Ladies and gentlemen, thank you for standing by and welcome to Matson's Third Quarter 2020 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the call over to Lee Fishman. Please go ahead sir.

Thank you, Jenifer. 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 November 2, 2020, and in our subsequent filings with the SEC. Please also note that the date of this conference call is November 2, 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. I'm going to start with a quick recap of our third quarter results, so please turn to Slide 3. Matson's businesses continued to perform well, despite the ongoing challenges from the COVID-19 pandemic and related economic effects. Ocean transportation had a very strong quarter and was led primarily by our China service, which included a full quarter of the CLX+ service as well as year-over-year volume improvement in our regular CLX service as a result of increased capacity. Volumes in Hawaii, Alaska and Guam improved from levels achieved in the second quarter as freight demand improved with the reopening of local economies. Volumes in Alaska and Guam were higher year-over-year and Hawaii volume approached the level in the third quarter of last year. And logistics had a good quarter as the continued reopening of the U.S. economy led to improved performance in all of business lines. In the fourth quarter, we expect our businesses to continue to perform well and to generate strong financial results. Before moving on to our current priorities and the current trends we see in our business, I want to spend a few minutes on the CLX+ service and why we believe we can make it permanent. Please turn to Slide 4. There are three main reasons we're confident we can make the CLX+ service permanent. First, Matson has a 15 year track record of operating the industry leading expedited China to Long Beach service. Our CLX service has demonstrated a best-in-class on time freight availability and through our relentless focus on reliability we've developed strong longstanding relationships with customers where service has been integral in their growth. Many of our long-term customers are riding on both the CLX and CLX+ given the outsized growth in their…

Okay. Thanks, Matt. Now on to our third quarter financial results on Slide 15. Ocean transportation operating income for the third quarter increased $42.6 million year-over-year to $86.5 million. The increase was primarily due to a higher contribution from the China service, including CLF+. Lower vessel operating costs, including the impact of one last vessel operating in the Hawaii service and the timing of fuel related charges – surcharge collections. Partially offset by lower contribution from the Hawaii service and higher general and administrative expenses. The company's SSAT terminal joint venture investment contributed $7.7 million or $0.7 million less than the prior year period. The decrease was primarily due to lower lift volume. Logistics operating income for the quarter was $11.9 million or $0.6 million higher than the prior year period. The increase was due primarily to a higher contribution from transportation brokerage. EBITDA for the quarter increased $45.6 million year-over-year to $134.7 million due to a higher consolidated operating income of $43.2 million and higher other income of $2.9 million partially offset by $0.5 million and lower depreciation and amortization, which includes dry dock amortization. Interest expense for the quarter was $5.7 million or $2.5 million lower than the second quarter of 2020. Lastly, the effective tax rate in the quarter was 25.4%. On a year-to-date basis ocean transportation operating income increased $63.7 million year-over-year to $136.7 million. The increase was primarily due to a higher contribution from the China service including CLX plots and lower vessel operating costs, including the impact of one last vessel operating in the Hawaii service partially offset by lower contribution from the Hawaii service. The company's SSAT terminal joint venture investment contributed $15.4 million or $2.4 million less than the prior year period. The decrease was largely attributable to lower lift volume. Logistics…

Thanks, Joel. There's been no shortage of uncertainty in 2020 for us, but Matson and its employees adapted to the extraordinary conditions and fostered organic growth opportunities to drive exceptional financial results in the third quarter. I'm proud of our accomplishments year-to-date, but we are heads down to finish-off a good year and prepare for 2021 and the evolving challenges during this unprecedented time. As key supply chain provider to lifeline economies and a leading provider of expedited ocean services to the U.S. West Coast, we're focused on what we do best providing exceptional customer service and on-time delivery to meet our customer's needs. And with that, I will turn the call back to the operator and ask for your questions.

[Operator Instructions] Your first question comes from the line of Jack Atkins [Stephens Inc.] Jack, your line is open.

Okay. Great. Thank you operator and guys congratulations on another great quarter here.

Thanks, Jack.

So I guess maybe just looking at star with the outlook, you know, I noticed that this quarter you guys sort of didn't provide your normal line item guidance, and I certainly understand given all the uncertainty out there right now, it's just tough, tough to predict. I guess I was just sort of curious if, if we could maybe talk about some high level directional trends sequentially, typically we see earnings, let's talk about the ocean transportation segment, down anywhere between 30% and 50% from an operating income perspective sequentially it's just sounds like volume is actually ramping sequentially for you guys though. So can you kind of help us think about how we should be thinking about normal seasonality and how the business is going to be trending third quarter and fourth quarter?

