Q3 2023 Matson Inc Earnings Call
These risk factors are described in our press release and presentation.
Fully detailed under the caption risk factors on pages 14 to 24.
Our Form 10-K filed on February 24th 2023.
And in our subsequent filings with the SEC.
Also note that the date of this conference call is October 32023, 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 will now turn the call over to Matt.
Okay. Thanks, Lee and thanks to those on the call.
Starting on slide three.
<unk> Ocean transportation and logistics business segments continued to perform well despite a challenging business environment in relatively difficult economic conditions impacting the U S consumer.
For the third quarter within Ocean transportation, our China service experienced solid freight demand. Despite the muted peak season in the transpacific trade lane, but generated lower year over year volume and freight rates, which were the primary contributors to the year over year decline in our annual and.
Our consolidated operating income.
We also saw lower year over year volumes in Hawaii, Alaska, and Guam compared to the year ago period.
In logistics operating income decreased year over year, primarily due to a lower lower contributions from transportation brokerage.
I'll now go through the third quarter performance of our trade lanes SSAT and logistics. So please turn to the next slide.
Hawaii container volume for the third quarter decreased one 9% year over year, primarily due to lower general demand.
Volume in the third quarter of 2023 was 0.8% higher than the volume achieved in the third quarter of 2019.
Please turn to slide five.
In August.
We experienced a significant economic disruption from devastating wildfires.
According to your Hero September September.
September economic report tourism to the islands may not fully recover in the next several years and the rebuilding of homes and businesses may take many years demand for construction workers is expected to increase with the rebuilding efforts in lahaina and other areas in Maui.
In the near term match and expect economic growth in Hawaii to moderate as tourism and visitor arrivals slowly rebound from the effects of the Maui wildfires.
Moving to our China service on slide six.
Matt since volume in the third quarter of 2023 was one 3% lower year over year, primarily due to no <unk> service in the quarter, partially offset by higher <unk> plus volume.
The higher <unk> plus volume in the quarter compared to the prior year period was a result of higher utilization on the vessels and greater capacity of the <unk> plus fleet as you may recall in the third quarter of last year, we began to see a path to normalization from the Penn Derrick pandemic driven highs as congestion.
Throughout the supply chain eased.
During the quarter, we continued to see solid demand in the e-commerce and eat goods verticals and stable demand from the government vertical.
We achieved average freight rates in the quarter that were lower than the year ago period, but well above those achieved in the third quarter of 2019.
Matson continue to realize the significant rate premium over the CSI in the third quarter of 2023.
Please turn to slide seven.
Currently in the Trans Pacific marketplace, we continue to see a reduction of deployed capacity in light of lower volumes as a result of lower consumer demand for region.
We continue to differentiate our China service from the others in the trade Lane with a high degree of reliability and consistency and 11 day Ocean Transit time, and 24 hour availability at the unique shippers transport off dock facility.
At 10% to 15% of the cost of Airfreight, Our China service continues to offer a significant value proposition for airfreight customers with only 5% to seven days of additional transit time.
And for those customers looking to reduce their products carbon footprint, while saving a considerable amount of money our customers tell us that switching from air freight to our expedited ocean freight product reduces their cotwo emissions by approximately 95%.
Looking forward absent an economic hard landing in the U S. We expect trade dynamics in 2024 to be comparable to 2023 as consumer related spending activity is expected to remain stable.
Furthermore, regardless of the economic backdrop, we continue to expect to earn a significant rate premium to the Sci Fi, reflecting our fast and reliable ocean services and unmatched destination services.
Please turn to the next slide.
In Guam Madison's container volume in the third quarter of 2023 decreased one 9% year over year. The decrease was primarily due to lower general demand vol.
Volume in the third quarter of 2023 was 12, 8% higher than the level achieved in the third quarter of 2019.
In the near term, we expect continued improvement in the quanta economy with low unemployment rate and a modest increase in tourism from low levels.
Please turn to the next slide.
In Alaska <unk> container volume for the third quarter of 2023 decreased nine 1% year over year. The decrease was due to lower export seafood volume from a X lower northbound volume due to lower retail related demand and lower south.
Volume, primarily due to lower domestic seafood volumes.
Approximately 85% of the year over year volume decline as a result of lower seafood volumes and the X and south out of services.
Year to year, there can be rather meaningful changes in the summer volumes, depending on the strength of the seasonal Alaskan catch.
Compared to the third quarter of 2019 volume in the quarter was 12, 9% higher.
In the near term, 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 turn to slide 10.
Our terminal joint venture SSAT declined $22 1 million a year over year to $1 3 million.
The lower contribution was primarily due to lower <unk> revenue and lower lift volume.
So significantly less to merge revenue in the quarter due to easing port congestion.
And lower lift volume consistent with lower year over year demand in the Transpacific service.
In the fourth quarter of 2023, we expect lift volume to reflect a relatively challenging environment for the Trans Pacific Trade Lane.
Turning now to logistics on slide 11.
Operating income in the third quarter came in at $13 9 million.
Or $6 $2 million lower than the result in the year ago period.
The decrease was primarily due to a lower contribution from transportation brokerage.
In the near term, we expect a mix of activity across to logistics lines of business. We expect continued growth in Alaska to be supportive of our freight forwarding demand, we expect slight supply chain management to track our China service.
And for transfer chip at Pacific brokerage excuse me and for transportation brokerage, we expect continued near term challenges with lower freight demand and excess capacity.
And with that I will now turn the call over to Joel for a review of our financial performance Joel. Okay. Thanks, Matt. Please turn to slide 12 for a review of our third quarter results from.
For the third quarter consolidated operating income decreased $203 $2 million year over year to $132 1 million with lower contributions from Ocean transportation and logistics of 97 million and $6 2 million respectively.
The decrease in Ocean transportation operating income in the third quarter was primarily due to lower freight rates in China, and a lower contribution from SSAT, partially offset by higher volume and the <unk> plus service and lower operating costs and expenses, including fuel related expenses primarily related.
