Good day, ladies and gentlemen. And welcome to the Matson Fourth Quarter 2018 Financial Results Conference Call. At this time all participants are in a listen only mode. Later we will conduct the question-and-answer session and instruction will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Director of Investor Relations, Lee Fishman. Mr. Fishman, you may begin.

Thank you, Josh. 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 February 21, 2019, 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 today. Please turn to Slide 3 for my opening remarks. Matson's performance in the fourth quarter was in line with expectations, with strong contributions from our China service and Logistics. Our China service saw higher average freight rates and higher volume compared to the fourth quarter of 2017, as a result of the stronger seasonal demand driven by the U.S. and China tariff situation. The Logistics segment in the quarter continued to execute well across all service lines, similar to prior quarters in the year and nearly double the operating income in the year-ago period. For the full year 2018, we had a strong performance in our China service, with higher average freight rates, and we had significant contributions from SSAT and our Logistics segment. We also saw steady performance in Hawaii. Countering these favorable contributions was the ongoing competitive situation in Guam and a weaker-than-expected southbound seafood season in Alaska, compared with the strong seafood harvest levels in 2017. Turning to Slide 4, I want to spend a few moments to highlight our current priorities, many of which are executing on the investments we've committed to that are long-term focused and value enhancing. First, we're focused on completing the Hawaii service fleet renewal, which consists of preparing the vessels to be in service and disposing the last of our steamships in an environmentally friendly manner. It's important that the operational transition is smooth, not only for the vessel schedule, but for our terminal operations. In November of 2018, the first of our four new vessels, the Daniel K. Inouye, entered service, and the vessel has performed very well so far. We're actively preparing for Kaimana Hila delivery at the end of this quarter and to be in service shortly thereafter.…

Please turn to Slide 13 for our fourth quarter and full year 2018 financial results. For the fourth quarter, we earned net income of 20.6 million, or $0.48 earnings per share compared with 166.9 million or $3.90 per share in the year-ago period. Net income and earnings per share in the fourth quarter of 2017 benefitted by 155 million and $3.62 per diluted share respectively from a one-time positive noncash adjustment arriving from the enactment of the tax cut and jobs act. Adjusting for the tax act impact, our net income earnings per share in the year-ago period would have been 11.9 million and $0.28 per share respectively. Ocean Transportation operating income for the fourth quarter increased by 1.3 million year over year to 21.4 million. This increase is primarily attributable to a higher contribution from China and the favorable timing of fuel surcharge collections. These favorable year-over-year comparisons were partially offset by higher terminal handling costs. Logistics operating income for the quarter was 9.1 million or 4.4 million greater than the result in the year-ago period. The increase was due primarily to higher contributions from transportation brokerage and freight forwarding. EBITDA for the quarter was 64.4 million or 1.9 million higher compared to the year-ago period, due to an increase in operating income of 5.7 million and other income of 0.2 million, partially offset by lower depreciation and amortization, including dry dock amortization of 4 million. For the full year 2018, Ocean Transportation operating income increased by 4.7 million year over year to 131.1 million. This increase is primarily attributable to higher average freight 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 full year…

Okay, Joel, thanks. To conclude our prepared remarks, the diverse nature of our transportation and logistics businesses really rang true in 2018. The favorable contributions in our China service, SSAT, and Logistics outweighed the impact of ongoing competitive situation in Guam and lower southbound volume in Alaska. For 2019, we expect the diversity of the business drivers to continue to bring consistency for the consolidated group. We remain intensely focused on cash-flow generation and managing our leverage, as we advance on the last three new Hawaii vessels and to finish off the first phase of the upgrade of our Sand Island terminal facilities. So, personally, I like where we are at Matson. We're positioned well in each of our key markets, and I'm very excited by the investments that are currently underway. And with that, I will turn the call back to the operator and ask for your questions.

[Operator Instructions] Our first question comes from Kevin Sterling of Seaport Global Securities. You may proceed with your question.

Let's see, Matt and Joel, you guys talked about your leverage peaking I think in Q1 '20 at I believe the mid-3s level, and then after that, you'll quickly de-lever. Did you say when you might get back down to the mid-2s? Is that by the end of 2020, or are we looking at maybe 2021?

Yes, Kevin, we said we expect to de-lever about a half a turn a year. So just [indiscernible], if we were at 3.5, then we would be down at 2.5 in about two years.

And along those lines-and thank you for that additional outlook with your depreciation and CapEx beyond 2020, and understand the higher levels of CapEx you have now and into 2020. But beyond that, say 2021, do you expect your maintenance CapEx to return to the more normal level of $50 million?

