Q2 2023 Matson Inc Earnings Call
Please also note that the date of this conference call is August one 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 everyone on the call I'll start on slide three.
Matt since Ocean transportation, and logistics business segments performed well, despite a challenging business environment and sluggish U S economic growth for.
For the second quarter within Ocean transportation.
China service higher sequential quarterly freight demand, but generated lower year over year volume in freight rates, which are the primary contributors to the decline in our consolidated operating income.
We also saw lower year over year volumes in Hawaii, Alaska, and Guam compared to the year ago period.
Logistics operating income decreased year over year, primarily due to lower contributions from transportation brokerage and supply chain management.
I will now go through the second quarter performance of our trade lanes SSAT and logistics. So please turn to the next slide.
Hawaii container volume for the second quarter decreased seven 1% year over year, primarily due to lower retail related volume as our retail customers continue to manage inventories to weaker consumer demand levels.
Volume in the second quarter of 2023 was three 4% lower than the volume achieved in 2019.
During the quarter total visitor arrivals increased modestly year over year with growth in international visitor arrivals, partially offset a decline in domestic visitor arrivals.
Total visitor arrivals in the second quarter of 2023 were just below the second quarter of 2019.
Please turn to slide five.
For the second half of 2023, we expect continued improvement in the Hawaii economy supported by continued growth in visitor arrivals and a low unemployment rate.
You Heroes may projections continue to show economic growth in 2023 supported by continued strength in total tourism and a relatively low unemployment rate.
Youll hero projects weakness in the domestic visitor arrivals from the effects of tighter credit and higher interest rates to be countered by continued improvement in international visitor trends.
Unemployment is expected to rise a little as the economy responds to the effects of higher interest rates.
To subdue inflationary pressures.
Moving to our China service on slide six.
<unk> volume in the second quarter of 2023 was 24, 6% lower year over year, primarily due to no CCF service in the quarter.
Lower capacity in the <unk> due to the dry docking of the Daniel K, Inouye, and one less CLS plus sailing.
Nearly three quarters of the year over year volume decline was related to the <unk> service in the year ago period.
<unk> continued to realize a significant rate premium over the Shanghai Containerized freight index in the second quarter of 2023.
We achieved freight rates that were lower than the year ago period, but well above those achieved in the second quarter of 2019.
During the quarter, we saw increased freight demand from.
E Commerce or e-commerce vertical and a modest increase in freight demand from garments and E goods customers electronic goods or <unk> consists of computers tablets phones and other electronic devices. The E. Commerce goods, we generally carry our wide range of high turnover items that need to be replenished.
Basis.
Please turn to slide seven.
Currently in the transpacific marketplace, we are seeing modest reductions and deploy capacity and.
And retail inventories are in a relatively better position than earlier in the year that retailers continue to carefully manage inventory levels in the face of lower consumer demand.
We further expect the trade lane to experience a muted peak season, but for Mattson, we expect our China services to be in solid demand with our vessels are near full during the traditional peak season.
Absent an economic hard landing in the U S. We continue to expect trade dynamics to gradually improve for the remainder of the year as the trans Pacific marketplace transitions to a more normalized level of consumer demand and retail inventory stocking levels.
Regardless of the economic environment, we expect to earn a significant rate premium to the CSI, reflecting our fast and reliable ocean services and unmatched destination services.
I want to spend a few minutes on the elements of demand for our China service as we believe important changes have taken place over the last few years that are positive forces for our business.
Prior to the pandemic period, we built the Madison brand in China over 13 years with a demonstrated history of the fastest ocean transit in the Trans Pacific with the <unk> X <unk>.
Service, our unparalleled service reliability at 24 hour cargo about availability at a unique U S customs bonded off dock facility in long Beach.
We ensured that this service had a premium high touch customer service effort, both at origin and destination.
Our key customer groups were garments and accessories <unk>.
<unk> and footwear.
The <unk> is also viewed by customers as a relatively fast cost efficient means to get last minute items to the U S West coast.
During the pandemic, we enhanced the Madison brand in China with the initiation of new services during an extremely challenging environment to address our customer needs.
As you May recall, we initiated the <unk> plus service in May of 2020 due to high demand for the CLS Ax.
This demand was initially driven by the loss of airfreight capacity, where many customers who use our services is the next best option to airfreight.
Customers quickly came to appreciate our value proposition versus air freight, which is a significantly lower cost for five to seven days of additional transit coupled with reliability and consistency.
We also initiated a temporary service in July of 2021 called the CTX to address the high level of demand for the <unk> and <unk> plus as a result of the challenges of port congestion and southern California.