To discontinuation of the <unk> service, which occurred in September of last year.
As Matt noted the decrease in logistics operating income was primarily due to a lower contribution from transportation brokerage.
We had interest income of $9 3 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 the prior year period.
Interest expense in the quarter decreased $2 6 million year over year due to the decline in outstanding debt as compared to the prior year period.
The effective tax rate in the quarter was 14, 5% compared to 24% 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 six $568 5 million from which we used $81 5 million to retire debt.
$168 9 million on maintenance and other capex.
$102 6 million on new vessel, capex, including capitalized interest and owners' items.
$4 1 million in cash deposits and interest income in the Ccs net of withdrawals or milestone payments.
$24 5 million on other cash outflows, while returning $253 $2 million to shareholders via dividends and share repurchase.
Please turn to slide 14 for a summary of our share repurchase program and balance sheet.
During the quarter, we repurchased approximately two 3 million shares for a total cost of $25 $8 million, including taxes.
For the first nine months of the year, we repurchased one 6 million shares for a total cost of $110 3 million.
Since we initiated our share repurchase program in August 2021 through September 30 of this year, we have repurchased 9 million shares or nearly 21% of our stock for a total cost of over $705 million as.
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 organic or inorganic growth investment opportunities.
Turning to our debt levels, our total debt at the end of the third quarter was $450 3 million a reduction of $12 1 million from the end of the second quarter.
I am now going to walk through an update on a couple of financial items. So please turn to the next slide.
The cash balance in the CCF at the end of the quarter with $591 6 million.
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 cash and cash equivalents currently on our balance sheet interest income on cash and CCF deposits that may be earned in future years and also excludes the 2022 tax year IRS refund of $119 million that we still expect to receive.
On vessel construction payments, we continue to expect to make our next milestone payment in the second quarter of next year.
Lastly for the fourth quarter, we anticipate an effective tax rate of approximately 23% versus the 14, 5% tax rate in the third quarter I'll now turn the call back over to Matt. Okay. Thanks, Joel Please turn to slide 16, where I'll go through some closing thoughts.
We expect consolidated operating income in the fourth quarter of 2023 to be higher than the level achieved in the first quarter of 2023.
Normal seasonality trends have returned to our domestic trade lanes and logistics for our China service. We expect continued solid freight demand with some seasonality in the post holiday timeframe.
We also expect <unk> and <unk> plus freight rates in the fourth quarter of 2023 to be well above pre pandemic rates.
Lastly, as I mentioned in our last earnings call. We are beginning to see consistency in our demand levels post pandemic and therefore continue to evaluate the return of our annual financial outlook with the release of our fourth quarter earnings in February.
And with that I will turn the call back to the operator and ask for your questions.
Thank you.
A reminder to ask a question. Please press star one one on your phone and wait for your name to be announced.
Your question. Please press star one one again.
<unk> is the compile the Q&A roster.
One moment please for our first question.
Okay.
Our first question will come from Jack Atkins of Stephens. Your line is open.
Okay, great. Good afternoon, guys and congratulations on executing really well in this tough environment.
Thanks, Jeff.
I guess, Matt if I could maybe kind of start with your one of your closing comments, there which is <unk>.
Fourth quarter consolidated operating income being above the first quarter.
I guess directionally that helps a lot, but I guess when I go back and think about kind of normal seasonality sort of pre COVID-19.
Third quarter to fourth quarter, typically saw earnings decline call, it 45% or 50% something like that just with normal seasonality.
Would there be any reason why you would expect this year to be materially different and if so could you maybe kind of help us think that the.
And takes there.
Yeah sure happy to try to do that Jack So I would say firstly, we still do expect the.
The seasonality that we saw pre pandemic.
Return.
So.
As we as you know in our business.
Second and third quarters are our busiest and our fourth and first are weaker just because of the amount of cargo in the market given the seasonality of purchasing and holiday periods in our market. It always has been and it always will be that way to a certain extent, but one of the verticals Jack that might be just a bit different.
Coming out of the pandemic than going in.
As we've talked about this on last quarter's call was the growth in E Commerce and there is an element we believe although we don't know exactly what it is yet but.
Some of that e-commerce moves year round, there is less seasonal pattern, it's recurring items that people purchase rather than holiday gifts or back to school.
Seasonal element to it and so that may explain why the differences both frankly in our fourth and first quarters may not be as seasonal as we've seen pre pandemic, but we still overall affect the seasonality pattern.
Remain pre and post pandemic if that helps.
Okay. So so if anything maybe there is a little bit less seasonality and I understand we're still trying to.
Understand what the new normal looks like but perhaps maybe theres a little bit less seasonality in the business going forward than there has been in the past just based on that E Commerce factor.
That's right, yes, okay, Okay got it.
That's helpful. I also love the baby.
Touch on a comment that you made matter around the kind of the thoughts around the 2020 for Trans Pacific trade.
I think one of the questions. We get a lot is just folks kind of trying to understand what's happening with <unk>.
Inventory balances and how we kind of reached a new normal from an inventory destocking perspective.
I guess what are your customers, telling you about about how to think about that going into next year. It sounds like theyre expecting relatively stable volume, but do you feel like we're kind of through the Destocking phase of this.
Call it year year and a half.
Yes.
I'm going to answer that in two ways Jack to answer your question directly we are hearing from many of our customers that this inventory overhang that they had when when there was a very sharp.
The decline in the year ago period, most of our retailers have worked through those inventories.
So.
There are exceptions, there are skus or product lines that are still surplus on but our general feeling is that retailers have done a really good job of.
Working through their overhang, but the other context point here at the risk of over answering your question Jack as well.
Where.
From our perspective.
We see the trans Pacific market and.
In our prepared comments, we refer to 2019 as a benchmark and of the world changed over the last few years and so if you look at the imports into the United States for the first nine months of 2023.
