Good day and thank you for standing by. Welcome to the Matson Fourth Quarter 2022 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Lee Fishman, please go ahead.

Thank you, Lisa. Joining me on the call today are Matt Cox, Chairman and Chief Executive Officer; and Joel Wine, Executive 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 presentation and are more fully detailed under the caption Risk Factors on Pages 26 to 37 of our Form 10-Q filed on November 3, 2022, and in our subsequent filings with the SEC. Please also note that the date of this conference call is February 21, 2023, and any forward-looking statements that we make today are based on assumptions as of this date. We undertake no obligation to update these forward-looking statements. I'll now turn the call over to Matt.

Okay, thanks, Lee. And thanks to those on the call. I'll start on Slide three. For the fourth quarter, Matson's differentiated Ocean Service performed well in a difficult business environment. Matson's had a solid financial position with low leverage and currently $622 million in cash deposits in our CCF for the new vessel program, while returning $445 million in cash to shareholders in 2022 through dividends and share repurchases. For the fourth quarter within Ocean Transportation, our China services achieved lower year-over-year volume and freight rage, which contributed to the decline in our Ocean consolidated operating income. We also saw lower year-over-year volumes in Alaska, Hawaii and Guam compared to the year ago period. In logistics, operating income decrease year-over-year primarily due to a lower contribution from supply chain management, consistent with lower demand in the Transpacific tradelane. I'll now go through the fourth quarter performance of our tradelanes, SSAT and logistics. So please turn to the next slide. Hawaii container volume for the fourth quarter decreased 13% year-over-year primarily due to lower retail and hospitality related demand compared to the elevated pandemic levels in the year ago period and the effect of one less week. Excluding the 53rd week in the year ago period, volume in the quarter decreased 7.9% year-over-year. Volume in the fourth quarter of 2022 was 3.2% lower than the volume achieved in 2019. We saw retail customers continue to manage inventories to weaker consumer demand levels despite continued improvement in the Hawaii economy. Hawaii Tourism during the quarter remained relatively strong, including a modest improvement in international tourists trends. Although there was a little bit of softness in December. For the full year, container volume decreased 5.8% year-over-year, primarily due to lower retail related demand compared to the elevated pandemic levels in the prior year…

Okay. Thanks, Matt. Please turn to Slide 13 for a review of our fourth quarter and full year results. For the fourth quarter, consolidated operating income decreased $382.9 year-over-year to $92.6 million, with lower contributions from Ocean Transportation and logistics of $380.9 million and $2 million respectively. The decrease in Ocean transportation operating income in the fourth quarter was primarily due to lower volume and average freight rates in China and a lower contribution from SSAT, partially offset by lower operating costs and expenses, primarily related to the discontinuation of the CCX service. As Matt noted, the decrease in logistics operating income was primarily due to lower contribution from supply chain management. We had interest income of $6.9 million in the quarter due to higher cash investment rates on our cash and cash equivalents and cash deposits in the CCF as compared to no interest income in the prior year period. Interest expense in the quarter decreased $1 million year-over-year, due to the decline in outstanding debt in the past year, including the $50.4 million in debt principal we prepaid in the third quarter. The effective tax rate in the quarter was 20.4% compared to 16.5% in the year ago period. For the full year consolidated operating income increased $166.1 million year-over-year to $1,353.6 million with higher contributions from Ocean Transportation and logistics of $143.5 million and $22.6 million respectively. The increase in Ocean Transportation operating income for the year was primarily due to higher freight rates in China and a higher contribution from SSAT, partially offset by lower volume in China, higher operating costs and expenses primarily due to the CLX+ service and higher terminal handling costs. The increase in logistics operating income was primarily due to higher contributions from transportation brokerage and freight forwarding. Please turn to the…

