCF for the new vessel program, while returning $445 million in cash to shareholders in 2022 through dividends and share repurchases.
For the fourth quarter within Ocean transportation, our China services achieved lower year over year volume and freight rage, which contributed to the decline in our ocean.
Consolidated operating income.
We also saw lower year over year volumes in Alaska.
In Guam compared to the year ago period.
In logistics operating income decreased year over year, primarily due to a lower contribution from supply chain management consistent with lower demand in the Trans Pacific Trade Lane.
I'll now go through the fourth quarter performance of our trade lanes SSAT and logistics. So please turn to the next slide.
Hawaii container volume for the fourth quarter decreased 13% year over year, primarily due to lower retail and hospitality related demand compared to the elevated pandemic levels in the year ago period, and the effect of one less week.
Excluding the 50 <unk> week in the year ago period volume in the quarter decreased seven 9% year over year.
Volume in the fourth quarter of 2022 was three 2% lower than the volume achieved in 2019.
We saw our retail customers continue to manage inventories to weaker consumer demand levels. Despite continued improvement in the Hawaii economy.
<unk> tourism during the quarter remained relatively strong, including a modest improvement in international tourist trends.
Although there was a little a little bit of softness in December .
For the full year container volume decreased five 8% year over year, primarily due to lower retail related demand compared to the elevated pandemic levels in the prior year and the effects of one less week.
Excluding the 50 <unk> week in 2021 volume declined four 4% year over year.
Please turn to slide five.
Throughout the year, the Hawaii economy continued to recover from the pandemic with increasing tourist arrivals and a decline in the unemployment rate.
Excuse me tourism was predominantly driven by domestic arrivals, but the industry did see some modest improvement in international tourist arrivals in the second half of 2022.
In the latter half of 2022, we saw our retail related customers manage their inventories down to a lower consumer demand levels.
Through the first seven weeks of 2023, we have seen a steadier level of retail related freight demand consistent with pre pandemic trends.
You Heroes December projections continue to show economic growth in 2023 supported by continued strength in tourism and a low unemployment rate. However.
However, the economic growth trajectory is uncertain given the negative trends as a result of higher inflation higher interest rates and the end of the pandemic era stimulus, helping personal income.
Moving to our China service on slide six <unk> volume in the fourth quarter of 2022 was 47, 2% lower year over year, primarily due to lower demand.
For our <unk> and <unk> plus services the discontinuation of the <unk> service in the third quarter of 2022, and one less week.
Excluding the 50 <unk> week in the year ago period volume declined 42, 1% year over year.
Matson continued to realize the significant rate premium over the Shanghai Containerized freight index in the fourth quarter of 2022, but achieved average freight rates that were lower than in the year ago period.
For the year.
Volume was 11, 7% lower primarily due to the lower demand for the <unk> and <unk> plus services and one less week, partially offset by incremental volume on the Cc ex service.
Excluding the 50 <unk> week in 2021 volume declined nine 4% year over year.
Please turn to slide seven.
On our November earnings call, we indicated that we expected the fourth quarter of 2022, and the first quarter of 2023 to be challenging in the transpacific trade lane as retailers inventories adjusted to consumer demand levels as ocean liners reduced vessel capacity to meet these.
Lower demand levels.
We did see this happen and we continue to see vessel capacity adjust as retailers continue to right size inventory to mid weakening consumer demand.
Increasing interest rates.
And economic uncertainty.
In the weeks ahead of lunar new year, we saw a modest improvement in demand for our <unk> and <unk> plus services compared to December but in the weeks post lunar new year, we saw late demand for our <unk> service and as a result, we decided not to sale to <unk> plus vessels from Shanghai for a few.
Weeks.
In the regions in which we operate in China, we are seeing businesses and factories reopen and life returning to normal from the most recent COVID-19 wave.
Looking ahead for the first quarter and the first half of the year, we expect our <unk> and <unk> plus services to reflect freight demand levels below normalized condition with lower year over year volumes and a lower rate environment.
Absent an economic hard landing in the U S. We expect improved trade dynamics in the second half of 2023 as the Trans Pacific marketplace transitions to a more normalized level of demand.
We will continue to manage volume in the <unk> and <unk> plus at freight rates to measure it with the premium services, we provide on the ocean at.
At the terminals and shippers transport.
Currently freight rates for our <unk> and <unk> plus services are above pre pandemic levels, regardless of the economic environment. We operate the two fastest and most reliable ocean services and as a result, we continue to expect to earn a significant rate premium to the Shanghai container.
Our eyes freight index.
Please turn to the next slide.
In Guam Madsen's container volume in the fourth quarter of 2022 decreased 14% year over year.
The decrease was primarily due to lower retail related demand there was no impact from the 50 <unk> week in the year ago period.