Compare that to the first nine months.
2019.
And cargo volumes into the United States.
East Coast West Coast from all foreign origins.
Close to 7% higher than 2019, so while it's true that there were significant declines in the euro year over year period.
When and how we lapped the bad news just from a context standpoint.
When we talked about seeing a new normal and are we there we see the inventories have largely been absorbed these excess inventories to your first part of your question and.
And we see growth from that 2019.
Those levels. So it's just another data point in our own thinking about us having reached an equilibrium and it is also why we think that 2024 is going to look a lot like 2023, given those underlying factors. So just again at risk of over answering your question I wanted to provide some context into our thinking.
That's really helpful. Maybe one more for me and I'll hand, it back and jump back in queue just to make sure everyone Ken can jump in but.
Yes, we think about we're trying to kind of frame up the quote unquote, new normal one area of the business that's underperforming relative to.
Pre COVID-19.
As the SSA joint venture and obviously it had some really good years there during during the supply chain disruption, but it's losing a little bit of money now.
Quarterly basis.
How do you think about the normalized earnings power for that.
Part of your business and I guess what.
What.
The level of import activity do we need to see to be able to get back to.
A stable level of profitability. There do you think I know you don't own that asset outright I am just trying to kind of get a gauge for that.
Yes, so first of all I'll say, firstly that we're going to have more to say about that in our year end earnings call, but I can I can give you my thoughts at this point so.
2023 has has we do.
Don't think not been a year yet of normalization in the in the joint venture I think we will see a normalization occurring in 2024 and there were a couple of reasons for that.
First of all this inventory overhang.
That that you've put in.
In the year ago period, a lot less cargo in into the overall market has been impacted but we also had a couple of other factors that we think we're suppressing.
Volumes during that period, one was the <unk> contract that was as you know extended finally now has been ratified and in place and we think that cargo was diverted as our customers kind of de risked by bringing cargo either through the Suez all water route from Asia or in Panama.
Al.
For 2024, I think Theres, a couple of things that should happen first of all the inventory overhang will be largely behind us there are some issues with the Panama Canal.
With regard to the drought, which is causing on the margin a reduction of effective capacity for the U S.
Panama All water services from Asia, and then thirdly, there is a contract renewal for the law, which will occur in 2024.
Some of the de risking that our customers did with Dirw renewal in 2023, we think are likely to play and be a factor on the margin again derisking. Those are I think factors that are going to allow for a more normal.
Level of performance.
In 2024 for the SSAT joint venture, but obviously not at levels pandemic area levels, where there was significant car.
Argo that was that was on the terminals and unable to be picked up by their customers because their warehouses were full so you would probably want to look back to an earlier year of SSAT profitability.
The pandemic.
I don't have those numbers in front of me and again, we'll have more to say about that in the next quarters call. Okay. That's really helpful. Matt. Thank you for that context ill jump back in queue. Thank you.
Sure.
Thank you.
And one moment. Please next question.
And our next question will come from Jacob <unk> of Wolfe Research. Your line is open.
Hey, Thanks for your time.
Jake.
Youre trying to volumes took another step up to around 39000 containers. This quarter. So it seems like you're tracking well above the one <unk> to 130000 annual run rate you gave a couple of quarters ago is this sustainable or how should we think about this moving forward.
Yes, Jake it's Joel <unk>.
Strong quarter for us, but we still we still think there'll be seasonality. So the fourth quarter will have some light periods of time relative to the third quarter. So I would say don't don't just take our 39000 for the third quarter multiplied times, something near four and assume Thats. The annual rate. So we're still sticking with the 120 130 total.
Volume for the 120 130000 for the whole year, we will see how the fourth quarter plays out and if we feel like adjusting that in 2024 basis. We can talk about that in February but that definitely.
That's not going to be the run rate every quarter.
Sounds good and then it looks like share repurchases slowed a little in the quarter I guess, how should we think about the cadence there moving forward.
Yes, I mean, we're going to we're going to continue to be steady buyers and so if you look at our last 12 last 12 months nine months through the course of the year, that's probably a decent run rate for us.
Annual basis, and there'll be some times, we were up a little bit down a little bit on that so I wouldn't read much into it other than just we're encouraging all investors take a long term view our view is long term and we want to be steady on a long term basis.
Okay, and then one last one for me.
I know you aren't giving guidance today, but after 2024 trade dynamic is similar to 2023 does that mean madsen's earnings should be stable or are there some puts and takes for Madison, specifically that youre able to call out.
Yes, we haven't.
We haven't.
Put all of our own thoughts yet together frankly on 24, we did comment that we think that the transpacific trade in one of our more important drivers of earnings.
Is going to be.
Look a lot like it did this year, which was frankly pretty good.
We talked about the beginning of a normalization of SSAT, our joint venture that will be up there could be others that are down, but we're saying we'll have more to say I don't know Joel would you add anything to that.
There'll be some pieces up and down a little bit, but overall, we're saying, it's shaping up to be a year that looks similar to 2023.
And we made that comment specific to operating income.
Got it alright, thanks for your time.
Okay. Thank you thank.
Thank you.
One moment. Please next question.
And our next question will come from Ben Nolan of Stifel. Your line is open.
Hey, guys.
Hi, Ben I have a handful.
I wanted to circle back on the on the China volumes and Joel I appreciate that.
It's seasonal.
But I think Matt you made a comment in the prepared remarks, when referencing the CLS ax that.
There was greater capacity on it I was curious if you could flesh that out a little bit.
In terms of.
Are you now.
Given the chartered in vessels or whatever you know able to carry a little bit more than <unk>.
It had been able to.
Ben its Joel.
Not significant different what happens sometimes is in any given quarter. When you have 12 or 13 sailings you may have a couple of your larger ships.
<unk> oriented three times versus the smaller ships. So from an overall quarter basis, we don't expect it to be significantly different where we're at today is we have five ships on charter today.
