Good day, ladies and gentlemen and welcome to Matson’s Third Quarter 2018 Financial Results Call. At this time, all participants are in a listen only-mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call may be recorded. I would now like to turn the conference over to Director of Investor Relations, Lee Fishman. Please go ahead, sir.

Thank you, George. Joining me on the call today are Matt Cox, Chairman and Chief Executive Officer; and Joel Wine, Senior Vice President and Chief Financial Officer. Slides from this presentation are available for download at our website, www.matson.com, under the Investors tab. Before we begin, I would like to remind you that during the course of this call, we will make forward-looking statements within the meaning of the federal securities laws regarding expectations, predictions, projections or future events. We believe that our expectations and assumptions are reasonable. We caution you to consider the risk factors that could cause actual results to differ materially from those in the forward-looking statements in the press release, the presentation slides and this conference call. These risk factors are described in our press release and are more fully detailed under the caption Risk Factors on Pages 13 to 21 of our 2017 Form 10-K filed on February 23, 2018, and in our subsequent filings with the SEC. Please also note that the date of this conference call is November 05, 2018, 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.

Thanks, Lee and thanks to those on the call. Please turn to slide 3 for my opening remarks. Matson's results for the quarter were in line with our expectations with ocean transportation results approaching the level achieved in the third quarter last year and logistics continuing its solid execution across all of its service lines. We're pleased to see the exceptional performance of our logistics segment for the quarter and year-to-date. For the quarter, within ocean transportation, we saw a favorable rate environment in China, continued strong performance from SSAT, and steady performance in Hawaii. But we also faced unfavorable timing in fuel surcharge collections relative to fuel cost increases, continued negative impact from the ongoing competitive dynamics in Guam and lower southbound volume in Alaska, largely due to the weaker-than-expected seafood season, compared with the strong seafood harvest levels in 2017. In the quarter, we earned net income of $41.6 million or $0.97 per share compared with $34.1 million or $0.79 per share in the year ago period. We generated EBITDA of $91.5 million in the quarter versus 96.2 million in the third quarter last year. Moving on to the outlook for 2018, based on the performance in the first nine months of the year and current business trends, we're raising our full-year 2018 outlook for ocean transportation and maintaining our higher outlook for logistics. For the full year 2018, we expect ocean transportation operating income to be modestly higher than the $126.4 million achieved in 2017. And in logistics, we continue to expect operating income to approximate $30 million. Joel will go into more detail on the financials and outlook later in the presentation. Please turn to slide 4. After countless man hours and the exceptional hard work of our employees and the workers at Philly Shipyard, we…

Okay. Thanks, Matt. Please turn to slide 13 for our third quarter and year-to-date financial results. Ocean transportation operating income for the third quarter decreased by 2.3 million year-over-year to 48.7 million. This decrease was primarily attributable to the unfavorable timing of fuel surcharge collections and higher terminal handling costs. Partially offsetting these unfavorable year-over-year comparisons were higher container rates in China and Hawaii. Logistics operating income for the quarter was 9.9 million or 2.6 million greater than the result in the year ago period. The increase was due primarily to higher contributions from transportation brokerage. EBITDA for the quarter decreased 4.7 million year-over-year, due to lower other income of 2.8 million, and lower depreciation and amortization, including drydock amortization of 2.2 million, partially offset by the increase in operating income of 0.3 million. On a year-to-date basis, ocean transportation operating income increased by 3.4 million to 109.7 million. This increase was primarily attributable to lower vessel operating costs, higher container rates in China and Hawaii and a higher contribution from SSAT. Partially offsetting these favorable year-over-year comparisons were higher terminal handling costs and a lower contribution from Guam. Logistics operating income for the first nine months of the year was 23.6 million or 7.4 million greater than the result in the first nine months of 2017. The increase was due primarily to higher contributions from transportation brokerage and freight forwarding. EBITDA for the first nine months of the year decreased 0.6 million, compared to the first nine months last year, due to lower depreciation and amortization, including drydock amortization of 11.7 million, partially offset by higher consolidated operating income of 10.8 million and a favorable increase in other income of 0.3 million. Turning to slide 14, for a summary of our balance sheet, you will note that our total…

Thanks, Joel. With nine months under our belt, we can clearly see the financial benefit out of a diverse set of transportation and logistics services, and look forward to finishing off the year on a strong note. We remain intensely focused on cash flow generation and managing our leverage, as we advance our new -- our vessel newbuild program and progress on the Sand Island crane investment. And with those concluding remarks, I will turn the call back over to the operator and ask for your questions. Operator?