Volume in the fourth quarter of 2022 was higher than the level achieved in the fourth quarter of 2019.
For the full year container volume decreased three 7% year over year, primarily due to lower retail related demand.
In the near term, we expect continued improvement in the quantum economy, with increasing tourism and a low unemployment rate.
However, there are negative trends as a result of higher inflation higher interest rates and the end of the pindaric pandemic era stimulus, helping personal income that creates uncertainty in the economic growth.
<unk>.
Please turn to slide nine.
In Alaska Madsen's container volume for the fourth quarter 2022 decreased seven 7% year over year.
The decrease was due to lower northbound volume, primarily due to one less sailing and one less week and lower southbound volume, primarily due to lower domestic seafood volume and one less week.
Partially offset by higher export seafood volume from a X.
Excluding the 50 <unk> week in the year ago period volume declined five 3% year over year.
Volume in the fourth quarter of 2022 was higher than the level achieved in the fourth quarter of 2019.
For the full year volume increased eight 6% year over year.
The increase was due to higher export seafood volume from Aaas higher northbound volume, primarily due to higher end excuse.
Excuse me higher retail related demand and volume related to our competitors' drydocking, partially offset by one less week and higher southbound volume primarily due to higher domestic seafood volume.
Excluding the 50 <unk> week in 2021 volume increased nine 3% year over year.
Turning next to slide 10.
The Alaska economy continues to show good growth and improvement in the key indicators from the depths of the pandemic.
In the near term, we expect the economy to benefit from low unemployment and continued job growth.
The federal infrastructure Bill is expected to lead to additional jobs.
In the near and medium term.
The state's economy is also expected to benefit from increased energy related exploration and production activity as a result of elevated oil prices.
There are negative trends as a result of higher inflation higher interest rates and the end of the pandemic era stimulus, helping personal income that creates uncertainty in the economic growth trajectory.
Please turn to slide 11.
Our terminal joint venture SSAT contributed $1 million in the fourth quarter of 2022 compared to $21 3 million in the prior year period.
The lower contribution was primarily due to lower lower other terminal revenue.
Lower lift volume and higher operating cost SSAT saw significantly less detention and demurrage revenue in the quarter due to easing port congestion and lower lift volume consistent with lower demand in the Trans Pacific Trade Lane.
For the year.
<unk> contributed $83 $1 million or an increase of $26 $8 million year over year.
The increase was primarily due to higher other terminal revenue.
For 2023.
We expect the first half lift volume to reflect the challenging environment in the Trans Pacific Trade Lane apps.
Absent an economic hard landing, we expect SSAT to trend to pre pandemic profitability levels in the second half of the year for.
For the year, we expect significantly lower detention and demurrage revenue due to the easing of port congestion and southern California.
Turning now to logistics on slide 12.
Operating income in the fourth quarter came in at $12 $8 million or $2 million lower than the result in the year ago period.
The decrease was primarily due to a lower.
Contribution from supply chain management, consistent with the lower demand in the Trans Pacific Trade Lane.
For the full year operating income was $72 $4 million or $22 $6 million higher than 2021 the.
The increase was primarily due to higher concentrations from transportation brokerage and freight forwarding.
In the near term, we expect a mix of activity across the logistic lines of business.
We expect continued growth in Alaska to be supportive of freight forwarding demand, we expect supply chain management to track, our China service, So a challenging environment in the first half of the year as I previously discussed.
And we expect our transportation brokerage business to weaken from the highest achieved in the pandemic period as freight demand normalizes modal shifts admitted market markedly improved rail congestion congestion.
And over inventoried retail customers continued to manage down consumer goods.
I will now turn the call over to Joel for a review of our financial performance Joel.
Okay. Thanks, Matt.
Please turn to slide 13 for a review of our fourth quarter and full year results.
For the fourth quarter consolidated operating income decreased $382 $9 million year over year to $92 6 million with lower contributions from ocean transportation and logistics of $380 9 million and $2 million respectively.
The decrease in Ocean transportation operating income in the fourth quarter was primarily due to lower volume and average freight rates in China, and a lower contribution from SSAT, partially offset by lower operating costs and expenses primarily related to the discontinuation of the <unk> service.
As Matt noted the decrease in logistics operating income was primarily due to lower contribution from supply chain management.
We had interest income of $6 9 million in the quarter due to higher cash investment rates on our cash and cash equivalents and cash deposits in the CCF as compared to no interest income in the prior year period.
Interest expense in the quarter decreased $1 million year over year due to the decline in outstanding debt in the past year, including the $50 4 million in debt principal we prepaid in the third quarter.
The effective tax rate in the quarter was 24% compared to 16, 5% in the year ago period.