For our <unk>.
Similar size one slightly larger.
Operator: These risk factors are described in our press release and presentation and are more fully detailed under the caption risk factors on pages 14 to 24 of our form 10K, filed on February 24, 2023, and in our subsequent filings with the SEC.
Of those four but then we have shifted a little bit smaller so it oftentimes depends on how often that smaller ship hits in any given quarter.
I'll also note that we chartered six ship that will take on here in a few weeks to have an additional ship to maintain the highest level of on time performance that we can then that larger six ship will be similar SaaS. The other four so.
Operator: Please also note that the date of this conference call is October 30, 2023, and any four looking statements that we make today are based on assumptions as of this date. We undertake no obligation to update these four looking statements.
I think any given quarter that capacity is going to really boil down to how many times that smaller ship sales in at 13, 12 or 13 week quarter.
Okay.
Matt: I will now turn the call over to Matt. Okay, thanks, Lee, and thanks to those on the call. Starting on slide three, Matson's ocean transportation and logistics business segments continued to perform well despite a challenging business environment and relatively difficult economic conditions impacting the US consumer. For the third quarter, within ocean transportation, our China service experience solid freight demand despite the muted peak season in the Trans-Pacific trade lane, but generated lower year-over-year volume and freight rates, which were the primary contributors to the year-over-year decline in our annual in our consolidated operating income. We also saw lower year-over-year volumes in Hawaii, Alaska, and Guam compared to the year-ago period. In logistics, operating income decreased year-over-year primarily due to a lower contributions from Trans-Pacific brokerage.
Well with that two things first of all adding ethics Yep I would assume.
Youre not releasing one or even the one that youre chartering is a little bit bigger.
Should add capacity there as long as there is demand that 120 to 130 should have some upside to that is that fair and then along those lines how much of that.
Shanghai based expedited market do you think that you captured right now and is there room to go.
You did have a little bit more capacity.
Yes, Ben this is Matt.
Two the two parts of your question the six ship, we're adding is primarily.
Intended to be used to always have.
Have a ship to be able to sail on time, regardless of if there's a weather event or a port closure. So it's really more about ensuring we have the sum the same number of sailings and so the primary purpose is not to get an extra six or 10 voyages in the year, but rather to ensure that the <unk>.
Matt: I will now go through the third quarter performance of our trade lanes, FFAT, and logistics, so please turn to the next slide. Hawaii container volume for the third quarter decreased 1.9% year-over-year, primarily due to lower general demand. Volume in the third quarter of 2023 was 0.8% higher than the volume achieved in the third quarter of 2019.
<unk> two voyages, we have are nearly perfect and so it's really more of an insurance policy. So that we can look at and our customers in the eye and say we have a reserve ship, we're not going to have a missed voyage and we're sort of taking the exact opposite tack that the rest of the market seems to be taking so just to clarify that one aspect.
Matt: Please turn to slide five. In August, Maui experienced a significant economic disruption from devastating wildfires. According to you hero, September's economic report tourism to the islands may not fully recover in the next several years, and the rebuilding of homes and businesses may take many years. Demand for construction workers is expected to increase with the rebuilding efforts in Lahaina and other areas in Maui. In the near-term, matching expects economic growth in Hawaii to moderate as tourism and visitor arrivals slowly rebound from the effects of the Maui wildfires.
Of the of the question and then Joel do you want to comment on the second.
So the.
The comment I was making with things because you asked about the charters that was all specific to <unk> plus 5% to six ships are the same is true on our regular CLS services. Our Jones Act not all those five ships have the same capacity either and we have sometimes a smaller vessel. So it also at the same point about the capacity in <unk>.
Sailings for the smaller vessels in any quarter can skew the capacity both for <unk> and <unk> plus.
Right and with respect to the.
Amount of the market share that you think that you've captured.
Matt: Moving to our China service on slide six, Madison's volume in the third quarter of 2023 was 1.3% lower year-over-year, primarily due to no CCX service in the quarter, partially offset by higher CLX plus volume. The higher CLX plus volume in the quarter compared to the prior year period was a result of higher utilization on the vessels and greater capacity of the CLX plus fleet. As you may recall, in the third quarter of last year, we began to see a path to normalization from the pandemic-driven highs as conjections throughout the supply chain.
Yes, I think we're very focused on that <unk> market share each week coming out of Shanghai, We still feel like our <unk> plus service is the number one number two services capturing the majority of that but not all but not all of that but we do believe we've got the majority of the expedited freight out of Nemo Shanghai on a weekly.
Okay great.
And then Joe I was going to ask on the.
The $119 million tax refund.
Waiting on that for a while you have any clarity I mean do you expected by the end of the year or is there some sort of dispute associated with that.
Matt: East. During the quarter, we continued to see solid demand in the e-commerce and e-goods verticals and stable demand from the garments vertical. We achieved average freight rates in the quarter that were lower than the year ago period, but well above those achieved in the third quarter of 2019. Matson continued to realize a significant rate premium over the SCFI in the third quarter of 2023.
No.
Can't say.
We don't know when we're going to get it we do still have the highest level of confidence that we will get it whether it comes before the year end or not we just don't know our understanding it's just taking time to process it within the IRS.
Related we think to the CCF deposit that we made that we've talked about that was $565 million last year. So it's a <unk>.
Effected amount, there and because that doesn't show up in the automated IRS systems. It has to be done manually and it's just taking time for them to review and make that adjustment manually is our understanding.
Matt: Please turn to slide 7. Currently, in the Trans-Pacific Marketplace, we continue to see a reduction of de Floyd capacity and light of lower volumes as a result of lower consumer demand for returns. We continue to differentiate our China service from the others in the trade lane with a high degree of reliability and consistency in 11-day ocean transit time and 24-hour availability at the unique Shippers Transport Off-Doc facility. At 10-15% of the cost of air freight, our China service continues to offer a significant value proposition for air freight customers with only 5-7 days of additional transit time.