Yes. Jack, I'll do the best I can. It's difficult to forecast in this environment. We've had conversations with our customers and they're doing as best they can to meet this demand that they're seeing throughout their networks. And it's really, again, I would say some of the things we're seeing in our Jones Act end markets, and what we're seeing in Matson logistics, what frankly, including China is the very strong demand we're seeing in the U.S. associated with the items that we discussed in the call around the work from home experience, inventory stocking, the benefits of stimulus and all of the factors that are making it creating this very robust freight demand environment. We are pleased that we have seen the improvement that we've seen in Hawaii and Guam and Alaska. And it's hard to know, we might've predicted or we might've guessed earlier in the year, let's say in March and April that we would not have seen the levels of demand that we've ended up seeing. And again, I think it's a combination of the same factors. It's a stimulus spending, we tend to provide essentials. There have been and the those are just some of the factors that go into it. So beyond that, how long Jack this remains is partly a question of macroeconomics. Is there going to be a second stimulus? Is the U.S. economy in recovery? What's the – how will the pandemic progress? What's the election cycle look like? When is the vaccine available? So again, it's difficult for us to know what's happened. I would comment that some of our normal seasonality, it's just really hard to tell where we go from here, but we're pleased to be in a position where we're able to serve our end markets. I'm really proud of the fact that we were able to be there and stand-up our second expedited China string. But a lot of our end markets are performing better than we would have expected in March or April. So that's all I can really say, Jack without being too specific because we ourselves aren't quite sure where the economy is going from here.

No. No. That I understand. I just wanted to kind of get your additional thoughts on that Matt. So that's helpful. Thank you. Maybe just a couple of other ones for me, off the items that you guys undertook this year to support and improved financial results, you said you're well ahead of the $40 million to $50 million initial expectation, obviously because of the wild success of CLX+. But we think about that, that $40 million to $50 million number going into next year. How much of that is tied to cost that you guys have maybe taken out temporarily that would maybe get better back in next year? Can you kind of maybe quantify that for us as we think about 2021?

Hey, Jack its Joel. I'll take that one. So as we said in our last call, it's a mixed bag. There are a number of cost initiatives and some revenue initiatives. The biggest revenue initiative is of course the CLX+. So we've talked – we've talked at length about how we see the supply demand elements there and that continuing into 2021. The remaining cost items, it's really, we can't get a lot of guidance on it, because it really depends upon each market. And when volumes come back and a lot of those markets where we have to reintroduce some additional costs, it really around – typically around our terminals and the gate hours and our hours of operation, where as you have more cargo flying through, you reintroduce some of those costs. So it will be a function of the volumes returning in a lot of those Jones Act markets. This is the way to think about it.

Okay. But, but Joel, with volume kind of back to flat in Hawaii, it looks like growth again in Guam and Micronesia and Alaska, I mean, would you say that those costs has kind of come – are back into the model now or no?

Some of them have, but not all of them. So it depends on the different submarkets within each of those markets. And so some of those have come back, but a lot of those have not yet. So – and then actually, I will just say Jack there will be some piece of that that will be permanent. And some of that will be permanent.

Sure.

But a lot of it, more than half of the remainder that's not revenue will be dependent upon volumes in those markets.

Okay. That's helpful. Maybe one last one and I'll turn it over. Just kind of thinking about the logistics segment for a moment, obviously a lot of dislocation in the domestic supply chain as well on the surface based side. I guess you guys did a really great job just in terms of maintaining your operating margin there this quarter. We didn't – we saw others not do nearly as well. How are you guys thinking about the logistics business as we head into 2021, where you should get some relief on the revenue margin side and obviously underlying demand trends and pricing trends are obviously pretty positive?

Yes. I think that the way I would answer that is first of all our logistics businesses, all of them are performing well. And as the President of our logistics business, Rusty Rolfe says that logistics business tends to thrive in chaos. And so there's been a lot of dislocation. We're a small, nimble organization. We've responded well to those markets, and if we are in the beginning of a grinding and slow economic recovery, we expect – we're not going to give guidance, but we expect the good performance to continue. But again, I think it's more subject to where the U.S. economy is in macro. But if there is more congestion on the rails, if there's more congestion at ports and terminals, the better off we do.

Okay. That makes sense. Thanks again for the time guys. Congratulations.

Thanks, Jeff.

Your next question comes from the line of Ben Nolan [Stifel]. Ben, your line is open.

Thank you, operator. Good quarter guys. I want to start a little bit and you, Matt it's been a whole lot of time and it was very helpful about thinking through the permanency or permanence of the CLX+ service and sort of how things are different now this time. But I wanted to maybe see if there's a tie-in here between some of the chaos that's happening and congestion issues and everything else in the West Coast. Are you being able to leverage your expedited service to maybe win more long-term business or alternatively have you seen any expansion in the premium that you get? Is there – if people are grappling for spots, is there anything you're doing this sort of leverage that that position at all?