Kevin, this is Matt. I would say yes, we see our long-term CapEx levels-maintenance CapEx, that is-to be in the $50 million range. We've talked about the major investments that we've highlighted, and as we've talked about before, the next major capital cycle would be the likely replacement of our Alaska vessels, which will take place sometime between 2025 and 2030. So there is a period under which we do expect to have significantly lower CapEx post this period.

And Matt, you mentioned in your prepared remarks about your CLX outlook for 2019. I think that's really, you said, based upon a neutral outlook for U.S./China trade relations. If the trade war is resolved-I understand that's a big if-where could the upside come from, do you think, with CLX? Would it be volumes, rates, or maybe both? How should we think about that if we get a trade war resolved?

Yes, I think if we get a good outcome on this trade dispute, which I know we're all hoping for, I would say that what we would-so there's two parts to the China market, as you've heard us talk about many times. One is the amount of demand, and I think it's in part a driver of where the U.S. economy is, and the other factors that are going to drive this trans-Pacific demand. And then the other factor, really, is the amount of deployed capacity by the other international steamship lines. So in order to have an orderly general trans-Pacific market, we would need to have a reasonably successful outcome of the trade negotiations and the international ocean carriers deploying the right amount of capacity and not an over-capacity. But that isn't to say that even if we have a more choppy outcome on trade negotiations, as long as the international ocean carriers deploy only the amount of capacity that's required for the market, then we still should be in pretty good shape. With regard to your question about now back to Matson, the upside for us is primarily in rate, given that effectively, other than for two or three works a year post-lunar New Year, when our ship is only partially full, we're basically full every other week of the year, so there isn't a ton of capacity upside for Matson. It has to be on the rate side.

And last question for me, and I believe you guys mentioned this before, so if you could just remind me, I'd appreciate it. Can you quantify for us again the financial benefit of one less vessel in operation? You talked about going from 10 to 9.

Yes, that one fleet unit, Kevin, we said is $13 million.

Thank you. Our next question comes from Ben Nolan of Stifel. You may proceed with your question.

I have just two quick questions, hopefully. Number one, I understand the idea behind the leasing, especially something of an older ship and being able to get cash out of that in terms of managing the leverage. Just curious if that is a lever that you might be looking to pull again, or I suspect you could, but is that very high on the list of tools that you might deploy?

Ben, no. It is something we could do again, but it's not-we don't think it's something that we need to do. We think this one transaction has optimized us, so if we're in a downside scenario or some recessionary scenario in the very near future, we could do it again, but we don't think that we'll need to.

And then switching gears a little bit to SSAT, obviously a good year. You know, hard to match that. But, you know, I know that in the past you guys have talked about possibilities to expand that, certainly perhaps in the Northeast or other areas across the West Coast. How are you thinking about that in terms of the likelihood that there might be some opportunities that materialize on the SSAT side, you know, or the coming 12, 24 months?

Ben, this is Matt. I would say that the scope of our joint venture, geographic scope, is on the U.S. West Coast. That isn't to say that we couldn't look at jointly doing something outside of that area, but the prime focus of the joint venture is within that geographic area. But I would say within that geographic area, there is-we're looking at now a discussion of a potential new terminal. It's been publicly announced, Terminal 5 in Seattle. There's a lot of moving pieces of international ocean carriers moving around as the Port of Seattle is looking at opening up new space closest to its downtown and migrating some others off of Terminal 46, and some other stuff going on. And there's no finalized deal there yet, but there's a possibility of us picking up an eighth terminal. We have seven terminals in the joint venture now on the West Coast. This could potentially add an eighth sometime this year, and that's been previously announced by the Port of Seattle. But that's an example. We continue to be very interested in working with our port partners at SSA to grow this joint venture. The nice part about the joint venture, as we've mentioned many times, is they are the best terminal operators on the U.S. coast, by far, and so there continues to be interest by various alliances in having SSAT conduct its operations. And so we continue to be very open over time, as we have been over the last two decades, in not necessarily pulling our dividends out, but continuing to focus on retaining the capital inside that joint venture to grow it and get the kinds of results that we experienced in 2018. So we, again, continue to be very bullish on this joint venture and our joint venture partners.

And our next question comes from Jack Atkins of Stephens. You may proceed with your question.

So, Matt, if I could start with a question on IMO 2020, and I know you discussed this in your prepared comments, but I guess as I'm thinking about it, you know, you guys are, just from my perspective, really positioned I think in a really advantageous way as this regulation sort of takes effect. So I would just be curious to get your thoughts on IMO 2020, and with the fact that you've got scrubbers installed in your Alaska fleet, you're going to have some scrubbers installed on the China fleet, which also services Hawaii. I mean, how do you think about the potential to either pick up some market share or pick up some margin overall, just given the fact that you're going to have a significant competitive advantage with your fuel input costs versus your competitors'?

