Ladies and gentlemen, thank you for standing by, and welcome to the first quarter 2020 financial results conference call. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker for today, Lee Fishman, Director of Investor Relations. You may begin.

Thank you, Towanda. 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 presentation and are more fully detailed under the caption Risk Factors on Pages 24 to 34 of our Form 10-Q filed today, May 5, 2020, and in our subsequent filings with the SEC. Please also note that the date of this conference call is May 5, 2020, 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. In light of the unprecedented environment we’re in, I wanted to begin the call with our current priorities before recapping our first quarter results. So please turn to Slide 3. First, we’re executing a number of critical objectives to manage the business through this pandemic and period of economic uncertainty. Our company has responded and continues to respond to the reality of operating under COVID-19 pandemic. There are three areas in particular I want to highlight. Our top focus is safeguarding the health and safety of our employees by enhancing processes on the vessels to ensure crew safety, ensuring those working from our warehouses or terminals adhere to Coast Guard, CDC and other government guidelines on PPE, disinfecting, social distancing and requesting those whose job functions allow them to do so to work from home. We’re also focused on ensuring the consistency of our Ocean Transportation service and making sure cargo is available to our customers as quickly as possible. Matson’s culture is rooted in providing the highest-quality service and best-in-class on-time performance to its customers because we are the lifeline to these remote communities, and this has never been more important than the pandemic environment in which we operate today. This economic environment is unlike anything we’ve seen before, but we’re no stranger to operating in difficult economic times. As you would expect, we are responding to the new reality and preparing for an extended downturn by managing the operational and financial aspects of the business heading into a downturn. As the COVID-19 situation evolved in early March, it became increasingly apparent that we had to ensure the company had balance sheet liquidity to manage through a sustained period of economic weakness. On March 31, we executed the amendments to…

Thanks, Matt. Now on to our first quarter financial results on Slide 16. Ocean Transportation operating income for the first quarter decreased $1.5 million year-over-year to $7.9 million. The decrease was primarily due to a lower contribution from China and SSAT and higher depreciation, partially offset by lower vessel operating expenses, primarily resulting from one less vessel in the operating in the Hawaii service and the timing of fuel surcharge collections. The company’s SSAT terminal joint venture investment contributed $4 million or $4.5 million less than the prior year period. The decrease was primarily due to the additional expense related to the new lease accounting standard adopted in the second quarter of 2019 that did not hit first quarter last year as well as lower volume due to canceled transpacific sailings. Logistics operating income for the quarter was $5.1 million or $3 million lower than the prior year period. The decrease was due primarily to lower contributions from transportation brokerage and freight forwarding. EBITDA for the quarter decreased $2.8 million year-over-year to $46.5 million due to lower consolidated operating income of $4.5 million, partially offset by an increase of $1.7 million in depreciation and amortization, which includes dry dock amortization. Interest expense for the quarter was $8.6 million or $3 million higher than the fourth quarter of 2019, primarily due to the higher capitalized interest associated with the Lurline moving into the P&L when the vessel was placed into service in the first week of January. Lastly, the effective tax rate in the quarter was 24.0%. Slide 17 shows how we allocated our trailing 12 months of cash flow generation. For the LTM period, we generated cash flow from operations of $284 million, borrowed $56.7 million on a net basis and received $14.3 million from sale-leasebacks, from which we used…

Thanks, Joel. Please turn to Slide 22 for my concluding remarks. Our second quarter is likely to be the worst period in this cycle as tourism is at a near standstill in Hawaii, and all of our other U.S. markets face economic headwinds from the shelter-in-place orders. However, we strongly believe it is – the inherent qualities of our businesses will be a standout throughout the economic cycle. Matson is the lifeline to remote communities of Hawaii, Alaska and Guam where we’re relied upon to deliver sustenance goods week by week. Our culture of placing high priority to on-time performance and high quality of service to these remote communities is at the heart of what makes Matson a preeminent transporter of goods, a critical part of domestic supply chains. Our CLX service is a superior product in times like this where airfreight capacity is challenged and other transpacific carriers are canceling sailings. Our Logistics businesses thrive when conditions are chaotic and bring a high quality of service that is prized during difficult times like these. Our recent debt amendments provide the necessary balance sheet liquidity to manage through the storm and complete our Hawaii fleet renewal, Phase 1 of the Sand Island terminal upgrade and our six-vessel scrubber program this year despite the challenging circumstances. As we speak today with all of the uncertainty surrounding us, I strongly believe that Matson will come out of this cycle positioned well with new and stronger customer relationships, new opportunities and the satisfaction that we met the greatest challenge of managing freight in this unprecedented time. And with that, I will turn the call back to the operator and ask for your questions. Operator?

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

And Matt, Joel, Lee, thanks so much for the time.