Yes. I mean, from our perspective, having been at this for 15 years, we've developed a really good base of customers who have – who as their businesses expanded, we've been able to accommodate that growth. And so the way I see the market today then is that obviously we're seeing some very busy hectic congestion on the U.S. West Coast. There's a lack of empty equipment, not matching but in the market, there's a lack of chassis, there's shortages of labor, there's disruption of rails is as very [indiscernible]. That part of it is temporary. And I can't say when that will end it. It may end in two weeks; it may not end until after Luna New Year, really hard to know where that part ends. But we're not relying on any of that cargo to impact our belief on the continuity of our CLX+ service. A lot of our thinking around CLX+ we outlined in and we went into quite a bit of detail, but among the more important factors, this is growth in e-commerce and the way in which cargo is being shifted and e-commerce wants an expedited transit and together with a more orderly container supply demand, the air freight, all of those things separate from the congestion we're seeing right now gives us confidence and not the least of which is to have identified and are in the execution stage of identifying a backhaul in the AAX to give us somewhat dual head-haul economics are all factors that give us that confidence that we described. And we always look for balancing; leveraging the opportunities in the short run with making sure we're maintaining enduring customer relationships that go year in and year out. So there are some markets where we could charge a lot more and other markets – than other kinds of market, but I can just give you as a data point. We are turning away each week more cargo on our CLX and CLX+ service than we are carrying to give you a sense of the demand right now. And again, we don't expect that super high demand to continue, but we expect enough demand to continue to make this we think long-term of success.

Okay. And I guess and that's what I would have expected. I guess, I was asking and maybe you've answered it a little bit. Is there a way to turn that leverage that you have with a really unique product into saying, okay, I'll fit you in here, but I want to know that I'm going to have 10 boxes a week from you for the next year or something like that, or is that just not part of the…

No, that conversation has been going on for 15 years where, well – everybody wants to get on the ship in the peak season, right, which customers can give us those containers every week, 52 weeks a year, right. So it is an ongoing element, so that we might, in peak season, forego the highest cargo, because people can give us cargo 40 weeks a year. And so, we're balancing the seasonal impact with the year round customer contribution. Yes, so that is just – that's a core part of how we approach the market and have for a long time.

Okay, that's helpful. And then maybe for Joel or both of you, de-leveraging, I think, is happening a lot faster than any of us thought that it would. And you did walk through your capital allocation hierarchy and I appreciate that, but to the extent that let's hope and say that some of this elevated level of cash flow continues to be here for a little while, and you do delever really quickly. Are there things as you look out into the future, maybe capital projects or refleeting Alaska or anything else where you say, okay, well, we thought this was maybe five years away or something else, but now we're in a position where we can maybe pull that forward or is that not even necessary, you don't – the timeline is what the timeline is and it's not a function of capital.

Yes, Ben, thanks for that question. So, I'd say, we do very much think long-term in everything that we do. So we do have a view of when we're going to need Alaska vessels and other major investments as well. And all that was really baked in to what we've been describing for the last couple of years and the overall plan of deleveraging when we're finished with this vessel cycle. So what we're going to continue to do is stick with that plan, because we did look at all those long-term needs if you put that client together. It just still happens at the – that this is all happening in this very uncertain time of the pandemic where we've seen some businesses opportunities to really expand for us. So the deleveraging has definitely accelerated because of this performance, but it hasn't changed our view that we still stick with this plan and the capital allocation hierarchy is something that we feel very good about and it's very appropriate. So it looks for us – continue to focus on de-leveraging in any kind of organic growth or other types of investments. Ben, it's still going to be subject to our normal discipline that kind of return thresholds that we see. So we're really – the overall message is we're sticking with that plan.

Okay, I appreciate Joel. And then last for me and I'll turn it over. Still I scratched my head at like the Hawaii volumes, given unemployment and everything else. And it's great for you guys, but how much of that and then particularly Hawaii, but maybe also Alaska. And Matt, you mentioned a little bit about stimulus and a perpetual payment in Alaska and so forth. How much of that do you think is – the cargo is stimulus specific or at least linked to stimulus that might be at risk if those payments don't continue. So are you at all concerned that there might be a little bit of a volume cliff at some point?