[Operator Instructions] Our first question comes from the line of Jack Atkins with Stephens.

Thank you for taking my questions and congratulations on a nice quarter.

Thanks, Jack.

So let me just kind of go to the fourth quarter outlook, or just I guess the broader 2018 outlook and sort of the changes there. If I'm hearing what you're saying correctly, it certainly sounds like the fourth quarter is a bit stronger than what you were expecting three months ago. Do we kind of chalk that up to some pull-forward related to the tariffs, which is going to positively impact the CLX operations, and I'm assuming that would impact positively SSAT. Is that, sort of, the way to think about it or if not, what's sort of driving the better fourth quarter outlook than this time three months ago?

Yeah, Jack, I think you have got -- you are on the right path here. It's really the implementation of the additional tariffs as we outlined from 10% to 25%. We do think that there is a pull-forward effect. Usually, Jack, as you know, as we get the merchandise into the stores prior to the holiday season, we usually see a lull in December, as most of the merchandise has wound its way across the Pacific and into our customer supply chains. We think there is sort of a beating of the clock factor going on in the broader market in general, and so we will see some pull-forward volumes. As we noted that Matson's principal commodities, footwear and garments, are not subject to these tariffs. But nonetheless, we do see a sort of beat the clock in the – and as you rightly point out, that benefits both Matson on the ocean service, it also benefits SSAT and probably to a lesser extent Matson Logistics as well, so that's the primary driver in the upgrade for the quarter. That may in fact have a little bit of a weaker quarter. We have an early lunar New Year in 2019, and so it may be some pull-forward that reflects some weaker volume post the lunar New Year, but we'll have more to say about that when we do our year-end earnings call. But I think, that's a recap of how we're seeing it.

And, sort of, is in line with what we are hearing, as well in terms of fourth quarter, first quarter, so it makes sense. Shifting gears here for a minute to Guam, I was encouraged to see that those volumes were flat both sequentially and year-over-year. Should we take that as a sign that while the competitive landscape in Guam still remains very challenging that things have at least sort of stabilized somewhat there or is that not the way to read that?

Yeah, it's hard to know, Jack. I mean, as we've said before, our position has been, we're going to fight for every stick of freight and I think what we've seen is that APL has not seen the momentum that it's hoped for, and we're just going to be continuing to compete. So hard to know exactly what's going to happen in the future, but I think it is fair to say that we have seen a lessening or a flattening as we've lapped the bad news as their share of the market has stabilized. What they do from here is really hard -- it's really up to them and hard for us to know.

And then just to go along with that, I saw that you all recently announced another service direct from the West Coast, excuse me, direct from Hawaii, down into the Pacific -- South Pacific. Could you kind of talk for a moment, are there other opportunities like that, as you saw, because I know this is one of several that you guys have been asked in the last 12, 18 months, that you see in terms of other island communities in the Pacific where it's not going to be something huge from an EBITDA perspective individually, but combining can be sort of a nice supplement to, sort of, what you're already doing within ocean transportation?

Yeah, the entry into the Kwajalein market direct from Honolulu really shortens the transit time and provides US flight service into that region, I think that's a positive step. Jack, it does complement our strategy to grow into adjacent markets in the Pacific, and you've seen we did a small announcement of -- in addition to Christmas Island, last year, we initiated a service directly in Tahiti, which is on the heels of an acquisition a couple of years ago in New Zealand into the Cook Islands, and so I do see us continuing to expand a strategy that allows us to link Matson's hubs in Guam and Honolulu into adjoining Pacific markets. So this is really, as we see it, a continuation of a strategy that we outlined a few years ago, growing organically into adjacent markets where we can -- our service can allow us to grow, and as you say modestly, but over time I think can move the needle for us.