Okay, Joel, thanks. Please turn to Slide 19, where I'll go through some closing thoughts. We expect the financial performance in the first quarter of 2023 to be the weakest of the year. Normal seasonality trends are returning to our domestic tradelanes and logistics. And as mentioned previously, in the quarter, we expect to see freight demand for our China service below normalized condition. In the near term, we expect continued economic growth in Hawaii, Alaska and Guam to be supportive of freight demand. But we recognize the potential economic overhang that could negatively affect volumes in each of these core domestic markets. We expect challenging conditions in the Transpacific tradelane in the first half of the year, with freight demand below normalized levels. In the second half of the year, we expect improved trade dynamics as the market transition to a more normalized level of demand. Please turn to Slide 20. Matson is well positioned financially and operationally to capitalize on opportunities as they emerge. The Matson brand has never been stronger. And we're in an enviable position to leverage the brand on our portfolio of essential high quality businesses to drive new opportunities. Supporting our opportunistic growth ambitions is a solid investment grade balance sheet with low leverage. As of today, nearly two-thirds of the remaining milestone payments in the new vessel program are funded with cash deposits and the CCF earning interest income on a tax advantaged basis. So we're in very good funding position with the CCF on this large vessel project, which will reduce our reliance on using cash flows in the next few years to fund vessel CapEx commitments. Going forward, we will allocate the shareholders capital like we always have in a disciplined manner regardless of the economic environment. We invest for the…

[Operator Instructions] First question is coming from Jack Atkins of Stephens. Your line is open.

Okay, great. Good afternoon, and thank you for taking my questions. So I guess, Matt, I'd love to maybe kind of start with a macro question or two, you guys have such an interesting look into what's going on because of your relationship with your customers beginning in their supply chain in China. But, is it your sense that retail shippers are going to be back to more normal ordering patterns around the middle of the year, is that what's sort of underpinning your outlook for -- things to kind of maybe get back towards normal in the second half of the year? I don't know -- I'm not trying to put words in your mouth, I'm trying to kind of understand the outlook from that perspective.

Yes, I think -- first of all, thanks, Jack for the question. A couple of things. I think our view now is that because of the very significant contraction in Transpacific demand and ordering that occurred in especially in the fourth quarter we saw the beginning towards the end of the third quarter, as retailers saw a slowing demand pattern by their customers and a significant catch up of inventory that was caught in the supply chain congestion caused an air pocket to occur, if you will, in Transpacific demand, as our customers individually curtailed future purchase orders as they -- our customers were being more cautious in their buying to get their inventories down where they needed them to be. So, I think what we're seeing is that -- and we're obviously listening to our large customers, the big box retailers and others for how well they're managing their inventory levels. And so we're watching that metric very closely. And the early read on that is, while there has been improvement in managing inventory levels down in some cases and other cases, and other retailers that hasn't occurred as quickly as they had expected. So, we're expecting some of the slowness that we saw in that fourth quarter to continue into the first quarter and frankly, into the first half. And then we do expect more normal seasonality to occur as we approach the Thanksgiving and Christmas holiday seasons. And so we're expecting a weaker first half of the year, owing to those questions and also ongoing impacts of higher interest rates and the Feds desire to curb inflation, some persistent inflation, some of the macro trends that we're all of us are following closely, will weigh on demand, we think particularly the first half.

Okay, got it. Now, that's helpful, Matt, thank you for that. And I guess, you know, maybe to kind of help us frame up the first quarter of the first half. I know you guys are not giving guidance. But this is the forum, maybe if you can help us think a little bit about seasonality. And maybe what that looks like, you said, the first quarter is going to be the most challenging quarter of the year from a financial perspective, in terms of the EPS or the profitability. If I heard you correctly. If I think back and kind of look back to how the business historically kind of trends fourth quarter to first quarter, typically, marine transportation margins, can be roughly half of in the first quarter what they were in the fourth quarter, is that the right way to think about the business this year, or is that maybe a good baseline. Anything to kind of help us think about how to frame it up, just because there's just so many moving pieces this year. I'm not trying to put you on the spot with guidance, just kind of looking for some direction.