We ended this service in September of last year due to a combination of lower overall market demand and the reduced need for expedited Ocean services, given the significant improvement in the west coast Port congestion.
Across our services in this period of time, we saw a wide range of demand from Covid related supplies to ecommerce and <unk>. We also saw an expanded geographic area of freight origination with loads coming from distant areas within China and cross border Commerce.
Post the pandemic, we've seen a significant increase in e-commerce demand as these customers are looking for a consistent and highly reliable expedited Ocean service.
This book of business complements our existing verticals with garments and <unk> that we've built over the last 16 years.
Going forward, we expect the e-commerce vertical to be an important driver of demand for our China service. According to the U S Census Bureau E Commerce penetration of total U S. Retail sales is approximately 15% and in the first quarter E. Commerce sales grew approximately 8% year over year.
Spectation, Sir for continued growth in e-commerce to outpace the growth of total U S retail sales.
Based on our customer conversations there is enough airfreight capacity in the market to meet the demand currently.
Most of our customers that exclusively used airfreight pre pandemic have chosen to continue shipping a significant portion of their business with mattson as they've already aligned their operations with our sailing scheduled.
We are confident that the majority of this business will remain with Madison, regardless of airfreight capacity as mats and service is economically advantageous and reliable relative to airfreight.
Over the last 17 years, we've carved a niche reliable service that provides the fastest and second fastest ocean transit coupled with unmatched destination services and unparalleled customer service and the consistency of our China service is a significant differentiator in the marketplace and create that flywheel of.
<unk> success, whereby our value proposition and unique service attributes drive our customers to build their supply chains around our two expedited service. Please.
Please turn to slide nine.
In Guam Madison's container volume in the second quarter of 2023 decreased seven 5% year over year. The decrease was primarily due to lower general demand.
Volume in the second quarter of 2023 was two 1% higher than the level achieved in the second quarter of 2019.
In the second half of 2023, we expect continued improvement in the Guam economy, with a low unemployment rate and a modest increase in tourism from low levels.
Please turn to the next slide.
In Alaska Madsen's container volume for the second quarter of 2023 decreased seven 2% year over year the.
The decrease was due to lower export seafood volume from the <unk> service lower northbound volume due to one less sailing and.
And lower volume, primarily due to lower household goods and domestic seafood volume.
Compared to the second quarter of 2019 volume in the quarter was 9% higher.
In the second half of 2023.
We expect the Alaska economy to continue to benefit from low unemployment and increased energy related exploration and production activity as a result of elevated oil prices. Please.
Please turn to slide 11.
Our terminal joint venture SSAT declined $26 $1 million year over year to a negative $1 4 million.
The lower contribution was primarily due to lower demurrage revenue and lower lift volume.
So significantly less diverge 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 second half of 2023, we expect lift volume to reflect a relatively challenging environment in the transpacific trade Lane.
Turning now to logistics on slide 12.
Operating income in the second quarter came in at $14 $3 million or $8 $8 million lower than the result in a year ago period.
The decrease was primarily due to lower contributions from trans Pacific brokerage and supply chain management.
In the near term, we expect a mix of activity across the logistics 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.
For transportation brokerage, we expect near term challenges with lower freight demand excess capacity and declining accessorial fees.
And with that I will turn the call over to Joel for a review of our financial performance sure. Okay. Thanks Pat.
Please turn to slide 13 for a review of our second quarter results.
For the second quarter consolidated operating income decreased $396 $4 million year over year to $96 $7 million with lower contributions from ocean transportation and logistics of $387 6 million and $8 8 million respectively.
The decrease in Ocean transportation operating income in the second quarter was primarily due to lower freight rates and volume in China, and a lower contribution from SSAT partially.
Really offset by lower operating costs and expenses, including fuel related expenses, primarily related to the discontinuation of the <unk> service and lower fuel costs and the timing of fuel related surcharge collections.
The decrease in logistics operating income was primarily primarily due to lower contributions from transportation brokerage and supply chain management.
We had interest income of $8 7 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 $6 million year over year due to the decline in outstanding debt.
The effective tax rate in the quarter was 22, 5% compared to 22, 4% in the year ago period.
Please turn to the next slide.
This slide shows how we allocated our trailing 12 months of cash flow generation for the LTM period, we generated cash flow from operations of approximately $827 3 million from which we used $134 1 million to retire debt $154 million on maintenance and other capex one.
<unk> hundred $1 8 million on new vessel, capex, including capitalized interest and owners' items.
$581 4 million in cash deposits and interest income in the Ccs net of withdrawals for milestone payments.
$28 million for other cash outflows, while returning $316 $4 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 second quarter, we repurchased approximately 6 million shares for a total cost of $42 4 million, including taxes.