Okay. So if we're waiting on the IRS it can be a few more years got it.
Just kidding there.
Technical <unk>.
Two more if you will.
I was going to add and then there is the reengineering.
Switching over to LNG.
The ships.
We haven't really heard much about that lately just curious how that process is going in and.
How youre thinking about it and the learnings from that.
Yes. This is Matt then so.
Matt: And for those customers looking to reduce their product's carbon footprint while saving a considerable amount of money, our customers tell us that switching from air freight to our expedited ocean freight product reduces their CO2 emissions by approximately 95%. Looking forward, absent in economic hard landing in the US, we expect trade dynamics in 2024 to be comparable to 2023 as consumer-related spending activity is expected to remain stable. Furthermore, regardless of the economic backdrop, we continue to expect to earn a significant rate premium to the SCI-FI, reflecting our fast and reliable ocean services and unmatched destination services.
The first vessel.
We have installed LNG on that it's now operating.
LNG is.
Daniel K Inouye.
And it was.
Went through a conversion process, adding tanks and manifolds and all of it as you know the engine was was already.
That too.
Consume or burn LNG fuel when we ordered it so that vessels out in its own way the second vessel.
Is going to go through the gas conversion or a gas engine conversion.
In the shipyard now.
And we have another vessel going in next year in 2024, we'll talk more about the timing of that but we're very much underway with our conversion projects. In addition to the three new vessels that are not yet cutting steel, but that will be delivered in a couple of years. Those will also be LNG ready. So we do have plan is rolling out just the way we.
Matt: Please turn to the next slide. In Guam, matches container volume in the third quarter of 2023 decreased 1.9% year-over-year. The decrease was primarily due to lower general demand. Volume in the third quarter of 2023 was 12.8% higher than the level achieved in the third quarter of 2019. In the near term, we expect continued improvement in the Guam economy with a low unemployment rate and a modest increase in tourism from low levels.
We expected.
The timing very consistent with our original timing on the.
The conversions.
Great and then and then lastly, I was going to ask as it relates to Uruguay.
And.
Obviously, there is that.
<unk> tragedy in Maui.
As we think about that longer term and.
Is this something that just purely from a from a freight and volume perspective.
Matt: Please turn to the next slide. In Alaska, matches container volume for the third quarter of 2023 decreased 9.1% year-over-year. The decrease was due to lower export seafood volume from AAX, lower northbound volume due to lower retail-related demand, and lower southbound volume primarily due to lower domestic seafood volumes. Approximately 85% of the year-over-year volume decline is a result of lower seafood volumes in the AAX and southbound services. Year-to-year, there can be rather meaningful changes in the summer volumes depending on the strength of the seasonal Alaska.
That could actually lift volumes for you guys is rebuilding happens and so forth.
And in the near term there is there is some headwinds from tourism, but just trying to think through.
What might be the volume impacts of that for you.
Yes.
It's a sensitive subject because obviously, we're focused on the tragedy and we should never happened.
But in the short term I think you've got it right, it's going to be a situation where in the near term there are some headwinds.
But over the longer term.
The rebuild process, we expect as we mentioned in our prepared comments.
The.
Coverage will occur in the medium term the rebuilding could occur over the longer term. So but eventually I think there will be a rebuild I know the residence in Maui and the.
Matt: Catch. Compared to the 3rd quarter of 2019, volume in the quarter was 12.9% higher. In the near term, 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.
<unk> Maui wants it to be rebuilt and that will translate into freight volumes at some point into the future.
Got it.
Right.
Again, thanks for letting me.
Matt: Please turn to slide 10. Our terminal joint venture, S.S.A.T, declined $22.1 million a year over year to $1.3 million. The lower contribution was primarily due to lower-demerge revenue and lower-lift volume. S.S.A.T, saw significantly less-demerge revenue in the quarter due to easing port congestion and lower-lift volume consistent the lower-year-year demand in the Trans-Pacific service. In the fourth quarter of 2023, we expect lift volume to reflect a relatively challenging environment for the Trans-Pacific trade lane.
Five year I appreciate it good quarter guys.
Okay. Thanks, Matt Thank you Matt.
Okay.
And again to ask a question. Please press star one on your phone and wait for your name to be announced to withdraw your question. Please press star one again.
Standby as we compile the Q&A roster.
And again to ask a question. Please press star one on your phone and wait for your name to be announced.
And speakers I am seeing no further questions in the queue.
Matt: Turning now to logistics on slide 11, operating income in the third quarter came in at $13.9 million or $6.2 million lower than the result in the year-ago period. The decrease was primarily due to a lower contribution from transportation brokerage. 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 our freight forwarding demand. We expect slight supply chain management to track our China service. And for transportation brokerage, we expect continued near-term challenges with lower freight demand and excess capacity.
I would now like turn the conference back to the CEO, Matt Cox for closing remarks.
Okay. Thanks, operator, thanks for listening in on our call today, and we look very much forward to seeing everyone on our year end call Aloha.
This concludes today's conference call. Thank you all for participating you may now disconnect and have a pleasant day.
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Joel: And with that, I will now turn the call over to Joel for a review of our financial performance. Joel. Okay, thanks, Matt.
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Joel: Please turn to slide 12 for a review of our third quarter results. For the third quarter, a consolidated operating income decreased $203.2 million year-over-year to $132.1 million with lower contributions from ocean transportation and logistics of $97 million and $6.2 million respectively. The decrease in ocean transportation operating income in the third quarter was primarily due to lower freight rates in China and a lower contribution from SSAT partially offset by higher volume in the CLX plus service and lower operating costs and expenses, including fuel-related expenses, primarily related to discontinuation of the CCX service which occurred in September last year.
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Joel: As Matt noted, the decrease in logistics operating income was primarily due to a lower contribution from transportation brokerage. We had an interest income of $9.3 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 the prior year period. Interest expense in the quarter decreased $2.6 million year-over-year due to the decline in outstanding debt as compared to the prior year period.
