Good afternoon, ladies and gentlemen, and welcome to the Second Quarter 2020 Financial Results Conference 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 your host today, Mr. Lee Fishman, Director of Investor Relations. Sir, the floor is yours.

Thank you, Joanna. 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 on May 5th, 2020, and in our subsequent filings with the SEC. Please also note that the date of this conference call is August 5th, 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 for those on the call today. I'd like to start with a quick recap of our second quarter results before I walk through our response to the COVID-19 environment and our current priorities. So please turn to slide 3. Matson's businesses performed well despite the challenges from the COVID-19 pandemic and related economic effects. Ocean transportation had a very good quarter and was led primarily by strength in our China service, including seven voyages in our supplemental service we call CLX+ as well as year-over-year volume improvement in our regular CLX service. In our Hawaii service, we had better than expected volume as we carried a portion of Pasha's volume due to a dry docking of one of its vessels. And Alaska volume was better than expected as the local economy gradually reopened in the latter half of May and into June, which led to improved freight demand. In logistics, some of the business lines continue to be challenged by the COVID-19 pandemic. The decline in operating income was led by lower contributions from transportation brokerage and freight forwarding, both of which are lower retail-related volumes because of the COVID-19 environment. Please turn to slide 4. On the first quarterly earnings call, I discussed how Matson was responding to managing the business through this pandemic and period of economic uncertainty. I want to spend a few minutes revisiting those actions and where we stand today. The operational and financial actions we've undertaken in the last few months had helped during this difficult period and led to opportunities. One such opportunity, the introduction of CLX+ service principally drove the year-over-year increase in the second quarter consolidated operating income. Other initiatives executed during the second quarter including shifting the Daniel K. in LA, one of our newest and…

Thanks, Matt. Now, on to our second quarter financial results on slide 16. Ocean Transportation operating income for the second quarter increased $22.6 million year-over-year to $42.3 million. The increase was primarily due to a higher contribution from the China service, including the contribution from the CLX+ service. Lower vessel operating costs including the impact of one less vessel operating in the Hawaii service and the timing of fuel surcharge related collections, partially offset by a lower contribution from the Hawaii service. The company's SSAT terminal joint venture investments contributed $3.7 million or $2.8 million more than the prior year period. The increase was primarily due to the absence of additional expense related to the early adoption of the lease accounting standard in the second quarter of 2019, partially offset by the lower lift volume due to canceled transpacific sailings during the second quarter of this year that Matt mentioned. Logistics operating income for the quarter was $8.9 million or $2.4 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 increased $21.3 million year-over-year to $86.2 million due to higher consolidated operating income of $20.2 million, higher other income of $0.7 million, and $0.4 million of higher depreciation and amortization which includes dry-dock amortization. Interest expense for the quarter was $8.2 million or $0.4 million lower than the first quarter of 2020. I will comment further on our interest expense run rate later in the presentation. Lastly, the effective tax rate in the quarter was 26.3%. On a year-to-date basis, Ocean Transportation operating income increased $21.1 million year-over-year to $50.2 million. The increase was primarily due to a higher contribution from the China service, including the contribution from the CLX+ service and lower vessel…

Thanks, Joel. Every day, we are reminded by the uncertainty this pandemic has presented us. There is uncertainty in the timing and staging of reopening plans in each of the local economies we operate as mitigation efforts evolve. It's difficult to know what's going to happen with the broader economy, the recovery trajectory and the ultimate impact it may have on our businesses. There's also a lot of political uncertainty as we head towards election day in the US. Despite the sea of uncertainty surrounding us, Matson's goal is simple, remain focused on exceptional customer service and on-time delivery to meet our customers' needs. We're also focused on finding new businesses and opportunities like our CLX+ service, to build new relationships and drive current and future lines of profitable business as the pandemic evolves. Our strategy since public inception in 2012 has been to broaden the portfolio of businesses and diversify the revenue streams across geographies and services which is to help derisk our cash flows to weather times like these, while also providing a strong foundation to grow. And make no mistake, we will look for opportunities created by the recession that we're now in the middle of. I'm proud of the work our has achieved year-to-date in managing in this challenging environment, but there continues to be a lot more work ahead of us to navigate through this unprecedented time. And with that, I will turn the call back to the operator and ask for your questions.