Yes, it's a good question, Jack. I think our primary threshold first was to make sure we feel we're well prepared. And with regard to the domestic trade, the Hawaii trade, our Alaska trade, our Logistics businesses and those kinds of things, we have and continue to expect our fuel surcharge mechanisms to help cushion any increases in cost in those trades. Although, you rightly point out that in our Alaska service, that we do have scrubbers installed. Our competitor is burning more conventional motor fuels. The same perhaps is true in Hawaii. But our main goal at this point is to keep our fuel surcharges as low as possible and compete on other services. It's a little hard for us to speculate as to whether it provides us a competitive advantage. I would note in the China service, though, and a number of CEOs of large international ocean carriers have talked about an additional $15 billion fuel bill for the international ocean carriers, and it requires a level of discipline that-in trying to be effective in collecting fuel surcharges. And, candidly, the track record of international ocean carriers being able to recover their fuel costs is not very good. And so I would just say we believe ourselves to be well positioned. It might create opportunities on the China side. You know, if the markets are in chaos, Matson thrives in chaos. And so this is an area of lots of uncertainty, but we feel extremely well placed for whatever happens in the marketplaces in which we operator.

And then, I guess a two-part question on sort of what's going on in the trans-Pacific lane. Could you maybe comment around contract season and sort of how you think the contract this season is going to play out? Obviously, second half of the year, very difficult comps in the spot market, but would just be curious to get your thoughts on sort of the just overall contract rate environment in '19 for the marketplace. And then, just as a follow-up to that, how did the fourth quarter play out with regard to pull forward versus your expectations? Obviously, October was-saw a significant pull-forward of freight, per the data, but it seems like December maybe didn't see as much as we were initially expecting. I just would be curious to get your thoughts on how that played out.

Sure. So with respect to how we see the China rate environment turning out, I think-well, first of all, it's too early to tell, is the short answer. But in the next month or so, we're going to start seeing, as we get into this April season and the contracting that goes on in this process. But what we understand is the international ocean carriers are pushing hard to create a mechanism in their annual service contracts that would allow them to recover higher fuel costs from January 1, 2020, through April 30. And as you know, Jack, the contracting season is May 1 to April 30, so international ocean carriers are focused on trying to get mechanisms in place that would allow for them to pass through the higher cost of the IMO fuel post-1-1. So far, their customers are pushing back strongly on that, and so there continues to be, at this early stage, something of a stalemate. But, again, it's yet very early in the process, so our view is that that is probably going to be the most important element to watch for in the contracting environment, followed closely by how much deployed capacity are they going to put in the trade. I think if there was any lesson for the international ocean carriers when you look at the first half versus the second half of 2018, was that if you put too much capacity, then rates fall, and if you try to better manage supply and demand and match it with capacity, you get a much better rate outcome. So that's about all I have, other than kind of stay tuned on the rate environment. And, forgive me, I didn't write down your second question.

No, no, that's what I get for asking a rambling question. But I guess the second part, Matt, would just be, you know, how do you think about-or how did the fourth quarter play out with regard to the pull forward? Obviously, you guys were expecting some, we saw some, but was December-did December see the type of pull forward that you were initially expecting when you gave your guidance in early November?

Yes, I mean, so I often, Jack, will be commenting on market conditions versus Matson's conditions, so let me be clear here. We, Matson, saw extremely strong demand all the way through December, and what had happened-and all the way through into January. And what happened was that, because of the pull forward of-or the threat of the change in tariffs, a lot of cargo got advanced, which created a significant amount of congestion in the L.A./Long Beach port complex, a significant backlog of rail demand, a significant filling of West Coast warehouses, and causing lots of disruption in chassis and terminal availability. There were a number of what they call extra loaders, which are unplanned large ship arrivals, which threw the Southern California port complex into disarray, which plays exactly into Matson's strengths. So in a period where we otherwise might have been a little slower, cargo was getting frustrated inside of ocean carriers' terminals for 7, 10 days, 14 days before they became available, and the rail service was similarly negatively impacted. So while we do think there was a definite pull forward in the market, the disruption caused by that pull forward put Matson in this highly differentiated sweet spot, where if you actually want to get your cargo and not have it held hostage on one of the terminals, we were the carrier to use. So we do think there was a pull-forward effect. We do think it will be a little bit slower post-lunar new year. But, you know, those are our thoughts on how it impacted us in the quarter, Jack.