Last question, I'll hand it over, it's -- maybe I have a follow-up on IMO, I know you all have a very clear strategy in terms of what you are planning to do to, to install scrubbers on at least three of your vessels, I guess three for now. But when you think about the impact that IMO 2020 could have on cost structure of competitors, I'm not so much thinking about your Jones Act lanes, but more specifically to the competitors in the transpacific lane coming back from China. Is there a way to, sort of, think about the impact that could have on pricing within the broader transpacific lane looking out 12 to 18 months. I mean, would you imagine that there's going to be an upward bias to pricing as carriers look to pass this through because it seems like this could have a pretty significant impact on the cost structure and fuel prices for some of your competitors?

I think you're right about that. I think what we're seeing as we get closer to this 2020 implementation, many of the largest international ocean carriers have said they're primarily going to depend on the imposition of additional fuel surcharges to cover what will be a substantially higher fuel cost. I think you may also see some further slowing down of services as they try to manage this increase in fuel costs. But I think the big question that while it is clear that the ocean carriers are going to be incurring additional expense associated with this compliant fuel, what is less clear is the industry on the international side’s track record of being able to pass through costs and in my mind, Jack, it’s primarily a function of whether or not the international ocean carriers can manage the supply and demand adequately to allow for those factors to be in balance and create somewhat more orderly market that would allow for those incremental fuel surcharges to be implemented. To the extent that they can't do that, then I think they're in for a world of hurt in managing that additional cost burden. So, time will tell, I think, the way we're seeing it. But that's why we love our position, we think the implementation of scrubbers as was mentioned on three of our five vessels allows us to continue to, we think, burn less expensive fuel and put ourselves in a good competitive position, regardless of what the market conditions. But I hope we are right in the premise of your question, that there is an orderly market and that rates do go up and we would certainly benefit from that market if it occurs. I'm just saying that it's not a sure thing that it would occur.

And our next question comes from the line of Kevin Sterling with Seaport Global.

Matt, just following up on the scrubbers question. You're going to start three scrubbers out of five on your CLX vessels. Can you remind me what's the plan with the other two vessels?

Yes. I think the way we're looking at this, Kevin, is that, as you know, we have three scrubbers installed on our Alaska vessels. Those are to comply with the eco requirements that were in place, those are up and running. And as Joel mentioned, we'll have three CLX vessels. So, 6 of our 12 core vessels, three in the Alaska and nine in our Hawaii, Guam and China service will be installed with scrubbers. We're going to continue to take a hard look at the remaining six vessels. That is the four new vessels and the remaining two vessels. And at this point, we're making no predictions, but at the next drydock period on those vessels, we’ll be taking a hard look at whether or not we install over time scrubbers on the remainder of our fleet. Exactly when that will occur is unclear. But to the extent that the less than two-year payback spreads that we've seen, I think there will continue to be a strong economic case for us to do it. And given that we're relatively small and focused, we're going to be able to implement it in many of the other larger and perhaps less capital capable companies in implementing the scrubber strategy. And one other point on the scrubber strategy that I think is helpful, we cannot predict exactly what the spreads of fuel are going to be in the market. Once all the market settles out, some are saying that there's going to be big underlying demands on diesel as this residual product is put into the market, so spreads may narrow, they may grow wider, but we really see this as having the optionality to burn the least expensive fuel. So that option value, we think is definitely worth $8 million to $10 million a ship, and $9 million a ship that Joel mentioned for our fleet. So for us, it's not a no-brainer, but it seems a pretty strong business case within the larger context.

Joel, you mentioned -- you talked about 2018 vessel progress payments, I think, moving down to 317 million for 2018 from 345 million, because of the timing delays. How about 2019, has that changed at all?

That’s changed slightly and it has been decreased a little bit as well. So, what's happening is really you're seeing things slide, the last ship is sliding further into 2020, Kevin. But not a lot, not an overall, it changed slightly in 2019, but not a big magnitude of change, because the delivery date for ship two and ship three is still pretty much on track and ship one just got delivered last week. So, not a big change in 2019.

And Joel while I got you -- as I look out, obviously your vessel progress payments are decreasing for the next, call it, five, seven years. My sense is, you guys don't need a vessel fleet replacement program like you're going through now. You're going to generate, I think, significant free cash flow. Can you outline your priorities as you think about redeploying that free cash flow? I assume you’ll de-lever first, but after that is it stock buyback, increasing the dividend? And just make sure I'm thinking about it right too this kind of next couple, call it, three years to five years, your free cash flow generation. If you could help walk us through your priorities.