Yes. And, part of our lack of guidance is the macro uncertainties that we're seeing. So it's not as if we have a number, and we're not going to share it with you. We're watching it along with everyone else. But we do think that, as we've said, if you look historically, what I mean by that is pre pandemic, or over a period of time, the first quarter has historically been our weakest, followed by I guess you would say, the fourth quarter. And our historically, our two strongest quarters are in the second and third quarter. So if you just look historically there, we're also seeing, I think, in the first quarter of this year, we had some disruptions related to COVID in China. And a weakening and certain demand pattern. I also think the piece that I haven't mentioned, but I think it's going to bear on what happens in the second half of the year. We saw it beginning in the fourth quarter, but I don't think it's taken its full force is in the China markets. Will the other international ocean carriers resize their transportation fleets in line with the lower expected demand, we're seeing some of that occur, we've seen announcements. But I think more of that does need to occur, so that there isn't an overhang of capacity in the market, that could weigh down on freight rates. So I would say as without talking about margins relative to the fourth quarter, I would just urge you to think about historic earnings, and then just apply what we see as a more cautious first half than the second half. And that's about as good as I could do Jack.

No, that helps a lot Matt. Thank you. And then that gives me up to work with there. So let me maybe ask one more, and I'll jump back in queue. But I guess, Joel, if you have some thoughts on this, let me get you to chime in on it on it too. But, when we kind of think about the last couple of years, obviously been extremely strong from an underlying demand perspective, a lot of things kind of happening, easy to layer on so maybe additional costs through that process. Now that the things are the businesses normalizing, in some cases, maybe below normalized levels. Are there opportunities to maybe take costs out of the business, maybe kind of look for ways to tighten the belt a bit in certain parts of the business that can help offset some of the challenges from a business perspective?

Yes, Jack, let me just start with my thoughts. And then I'm going to turn it over to Joel to get his perspective. I think what we -- the biggest levers that we can pull, as you know, are really around fleet deployments. And so our cancellation of the CCX service that occurred towards the end of the third quarter and through the fourth quarter is a way in which we could take every one of our vessels which were deployed, put them back, in some cases into reserve status, and lower the operating costs and by our fleet size. The other element that we're going to be focused on in 2023, is at its peak, we had seven vessels in the CLX+ service. And we're going to be moving towards a more conventional five vessels, as we as we continue to CLX+ service into '23 and likely moving forward. So there's a couple of big level levers. One of the things that did not occur, Jack, in the last three years of the pandemic was really on the G&A and people side. We added less than 3% to our workforce in each of the two years of the pandemic. So, and we have a normal level of retirements and other kinds of things that doesn't put us in a position where we feel like our people resources are significantly overstep. But having said that, we're going to go back to doing what we've done in a normal environment is looking for ways in which to operate more efficiently, whether it's the speed of our vessels, the size of our equipment fleets, the use of overtime, and gait times, and a lot of just blocking and tackling that will occur and does occur in a normal environment that will allow us to reflect that we're in a different environment and trying to keep our costs in line with this less congestion and a lower demand environment overall. But I would turn it over to Joel for his thoughts as well.

Yes, that I mean, those are the key items Jack. And just to put a little bit of order of magnitude on. Our biggest cost is terminal handling. And so as the freight package goes up and down over time, and right now it's soft with the declines you've seen, that naturally goes down. And so you do get some reduction in costs on a per unit basis, as you have less freight moving through your terminals. The next costs are the vessel operating costs broadly, including fuel and there’s as Matt said, our fleet is pretty fixed right now. We will go to ratchet down two units on the CLX+ from seven ships to five, that'll help. And we'll do that over the course of the first two quarters of this year. And the rest of it is pretty fixed network of vessels, staying on schedule, and then we have fuel that fluctuates based on fuel prices. So that's the next biggest category. And then equipment Matt touched upon that. We did flex up, we've repurchased a lot of equipment in the early and midstream days of the pandemic. And then we actually leased quite a bit in the last 12 months that we now can hire and turn that equipment back to the lessor is and ratchet down a little bit of across our network there which will help the cost structure a little bit. And then the last piece is the people as Matt said, we see election, additional channel services do not require big increases in our headcount. So we're pretty disciplined about adding people only when necessary in the last couple of years. And so therefore, there's not there's not a big additional number of headcount that increased our cost structure. So that just put a little bit of color in terms of the order of magnitude on each of those costs, but it's Jack.

No, I really appreciate that. Joel, thank you. And I'll hand it over and jump back in queue.

Our next question is coming from Jake Lacks, of Wolfe Research. Your line is open.

Hey, thanks for your time.

Hi, Jacob.