Hi, Jack.

Well, I guess, let me start off by saying that thank you for all the detail that you guys provided. I think that’s the most detailed in terms of business trends and outlook that we’ve heard from a lot of companies. So kudos on that. I know it’s a tough operating environment. I guess let me start with sort of the cost reduction actions. And as you think about that $40 million to $50 million that you guys have targeted, I believe it’s for the balance of this year, can you talk about how that gets scaled in? And how much of that is permanent versus just temporary based on current business levels?

Okay. Yes, Jack, this is Matt. I’ll take a crack at it, and then I’ll ask Joel to comment on some of the sequencing and timing. So I think basically, the cost reduction efforts, as I mentioned, fall into several buckets. The first is in the category of deploying our largest assets in the market that seems the most active. What’s clear is Hawaii will remain muted for the time being at least. And so moving our larger vessels into the CLX where we happen to have this unprecedented level of demand given the relocation of the market will produce some of that benefit. And then we basically did a bottom-up – as most companies are doing, a bottom-up look at ways in which we can reduce our operating expenses in line with the lower expected levels of freight volume. And so there are, I would say, over 100 separate initiatives from every terminal, from every location, every one of our locations, which are looking at ways to reduce our operating costs. And then, of course, we’re looking at deferring capital and deferring all sort of discretionary expenditures until we get a better look at this cycle. So I would say with regard to your question about when and how they roll out, a number of the initiatives that we’re looking at only get a three-quarter a year or eight-month benefit. So the annual run rate of that $40 million to $50 million is actually higher. And to the extent that the economic cycle is – remains muted into the future, we’ll have a running head start on cost reduction initiatives going into 2021, if that’s necessary. So given that it was difficult for us to know exactly what was going to happen, we’ve decided to take a very strong, firm reduction at our recurring operating expenses given the uncertainty. But we’re also careful to do nothing that would create permanent damage to our services so that when this cycle ends – our whole goal is to remain effective and to be able to bounce back when that eventual recovery occurs, although for planning purposes, we’re not assuming it happens in the next nine to 12 months. But what else would you add, Joel, to that?

Yes. I think that hits it all. I mean, Jack, and I think the key for – to your point about – the question around timing is a number of these initiatives don’t – you can’t just make them go effect one day, you have to phase them in. So a lot of that – some of them began at the end of April. A number of other ones, especially the vessel deployments, they’ll be phased in as we move vessels into these markets through the course of May and June. So if you look at the total $40 million to $50 million, you and investors should wait more of that to Q3 and Q4. Some of it will definitely benefit Q2, but it won’t be proportional, equally between Q2 and the latter half of the year. So that’s a little bit of sense on the overall timing this year. And then you also said how many of these will be permanent. And as Matt just articulated, to the extent that we keep our vessels where they are, they’ll be permanent. But to the extent that we move them later because market conditions dictate, then it will change, but we’ll give updates around the magnitude of that as dictated as those changes occur.

Okay. That all makes a lot of sense. And so I guess just sort of following along with that, I mean given that it seems like the second quarter, hopefully, is the trough from a volume perspective, and it’s going to take at least a little bit of time to get to that full $40 million to $50 million run rate, do you expect the business to be able to generate a profit in the second quarter? I know you’re not giving guidance. I’m just trying to think that – trying to figure out, does all this equate to a breakeven or maybe even a modest operating loss? Or do you think we’re going to be able to generate a profit in the second quarter?

Yes, Jack, we believe we’ll have a profit in Q2 this year.

Okay. That’s great. That’s great to hear. Last question for me, and I’ll turn it over, on the Title XI financing. Joel, can you just talk for a moment about – does that provide you more flexibility around the fleet longer term, less flexibility around the fleet? Does that change the way you kind of think about the capital structure as we sort of look out over the next several years? I know you guys have sort of debated whether or not to take that financing in the past and opted not to, now obviously it gives you a little more flexibility near term. Does that change anything longer term about the business?

No, I don’t think it does. It will have zero impact on how we deploy the vessels themselves. So it’s really just a capital structure financing decision. And the reason we’ve been reluctant to do too many of these is because it’s really important that Matson has access to unsecured long-term capital when and where we need it, and the core foundation of that is being an investment-grade company. And if you just do too much secured financing, then you lose or maybe inhibit some of your access to unsecured capital. So that’s why we’ve talked about it in the way we have in the past. But if you look at the new world we’re in, Jack, of course, which we don’t think is going to go away in a quarter or two, this incredibly attractive financing, long-term financing, as I said, 1.6% effective interest rate, 1.22% cash coupon, this is really, really low cost of capital. And so from our perspective, it absolutely makes sense to do right now and to do it in a judicious way. And we think exploring another tranche of this, around $140 million in size, as I mentioned, is smart for us to do in this environment. So that’s how we’re looking at it. But no impact to operations or how we deploy the vessels, Jack.