Sure. Great question, because we do see ourselves generating free cash flow in that scenario, so it really should start in 2020, because I'll remind folks that in 2020, we'll just have the remaining milestone payments on the last ship. And those milestone payments, when you -- when we get through the winter period and we look at March, April and May of the normal cash flow generation of our company, the normal cash flow should generate more cash than those remaining milestone payments. So, we should start de-levering actually around Q2-ish of 2020. And so, first priority is definitely to pay down debt. We've talked about our leverage ratio going into the mid-3s and we've talked about how on an annual basis, we should be able to de-lever about half a turn a year. And we'd like to be down at least into our target levels in the low-2s. So that means, for two or three years, the priority focus will be paying down debt to get down into those strong investment grade low-2s ratio where we like to be. So, now you're talking about 2022, 2023 and until that timeframe, we would tell you, a lot of things can change between now and then of course, but that will be our focus as far out as we can see on a stable performance basis from a priority of cash flow perspective. Now, the dividend is really important to us. We've got a great track record, we’ve increased the dividend every year since the time of our spin off. So, no guarantees we’ll have in the future, but we definitely have talked to our investors and with the investment community about the importance of rewarding our long-term shareholders as we grow our free cash flow per share to reward shareholders with increased dividends over time. So, dividends will be on the table for continued sharing with shareholders as we generate cash flow. We bought back stock in the past and we've acquired companies and made growth investments internally in the past. So, we will continue to be looking at attractive M&A investments and internal organic growth investments during those years, Kevin. And the key there for us will be disciplined. We've talked about our return thresholds are in the mid-teens from a cash-on-cash return perspective. As we look at new investments, we very much look at it on a cash-on-cash basis and we like our portfolio of businesses today. So we expect that really, we look to grow, but we want to maintain discipline that we're buying quality assets that contribute to our portfolio and return well for shareholders over time. So I'd layout those as our priorities as we think about that time frame.

Speaking of that, as we look at maybe your pipeline for potential M&A, particularly on the logistics side, are you seeing multiples come in a little bit or are they still little bit too pricey for your liking?

We're not really seeing things change right now, but it's a very dynamic market right now. I mean, clearly it's been a strong economy, a lot of logistics players are doing very, very well right now, given the tight supply demand characteristics, especially on the supply side with trucker, driver shortages and things of that nature. So it's been a very good market for a lot of logistics players, profitability has increased, but where is the economy going to be in 2019, well, some of these businesses come off a little bit, it's a question. And we really haven't seen a lot on the M&A side, it is just a change in the market, so too early to say. But I think from our point of view, we want -- we don't want to just grow for the sake of growing. If we look at logistics businesses, they've got to make sense in the portfolio and in the businesses that we're in today, where we're bringing something to the table from a synergy perspective or from a overall business congruity perspective with respect to what we have today. So I think staying close to home with respect to the businesses we're in is really important. And then of course the economics, it depends a lot to be in the teens from a cash-on-cash return perspective that I talked about before. So that's what we will focus on and we haven't seen really a change in the M&A pricing quite yet.

And last question and Matt, this is maybe bit of a bigger question for you. You talk about the uncertainty with tariffs and if manufacturing were to move out of China, where it might go and the impact that I know could take years. But if that were to be the case, if your customers were to move manufacturing out of China, would you say with your smaller vessels, you would have maybe a competitive advantage, you could get in and out of smaller ports more quickly, or maybe that some of the other larger vessels may not be able to access, if that were to happen?

Yeah. Kevin, we've done contingency planning and off -- I mean, the way we're thinking about this is that if there is some migration of manufacturing capacity out of China, it's likely to migrate to Vietnam, to India, to other places in Asia. So the point we were -- one of the points we were trying to make was that we continue to see China as a dominant player, and ultimately I believe and I don't know when that will occur, there will be a resolution of the US, China trade tariffs. And again, without knowing exactly where that is, China has built this ecosystem of high quality and it's not just the garments, but it's the dies and the buttons and the zippers and the cloth and the expertise and the quality that is difficult for Vietnam or Malaysia, or in India to match that quality. So there are certain -- and the other reality is there already is migration of low-end manufacturing that is already occurring to going on in Vietnam and Malaysia, and India as we speak. So we think some of that will get ramped up, I mean if there's a total breakdown in relations with the US and China, which we don't foresee, there are other markets where our small ship could go to, whether it's Vietnam or in Thailand and other places where there are relatively small ports, that big ports can’t go to, that’s certainly a possibility, but that's really not where our heads are at right now.