For the full year consolidated operating income increased $166 1 million year over year to 1 billion $353 6 million with higher contributions from Ocean transportation and logistics of $143 5 million and $22 6 million respectively.
The increase in Ocean transportation operating income for the year was primarily due to higher freight rates in China, and a higher contribution from SSAT.
Partially offset by lower volume in China, higher operating costs and expenses, primarily due to the <unk> plus service and higher terminal handling costs.
The increase in logistics operating income was primarily due to higher contributions from transportation brokerage and freight forwarding.
Please turn to the next slide.
The next slide shows how we allocated our trailing 12 months of cash flow generation.
For the LTM period, we generated cash flow from operations of $1 billion $271 9 million from which we used 111 5 million to retire debt.
$146 9 million on maintenance and other capex.
$62 4 million on new vessel, capex, including capitalized interest and owners' items.
$518 2 million in cash deposits and interest income in the Ccs net of withdrawals for milestone payments.
$21 9 million on other cash outflows, while returning $445 million to shareholders via dividends and share repurchase.
Please turn to slide 15 for a summary of our share repurchase program and balance sheet.
During the fourth quarter, we repurchased approximately one 5 million shares for a total cost of $101 9 million.
For the year, we repurchased approximately 5 million shares for a total cost of $397 million.
At the end of 2022, we had approximately $1 5 million shares remaining on our share repurchase program.
Turning to our debt levels, our total debt at the end of the quarter was $517 5 million.
We reduced outstanding debt principal by $111 $5 million during the year of which $60 1 million was through regular amortization and the balance of $50 4 million was through their prepayment of long term debt that we highlighted on the third quarter earnings call.
In January 2023, we prepaid $14 3 million for all of the outstanding principal on the mono really tied 11 debt.
Plant and we plan to prepay in March $12 1 million for all of the outstanding principal on the moniker title 11 debt.
I'm now going to walk through an update on our capital construction funds. So please turn to the next slide.
We ended 2022 with cash deposits of approximately $518 million in the capital construction fund and year to date 2023, we have had interest income of approximately $4 million.
This month, we deposited an additional $10 million.
An additional $100 million in cash into the CCF and place the accounts receivable to reduce taxable income in 2022.
Following this $100 million cash deposit we currently have approximately $622 million in cash deposits and the Ccs to cover 66% of the approximately $949 million remaining milestone payments for the new vessel program.
Note that this funding calculation excludes the cash and cash equivalents on the balance sheet, which was approximately $250 million at year end.
We currently do not expect to make additional cash contributions to the CCF for milestone payments until 2026.
I would like to note that interest income on CCF cash deposits as tax advantaged and will help pay for future milestone payments.
Considering the interest rate environment. We currently are in interest income could be a meaningful contributor of additional cash deposit into the CCF in the next couple of years.
Please turn to slide 17.
The table on this slide summarizes our $209 3 million and capital expenditures in 2022.
We had capitalized construction expenditures of 60 point $62 4 million of which $11 9 million waste for the new Inter island barge placed into service in the third quarter and $50 5 million was for a milestone payment and other related costs on the new vessel program.
We had maintenance capex and other capex of $146 9 million of which $60 5 million was for equipment to support New trade Lane services and to provide fluidity in the network and $21 3 million was for the LNG installations on the Daniel K Inouye commodity Gila and Monica.
Please turn to the next slide.
Slide 18 shows the key areas for capital deployment over the next three years.
Starting with maintenance and other capital expenditures, we expect 80% to $90 million per year. This.
This capital spend includes phase II and phase III work at sand Island in Honolulu, and normal course capital expenditures to support our vessels shoreside operations and logistics businesses.
The next line item relates to the new vessel program. The figures shown reflect the milestone payments owner's items and capitalized interest we currently expect.
There is enough cash on deposit in the CCF today to pay for all of the remaining all of the expected milestone payments in the next three years and partially into 2026.
And the last item is the LNG installation and reengineering capex on existing vessels.
The Daniel K Inouye is currently in dry dock for its LNG installation and is expected to be back in service in the middle of this year.
Following Daniel K Inouye Monica will enter Drydock for a one year project to re engine to operate on both LNG and conventional fuels.
Come on a hela will enter the dry dock in the second quarter of 2024 for a roughly five months period for its LNG installation.
So in total we expect capital expenditures of $195 million to $210 million in 2023.
$205 million to $220 million in 2024, and $440 million to $450 million in 2025.
With that I'll now turn the call back over to Matt. Okay. Joel. Thanks, Please turn to slide 19, where I'll go through some closing thoughts.
We expect our financial performance in the first quarter of 2023 to be the weakest of the year.
Normal seasonality trends are returning to our domestic trade lanes and logistics and as mentioned previously in the quarter, we expect to see freight demand for our China service below normalized condition.