So we spent a fair amount of time talking about the demand environment. Can you talk about how you view the supply side for the balance of the year? I think you talked a bit about some blank sailings, but the order book is pretty elevated. Could that be offset by vessel scrapping? I would like to get your thoughts there.

Yes, I sure I can give you my thoughts. And let me give you my thoughts about what should happen. Well, what I think will happen and what should happen. That is that the international Ocean carriers, operating through their global alliances will ultimately resize their fleets in the Transpacific and globally but in the markets we care about in the Transpacific for ultimately the level of demand that is needed in the trades. We acknowledged there was a larger order book, that those vessels are going to be delivered, some of those will be delayed, as Ocean carriers seek to push back the delivery, we'll see some advanced level of scrapping. We'll see for vessels that are chartered, which represent about 50% of the global fleet, many of those vessels will be returned to their vessel owners when the charter periods are over. So I think you're going to see a combination of resizing that's going to occur, and even potentially laying up vessels or again, scrapping vessels that should have been scrapped, or would have been scrapped, except for the extraordinary market cycle that has occurred over the last few years. So you'll see a combination of all of those things occurring over the coming months. And as I said, some of it has occurred. We ourselves are an example of that, having three transpacific services at our peak, and then scaling that back to two in light of slack, falling demand. So those are those are really our thoughts about what should and are very likely to happen as we go through 2023.

Got it. Thanks. And then, I understand there's a lot of noise right now, given inventory stocking. But do you think there's sufficient demand for two weekly transpacific services year round? Or is there an option to make a CLX+ plus seasonal or every other week or something?

Yes, I mean, I think our view is -- let me address the market that we care about, which is the expedited market. And it's a good reminder that even while customers may be handling a lot of seeing a lot of inventory in their systems, in part as a result of inflation on the underlying cost of that inventory. There is still going to be a need for product that is moving, that needs to be replenished. And our view is that while customers will likely remain cautious on managing through their inventory levels, they are going to want to fill the shelves. And Matson's view is that there is a size of a market sufficient in the expedited space for two weekly services. And it's our view that if we remained the fastest and most reliable, which we expect to that we're going to get the lion's share of all that expedited freight, and there's enough expedited freight in the market that will allow us to sustain two services.

That makes sense. And then one last one for me. You noted some weakness in the demand environment and one key coming out of China. You had a big decline in rates from 3Q to 4 Q, has that found a bottom yet? Or should we think rates decline again, in first quarter?

Yes, it's a good question. I mean, I think and I think it's important here to differentiate between what we'll say our market rates or spot rates and what that since rates are. So let me let me first start talking about our thoughts about the spot rates in the market. I think typically what you see are after, historically, after Lunar New Year, or before the factory is reopened, we typically see that as the lowest point in the year for spot rates, but the demand is low as international ocean carriers typically void or cancel or blank sailings during that period. And that's when you see the spot rates at their lowest. So whether we're exactly at the bottom or near the bottom, I think we're close, if we're not there. So I think what we're going to do, and based on my belief and expectation that the ultimately the capacity will be reset, as I mentioned, that spot rates will come up from these lows, the extent to which it will be determined by lots of factors on the supply and demand side. But I think we're at or near the bottom on the spot rate side. I think if you look at then we move into the sort of in the Transpacific this annual contracting cycle and what I expect to occur is that in the entire transportation trade, we will see lower contracted rates then in the previous year as these contracts renew. They'll likely to be above the spot rates but below the rates at which they were contracted last year. That's pretty clear. The other thing that up for Matson while our rates are down from the previous year, and volumes were down as we mentioned, our rates remained significantly higher than the market rates and they remain above where they were pre pandemic in our expedited space. So it's hard to know exactly what will occur. But we feel comfortable that we are receiving a premium to the market that is commensurate with our highly differentiated service. So not knowing exactly how it's going. We like where our position is in the market.

All right, thanks for your time.

And our next question will be coming from Jack Atkins of Stephens.