For the first six months of the year, we repurchased one 3 million shares for a total cost of $84 5 million.
Since we initiated our share repurchase program in August of 2021 through June 30 of this year, we have repurchased eight 7 million shares or approximately 20% of our stock for a total cost of over $680 million.
As we have said before we are committed to returning excess capital to shareholders and plan to continue to do so in the absence of any large growth investment opportunities.
Turning to our debt levels, our total debt at the end of the second quarter was $462 4 million a reduction of $14 3 million from the end of the first quarter.
I am now going to walk through an update on a few financial items. So please turn to the next slide.
The cash balance in the CCF at the end of the quarter with $583 9 million.
During the quarter, we made an approximately $50 million payment from the CCF for the new vessel build program base.
Based on the remaining milestone payments of roughly $899 million today nearly two thirds of the program is funded by restricted cash in the CCF.
Note that the two thirds figure excludes interest income on cash deposits that may be earned in future years.
We expect to make our next milestone payment in the second quarter of next year.
We continue to expect a general corporate tax refund of approximately $120 million for the cash deposited into the CCF last year that was applied to the 2021 tax here.
Lastly for the third quarter, we expect an effective tax rate of approximately 15%.
That lower expected tax rate compared to the level in the second quarter is primarily due to further refinement of the 2022 tax deduction related to foreign derived intangible income or <unk> under section 250 at the internal revenue code.
The city deduction is available to U S corporations that generate income from services provided in foreign countries.
For the fourth quarter, we expect the effective tax rate to revert to roughly 24%.
With that I'll now turn the call back over to Matt Okay. Thanks, Joe Please.
Please turn to slide 17, where I'll go through some closing thoughts.
We expect our consolidated operating income in the third quarter of 2020 to be higher than second quarter.
Normal seasonality trends have returned to our domestic trade lanes and logistics and as previously mentioned, we expect our China service to be near full during the traditional peak season.
We also expect consolidated operating income in the fourth quarter of 2023 to approach the level achieved in the first quarter of this year.
For both the CLEC since helix plus service in the first half of the year, we earned freight rates well above pre pandemic levels for the second half of the year, we expect to continue to earn freight rates well above pre pandemic levels.
In closing Madison had a solid performance in the first half of the year, despite the challenging business environment our.
Our balance sheets in great shape, and we're nearly two thirds funded.
On our new vessel program, Michelle just mentioned.
I feel very good about our market positioning and ocean transportation and logistics and the company's potential earnings generation.
We are beginning to see consistency in our demand levels post pandemic and therefore are evaluating the return of our annual financial outlook with the release of our fourth quarter earnings in February .
With that I will turn the call back to the operator and ask for your questions.
Thank you we will now conduct a question and answer session.
As a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced to withdraw your question Press Star one one.
Please standby, while we compile the Q&A roster.
Our first question is from <unk>.
Yes.
For the fourth quarter.
Thank you Hey, guys I apologize if there is background noise on the airplane.
I think for me as a person that's important question.
Is around.
The pricing.
On the lag.
And feel like it's really.
We've seen some stability in the Shanghai Index, you guys obviously.
Greenlee well there does it feel like we've reached as it relates to how youre pricing freight.
Have we reached sort of a new normal or a flattening point and.
Or the inverse of that is there were some weird things going on but labor on the west coast.
Joe normalization.
The question, we Havent got clarity new vehicle.
This feels like business as usual yet.
Yes, it's a great question Ben.
From our point of view I think the short answer to your question is yes, I think when we look at the elements of demand that we outlined in our expedited service something change during the pandemic period, where previously <unk> been able to fill it see Alex expedited service set at much higher than market freight rates.
In the course of the pandemic, we have seen a lot of cargo move out of the air that was moving.
<unk> and now into.
Our expedited ocean products. So we think that demand has expanded as a result of the pandemic and that level of demand will allow us to fill our two services. We feel consistently for the reasons that I mentioned and based on that demand level <unk> feel that there is a.
Theres a firmness in our pricing as a result of the growing.
Market for our expedited offering so the short answer is yes, we we feel confident in that we've said look if there is a recession.
That could that could mix the economics with frankly, the conversion from airfreight into our expert expedited Ocean is so compelling to our customers for those that are able to do it. We even believe there is an efficiency around that so that's how I would respond to your questions.
All lines.
Alright, I appreciate it and thanks.
Candor on that.
Certainly the next question.
<unk> seen some of your competitors they've offered varieties of expedited services.
Need those businesses or get out of the business.
Do you think there are any opportunities to pick up share maybe I don't know.
Tweak the model a little bag.