In the near term, we expect continued economic growth in Hawaii, Alaska, and Guam to be supportive of freight demand, but we recognize the potential economic overhang that could negatively affect volumes in each of these core domestic markets.
We expect challenging conditions in the transpacific trade lane in the first half of the year with freight demand below normalized levels in the second half of the year, we expect improved trade dynamics as the market transition to a more normalized level of demand.
Please turn to slide 20.
<unk> is well positioned financially and operationally to capitalize on opportunities as they emerge. The madsen brand has never been stronger and we are in an enviable position to leverage the brand on our portfolio of essential high quality businesses to drive new opportunities.
Supporting our opportunistic growth ambitions as a solid investment grade balance sheet with low leverage as of today nearly two thirds of the remaining milestone payments in the new vessel program are funded with cash deposits and the CCF, earning interest income on a tax advantage basis. So we're in very good.
Funding position with the CCF on this large vessel project, which will reduce our reliance on using cash flows in the next few years to fund vessel Capex commitments.
Going forward, we will allocate the shareholders' capital like we always have in a disciplined manner, regardless of the economic environment.
We invest for the long term to create value for shareholders in some cases the capital decisions. We make today are to power us for decades to come like our $1 billion new vessel build program.
We're always on the lookout for opportunities to expand the Madison brand and drive organic growth.
We did this during the pandemic with the <unk> plus service and derivative opportunities in logistics and we're confident that we're positioned well with our customers in the marketplace to drive future opportunities.
We will look to acquire businesses as an extension of the great collection of assets. We have today, we want to ensure that any business, we acquire complements one or more of our existing businesses provides a unique or differentiated value proposition to our customers fits culturally with ours and is purchased at a double digit.
Cash on cash yield with good long term cash flow characteristics.
We did close a small tuck in acquisition in 2022, and we're actively looking at acquisitions, including tuck ins in both Ocean transportation and logistics.
We still believe that valuation expectations are higher than justified by earnings fundamentals and growth prospects, especially in light of current economic conditions. This may change in the coming year, and we expect attractive candidates to emerge that meet our investment criteria.
We also have a solid balance sheet, which provides a lot of optionality for us.
And last but not least we will continue to return capital to shareholders. After funding our maintenance Capex expenditures long term investments and dividend in the last two years, we've repurchased approximately seven 5 million shares for nearly $600 million.
Going forward, we expect to be a steady buyer of shares.
As I've said before we remain focused only on what we can control and doing what we've always done and that's to maintain vessels service reliability provide high quality customer service and allocate shareholders' capital to its highest and best use to create value over the long term.
And with that I will turn the call back to the operator and ask for your questions.
As a reminder, if you'd like to ask a question. Please press.
Star one on your telephone one moment, while we compile the Q&A roster.
First question is coming from Jack Atkins of Stephens. Your line is open.
Okay, great. Good afternoon, and thank you for taking my questions.
<unk>.
So I guess, Matt I'd love to maybe kind of start with a macro question or two you guys have touch up.
An interesting look into what's going on because of your relationship with your customers beginning.
Supply chains in China, but.
Is it your sense that.
Retail shippers are going to be back to more normal ordering patterns.
Around the middle of the year or is that sort of underpinning your outlook for.
Thank you for the kind of maybe get back towards normal in the second half of the year I don't know im not trying to put words in your mouth I'm trying to kind of understand the outlook from that perspective, yes, I think first of all thanks, Jack for the question.
A couple of things I think our view now is that.
Because of the.
Very significant contraction in trans Pacific demand and ordering that occurred.
Especially in the fourth quarter, but we saw at the beginning towards the end of the third quarter.
As retailers.
Slowing demand pattern by their customers and a significant catch up of inventory that was caught in the supply chain congestion cause an air pocket.
<unk> to occur if you will and transpacific demand as our customers individually.
Curtailed future purchase orders as our customers were being more cautious.
And theyre buying to get their inventories down where they needed them to be so I think what we're seeing.
Is that.
We're obviously listening to our large customers the big box retailers and others for how well they are managing their inventory levels and so we're watching that metric very closely.
The early read on that is while.
<unk>.
There has been improvement in managing inventory levels down in some cases in other cases and other retailers that hasnt occurred as quickly as they expected. So we're expecting some of the slowness that we saw in that fourth quarter to continue into the first quarter and frankly into the first half and then we do expect.
More normal seasonality to occur as we approach the Thanksgiving and Christmas holiday seasons, and so we're expecting.
A weaker first half of the year, owing to those questions and also ongoing impacts of higher interest rates and the feds desire to curb inflation. Some persistent inflation in some of the macro trends that we're all of US are following closely will weigh on demand, we think particularly in the first half okay. Okay got it no that's helpful.