Thank you. [Operator Instructions] We have our first question. It's coming from the line of Steve O'Hara from Sidoti & Company. Your line is open.

Hi, good afternoon. Thanks for taking my question.

Hi, Steve.

Hi. Just I guess on CLX+, can you just talk about -- I know you said you're committed to, I think, through the peak season in October and then kind of see what happens at that point. How quickly can you pivot in this business to -- if you make a decision in October to continue going forward, how quickly can you scale that back if things don't pan out? And then maybe can you talk about this is different than kind of the CLX2 that you used to have in place years ago.

Yes, both good questions. I would say to the first part of the first question you asked -- basically what we have from a vessel, we've chartered six vessels to operate this service. And we've also leased additional equipment from traditional equipment lessors and have accelerated some of our CapEx spending for regular container purchases to allow for us to ramp up effectively if double or more than doubling of our China service. That's all happened fairly easily if -- and let me also be clear. I said in my comments, but I think it bears repeating, our goal is to continue the CLX+ if we're able to do it. And that means if our customers continue to see value and book cargo to our vessel, our desire is to make this a permanent fixture. But some of the fundamental economics of vessels chartering and fuel and most importantly whether our customers will continue to support us in potentially a different market environment will dictate whether we continue it. But having said that, we've chartered these six vessels. They're relatively short duration, so unwinding these vessels will be relatively simple if we choose to do that. Secondarily, we have the ability to off-hire leased equipment and the worst thing that happens on our CapEx is that we're really just pulling forward some of our normal CapEx that we would spend as replacement capital anyway over time. So the exit costs are really low and sensible. And again that's not where our heads at, but it's a relatively straightforward exit. And the second question around CLX2 which for those who are not part of investors in Matson at that time, a number of years ago after we started CLX, which covers Central China, Shanghai, Ningbo, Xiamen at that time, we tried…

No, that's very helpful. That's good color. And maybe just as a follow-up, if you look at your other markets today, and I understand this is maybe a sensitive topic, but you -- all of your markets still make sense in a post-COVID world longer term, do you think?

Yes. I mean it's a good question, and I think it's a good time for every business operator to look at their portfolio of businesses to see whether they make sense. And the short answer is yes. All of them are making money. All of them are poised for recovery whenever that occurs. From a planned standpoint, Steve, we're trying to be relatively conservative on how quickly some of the core Jones Act markets are going to come back. And frankly, we are not depending on a quick recovery in those markets to allow Matson to continue to thrive. And it was partly the reason why we took advantage of the market opportunity as we saw the significant dislocation in the China freight markets. But that's allowed us to stand up the CLX service, but I think all of our businesses are good. They're solid. We've got -- we've done what we needed to do and taken our medicine on resizing our networks, and overtime hours, and all kinds -- hundreds and hundreds of individual projects to size our businesses for the new environment. But we feel each is fundamentally sound and part of our portfolio, and frankly we're on the lookout for more businesses, Steve.

Okay, all right. Thank you very much. I'll jump back in queue.

Your next question is from Jack Atkins of Stephens. Your line is open.

Hey, great. Good afternoon, and guys, congratulations on a phenomenal quarter given all the volatility that you face. So great job executing that.

Thanks, Jack.

So, I guess just to kind of go back to CLX+ for a moment. And I do have some of the things I'd like to talk about, but I think that to me is the most exciting thing when we kind of look forward into 2021 beyond. I guess can you kind of walk through the decision tree over the course of the next couple of months as you sort of think about making that service more and more permanent? I mean what do you need to see whether it is in terms of market rates or customer commitments to commit to that service into 2021, because I mean, I would imagine that the air freight shortage will be around for a while.