Gained some of that business.
The others are walking away.
Yes, I think.
I'll answer that in two ways. The first thing I would say is.
In our view.
If we can consistently operate the fastest and second fastest and most reliable services and the transpacific.
Going to remain or retain the lion's share of the expedited market in fact, the segment we invented over the last 17 years and fulfilled.
Are there opportunities to expand I would say on the margin. There is as we may replace over time, a smaller vessel with a larger vessel.
Either <unk> plus services and there may be incremental capacity that will gateway gain over time.
And frankly.
The rest of the expedited offering as we see it is relatively small so it makes it difficult for other competitors to try to come up against Mattson with our combination of benefits and as we've talked about before elements of our expedited model can be replicated, but all of them cant include.
Including operating at full steam there full speed in.
Our shippers transport.
<unk> facility are the only U S customer funded facility in long Beach.
So we're reasonably confident that we're going to retain the leading position in that market, regardless of what happens on the margins.
Okay I appreciate it thank you.
Yes.
Okay. Thanks, Matt Thanks, Matt.
Thank you for months.
Yes.
Our next question comes from the line of Jack Atkins.
Stephens Inc. Your line is now open Jack Okay, great. Thank you.
And thanks for taking my questions guys. Congrats on a great great quarter.
I guess, Matt if I could maybe pick up where bid left off but obviously wishing him safe travels on the on the flight but.
I guess as you sort of think about the differential between.
Your service and airfreight on a per pound basis, I mean, if I were to pick back pre pandemic. It was airfreight with 10 to 12 times more expensive than then.
In expedited ocean offering like yours.
How would you kind of think about that today is there a way to maybe frame that up roughly yeah sure I can Jack.
Economics remain compelling in the way that you said the way if we look at it more recently.
Our expedited.
Ocean offering is between 10 and 15% of the cost of the equivalent air freight.
But it adds.
Four to five days in the transit so a customer is making a conscious choice.
An opportunity to move at least some of their cargo at a dramatic discount to the airfreight equivalent. So that's why we think when we said we believe it's economically compelling and even if a recession occurs it remains in some ways, just azure or more economically compelling gives us confidence to believe that this level.
Cargo that has migrated from air freight over the last few years is here to stay okay. Okay. No. That's very helpful. And then I guess when we think about the comment that you would expect your.
CLEC services to be roughly full or at full capacity in the third in the third quarter.
Would that imply something around 40000 containers, just if I think back you were probably the only at roughly full capacity in the third quarter last year.
Could you maybe.
Help us think about that just in terms of would that be roughly flat year over year is that the right way to think about it yes.
Yes, although a little less probably in the mid <unk> Jack.
Said annually of 60 to 65000 for each service. So the higher end of that will be $1 30, but the third quarter does get more than 25%. So I'd say I would say in the up in the mid to upper Thirty's.
Accordingly, we have pretty high number maybe.
There's a little bit on exactly what which ships are sailing on in any given 90 day period of time okay.
Roughly comparable to the second quarter just to kind of.
If I think about that so that makes sense.
Last quarter, we were very full as well, yes, okay. Okay that that helps maybe shifting gears to Hawaii for a moment.
Could you kind of talk about what Youre seeing there would you feel like that maybe we're kind of bouncing along the bottom in terms of demand.
Two Hawaii westbound demand.
If I kind of think about this year it looks like youre kind of at a run rate to do.
Volume level, there that it's been quite some time since we've seen something in.
Kind of the run rate that you're at I.
I guess, how would you maybe characterize that.
Sort of the demand situation in Hawaii for for your westbound services, yes.
Yes I.
I don't think we've seen any significant weakness nor have we seen dramatic bumps I would say steady as she goes is how I would describe it I would say the fundamentals as we described and as you hear our reported have been relatively steady.
Our freight demand isn't quite as high as we expected it to be but I think it's.
Adequate and acceptable it's going to be moving kind of sideways is the way we would see it I think theres still a lot of inventory management active inventory management, among our large customers in Hawaii.
They're not going to oversupply the market. So we think steady as she goes is our best bet at this point, Okay, and then Matt I guess as you sort of look out.
Maybe it's 2024 beyond is there anything that makes you a little bit more optimistic about demand trends in Hawaii, whether it's construction activity that may pick up or just any sort of projects on the horizon that would make you feel like that.
We can maybe get back to.
A higher level of demand to Hawaii.
Yes.
It's not obvious that there are significant catalysts I mean, I would say they would be more macro they would be.
Covering U S economy.
Hawaii.
To be very desirable place for people to go and holiday. If you look at the level of spending including the military spending is U S military pivots to the Pacific there'll be a tailwind there should be small but steady.