Yes, I mean, I said it all three of the Jones Act markets that this has come back faster than we expected. And I think in part it's the same package on the U.S. Mainland, right. I mean, there's demand for work from home and home improvement and getting money into the hands of the unemployed and the PPP loans keeping small businesses afloat. And all of the really timely federal government response to the pandemic has all helped. What we've remained cautious because our point is it's unclear what's going to happen next, are we – or is the delivery of the vaccine going to bridge and additional stimulus bridge us into a lasting recovery will there be an air pocket in any of our trades, those all are really hard to forecast. And so, again, we feel well. And the other thing – and there has been – a lot of our business is grocery store business, right. It's going to our long-time customers, who are selling the basics. And so, we know there is a certain floor level of demand that will continue. So it's better than we expected. And it's not crystal clear whether it continues, although we hope it will. That's why it's really difficult for us to talk about exactly what's going to happen. So it's as much about the macro as it is about any of our end markets in particular.

All right. Now, I appreciate that Matt and Joel, and I appreciate the time and congrats again on a fantastic quarter. It looks like it's the second of a number, so good work.

Thanks, Ben.

Your next question comes from the line of Steve O'Hara [Sidoti & Company]. Steve, your line is open.

Thanks. Thanks for taking the question. Good afternoon.

Hi, Steve.

Hi. I guess first just on the – talk about confidence in CLX+ being a longer term initiative. Does that mean that you were kind of in the process of taking maybe a longer term capacity acquisition or anything like that? I think you'd chartered capacity in that market, but have those charters going out in time more than maybe previously?

Yes, so Steve, we're six chartered vessels in the service. We don't envision purchasing any vessels. We continue to think the best way to address this market is chartering. And you may know that for example, the international ocean carriers charter or operated about 50% of their capacity is chartered. So it's a normal way in which an operator would have a portfolio of owned and chartered assets. So it feels normal to us to have that combination. We expect that to continue. Our confidence going into 2021 and make CLX a permanent service will – as these charters expire, we will be renewing them. And so that – in due course I don't think we're going to do a five-year charter or whatever, but these will be rolled over on kind of six, 12 month terms and those will be negotiations with the charter owners as we go, but we're definitely keeping our feet on the ground here. We have a lot of confidence in them. We're confident we're going to be able to charter vessels to be able to continue to service and we'll be to sort of balancing the renewals with the owner's intentions there, like it's hard to be real specific about it.

Okay. That's helpful. And then maybe is there a way to think about pricing within CLX and CLX+ in terms of maybe where rates are versus previous time periods? And what the impact of this as maybe other methods of shipping come back over time? What that pricing looks like relative to what it is today?

Yes. I mean I can. I mean, our – and you know this Steve that our service commands are premium to the spot market and it has for a long time. And the same is true in this environment for both our CLX and CLX+ vessels as the fastest and second fastest service in the transpacific and owing to the fact that we have. We're turning away more part more than we're carrying. We can be selective in the cargo that we continue to carry and that commands a market premium. And so I would say if you look at the SCFI, the Shanghai Containerized Freight Index, as one that it's had an all time high. And so, we're not giving specific rate guidance, but our rates are doing very well. And that's just as one market data point, the SCFI is at a record high, we command a premium to the spot market in half. So, we're feeling good about where we are on the pricing.

Okay. And then just on the comments, I guess, around October specifically within the China market. I mean, is that – with the way the peak season works and is there a kind of a fall off typically in November or December as kind of a peak season ends? Or is it usually kind of done by in October or I guess I'm just wondering if the expectation that may continue that very strong performance in October could continue for the entire quarter, or is it kind of typically stepped down. Would that be kind of the normal expectation that it will kind of step down from October to November to December?

Yes. I mean, I think, your point about is what happens typically that sort of by the end of October, you start to see things, most of what is going to make its way into the holiday season shopping cycle will have arrived. That's not what we're seeing. We're seeing significant congestion in Asia cargo that's just not matching, but cargo that wants to get on a ship that's being rolled, we're seeing the other international ocean carriers put in additional extra loaders. So this is not a typical season. We're seeing a more extended season because there's such a demand for cargo. There are – many of our customers can't keep up with the demand and cargo was back ordered. And for all of those reasons, we're expecting to see the season extended to when is the big question. I mean, this could end in a few weeks and it could continue all the way into February in lunar New Year. Nobody really knows exactly how and when this ends. But at least through now, we're seeing very strong demand.

Okay. All right. Thank you very much for the time.

Okay, you bet Steve. Thanks.

[Operator Instructions] And there are no further questions at this time. I'll turn the call back over to Mr. Matt Cox.

Okay. Well, thanks for your interest in the call. I hope everyone has a safe holiday season, and we'll look forward to catching up with everyone at the yearend call. Thanks very much. Bye-bye.

Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation. You may now disconnect.