Yes. I mean, I think -- Jack, the way we're thinking about it is that it's a business that was desperately needed. There is so much friction around who is going to get on our core CLX service, that when we stood up the second chartered service, they immediately got full. So part of this, we understood was an opportunity to get started. But what we're seeing now from the -- even just from when we started the service, Jack, we saw as you can imagine lots of PPE and lot of governments around the world they were caught flat-footed on PPE and other supplies. And so there was a big chunk of demand initially but that has given way to lots of other businesses like customers reducing their air freight spend in the middle of a recession. The boom and acceleration in e-commerce that requires an expedited product, and so we've seen more and more new and different slices of customers that for various economic reasons makes sense to move it on that since expedited service. So I think as we move forward what we do expect is of course we're in the middle of peak season now, so our vessels are full. This is everyone's traditional peak season, although we are in again times that are difficult to forecast. We expect after peak season, there is less market demand for all products. Matson, as you know, has managed to remain relatively full in our CLX service all year round even after peak season. But without going into the economics, how we look at it at the margin, we are willing to tolerate less profitable times during the slower months and expect this business to make lesser contribution in the fourth and first quarters, and then position Itself for very busy second and third quarter. So -- but the point, and what we're going to find out is can we tolerate a lower level of profitability in the slower month and what is that level of profitability and what's the level of support in freight, but if the freight is there, we're going to keep this business going.

Okay, that's great. I think that would be fantastic for the longer-term story if that were the case. So that's great to hear. Can we shift gears and maybe talk about Hawaii for a moment. You know, I thought the July update was pretty encouraging given the fact that there is still no tourism going on in the state. Do you feel like the down low-single digit westbound level of activity is that reflective of the current economic outlook? Or do you think there is some sort of inventory restocking that's happening in Hawaii? Just, how do we think about the July run rate relative to sort of what's happening there from an economic level?

Yes. I mean -- I'll speculate a little bit. I think what, and I mentioned this in my prepared notes, and there has been a more recent outbreak in Hawaii to over 100 cases a day of new reported cases which is causing the Governor and the Mayors to consider re-imposing some further restrictions to limit activity. And so we think it's unlikely that we're going to see September 1st reopening. In fact, they haven't made any announcements, and I'm speculating. I don't have any insight knowledge, but our expectation is that they are going to be very cautious about opening the market while they're dealing with the mini outbreak that exists today. But having said that, I think our view is, at least our thinking is that as the economy will open up at least for travel within the state or as businesses have reopened partially, that is sort of high single-digit down market feels about right to us. It could be 10%, but 7% to 10%. There was a tiny bump at the end of July around -- you know, the people stock up for the hurricane season, but I doubt that was more than a 1% or 2%. So there may be an element of that, but I think, I think 7% to 10% feels right for us while we're in this phase. And I think, we'll be in this phase for a while. It's kind of our thinking now in Hawaii.

Okay. Okay, that's helpful. Well, I guess one last question, and then I'll jump back in the queue -- but the $40 million to $50 million in sort of cost in operating initiatives, and you guys have done a great job executing on that. How do we think about how that $40 million to $50 million breaks out in terms of, I guess, two different ways to slice it? How much of that is related, if any, to the CLX+ service? And then how much of that is really tied to temporary versus more permanent cost reductions across the business?

Jack, it's Joel. So the first thing on the $40 million to $50 million, we reiterated that we think we'll exceed that. CLX+ is included in that. So it's not just, it's not just cost initiatives. It also is revenue and growth initiatives. Its things that we've all done to respond to the COVID world that we're in. The CLX+ is the biggest piece, but there are many, many other pieces to it as well. Also -- and we believe a lot of those on the cost side can be permanent. Some of those are a reflection of lower volumes coming through our network and our businesses. And so we're able to, without impacting customers in a negative way, reduce some of our cargo handling costs. And when volumes come back, we'll have to reintroduce some of those costs as we expand our gate hours and terminal hours and things like that. But a number of them can be permanent as well. But the CLX+ is the biggest piece of all of that. We also have compensation numbers in there too, so depending on how comp plays out, and other G&A categories that are more formulaic, those will go up and down as the business performs. So it's a mixed bag of whether those costs are going to be permanent or not. And that's one thing that we'll give updates as we head into the end of this year, next year on some of those items.