Okay. That’s great effort to hear. Thanks a lot for the time, guys.

Thanks, Jack.

Thanks, Jack.

Thank you. Our next question comes from the line of Ben Nolan with Stifel. Your line is open.

Great, thank you and good start too, guys. And first, let me just go out and say I appreciate that you guys are taking a hit to your own salaries, and I think that’s very admirable and good for you for doing that. But the – I have a handful of questions. And the first is just as we look at capital allocation in this environment, and I appreciate it’s a little bit early, but ordinarily in June, every year, you can set your clock where you guys are increasing your dividend. Have you given any thought to that? Or how do you prioritize dividends in general with respect to where we are in the market? And do you sort of view that as sacred or a tool in a tool chest?

Yes. Ben, thanks for the question and for your comment earlier. But basically, we continue to be, and believe ourselves to be, a very strong cash flow creator. And while we’re at the very end of a large capital program, and not to minimize the disruption but inconveniently timed recession, we don’t believe that interrupts our long-term story about cash flow generation. And we equally remain committed to being disciplined in returning capital to shareholders. So while the Board will make the decision with respect to dividends and the approach to dividends, we would be – we see ourselves very much committed to that approach of capital, if that answers your question.

No, no. That’s perfect. And then my next question is sort of around – I mean you are shifting the more modern larger ships to the CLX service, totally understandable. Earlier on, you made some comments about maybe changing some of the Neighbor Island port call schedules or Kodiak. Curious if there are any long-term implications of some of those moves. I suppose you can always go back and do them again as demand is required, but does it change the supply chains at all such that maybe there’s unintended consequence?

Yes. I mean I would say the answer to your question specifically is yes, there are adjustments that are required by our customers. So for example, if we were making three calls to a particular day or island, and now we’re making two, we have to make sure that we’re carrying the cargo a little bit differently the way that our retail store customers would have to order to restock in order for the cargo to be flowed onto their network will require some adjustments. All of that takes some adjustment work by customers, but that can be easily changed when volume returns. And we want – obviously, we’re working very closely with our customers to make sure that their core sales and supply chains are not interrupted by this too dramatically but, again, are all very changeable, we think, with minimal disruption and can be easily changed back when volume returns.

Okay. Helpful. And then lastly, again, maybe a bigger – kind of a macro, bigger picture question, and you guys think – in my opinion, you guys think bigger picture. As you look out, and let’s say that this is maybe – certainly, it’s a challenging environment now, and it remains challenging for a little while. Do you envision any big changes in sort of the competitive landscape that you’re operating at? And that certainly is true for the ocean service. But also on the logistics side, I mean is there – do you view this as an opportunity to maybe take market share? Or do you think there’s going to be some consolidation or shifting of share or any of those kind of things that might fall out as people grapple with the current environment?

Yes. I mean it’s a great question, a little difficult to know for certain. But I mean, if you just look at it trade by trade, it’s the easiest way or the way we think about it. If you look at Hawaii, Hawaii has been a two-carrier trade for many decades and decades as has been Alaska. We don’t expect the fundamentals of those carrier dynamics to change. If you look at the China market, it continues to be in turmoil. And depending on the depth and duration of this economic cycle, you could expect potentially further international ocean carrier consolidation, whether there’s bankruptcies or acquisitions or whether national governments continue to combine their flag carriers. All of that, there’s a possibility for. I think as it relates to our Logistics business, for the most part, we see opportunities there. I mean I think, first of all, it’s important for us to resize our capital projects and our fleet for the new economic circumstances, and we’re going to continue to be working on this. By any means, I don’t think we’re done as we continue to look at it, but we wanted to make a very early and strong statement about changes to our structure. We do think that there will be some opportunities as other companies who are not as well prepared – and Matson has got a long arch of history. I mean we were mentioning we don’t quite remember the Civil War, but we do remember World War I and World War II. So we’ve been around a long time. And often, in these downturns, opportunities will present themselves in, I think, first, us resizing our networks and doing what we needed to do but, secondly, be able to look out for opportunities as they present themselves perhaps in the logistics space or elsewhere, I think, is very much on our minds.

Okay. All right. Well, with that, I’ll turn it over. But I appreciate the time, guys.

Okay, Ben. Thank you.

Thank you, Ben.

[Operator Instructions] I’m not showing any further questions at this time. I would like to turn the call over to Matt Cox for closing remarks.

Okay. Well, thank you, everybody. Please stay safe. We look forward to catching up with everyone at the end of the second quarter call. Aloha?

Ladies and gentlemen, this concludes today’s conference. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.