Yes, Jack Atkins with Stephen, thanks for letting me jump back in and ask a couple more questions. So I guess, I know you guys don't like to talk about tradelane level profitability. But there's a lot of question, I think out there in terms of like what rates where they are, and the CLX+ not necessarily having that full double head all like the original CLX has. How does it fare in this type of operating environment, do you feel like that with the cost levers that you have to pull in terms of being able to blank sailings when necessary, and going from seven ships to five ships, that should be able to keep CLX+ profitable or at worst neutral to earnings, even in this type of rate environment? Is that reasonable to expect?

Yes, it's a good question. And I'll start by saying we don't talk about trade level profitability. What I can say with confidence Jack is this. There is even in this last week sailing, more demand for expedited service than we can fit on our CLX+ service. And this is at the seasonal low. So we do expect that the size of the expedited market can't be satisfied with a single vessel even in a down market we're in an overshot market. And we also firmly believe that over time, there will be long-term value creation by having the fastest and second fastest markets in a trade, there's a there's a demand for it, there'll be pressure to try to move product out of air freight into our expedited or deferred airtight product. And I would say that, obviously profitability is going to be lower on all of our transpacific services, and in the previous year, but we remained confident that these two services will create long term value for our shareholder.

Okay. Got it. I knew that was going to be a tough question to answer. But I want to see if you guys would, would maybe elaborate. So I guess maybe kind of shifting gears to a couple of other items. You know, Joel, could you could you maybe help us think about how interest expense should trend? I know it's interest rates can move around a lot. So not asking for a full year look. But, with the -- the progress payments being made into the capital construction fund and higher rates on your cash balance? I mean, what's the right way to think about interest income, I guess I should say, over the next couple quarters?

Yes. Well, interest expense will be very easy to project we'll have four instruments after we pay off these two Title XI here in the first quarter, so that two remain private placement tranches, and two remaining Title XI tranches. So that'll be very fixed on the interest expense side. So your question on the interest income side. Just take a look at the cash on deposit in the CCF as well as cash and cash equivalents on the balance sheet itself. So all of those funds will be invested in short term, high rated securities. And so what's the interest income on that -- on those two total amounts going to be? I mean, right now it's running close to 4%. And we told you what we made, we made $4 million of interest income here, so far year to date, and just the CCF alone, which had $518 million at year end and through -- up until the $100 million deposit we made just this past week. So it's really a function of this, look at those two numbers together on the balance sheet Jack, CCF plus cash and equivalents, and then look at what market rates are for high quality money market, government backed funds, government types of securities, because we'll maintain a very high quality of money market type investments with those funds. So that's the kind of return you should expect on the interest income side.

So in terms of like how that nets out onto the P&L, we're looking at something maybe slightly north of what you saw in the fourth quarter, again, depending on the potential fluctuation with container rates?

Yes.

Okay. Got it. Thank you for that, Joel. And then in terms of thinking about a couple of other items on the cash and cash flow side, with the deposit into the capital construction fund, should we be thinking about the cash taxes being just basically backed out of the alternative minimum tax, is that the right way to think about that plus your state income tax? Is there another way to be fairly minimal cash taxes?

Well, it should revert to something more normal, I would say in 2023. So what you saw is in 2021, and 2022, we had very high levels of profitability, we did have high amounts of cash taxes. So if you look at those two years together, we're going to get some refund back on the 2022 amount of cash taxes we paid. So that'll help overall cash flow. But going forward, Jack in 2023 will actually revert to something more normal in terms of cash taxes relative to our underlying earnings.

Okay, so the capital construction deposit -- that's going to shield the -- that's going to drive a refund from prior periods and going forward, it's going to be more your cash taxes and your payroll taxes maybe it will be fairly similar?

Yes, they'll be much closer together. And the way -- what we'll have to do in 2023, is start making quarterly estimated cash tax payments, so that you'll see that, but then that'll be a little bit overwhelmed by at some point here, we'll get a refund from the IRS. We don't know when at some point this year, we'll receive a big one-time refund. But we'll also be making regular quarterly cash tax payments to the IRS based on 2023 estimated profitability.

Okay, I hope I'm going to get a refund this year, too, but I'm not going to hold my breath. Okay, so I guess it'd be last question, then I'll turn it over. It’s on the sort of the pace of share repurchases, you guys have been pretty active on those over the last couple of years. And its really larger share count pretty significantly. How should we be thinking about that moving forward? I mean, is this going to be kind of a similar pace a little bit more ratable? You guys will be more opportunistic with it. How should you’d be thinking about that?