Okay, great. Maybe we'll try to sneak in one last quick question, Joel, for you on CapEx for the second half of the year. I know you guided to $62 million in progress payments related to vessels. I think a slug of that has already been paid in July. Well, what's your total CapEx outlook for the second half of the year?

We're not giving outlook, Jack. We have withdrawn that as you know, but the CapEx for the first six months was $34 million. And I think the two big projects that we've talked about the size of the vessels that will continue, that are committed, are the scrubber projects and the Sand Island projects. So those will continue. Those are significant. The overall six scrubber program is $10 million per scrubbers. So about half of that will fall in the calendar year this year. And so far, only about a third of it is in the $34 million of CapEx this year. So you're going to see the number just because of the scrubbers and because of the Sand Island items we've talked about be in the neighborhood of what we had for the first six months. The other thing though that Matt alluded to that we're evaluating is because of the growth in our volumes in the China and the CLX+ service, we may need more equipment. And we typically -- we're always buying equipment throughout the year. And we may accelerate some of the equipment that we would have bought in 2021 to allow for us to be well-positioned from an equipment perspective for the CLX+ service. So if you see a little bit of uptick in our CapEx in Q3 and Q4, it would only be because of related growth initiatives, but the rest of it -- what you've seen so far this year with the continuation of the scrubber program and the Sand Island infrastructure program.

Okay, great. Thanks again for the time.

Thanks, Jack.

Thanks, Jack.

[Operator Instructions] Your next question is from Ben Nolan of Stifel. Your line is open.

Hey, Matt and Joel. Hope you guys are well.

Hi, Ben. What do you think?

Yes, good. So I, most of, I have a lot. Maybe I'll have to get back in queue. It seems like that's the formula for today, like going on, but I'll start with the CLX+. I know, I believe APL and ZIM have both also introduced sort of expedited China to the West Coast services. Can you may be compare and contrast from a service perspective what you guys do versus what they do?

Yes, sure. I mean, I think -- see, first of all, APL who has had an expedited service for three or four years. So this is a service that they've competed against us out of Central China, Shanghai, Ningbo markets. And they have, in connection with seeing the same dislocated expedited air market, had upsized some of their vessels to be able to provide additional capacity. So they've been a participant in the market. And ZIM, who is -- it's operating in expedited service out of South China, Hong Kong, Yantian to LA. So it's, it's not directly in competition with Matson service. We drew some freight from the South China market onto our CLX or CLX+ service, but it's nominal -- the amount of impact. And so what I would -- my understanding is that ZIM is relatively full in South China, and my understanding is that APL is also relatively full. Where the difference has come in, Ben, is they can charter ships. They can run them at higher speeds and match that part, but what they can't do is when it gets to the LA Long Beach area, move their cargo through their terminals as quickly as we can and make them available at this bonded facility at Shippers Transport that -- and so there are days of advantage in service associated with, from shipping until availability. And some of those are focused on the Southern California for complex where we have an untouchable service as it relates to that, that creates transit advantages. So the way I think about this is when Matson ships are full, then they call APL and that's kind of been the way -- it's been, I don't need to be too unflattering to a competitor, but -- and they've done a good job, but, and then they continue to be full, but there continue to be advantages. And there may be others, in the market that's expected. But we have 15 years of track record. We have a brand in China where people -- if something needs to move in the markets, whether it's a late order, whether it's a rushed shipment, whether it's an e-commerce or whatever, they know after 15 years call Matson, and so we're the first choice in this market.

Okay. That -- and days difference; I guess two, three whatever, but that kind of gets to my next question. Obviously, the competitive advantage here or a primary competitive advantage is infrastructure that you have that nobody else has or even could have. And the same could be said about opening for instance or Seattle. In the long-term big picture, is there, do you think any opportunities to maybe replicate what you're doing currently in the CLX+ into other geographies where you have a distinct competitive advantage?