And our next question comes from the line of Ben Nolan with Stifel.

So I know that you have or will be putting out your 2019 guidance, I think next quarter, and I certainly don't want to step on that. But, especially as it relates to the core, Hawaii and Alaska markets, I'm curious as you look out into next year, without putting any numbers on it or anything, is there anything that leaves you especially optimistic or maybe pessimistic about either of those two markets or feeling any differently about those than where you sit today?

Sure. Ben, this is Matt. I think our view of Hawaii is very consistent with UHERO, the University of Hawaii’s Forecast that would look for flat or very low single-digit growth in the overall economy, performing at a relatively high level. I think our views would, probably at this point, not be very different from that, with regard to Hawaii. With regard to Alaska and talking to customers now, the feeling is that they may be through the recession and people are more upbeat about the prospects. We understand that in Alaska, there are a significant amount of projects on the North Slope that are going to be done this winter, different from last year, while we are not a big participant in the North Slope, there are indirect benefits that come from Matson supplying that, and there was a budget issue in the State of Alaska in past, that's been resolved, and post-election cycle. So there's a little bit of optimism about Alaska. Of course, that is dependent on energy prices and so -- and unlike other places of higher energy prices, it's a benefit to the state. So it is still early and subject to where the overall state economy goes there. But overall, we're looking for flat Alaska and potentially up, if -- or at least bottoming out in Alaska, with potentially some more optimistic views of where the future takes us, that's as best as I can provide. We should have a better feel for that when we do our year-end earnings call.

No, and I appreciate that color, even to the extent that you're able to give it, so that was helpful. And then as it relates to really I guess the West Coast port business SSAT or maybe the China trade have been seeing some interesting trading patterns, where the volumes coming into Seattle and Tacoma have really spiked as opposed to like Long Beach and Los Angeles, where they were flat to maybe little down. I'm curious if you are seeing anything unique there and if there is a change in the trading patterns, how does that potentially play out as it relates to SSAT and your business more broadly?

Yes. So, I think to your point about observations of movement within the West Coast, I think we are seeing very small anomaly. I think at this point we're not interpreting them to be permanent, it's just more where vessel capacity and supply and demand is, and there is significant demand across the markets right now that maybe just where there is more vessel capacity and at the end of the day, the carriers will sell whatever they have available capacity and perhaps with less capacity into Southern California, which is traditionally a place where that goes. The nice part about Matson's investment in SSAT is that we have terminals in all three markets. So regardless of where that volume goes, we're going to be able to participate in those markets. So we feel well positioned regardless of which of those three West Coast markets, where the volume comes in.

And then lastly for me, just on the -- circling back around to the timing, and the delivery over the last, the Matsonia being a few quarters late, obviously that probably has a little bit of an impact on the operating cost savings that you foresee getting out of that. I was just curious, if you have any recourse or remuneration relative to the shipyard for the delay or is that within the parameters of the contract?

It is within the parameter of the contract and there are provisions for a delay. So there will be economic consequences under the terms of the contract for that, they're not majorly material to our overall results, in this case 2020, Ben. But what I would remind folks is that the $28 million to $31 million that we've talked about of incremental EBITDA benefit of the all four ships being in place compared to our current fleet, most of the – the vast majority of that is really coming -- should come when the third ship is delivered, because that's the time that we believe we'll be able to ratchet down from a 10 ship deployment in Hawaii to a nine ship deployment in Hawaii, that is still scheduled for the fourth quarter of next year, 2019. So you might not see a lot of benefit in 2019 towards that $28 million to $31 million benefit, but we should see the majority of it actually in calendar year 2020 even if that fourth ship delivery date moves around and moves back in this case.