Okay, thank you, Matt. And then, last question for me, and Joel, this one is for you. I just want to echo Kevin's comments around, you know, kudos on the longer-term depreciation and CapEx and interest expense guidance. But, you know, when we think about 2019 cash from operations, obviously, 2018 was a very, very strong year in terms of cash from operations. How are you thinking-I know you don't want to provide specific cash from ops guidance, but how should we think about the direction of cash from operations in 2019? Do you think you can maintain the level that you saw in 2018, or I'm just trying to think about how we have free cash flow this year?

Sure. Well, the key driver, you start at the top of EBITDA. So in our outlook, we're basically saying EBITDA is going to approximate last year's level, but then adjust downward for the sale leaseback transaction. And then everything below that is going to be working capital items, dry docking items, tax items, etcetera. And look, a couple elements of why this year was particularly strong, we had EBITDA in line with our general expectations for the year, but we also had a lot less dry docking in 2018 than we did 2017, so that was a very helpful item. We're continuing to focus-SSAT had a really good year, so the focus in cash flow generation coming out of SSAT was strong. We're very focused on working capital as a company, so we did see some improvements in working capital in 2018 that, if sustained, then would just be good-you know, it would be year-over-year increases in 2019. But overall, Jack, there's no reason we can't still put up very, very strong cash flow numbers in 2019, but it's going to be driven by more things below EBITDA and the working capital and dry docking side than it would be on anything from EBITDA.

And if I could just maybe sneak one more question for you, Joel, in here on depreciation and amortization. The 2021 number, it's a pretty big step up versus 2020. Is that due principally to higher dry dock amortization? Because if my memory serves, you guys will be kind of going into a two-year period of higher dry dock amortization in 2021 and 2022. Is that the right way to think about that?

Yes, that's a big piece of it, because we do-it's every five years, so 2016 and 2017 were big years, and then you begin to get into that in 2021 as well. So that's a piece, as well as the full-year effect of the last vessels delivered in third quarter. So those are the two biggest drivers of that additional $10 million increase.

Thank you. [Operator Instructions] Our next question comes from Steve O'Hara from Sidoti. You may proceed with your question.

Just question on the previous guidance on the-or I guess cost outlook on the ships and the benefits there. I know you had said you expected depreciation to be lower or, you know, that expectation was still the same. And I think, you know, it was 28 million to 31 million was the reduction in the operating costs going from 10 to nine. Is that still, you know, the same, aside from maybe the 5 million additional that you get from the investments in 2021 or something?

Steve, big picture, yes, everything is the same. The core economics of the 28 million to 31 million benefit from the four ships is still the same. About 13 million of that was the reduction of 10 fleet units down to nine, and the other half came from partly efficiencies in our auto rolling stock business, given the garages on the third and fourth ships, and then just general lower maintenance and repair costs across all four vessels. So that core of 28 million to 31 million, it's still the same. On the D&A side, and that's part of the reason why we gave longer visibility here, there's a lot of moving parts. I mean, we've got the scrubber projects, we've got the other projects I mentioned on the CapEx slide, so we wanted to layer in all these new projects on top of the $5 million to $8 million reduction from the vessels themselves so we could give investors a good picture of the next couple years and how that plays out. But embedded into all these new numbers that we just showed you is a consistent improvement in benefits from the four ships themselves.

And then just, can you remind me what the one-time benefit was in SSAT last year and what that was from, the size and…

Yes, that was about $3 million, and it came from a whole slew of year-end adjustments as they closed their accounting books. They're a January 31 yearend, and so if they have yearend adjustments, it hits us in Q1. So that's what it was last year.

And then, just on Logistics, I mean, I think you're looking for kind of flattish operating income in 2020, but up in the first quarter, I guess. And what's happening later in the year that's maybe not as favorable? Is it related to the pull forward that you talked about earlier or the very strong demand with tariffs, or is there something else going on that's maybe weakening things as the year goes on?

Yes, I mean, I think our view was we, like many other logistics operators, had the ability to effectively reprice our entire portfolio of businesses on the brokerage side, and so we got the benefit of it as the year went on. We're beginning to lap the good news with regard to the repricing and some of the other favorable dynamics as we move forward. So I think we continue to feel that the unit will perform very strongly after a record 2018. We think we're going to replicate it. But I don't think there's anything particular about, because we're saying we're going to have a stronger first quarter, that implies there's other new, negative things that are opening up. But more, rather, we think as the full year progresses, there might be a fourth quarter impact in 2018 that ends up performing stronger than the fourth quarter of '19 because of some of the pull forward and other congestion that we saw. But we're not trying to make any significant statements, Steve, about new negatives that are opening up relative to the strong performance we're seeing.