Yes, I would say it's going to be a slower pace than what we've done this first year and a half. I mean, remember, we started in August of 2021. And so in that 18 months, we've bought back 7.5 million shares already. So that's more than the steady pace you'd expect for the rest of this decade. And the reason we did that is because we had such very large levels of cash flow and profitability in 2021 and 2022. So as things kind of revert back to something more normal in '23 and beyond the share repurchase activity will go down and reduce from that annual pace. So more of a steady pace that's more measured with our cash flow from operations minus our kind of maintenance CapEx levels, because we because we funded the big vessel for CapEx in the CCF already two-thirds of that. So, more of a steady, so less pace and what we've seen in the last 18 months, but a steady pace for years to come. It's what we expect, Jack.

Okay, no, that's great to hear. And I guess maybe one last one for me, and I'll hand it over. And I just would like to maybe kind of go back to this idea of sort of what normalized earnings could look like for Matson. And I know it's a difficult question to answer. But I guess as you guys think about sort of the margin range for marine transportation, historically, it's sort of in mid-single digits at the trough of a cycle, mid-teens at the peak of a cycle. It's because of COVID times out for a moment, and sort of high single digit, low double digit, and we're in a more normalized operating environment. Is there any reason to think that that range has kind of changed one way or the other through the cycles we look forward? I mean, is that still the right way to think about it? Do you feel like the business is structurally more profitable? Any sort of color around that I think would be helpful for investors.

Yes, Jack, this is Matt. I'm going to try to answer part of it, and then I'll turn it over to Joel. I think we continue to believe that our earnings coming out of this pandemic will be higher than it was going in. And I'm not sure whether we've hit normalized earnings, especially in the first half of this year. But we do expect eventually to get there. And I think our view there is partly driven from the addition of the CLX+, which as I said earlier we think will drive long term value over and above our core earnings. I think the value of our CLX and the brand that that it stood out in a really disruptive cycle is also going to allow us to continue to earn a very healthy premium. In a few years-time, I do expect these three new builds to put these additional 500 containers for sailing for those three ships that we're going to be introducing into the CLX to be another bolt on of additional earnings through upsizing kind of an organic growth initiative. And I expect us to be lookout for small tuck-ins. And I think those acquisitions in other growth opportunities, absent of a pretty large acquisition, which are not included in our comments if we can find one that fits. So without trying to put a percentage on it, those are some of the things I think, give us competence to say that we do believe that we're going to be a different company than we are going into it. But I'll turn it over to Joel to give you the mid-cycle percentage profit margins.

Which, and Jack, you've heard us say before, because there's so many moving parts, especially fuel, that margin analysis becomes very, very difficult. And so I know, you went through in your question, a couple of predicates there in terms of what margins might be normalized and lower end and high and low points in the cycle. And we honestly, we just don't think of it that way. We don't think of our businesses in terms of what margins they're going to produce, we think of our businesses in terms of what aggregate EBITDA and operating income they're going to produce. So I think for investors, we've always talked about taking a run rate, and then doing your analysis, what you think is going to happen the future off that run rate. So if you if you assume more volume at x price, then you can back into what your contribution and incremental contribution margin might look like. And then you can start working on aggregate EBITDA and operating income based on based upon that starting point, as opposed to building a revenue number and then applying the margin against it. Does that make sense?

It does, it does. I just -- I think you guys know your business better than anybody else. And it's tough from the outside looking in with all the different tradelanes to be able to in a lot of these businesses overlap on each other to be able to really model it and think about where things are going to settle out. So I think that once we can get some more clarity around that, I think that will help valuation once we can kind of get some views. So I just tried to get you guys to go on the record on that, but I guess we'll have a better sense for that in the second half of the year. So thank you again for the time. Really appreciate it.

Okay, sure. Thanks, Jack.

Thank you. That concludes the Q&A session for today. I would like to turn the call back over to Matt Cox, for closing remarks.

Okay, well, thanks, everybody for your interest in today's call. We look forward to catching up with everyone next quarter. Aloha.

Thank you all for attending today's conference call. You all have a great evening and you may disconnect now.