We see low unemployment.
Those fundamentals will be underpinning, but neither do we see significant catalyst thats going to really take that up we see small growth overtime kind of <unk>.
With Pryor.
Prior history. This is the way I think of it.
Okay.
Then I guess, maybe for my last question before I hand, it back when I think about the logistics business.
Obviously doing really well considering how challenging the broader.
Freight environment is within the lower 48 in the U S I guess.
It would seem like that youre sort of.
<unk> services related to.
China, and Alaska are helping to really drive that business I mean should we think about that kind of seasonal seasonality of the operating income there may be tracking with the seasonality of the CLS ax.
Service and the seasonality in Hawaii excuse me in Alaska.
Okay.
Maybe help us think through what's kind of driving that business quarter to quarter. Because you saw a nice step up of operating income with relatively consistent earnings.
Yes, I think you're on the right track there Jack I think as it relates to.
Our supply chain services, which track our China services.
We do expect very significant parallel so as we get into traditional peak season, there's more cargo moving our supply chain services are more active during those seasonal two middle quarters.
And with regard to Alaska as you know.
We've got.
Summer season is really the same as the construction season, and so we do see traditionally a spike up during those the middle of the year or.
The warmer months, but.
But I'd also say that we are seeing we are providing on the margin a little bit more activity to the north slope, which is a relatively new segment that we're focused on.
That moves in some ways outside of the more traditional construction cycle for pipe and other materials and so I would say largely those two verticals that you mentioned within Matson logistics are are welcome expansions to our portfolio over the last few years and we see those as continuing.
Okay. Okay. Thanks, again for the time guys and congratulations Jack.
Jack Thank you Jack.
Thank you.
Alright.
Okay.
Alright, everyone. Please standby, while we compile our Q&A roster and as a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one one thank you.
Okay.
Our next question comes from the line of Jake lacks with Wolfe Research. Your line is now open.
Hey, thanks for the time.
Hi, Jay.
So I guess I wanted to come back to an earlier question. There was some labor uncertainty at the West coast in the quarter and now we're seeing labor uncertainty in Canada is this helping your demand levels right now or do you think this is entirely the value proposition that you talked to earlier and then I guess just on the West Coast are you seeing volume shift.
Given the type of agreement.
Yes, so with regards to the labor agreement.
I think if you look at our SSAT joint venture, which was not the root of your question, we had seen because of the delay.
The renewal of the contract.
Did see a lot of the other international Ocean carriers.
And their customers.
Move cargo differently over the west coast to try to avoid any congestion related to the labor disruption that reflected in lower volumes to the west coast is as services went all water or other through the Panama. Other other ports of loading that benefited from the diversion of the cargo our view is that as.
We.
We're now in the process of the contract being ratified which we expect it to be ratified that cargo will generally migrate back.
And some of that will be permanently lost but as it relates to the balance of this year.
Freight volume on the West coast, because we are in a relatively muted peak season now we're not expecting any dramatic changes sort of in the second half of the year.
From from what we saw in the first half of the year. So.
But to your question about whether we think we benefited from any.
Ourselves of the uncertainty I would say the answer to that is no I would say most of the expedited market.
He wants to go to the West coast It wants to be able to as soon as it's just discharged go to teen trucker or.
Other method by which to.
Pick it up and move it to interior points, so theres not a lot of that cargo.
In our view that was that we benefited from it was just more of the core E Commerce and E goods in.
Stuff that was moving pretty reliably on our services over the last quarter.
Got it that's helpful and then just.
On guidance it assumes a pretty material step down in earnings for Q.
What do you think that the biggest driver of that and do you think just seasonality for the business is a little more pronounced since adding yes, I think I think you are right. It's just the seasonality and if you look back at <unk> services, although were.
Admittedly a little bit different than we were going into the pandemic.
I would say, we continue to expect that seasonality factor.
The first week or two of October we will expect all the holiday shipments to be on the water or be delivered and available for the Christmas and holiday selling seasons, and so it's really more of a reversion to historical patterns and really has almost no.
Nothing to do with demand factors that are unique to match it or just a market reaction.
Great great.
Great I appreciate the time.
J J, thanks very much.
Thank you.
<unk>.
Okay.
Okay.
Sean I am showing no further questions at this time I would now like to turn the conference back to Matt Cox for closing remarks.
Okay. Thanks, operator, I just wanted to say thanks for joining the call today, we look forward to catching up with everyone on next quarter's earnings call Aloha.
Okay.
Today's conference call. Thank you for participating you may now disconnect.
Okay.
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Yes.
Okay.
Okay.
Sure.
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