Joel: The effective tax rate in the quarter was 14.5% compared to 20.4% in the year ago period, in the next slide. The slide shows how we allocated our trailing 12 months of cashflow generation. For the LTM period, we generated cashflow from operations of approximately $568.5 million from which we used $81.5 million to retire debt, $168.9 million on maintenance and other catbacks, $102.6 million on new vessel catbacks, including capitalized interest and owner's items, $24.1 million in cash deposits and interest income in the CCF, net of withdrawals for milestone payments, $24.5 million on other cash outflows, while returning $253.2 million to shareholders via dividends and sharey purchase.
Joel: Please turn to the slide 14 for a summary of our sharey purchase program and balance sheet. During the quarter, we repurchased approximately 0.3 million shares for a total cost of $25.8 million including taxes. For the first nine months of the year, we repurchased 1.6 million shares for a total cost of $110.3 million. Since we initiated our sharey purchase program in August 2021 through September 30th of this year, we have repurchased 9 million shares or nearly 21% of our stock for a total cost of over $7.5 million.
Joel: 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 organic or inorganic growth investment opportunities. Turning to our debt levels, our total debt at the end of the third quarter was $450.3 million, a reduction of $12.1 million from the end of the second quarter.
Joel: I'm now going to walk through an update on a couple of financial items, so please turn to the next slide. The cash balance and the CCF at the end of the quarter was $591.6 million. 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 cash and cash equivalence currently on our balance sheet, interest income on cash and CCF deposits that may be earned in future years, and also excludes the 2022 tax year IRS refund of $119 million that we still expect to receive.
Joel: On vessel construction payments, we continue to expect to make our next milestone in the second quarter of next year. Lastly, for the fourth quarter, we anticipate an effective tax rate of approximately 23%, versus the 14.5% tax rate in the third quarter.
Matt: I'll now turn the call back over to Matt. Okay, thanks, Joel.
Matt: Please turn to slide 16. We'll all go through some closing thoughts. We expect the solidated operating income in the fourth quarter of 2023 to be higher than the level achieved in the first quarter of 2023. Normal seasonality trends have returned to our domestic trade lanes and logistics. For our China service, we expect continued solid freight demand with some seasonality in the post-holiday time frame. We also expect CLX and CLX plus freight rates in the fourth quarter of 2023 to be well above pre-pandemic rates, last week.
Matt: Lastly, as I mentioned in our last earnings call, we are beginning to see consistency in our demand levels post-pandemic and therefore continue to evaluate the return of our annual financial outlook with the release of our fourth quarter earnings in February.
Operator: And with that, I will turn the call back to the operator and ask for your questions. Thank you. As a reminder to ask a question, please press star 11 on your phone and wait. Thank you for your name to be announced. To enjoy your question, please press star 11 again. Stand by as we compile the Q&A roster. One moment please for our first question.
Jack Atkins: Our first question will come from Jack Atkins of Stevens. Your line is open. Okay. Great. Good afternoon guys and congratulations on just executing really well in this tough environment. Thanks, Jack. So I guess, you know, Matt, if I could maybe kind of start with your one of your closing comments there, which is around fourth quarter, Catholic operand, come being above the first quarter. I guess directly that helps a lot, but I guess when I go back and think about kind of normal seasonality sort of pre-COVID, third quarter to fourth quarter, typically saw earnings, you know, decline, call it 45 or 50% something like that just with normal seasonality.
Jack Atkins: You know, would there be any reason why you would expect this year to be materially different if so, could you maybe kind of help us think that the puts and takes there? Yeah, sure. We happy to try to do that, Jack. So I would say firstly, we still do expect the seasonality that we saw pre-pandemic return. And so as we, as you know, in our business, the second and third quarters are our business and our fourth and first are weaker just because of the amount of cargo in the market given the seasonality of purchasing.
Jack Atkins: And holiday periods in our market, it always has been and it always will be that way to a certain extent. But one of the verticals, Jack, that might be just a bit different going coming out of the pandemic and going in as we've talked about this last quarter's call was the growth of e-commerce. And there's an element we believe, although we don't know exactly what it is yet, but there are some of that e-commerce moves year round.
Jack Atkins: There's less seasonal pattern. It's recurring items that people purchase rather than holiday gifts or back to school or the seasonal element to it. And so that may explain why the difference is both frankly in our fourth and first quarters may not be as seasonal as we've seen pre-pandemic, but we still overall affect the seasonality pattern to remain pre and post-pandemic if that helps. Okay, so if anything, maybe there's a little bit less seasonality and I understand we're still trying to understand what the new normal looks like, but perhaps maybe there's a little bit less seasonality in the business going forward and there has been in the past just based on that on that e-commerce factor.
Jack Atkins: That's right, yeah. Okay, got it. That's helpful. I'd also love to maybe touch on a comment that you made, Matt, around the thoughts around the 2024 Trans-Pacific Trade. I think one of the questions we get a lot is just folks trying to understand what's happening with inventory balances and have we kind of reached a new normal from an inventory destocking perspective. I guess what are your customers telling you about how to think about that going into the next year?
Jack Atkins: It sounds like they're expecting relatively stable volume, but do you feel like we're kind of through the destocking phase of this last year or year and a half? Yeah, I'm going to answer that in two ways, Jack. To answer your question directly, we are hearing from many of our customers that this inventory overhang that they had when there was a very sharp decline in the year ago period. Most of our retailers have worked through those inventories.
Jack Atkins: And so now there are exceptions and there are skews or product lines that they are still surface on, but our general feeling is the retailers have done a really good job of working through their overhang. But the other context point here at the risk of over-answering your question, Jack, is where from our perspective, how we see the Trans-Pacific market. And in our prepared comments, we refer to 2019 as a benchmark into the world changed over the last few years.