Thank you for that and I guess, maybe.
Maybe to kind of help us.
Frame up the first quarter. The first half I know you guys are not giving guidance.
This is the form maybe if you could help us think a little bit about.
Seasonality and maybe what that looks like you said the first quarter is going to be.
The most challenging quarter of the year from a financial perspective in terms of the EPS.
The EPS or the profitability.
If I heard you correctly, if I think back and kind of look back to how the business historically kind of trends fourth quarter to first quarter typically marine transportation margins can be roughly half of the first quarter, what they were in the fourth quarter.
Is that the right way to think about the business.
This year or.
Is that maybe a good baseline anything to kind of help us think about how to frame that up just because there's just so many moving pieces this year, but I'm not trying to put you on the spot with guidance just kind of looking for some good direction yes.
Part of our lack of guidance is the macro uncertainties that we're seeing so it's not as if we have a number and we're not going to share. It with you we're watching it along with everyone else, but we do think that as we've said if you look historically, what I mean by that is pre pandemic or over a period of time in the first quarter has historically been our weakest followed by <unk>.
I guess, you would say the fourth quarter and our historically, our two strongest quarters are in the second and third quarter. So if you just look historically there. We're also seeing I think in the first quarter of this year, we had some disruptions related to.
Covid in China.
And a weakening in uncertain demand pattern I also think the piece that I haven't mentioned, but I think it's going to bear on what happens in the second half of the year. We saw beginning in the fourth quarter, but I don't think has taken its full force is in the in the China markets will be other international Ocean carriers resize their transportation fleets.
In line with the lower expected demand, we're seeing some of that occur we've seen announcements announcements.
But I think more of that does need to occur so that there isn't an overhang of capacity in the market.
Could we weigh down on freight rates. So I would say is without talking about margins relative to the fourth quarter I would just urge you to think about historically.
Earnings and then just.
Just apply what we see as a more cautious first half than the second half and that's about as good as I could do Jack.
That helps a lot Matt Thank you and then.
I guess, we have to work with there. So let me maybe ask one more and I'll jump back in queue.
But I guess.
Joel if you if you have some thoughts on that so let me get you to chime in on it on it too but.
When we kind of think about the last couple of years, obviously been extremely strong from an underlying demand perspective, a lot of things happening easy to layer on some maybe additional cost through that process now that.
Things of the business is normalizing.
So maybe below normalized levels are there opportunities to maybe take cost out of the business, maybe kind of look for ways to.
Tighten the belt a bit in certain parts of the business that can help offset some of the challenges from a business perspective.
Yes, Jack let me start with my thoughts and then im going to turn it over to Joel to give his perspective I think what we what we.
The biggest levers that we can pull as you know are really around fleet deployments and so our cancellation of the Ccs service that occurred.
Towards the end of the third quarter and through the fourth quarter is it isn't.
It's a way in which we could take that every one of our vessels, which were deployed put them back in some cases into reserve status and lower the operating costs by.
By our fleet size the other element that we're going to be focused on in 2023.
Is at its peak, we had seven vessels in the <unk> plus service and we're going to be moving towards a more conventional five vessels as we as we continue to see Alex plus service into 'twenty, three and likely moving forward. So those are a couple of our big level, what levers one of the things that did not occur Jack.
In the last three years of the pandemic was really on the G&A and people side, we added <unk>.
Less than 3% to our workforce in each of the two years of the pandemic, so and we have a normal level of retirement and other kinds of things that doesn't put us in a position where we feel like our.
Our people resources are significantly overstepped, but having said that we're going to go back to doing what we've done in a normal environment is looking for ways in which to operate more efficiently whether it's the speed of our vessels.
The size of our equipment fleets, they use of overtime and gate times in a lot of just blocking and tackling that will occur and does occur in a normal environment that will allow us to reflect that we are in a different environment and trying to keep our costs in line with.
Less congestion and a lower demand environment overall, but I would I would turn it over to Joel for his thoughts as well.
Those are the key items, Jackie and just to put a little bit of order of magnitude on our biggest cost is terminal handling and so as the freight package goes up and down over time and right now it is soft with the declines you've seen.
That naturally goes down and so you do get you do get some reduction in costs.
Per unit basis, as you guys have less freight moving through your terminals. The next cost of the vessel operating cost broadly, including fuel in there as Matt said.
Our fleet is pretty fixed right now we will go to ratchet down two units on the <unk> plus seven ships to five so that'll help and we'll do that over the course of the first two quarters of this year.
But the rest of it is pretty fixed network of vessels staying on schedule and then we have fuel that fluctuates based on fuel prices.