Okay. And then, maybe lastly, with the ship, it looks like the fourth ship moved forward a little bit, and can you just remind me what the issue was there on the, you know, the timing? Why was it delayed? Was it commodity related or cost related there?

Yes, the impact there was the yard in which we were constructing those second two vessels in San Diego at NASSCO had a dry dock, or a construction dock, that had some flooding and took it out of commission, and they had to re-jiggle their schedule, delivery schedule, and initially gave us a number that they've now pulled in because they've been able to figure out how to deliver it closer to its original due date. So nothing more than a better plan, a recovery plan, from the shipyard related to that incident.

Thank you, and our next question comes from Michael Webber of Wells Fargo. You may proceed with your question.

Most of my questions have been asked, but I wanted to touch on just a couple sector points. We certainly agree on I guess the degree of skepticism around the international container lines' ability to pass through, you know, and exogenous shock to their cost curve. I'm just curious, you know, considering that you do share a customer base, have you noticed any material change in that customer base in terms of the way they're approaching booking their freight, the way they're thinking about credit risk? Have you just noticed anything, aside from just the degree, kind of a tense kind of stalemate as everyone kind of stares at their attempts to pass that through?

Yes, it's a good question, and it's a little early to tell, Mike. I would say one of the factors that we've not talked about, I don't think it's going to be a cascade effect, but I think a lot of our customers who were, because of the tariff situation as it played out, if you sourced from multiple Asian countries, given the political risk, you were looking to see if you could expand sourcing from your second country outside of China. If you were a sole sourcer inside of China, you began to look at developing a China-plus-one strategy from customers, just making sure and hedging their production sourcing. But these things are not easily done, and they're done over many years, and so that was something that occupied some of our customers' minds. And I think the other point I would make about the change in sourcing is there's always a sourcing that is looking for lowest cost anyway, so we saw our normal customers in China looking to source in Vietnam, in other low-cost countries. But that follows the last 30 years of cargo moving, you know, from Japan to Taiwan, from Taiwan to Korea, from Korea to China, from China to India and Vietnam. So that sourcing thing is I think part of a larger factor. Exactly how this-back to your part of your question about IMO and the kind of standoff, a little hard to tell. My sense is if the carriers don't get a satisfactory outcome with regard to mechanisms that allow them to recover all or part of their fuel surcharge, they're going to take a very hard look at deployed capacity. But that's only a speculation on my part. But that's only a speculation on my part.

Well, though, it kind of leads into my last question just around that deployed capacity, and we've seen an oversupply of Megamax and also large tonnage on Asia to Europe. It started to spill over, not necessarily to trans-Pac. It's been mostly kind of in the Mid-Eastern routes. But there's been more kind of one-off Megamax vessels kind of trading trans-Pac. I don't think anyone has it in string yet. But as you think about the way-I guess maybe just how do you think about the dynamics over the next kind of three to four years, or maybe longer, when it seems inevitable that we're going to see some ultra-large tonnage actually on trans-Pac and how that impacts your speed advantage, and also your premium service?

Yes, I mean, I think we could not be better placed. I think you're going to continue-the premise of your question I agree with, which is larger and larger ships, even 10,000 TEU ships moving to 14,000 TEU ships, as those ships are deployed from Asia and Europe to the trans-Pac. I see more pressure on consolidation among ocean carriers, more pressure on potentially slow steaming a solution to a partially-successful IMO. You know, if they don't get that back in the mechanism, more grouping of big, large ships making terminals congested, which allows us to continue to stand apart in our service offering as a deferred air-freight type of product. So I feel very confident in the long-term prospects and the macro trends for our little express China service.

Yes, it would seem that way. Out of curiosity, do you think it's likely within the next three or four years, we'd see an actual string of Megamax carriers trading trans-Pac?

Well, yes, I mean, I would expect to see larger ships of 14,000 TEUs and strings of those over the next few years. And I think if you look at investments that SSAT, our joint venture is making, newer, larger cranes at one of our terminals in Oakland, OICT, the largest cranes to accommodate that, we continue to position our joint venture to be able to accommodate those, because we do expect they're coming-and strings of those to be coming.

Thank you. And I am not showing any further questions at this time. I would now like to turn the call back over to Matt Cox for any further remarks.

Okay, thanks, Operator. Thanks for everyone for listening, and we look forward to catching up with everyone at the first quarter 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 wonderful day.