Yes, it's a good question. The answer, the short answer, in the long-run anything is possible. But the warehouse infrastructure, the trucking rail capacity infrastructure, the local market wants to go to LA. That's where this cargo wants to go. That's where the air freight infrastructure is. That's where the forwarders are. That's where the millions and millions of square feet of distribution centers are. There is a fraction of those in Seattle/Tacoma or in Oakland, and so there could be some individual customers that want to set their infrastructure, but the market is in Southern California because that's where it all wants to go.

Okay. Well, and then just to flip that. I mean would you think about or is it possible to add maybe more port calls and I don't know Southern China or Korea, Japan, anything like that.

Well, okay, so today what we see is a lot of cargo that's on our CLX and CLX+ service is actually cargo that originates in Thailand, and Vietnam, and in Japan, and Korea and other places, that will either go by air into Shanghai to be put on our vessel, so-called sea-air program or are on, in fact, we have customers, a large brand name electronics company that is moving, just as an example, that is moving cargo out of Thailand [indiscernible], across the China border to our CLX service in Shanghai and CLX+. So there are lots of that cargo that has found its way to us over the last 15 years that are part of their sea-air or truck-air programs, and so would we look at an additional port? We could, but what we want to do is remain focused on providing an outstanding service to the Shanghai and Ningbo market. And Ningbo has exploded with e-commerce. And it's just phenomenal the growth we've seen in the larger region for which the port of Ningbo serves that is focused on e-commerce. So we could -- our current thinking is we won't have to. And our current focus is keeping our service simple so the reliability in the speed is there. I probably over answered your question, Ben.

No, no, no. Right, that's helpful. And then lastly for me, and I'll turn it over and maybe get back in, but when thinking about, over the course of last quarter and even currently air freight obviously spilled out into the sea and air freight pricing just went crazy, although it's come in a lot. When you guys are pricing your freight, and I appreciate you don't break it out specifically, what have you, but when you're pricing your freight, has there been any fluctuation in sort of how you're pricing and/or is this here is the price and it's all about just extra volume that you're able to get out of it?

Yes, I mean, it's clear that, as you point out, Ben, that the initial stand of the CLX+ was just because of the huge amount of dislocated freight. There was just no air freight capacity or it was so significantly curtailed and that what was available what reserved by national governments because they were caught with their pants down on PPE around the world. So there really wasn't much available. That market has become more orderly now. Air freight rates, as you pointed out, were astronomical. They've come back a month ago to more historic norms. But over the last month, we've seen air freight rates on the rise again. And on the margin, I think what it does is to -- so one of the factors for us is we're not unmindful of the air freight rate market. We're also not unmindful of where the ocean freight markets are because we're this hybrid product, and but we have shown our ability to produce pricing that allows us to fill our ship, but week-by-week we continue to have more cargo, even with the CLX+ the capacity, then we have the capacity to carry it. And so, obviously, we'll take advantage of that in terms of pricing and market adjustment factors and other things to price that allows us to earn a good return, especially in very busy times.

Okay. So maybe put it another way, I think you had said in July your CLX was up 125% or so. We should not expect this on an aggregate basis or a specific basis that yes air freight pricing came in, that 125% should be materially less from a pricing perspective and some of the pricing that you were able to experience in the second quarter.

I wouldn't say that.

Okay.

I would say, we've said we expect to make more money in the third quarter than we did in the third quarter of last year. And I would say we've seen healthy freight rates and continuing to see healthy freight rates.

All right. I appreciate it. Thank you, guys.

Okay, Ben. Thanks.

Thank you, Ben.

Speakers, we have another question from Jack Atkins of Stephens. Your line is open.

Thanks for taking my follow-up. You couldn't get rid of me that easy.

No problem, Jack.