Jack Atkins: And so if you look at the imports into the United States for the first nine months of 2023, compare that to the first nine months of 2019. And cargo volumes into the United States, both East Coast, West Coast from all foreign origins, is close to 7% higher than 2019. So while it's true that there were significant declines in the year-over-year period and when and how we left the bad news, just from a context standpoint, when we talk about seeing a new normal and are we there, we see the inventories have largely been absorbed, these excess inventories to your first part of your question.
Jack Atkins: And we see growth from that 2019 those levels. So it's just another data point in our own thinking about us having reached an equilibrium. And it's also why we think that 2024 is going to look a lot like 2023 given those underlying factors. So just again, at risk of over-answering your question, I want to provide some context into our think. No, that's really helpful. Maybe one more for me and I'll hand it back and jump back in queue just to make sure everyone can jump in.
Jack Atkins: But I guess we think about, we're trying to frame up the quote-unquote, new normal. One area of the business that's underperforming relative to pre-COVID is the SSA joint venture. And obviously it had some really good years there during the supply chain disruption. But it's losing a little bit of money now on a quarterly basis. How do you think about the normalized earnings power for that part of your business? And I guess what level of import activity do we need to see to be able to get back to a stable level of profitability there?
Jack Atkins: Do you think, I know you don't own that asset outright. I'm just trying to kind of get a gauge for that. Yeah, so first, I'll say firstly that we're going to have more to say about that in our year on earnings call. But I can give you my thoughts at this point. So 2023 has, we don't think not been a year of normalization in the joint venture. I think we'll see a normalization occurring in 2024.
Jack Atkins: And there were a couple of reasons for that. First of all, this inventory overhang, that put, you know, in the year ago period, a lot less cargo into the overall market has been impacted. But we also had a couple of other factors that we think were suppressing volumes during that period. One was the IOWU contract that was, as you know, extended a finally notice and ratified and in place. And we think that cargo was diverted as our customers kind of de-risked by bringing cargo either through the Suez all water route from Asia or in the Panama Canal.
Jack Atkins: But for 2024, I think there's a couple of things that should happen. First of all, the inventory overhang will be largely behind us. There are some issues with the Panama Canal that, with regard to the drought, which is causing on the margin of reduction of effective capacity for the U.S. Panama water services from Asia. And then thirdly, there is a contract renewal for the ILA, which will occur in 2024. And some of the de-risking that our customers did with the IOWU renewal in 2023, we think are likely to play and be a factor on the margin in, again, de-risking.
Jack Atkins: Those are, I think, factors that are going to allow for a more normal level of performance in 2024 for the SSA T-Join venture. But obviously not at levels, pandemic area levels where there was significant cargo that was on the terminals and unable to be picked up by the customers because their warehouses were full. So you would probably want to look back to an earlier year of SSA T-Prophetability pre-pandemic. And I don't have those numbers in front of me.
Jack Atkins: And, again, we'll have more to say about that in the next quarter's call. Okay, that's really helpful, Matt. Thank you for that context. I'll jump back in. Thank you. Sure. Thank you. And one moment, please. Well, our next question.
Jacob Lacks: And now next question will come from Jacob Lacks of Wolf Research. Your line is open. Hey, thanks for the time. Hey, Jake. So you're kind of all of us took another step up to around 39,000 containers this quarter. So it seems like you're tracking well above the 120 to 130,000 annual run rate. You gave a couple quarters ago. Is this sustainable? Or how should we think about these moving forward?
Jacob Lacks: Yeah, Jake is sure. He was a strong quarter for us, but we still think there'll be seasonality. So the fourth quarter will have some light periods of time relative to the third quarter. So I would say don't just take our 39,000 for the third quarter and multiply times something year four and assume that's the annual rate. So we're still taking with the 120 to 130 total volume for the 120 to 130,000 for the whole year.
Jacob Lacks: We'll see how the fourth quarter plays out. And if we feel like adjusting that in a 2024 basis, we can talk about that in February. But definitely caution, that's not going to be the run rate every quarter.
Jacob Lacks: That's good. And then it looks like Sherry purchases a little on the quarter. I guess how should we think about the cadence there moving forward? Yeah, I mean, we're going to continue to be steady buyers. And so if I would look at our last 12 last 12 months, nine months through the course of the year, that's probably a decent run rate for us on an annual basis. And there'll be sometimes we're up a little bit down a little bit on that. So I wouldn't read much into it other than. We're encouraging all investors to take a long-term view. Our view is long-term and we want to be steady on a long-term basis.
Jacob Lacks: Okay, and then one last one for me. I know you aren't giving guidance today, but if the 2024 trade dynamic is similar to 2023, does that mean Matson's earnings should be stable, or are there some puts and takes for Matson specifically that you're able to call out? Yeah, we haven't put all of our own thoughts yet together, frankly, on 24. We did comment that we think that the Trans-Pacific trade and one of our more important drivers of earnings is going to be look a lot like it did this year, which was frankly pretty good.
Jacob Lacks: We talked about the beginning of a normalization of SSAT or joint venture that will be up. There could be others that are down, but we're saying we'll have more to say, I don't know, Joel, would you add anything to that? Yeah, exactly. There'll be some pieces up and down a little bit, but overall, we're saying it's shaping up to be a year that looks similar to 2023, and we made that comment-specific to operating income.
Ben Nolan: All right, thanks for the time. Okay, thank you. Thank you. One moment, please, for our next question.
Ben Nolan: And our next question will come from Ben Nolan of Tiefel. Your line is open. Hey, guys. I have a handful. I wanted to circle back on the China volumes, and Joel, I appreciate that it's seasonal always is. But I think Matt, you made a comment in the prepared remarks when referencing the CLX that there was greater capacity on it. I was curious if you could flesh that out a little bit in terms of, you know, are you now, I don't know, given the targeted investors or whatever you now able to carry a little bit more than you had been able to.