So that's the next biggest CAGR and then equipment Mac touched upon that we did flex up we purchased a lot of equipment in the early in midstream days of the pandemic and then we actually leased quite a bit in the last 12 months that we now can off hire and turn that equipment back to the lessors and ratchet down a little bit.
Cross our network, there, which will help the cost structure, a little bit and then the last piece is the people and as Matt said, we see election additional China services do not require a big increases in our head count. So we're pretty disciplined about adding people only when necessary over the last couple of years and so therefore, theres not theres not a big additional.
A number of head count that increased our cost structure. So that just puts a little bit of color in terms of the order of magnitude on each of those cost buckets Jack.
I really appreciate that Joel Thank you and I'll.
I'll hand, it over and jump back in queue.
Thank you one moment, while we prepare for the next question.
Our next question is coming from Jake lacks.
Wolfe Research your line is open.
Hey, thanks for the time.
Hi, Jacob.
So we spent a fair amount of time talking about the demand environment can you talk about how you view the supply side for the balance of the year I think you talked a bit about some blank sailings, but.
The order book is pretty elevated could that be offset by vessel scrapping.
I would like to get your thoughts there.
Yeah.
Sure I can give you my thoughts.
Let me give you my thoughts about what should happen well, what I think will happen and which should happen that is.
The.
International Ocean carriers operating through their global alliances.
Ultimately resize their fleets.
In the Trans Pacific and globally in the markets, we care about in the Trans Pacific for ultimately the level of demand that is needed in the trades.
We acknowledge there is a larger order book.
Those vessels are.
Going to be delivered some of those will be delayed as <unk>.
Ocean carriers seek to push back the delivery, we will see some advanced level of scrapping will see four vessels that are chartered.
Which represent about 50% of the global fleet. Many of those vessels will be returned to their vessel owners. When the charter periods are over so I think youre going to see a combination of recycling that's going to occur.
Even potentially laying up vessels or again scrapping vessels that should have been scrapped or would have been scrapped except for the extraordinary market cycle.
That has occurred over the last few years, so you'll see a combination of all of those things occurring.
Over the coming months.
I said some of it has occurred.
We ourselves.
Are an example of that.
Having three trans Pacific services at our peak and then scaling that back to.
In light of slack following demand. So those are those are really our thoughts about what should and are very likely to happen as we go through 2023.
Got it thanks.
I understand there is a lot of noise right now given inventory destocking, but do you think there is sufficient demand for two weekly trans specific services.
Round or is there an option to make the CLS plus seasonal or every other week or something.
Yes.
I think our view is let me address the market that we care about which is the expedited market and it's a good reminder, that even while customers may be.
Handling a lot of seeing a lot of inventory in their systems in part as a result of inflation on the underlying cost of that inventory. There is still going to be a need for product that is moving that needs to be replenished and our view is that while customers will likely remain cautious on managing through the <unk>.
Inventory levels.
They're going to want to fill the shelves.
<unk> view is that.
There is a size of a market sufficient in the expedited space for two weekly services and it's our view that if we remain the fastest and most reliable, which we expect to that we're going to get the lion's share of all of that expedited freight and there's enough expedited freight in the market.
That will allow us to sustain two services.
Yes that makes sense and then one last one for me.
Some weakness in the demand environment.
Coming out of China.
You had a big decline in rates from <unk> to <unk>.
<unk> found the bottom yet or should we think rates decline again.
In the first quarter.
Yes, it's a good question I think.
And I think it's important here to differentiate between what we'll say our market rates or spot rates and then what Matt since rates are so let me. Let me first start I'll start talking about our thoughts about the spot rates in the market I think.
Typically what you see are after.
Historically.
After lunar new year or before the factories reopened we typically see that is the lowest point in the year for spot rates, but the demand is lowest.
International Ocean carriers, typically void or cancel or blank sailings during that period and thats. When you see the spot rates at their lowest so whether were exactly at the bottom or near the bottom I think we're close if were not there.
So I think what we're going to do.
Based on my belief and.
An expectation that the ultimately the.
The capacity will be reset as I mentioned.
That.
Spot rates will come up from these lows the extent to which it will be determined by lots of factors on the supply and demand side, but I think we're at or near the bottom on the spot rate side.
I think if you look at then we move into the sort of in the transpacific. This annual contracting cycle and what I expect to occur.
Is that.
And the entire transportation trade, we will see lower contracted rates than in the previous year as these contracts renew.
They are likely to be above the spot rates, but below the rates at which they were contracted last year, that's pretty clear the other thing that but for mattson.
While our rates are down from the previous year and volumes were down as we mentioned.
Our rates remain significantly higher.
Then.
The.
Market rates and they remained above where they were pre pandemic.