So, I just kind of wanted to go back. I think you guys have said a couple of different times through the course of this call that you guys are evaluating other opportunities to maybe take advantage of dislocations in markets. And I know you would be sensitive to talking about that on a public conference call, and I know your competitors are listening to this call as well, but perhaps if you could maybe give us some broad strokes or sort of maybe a little bit more detail what you're talking about there. Are these organic opportunities, maybe acquisition opportunities? Are these for Jones Act claims? Are these maybe in other parts of Asia to the United States? I know, Ben was asking about that to some degree, but just maybe a little bit more color on what you mean by some of those references you're making earlier, I think it would be very helpful?

Okay. Yes, and I want to say at this point, Jack that we -- Matson has traditionally been a pretty strong cash flow producer. We are, I think, managing ourselves reasonably well so far through the recession. We're paying down our debt, but we're also positioning ourselves for what I think it's the coming pain in this economic cycle, which we haven't seen yet. And traditionally Matson has been able to find investments in down markets at reasonably priced valuations that are businesses that are consistent with our service delivery model that would allow us to continue to grow into markets that we have -- so what is that -- okay, what traditionally has that been. And if you've looked at us since we separated from Alexander & Baldwin, what have we done? We've grown into adjacent markets organically. We have done acquisitions of Jones Act and other businesses, and so -- and again, we've again taken advantage of opportunities. And I do think there is going to be a coming cycle. There's going to be opportunities. I can't say exactly what they are, but we are not jumping in our foxhole putting in our [indiscernible] on and waiting until the end of this recession. I mean, we needed to take our medicine on costs and our service initiatives. And I think we've done that. We're on a good trajectory towards paying down our debt. And now want to have -- and we want to be on the lookout for those kinds of deals. Now I'm going to ask Joel to comment as well.

Yes, that's exactly right, Jack. And one also a way to think about it and to communicate about it is we love to grow with our customers. I mean what, what we do with CLX+ is grow with our customers. We have customers who want to get on our ship, and we're oversubscribed. So we're always looking for ways to grow with our customers in existing markets or new markets. And then, of course, we're a network business. So the other piece of it is we're constantly looking at our network. And where we go today and how we can leverage off our network into new adjacent markets that really leverage our infrastructure in what we do. So, that's kind of two dimensions, growth with customers, and leveraging our existing network. The majority of what we look at, not everything, but the majority of what we look at falls into those categories. And they do fall into organic opportunities and what you would call traditional M&A opportunities. Does that make sense?

Okay. No, that -- yes -- no, it did. It totally does. I appreciate that. Last question for me is on the logistics segment. I think when we sort of think about the trajectory of the brokerage market, I guess in the US over the course of the next several quarters, I would anticipate after a pretty tough July, I think you're going to be getting incrementally better in August and September. And obviously the trucking anecdotes continue to be extremely positive in the third quarter. I mean, how do you guys see the next several quarters playing out with regard to your truckload and intermodal brokerage businesses. I know it's a smaller piece of the pie, but obviously there is a cycle inflection that appears to be happening. We'd just be curious to get your take on that?

Yes. Jack, I think -- I think our feeling in our domestic logistics businesses -- so if you look at our warehousing unit, although small, has been a consistent earner. If you look at the brokerage business, they have been off but your comments about truck pricing improving; we're seeing the same thing. And so I think we're feeling like we're well placed. And, of course, what happens in the pandemic, and what happens with the broader economy, and the stimulation, and all of it, all the other uncertainties that we've talked about, hard to predict, but we do feel see things getting sequentially better in our logistic businesses. So we're encouraged, but that's really tough to declare victory because who the heck knows what's going to happen, but we are encouraged by some of the trends that you, that you pointed out in your question.

Okay, great. Thank you again.

Okay. Thanks, Jack.

Thanks, Jack.

Thank you, speakers. I am showing no further questions at this time. I would like to turn the conference back to Mr. Matt Cox, CEO. Sir, please go ahead.

Okay. Well, thanks, everybody for listening in. I hope everyone stays safe and well. And we look forward to catching up with you on the third quarter call. Thanks.

Thank you, speakers. Ladies and gentlemen, this concludes today's conference call. Thank you all for joining. You may now disconnect.