Ben Nolan: Ben, it's Joel. So it's not, no, it's not something that's been different. What happens sometimes is, and any given quarter, when you have 12 or 13 salings, you may have a couple of your larger ships that hit twice or even three times versus the smaller ships. So from an overall quarter basis, we don't expect to be significant and different. What we're at today is we have five ships on charter today for our similar size, one slightly larger of those four, but then we have a fifth ship that's a little bit smaller.
Ben Nolan: So it oftentimes depends on how often that smaller ship hits in any given quarter. I'll also note that we chartered a sixth ship that will take on here in a few weeks to have an additional ship to maintain the highest level of on time performance that we can. Then that larger six ship will be similar size to the other four. So I think any given quarter of the capacity is going to really blow down to how many times that smaller ship sales in a 13, 12 or 13 week quarter.
Ben Nolan: Okay, so and well, with that two things, first of all, adding a sixth ship, I would assume if you're not releasing one or even if the one that you're chartering is a little bit bigger should add capacity. So as long as there's demand that 120 to 130 should have some upside to that fair and then along those lines. How much of that Shanghai based expedited market, do you think that you've captured right now and is there room to go if you did have a little bit more capacity.
Ben Nolan: Yeah, Ben, this is Matt. So, to the two parts of your question, the sixth ship we're adding is primarily intended to be used to always have a ship to be able to sail on time regardless of if there's a weather event or a port closure, so it's really more about ensuring we have the same number of sailings, and so the primary purpose is not to get an extra six or ten voyages in the year, but rather to ensure that the 52 voyages we have are nearly perfect.
Ben Nolan: And so it's really more of an insurance policy so that we can look at it in our customers in the I&C, we have a reserve ship, we're not going to have a missed voyage, and we're sort of taking the exact office attack that the rest of the market seems to be taking. So, I'd just clarify that one aspect of the question, and then Joel, do you want to comment on the second point?
Ben Nolan: Yeah, well, and also Ben, the comment I was making, because you asked about the chargers, that was all specific to CLX Plus, the five and six ships, but the same is true on a regular CLX service with our Jones Act, not all those five ships have the same capacity either, and we have sometimes a smaller vessel, so it also, the same point about the capacity and number of sailings for the smaller vessels in any quarter, can skew the capacity, both for CLX and CLX Plus. Right, and with respect to the amount of the market share that you think that you've captured?
Ben Nolan: Yeah, I think we're very focused on that x-rated market share each week coming out of Shanghai. We still feel like the CLX and CLX Plus service is the number one and number two service is capturing the majority of that, but not all of that, but we do believe we've got the majority of the x-rated freight out of Ningbo Shanghai on a weekly basis. Okay, great. And then, Joel was going to ask on the $199 tax refund, we've been kind of waiting on that for a while, give any clarity, do you expect it by the end of the year, or are there some sort of dispute associated with that?
Ben Nolan: No, I can't say if we don't know when we're going to get it, we do still have a high slow confidence that we will get it, whether it becomes before the year end or not, we just don't know. Our understanding is just taking time to process it within the IRS. It's related, we think, to the CCF deposits that we made that we've talked about that was $565 million last year, so it's a tax-affected amount there.
Ben Nolan: And because that doesn't show up in the automated IRS systems, it has to be done manually, and it's just taking time for them to review and make that adjustment manually as our understanding. Okay, so if we're waiting on the IRS, it could be a few more years to get it. The, just getting there for technical purposes. Two more if you'll indulge me. I was going to ask, and there was the re-engineering, you know, switching over to LNG of some of the ships, and we haven't really heard much about that lately.
Ben Nolan: Just curious how that process is going, and how you're thinking about the learning from that. Yeah, this is Matt Ben. So our first vessel that we have installed LNG on that it's now operating on LNG is the Daniel KNOA and it went through a conversion process adding tanks and manifolds and all that. As you know, the engine was already set to consume or burn LNG fuel when we ordered it. So that vessel is out and it's on way the second vessel that's going to go through a gas conversion or a gas and engine conversion is in the shipyard now.
Ben Nolan: And we have another vessel going in next year in 2024. We'll talk more about the timing of that. But we're very much underway with our conversion projects in addition to the three new vessels that are not yet cutting steel, but that will be delivered in a couple of years. Those will also be LNG ready. So we do have, you know, the plan is rolling out just the way we expect it and the timing very consistent with our original timing on the conversions.
Ben Nolan: Great. And then lastly, I was going to ask is it related to why and obviously there's a horrendous tragedy in Maui. As we think about that longer term and is this something that just purely from a from a freight and volume perspective that could actually lift volumes for you guys as rebuilding happens and so forth. And in the near term, there's there's some headlands from tourism, but just trying to think through what might be the volume impact for that for you.
Ben Nolan: Yeah. And you know, it's a sensitive subject because you know, obviously we're focused on the tragedy and wish it never happened. But in the short term, I think you've got it right. It's going to be a situation where in the near term, there's some headwinds and but over the longer term and the rebuild process we expect as we mentioned in our prepared comments, the recovery will occur in the medium term. The rebuilding could occur over the longer term.
Ben Nolan: So but eventually, I think there will be a rebuild. I know the residents of Maui and the leadership in Maui wants it to be rebuilt and that will translate into freight volumes at some point into the future. Yeah. All right. Well, again, thanks for letting me go for Friday. I appreciate it. Good quarter. Okay. Thanks, Ben. Thank you, Ben. Thank you. And again, to ask a question, please press star 11 on your phone and wait for your name to be announced.
Ben Nolan: To withdraw your question, please press star 11 again. Stand by as the compiler to Q&A roster. And again, to ask a question, please press star 11 on your phone and wait for your name to be announced. And speakers, I am seeing no further questions in the queue.
Matt Cox: I would now like to turn the conference back to the CEO Matt Cox for closing me more.
Matt Cox: Okay, thanks operator. Thanks for listening in on our call today.
Matt Cox: We look very much forward to seeing everyone on our year end call. Aloha.