Our expedited space. So it's hard to know exactly what will occur, but we feel comfortable that we are receiving a premium to the market.
That is commensurate with our highly differentiated service so not knowing exactly how it's going we like artwork, where our position is in the market.
Alright, thanks for your time.
Sure.
Okay.
Thank you one moment.
And our next question will be coming from.
Jack.
Okay.
Yes.
Yes, Jack Atkins with Stephens, Thanks for letting me.
Jump back in and ask a couple a couple of more questions.
So I guess.
<unk>.
I know you guys don't like to talk about trade lane level profitability.
There's a lot of question I think out there in terms of like with rates where they are.
And the <unk> plus not necessarily having that full double had all like the original <unk> has.
How does it fare in this type of operating environment do you feel like that with the cost levers that you have to pull in terms of being able to.
Blank sailings when necessary going from seven ships to five ships, but you'd be able to keep <unk> plus.
Profitable where at worst neutral to earnings even in this type of rate environment does that is that reasonable to expect.
Yes, it's a good question and I'll start by saying, we don't talk about trade level profitability.
What I can't say with confidence Jack is this.
There is even in even in this last week sailings more demand for expedited services and we can fit on our <unk> plus service and this is the seasonal low.
So we do expect that the size of the expedited market cap.
Can't be satisfied with a single vessel even in a down market, we're in and in overshot market.
And we also firmly believe that overtime.
There will be long term value creation by having the fastest and second fastest markets penetrate there is there is a demand for it there'll be pressure to try to move product out of airfreight into our expedited or deferred air type product.
And.
I would say that obviously profitability is going to be lower on all of our trans Pacific services and in the previous year, but we remain confident that these two services will create long term value for our shareholder okay. Okay got it I knew that was going to be a tough question to answer but I wanted to I wanted to see if you guys would maybe elaborate.
So I guess, maybe kind of shifting gears a couple of other items.
Joel could you could you maybe help us think about how interest expense.
<unk> should trend I know it's there.
Interest rates can move around a lot so not asking for a full year look but.
The.
The the <unk>.
Progress payments being made into the capital construction fund and higher rates on your cash balance I mean, whats the right way to think about.
Interest expense interest income I guess I should say.
Over the next couple of quarters.
Yes, yes.
Yes.
Interest expense will be very easy to project will have four instruments after capacities to tie the 11th year in.
First quarter. So we'll have to remain private placement tranches in two remaining time 11 tranches, so that will be very fixed on the <unk>.
Interest expense side. So your question on the interest income side.
Just take a look at the cash on deposit in the Ccs as well as cash and cash equivalents on the balance sheet itself. So all of those funds will be invested in short term high rated securities.
And so what's the interest income on that on those two total amount is going to be I mean, right now it's running close to 4%.
And we told you what we May we made $4 million of interest income here, so far year to date and just the CCF alone, which had $518 million at year end and through through up until the $100 million deposit. We made just this past week. So it's really a function of just look at those two numbers together on the balance sheet, Jack CCF plus cash.
Equivalents and then look at what market rates are for high quality money market government back funds government type securities.
We will maintain a very high quality of money market type of investments with those funds. So that's the kind of return you should expect on the interest income side.
In terms of how that nets out onto the P&L, we're looking at something maybe slightly north of what you saw in the fourth quarter.
Again, depending on the potential fluctuation when container rates.
Yes, okay.
Got it. Thanks, Thank you for that Joel and then in terms of thinking about a couple of other items on the on the cash and cash flow side.
With the with the deposit into the capital construction fund should we be thinking about the cash taxes.
Being.
Just basically backed out of the alternative minimum tax.
Is that the right way to think about that plus your state income tax.
Put another way should be pretty quick.
Fairly minimal cash taxes.
Well it should it should revert to something more normal I would say in 2023. So what you saw in 2021 and 2022, we had very high levels of profitability. We did have high amounts of cash taxes. So if you look at those two years together, we're going to get some refund back on the 2020 to amount of cash taxes, we paid so.
So that will help.
Overall cash flow by going forward, Jack in 2023 will actually revert to something more normal in terms of cash taxes relative to our underlying earnings okay.
The capital construction.
The part that's going to that's going to shield.
That's going to drive a re front.
Prior periods and going forward, it's going to be more.
Your cash taxes in your P&L taxes.
Maybe it will be fairly similar.
Yes, yes, there'll be much closer together.
The way that we'll have to do in 2023 to start making quarterly estimated cash tax payments. So that youll see that but then that will be a little bit overwhelmed by at some point here, we will get a refund from the IRS, we don't know when but at some point. This year, we will receive a onetime refund.
But it will also be making regularly quarterly cash tax payments. The IRS based on our 2023 estimated profitability, Okay, I hope I'm going again.