[Operator Instructions] And our next question comes from the line of Sahm Cho with Wells Fargo Securities.

So, I know you talked about some of the option value with the scrubber installations. But how should we be thinking about the payback period of those investments? Is there an incremental re-pricing strategy for the cargos going forward or how should we kind of think about that?

Yeah. Sahm, the way we're thinking about it is that we expect to recover the incremental capital cost in the scrubbers through our fuel surcharge mechanism. I think as you may know, Sahm, in many of our trades, we have fuel surcharge mechanisms in Hawaii and Guam and Alaska that allow us to effectively recover our fuel cost in the trades. And so what we think this allows us to do is to keep our fuel surcharge as low as possible once we've recovered the capital related to those scrubber installations, and so for us, there is a very clear payback. We said before in earlier presentations that within -- at today's spreads, between the MGO and the residual fuel, there is a less than two-year payback and to the extent those spreads widen or shorten or narrow, then the payback period will be adjusted. But in any event, there is a very strong business case for Matson in making these investments. And over time, we would expect to remain competitive in our marketplaces, being in a position to be able to burn the least expensive fuel and remain competitive in those markets where we are able to recover our fuel surcharge.

So, when we're thinking about modeling the amortization of those costs, so we should really be looking at second half of ‘19 through 2022, is that correct?

No. From an accounting perspective, it will be amortized over a longer period of time. Most of these scrubbers can last the life -- the remaining life of the vessels themselves. So we haven't announced, I mean, done the final work to tell you exactly what that depreciation schedule look like. But in some cases, it could be over 10 years. So [indiscernible] talking about is the economic payback period.

And then, when we talk about the cargos that are being pulled ahead of the January 1st tariffs, can you give us a bit of a split on how much of those cargos you've seen in Q3, and what's being laid on for Q4, or if there is a -- any color on, if it's split evenly or so?

Yeah, I mean it's hard to know or generalize, what -- our comments are anecdotal comments from customers. I think in some cases, it's really all over the place. So it's really hard for us to aggregate in talking with our small sliver of customers and again some customers have the ability to do it, others don't, others have tried to ramp up and source from other locations. So it's kind of all over the map, so it's difficult to know other than just knowing generally that customers have tried to pull forward, let's say, spring merchandise, stuff that would normally ship in the first quarter to try to cover that spring inventory. But in many cases, customers have limited ability to store it in their warehouses. So there's -- it's, I would say, there is a pull-forward factor, but exactly what percentage it is, it's really hard to say.

Yeah, you remember in the third quarter, we were full and we were full almost every third quarter and most of our sailings are always full. So and this quarter is probably is more of an impact on rate. Now the fourth quarter, as Matt mentioned earlier, there is a typical low in the December time frame, and so if we see higher volumes this year in December that are persistent until the end of the year, that's where you'd see some volume impact relative to the previous years where you see some declines in the month of December. But in the third quarter, you should look at our volumes. The main driver of difference in this third quarter volumes versus last year was just drydock additional voyages from last year, where we had ships returning on drydock, but for our core service or weekly service, we were full last year and we are full this year.

And then just switching gears to the logistics segment, can you give us a little bit more color on what you're seeing in the trucking market. I think a couple of quarters ago, you mentioned the consistent market share gains due to the early yield of the implementations. Is that still going on or we'd like -- what do you see your competitors doing in that space?

Yeah, I think what we're doing in our logistics business is that what I think other logistics providers are doing, which is in order to secure actual truck capacity, we're needing to pay the trucking company more in order to ensure that they carry the load that increase in cost is passed on to the customer as well as a reset of margin that's occurred industry-wide. So our truck brokerage business we think is not behaving or performing differently. It's allowed us to have a reset with our customer and the customer is not about it's -- in some ways, it's less about price and more about being able to pull, take the load off the dock and get it to its destination rather than to try to knock another $10 off the rate, because that's where the market is. And so I think our experience is very consistent anecdotally of what we're hearing from other truck brokers and domestic providers within the US.

Thank you. And I show no further questions at this time. I would like to turn the call back over to Matt Cox for any closing remarks.

Okay. Thanks, operator. Thanks for everyone for listening in and we look forward to catching up with our year-end call. Aloha.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program and you may all disconnect. Everyone, have a great day.