Refund this year too, but I'm not holding my breath.
Okay.
I guess, maybe last question and I'll turn it over.
Yes.
The pace of share repurchases you guys have been pretty active on on those over the over the last last couple of years, and it's really lowered your share count pretty pretty significantly.
How should we be thinking about that moving forward. I mean is this going to be kind of a similar pace a little bit more ratable.
As we more opportunistic with it just how should we be thinking about that.
Yes, I would say, it's going to be a slower pace than what we've done in this first year and a half I remember we started in August of 2021, and so in that 18 months, we bought back $7 5 million shares already so that's more than the steady pace you would expect for the rest of this decade and the reason we did that because we have such very large levels of cash flow in <unk>.
Profitability in 2021, and 2022, so as things kind of revert back to something more normal in 'twenty, three and beyond the share repurchase activity will go down and reduce from that annual pace. So so more of a steady Eddie pace, that's more commensurate with our cash flow from operations minus.
Or kind of maintenance capex levels, because we because we funded that.
The vessel Capex in the CCF already two thirds of that so more of a steady eddy so less pace than what you've seen in the last 18 months, but but a steady pace for years to comments that we expect Jack okay.
That's great to hear and I guess, maybe one last one for me and I'll hand, it hand it over.
And I just would like to maybe kind of go back to this idea of sort of what normalized earnings could look like for Madsen.
I know, it's a difficult question to answer, but I guess as you guys think about sort.
The margin range for Marine transportation, historically, it's sort of been mid single digits at the trough of a cycle mid teens at the peak of a cycle.
Covid times out for a moment.
And sort of high single digit low double digit.
In a more normalized operating environment is there any reason to think that that range has kind of changed one way or the other through.
The cycles, we look forward I mean is is that still the right way to think about it do you feel like the business is structurally more profitable any sort of color around that I think would be helpful for investors.
Yes.
Jack This is Matt I'm going to try to answer part of it and then I'll turn it over to Joel but I think.
We continue to believe.
Our earnings coming out of this pandemic.
<unk> will be higher than it than it was going in and I'm not sure whether we've hit normalized earnings, especially in the first half of this year, but we do expect eventually to get there and I think our view there is partly driven from the addition of the <unk> plus which as I said earlier, we think will drive long term value over and.
Above our core earnings I think the value of our <unk> brand.
That it stood out in a really disruptive cycle is also going to allow us to continue to earn a very healthy premium.
Few years' time, I do expect these three new builds to put.
These additional 500 containers for sailing for those three shifts that we're going to be introducing into the <unk> to be another bolt on of additional earnings through.
Upsizing kind of inorganic growth initiatives.
I expect us to be on the lookout for small tuck ins and I think those.
Acquisitions and other growth opportunities.
Absent a very large acquisition, which are not included in our comments. If we can find one that fits so.
Without trying to put a percentage on it those are some of the things I think give us confidence to say that we do believe that we're going to be a different company than we are going into it but I'll turn it over to Joel to give you the mid cycle percentage profit margins basically.
And Jack you've heard us say before it because there's so many moving parts, especially fuel.
That margin analysis becomes very very difficult and so I know you went through in your question.
A couple of credit gets there in terms of what margins might be and normalize in lower end in high and low points in the cycle.
Honestly, we don't think of it that way, we don't think of our businesses in terms of what margins are going to produce we think of our business is in terms of what aggregate EBITDA and operating income they're going to produce.
I think for investors.
We've always talked about taking a run rate and then doing your analysis of what we think is going to have in the future off that run rate. So if you assume more volume at X price and you can back into what your contribution and incremental contribution margin might look like and then you can start working on aggregate EBITDA and in operating income based on based upon that start.
Point as opposed to building a revenue number and then applying.
Mark a margin against it.
Makes sense.
It does it does.
I just I think you guys know your business better than anybody else and it's tough from the outside looking in with all the different <unk>.
Trade lanes to be able to.
And a lot of these these businesses overlap on each other to be able to really model. It and think about where things are going to settle out. So I think that once we can get them.
Some more clarity around that I think that will that will help valuation once we can kind of get some some views. So I was just trying to get you guys to.
Go on the record on that but I guess, we'll know we'll have a better sense for that in the second half of the year. So.
Thank you again for the time really appreciate it.
Okay, yes, thanks Jack.
Yeah.
Thank you that concludes the Q&A session for today I'd like to turn the call back over to Matt Cox for closing remarks.
Okay, well thanks, everybody for your interest in today's call, we look forward to catching up with everyone next quarter Aloha.
Okay.
Thank you all for today today's conference call you all have a great evening and you may disconnect now.
Okay.
The conference will begin shortly to raise and lower Johan during Q&A you can dial one one.
[music].
Yes.
Yes.