Welcome to the Matson, Inc. Fourth Quarter 2021 Financial Results Conference Call. At this time, all participants are in listen only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference may be recorded. [Operator Instructions] I would now like to hand the conference over to your speaker host today, Lee Fishman. Please go ahead.

Thank you, Olivia. Joining me on the call today are Matt Cox, Chairman and Chief Executive Officer; and Joel Wine, Executive Vice President and Chief Financial Officer. Slides from this presentation are available for download at our website, www.matson.com, under the Investors tab. Before we begin, I would like to remind you that during the course of this call, we will make forward-looking statements within the meaning of the federal securities laws regarding expectations, predictions, projections or future events. We believe that our expectations and assumptions are reasonable. We caution you to consider the risk factors that could cause actual results to differ materially from those in the forward-looking statements in the press release, the presentation slides and this conference call. These risk factors are described in our press release and presentation and are more fully detailed under the caption Risk Factors on Pages 12 to 21 of our Form 10-K filed on February 26, 2021, and in our subsequent filings with the SEC. Please also note that the date of this conference call is February 17, 2022, 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. With that, I'll now turn the call over to Matt.

Okay. Thanks, Lee, and thanks to those on the call today. I'll start on Slide 3 with a quick recap of our fourth quarter performance. We finished off a strong year with continued improvement in economic and business trends in our markets, driving overall solid performance in Matson's Ocean Transportation and Logistics businesses. The year-over-year increase in Ocean Transportation operating income in the quarter was primarily driven by strong demand for our China expedited ocean services. In our domestic tradelanes, we continue to see strong demand with higher year-over-year volumes, including the benefit of the 53rd week compared to the largely pandemic reduced volumes in the fourth quarter of last year. Logistics operating income for the fourth quarter increased year-over-year as a result of continued elevated goods consumption, inventory restocking and favorable supply and demand fundamentals in our core markets. The supply chain environment remains the key issue in the transpacific tradelane with a number of supply and demand factors at play that will take time to unwind. I'll come back to this issue when we discuss our China service. But importantly, we remain focused on maintaining our fast, reliable tradelane services and providing high-quality customer service during this challenging period for our customers. I'll now go through our tradelane services, so please turn to the next slide. Hawaii container volume for the fourth quarter increased 10.4% year-over-year and was 11.3% higher than the result in the -- achieved in the 2019 period. The increase year-over-year was primarily due to higher retail and hospitality-related demand and the benefit of the extra week compared to the pandemic reduced volume in the year ago period. Excluding the benefit of the extra week, volume in the fourth quarter of 2021 increased 5.3% and 6.2% compared to the levels achieved in the fourth quarter…

Yes, you're back live.

Sorry for the interruption. I'm going to review my comment on Slide 6. So moving on to our China service on Slide 6. Matson's volume in the fourth quarter 2021 was 32.7% higher year-over-year, primarily due to the volume from the extra California-China Express Service or CCX service and the benefit of an extra week. The total number of eastbound voyages in the China service, including the impact of the extra week, increased by nine year-over-year, of which eight were from CCX voyages and one from CLX. Excluding the benefit of the extra week, volume in the fourth quarter of 2021 increased 24.8%. Freight demand in the quarter remained strong as we continue to see sustained and elevated consumption trends and low inventory levels drive increased demand for our expedited ocean services. Matson continued to realize a significant rate premium over the Shanghai Containerized Freight Index in the fourth quarter of 2021 and achieved average freight rates that were considerably higher than in the year ago period. For the full year 2021, container volume increased 55.4% year-over-year, primarily due to the incremental volume on the CLX+, the addition of volume from the CCX, higher volume on the CLX as a result of increased capacity in the tradelane and the benefit of an extra week. The total number of eastbound voyages for the year, including the impact of an extra week increased by 41 over the full year 2020, of which 20 were from the CLX+ voyages, 13 from the CCX voyages, one from the CLX and seven from extra loaders. Excluding the benefit of the extra week, volume for the full year 2021 increased 52.7%. I'll now comment on current business trends, so please turn to Slide 7. For January 2022, eastbound container volume was lower year-over-year by approximately 20%,…

Okay. Thanks, Matt. Please turn to Slide 13 for a review of our fourth quarter and full year results. For the fourth quarter, consolidated operating income increased $357.8 million year-over-year to $475.5 million, with higher contributions from both Ocean Transportation and Logistics of $352.6 million and $5.2 million, respectively. The increase in Ocean Transportation operating income in the fourth quarter was primarily due to a higher contribution from China, which was a result of considerably higher average freight rates and higher volume, partially offset by higher operating costs and expenses, primarily due to the CCX service and higher incremental costs associated with the CLX+ service. The increase in volume was primarily due to volume from the CCX service and the benefit of an extra 53rd week. The increase in logistics operating income was primarily due to higher contributions from supply chain management and transportation brokerage. Interest expense for the quarter was $4.7 million or $0.4 million lower than the third quarter as a result of lower outstanding debt and a small amount of capitalized interest. Lastly, the effective tax rate in the quarter was 16.5%, well below the 25.2% recorded in the year ago period. Matson benefited from a deduction related to foreign-derived intangible income or FDII, under Section 250 of the Internal Revenue Code. The FDII deduction is available to U.S. corporations that generate income from services provided in foreign countries. We expect to continue to record FDII deductions in 2022, and as such, we expect our full year 2022 effective tax rate to be between 23% and 24%. Turning to Slide 14. We illustrate how we allocated our trailing 12 months of cash flow generation. For the LTM period ending December 31, we generated cash flow from operations of $984.1 million from which we used $131.1 million to…

Okay. Thanks, Joel. After our performance in 2021, many investors may be focused on what will Matson's profitability look like when we get to the other side of the supply chain congestion and the environment finally normalizes. I don't know yet what the new normal will look like. And I suspect the path to normalization may not be linear and maybe longer than some realize. But when we do get to the new normal, I remain confident that the secular tailwind of e-commerce adoption and our unique positioning in the Pacific with an expanded network and superior service offerings will result in a sustainable higher levels of cash generation than we anticipated a year ago and meaningfully higher than our pre-pandemic 2019 base. Throughout Matson's long history, we've won new business and grown with our customers through uncertain times by having the fastest, most reliable services and having control of great assets to quickly adapt to changes. To this end, we remain focused on maintaining the reliability of our services and working closely with our customers in ocean transportation and logistics to manage through this difficult environment. The capital allocation plan for 2022 is to stay the course. Joel reviewed our key maintenance and other CapEx expenditures we intend to make in the next two years. We're strategically positioned well, and we'll continue to look for opportunistic areas of organic growth to leverage off our recently expanded services in the Pacific. We're also on the lookout for acquisitions that meet our key criteria, but we will remain disciplined in our approach. We will continue to reduce our outstanding debt through scheduled amortization of our long-term instruments. Lastly, in the absence of organic growth and acquisition opportunities, we will consider the return of excess cash to shareholders in the form of share repurchases and/or special dividends. And with that, I will turn the call back to the operator and ask for your questions. Thank you.

[Operator Instructions] And our first question is coming from the line of Ben Nolan with Stifel.

Yes. Joel, Matt, good talking to you, another good quarter here. I've got a couple. The -- I first wanted to maybe ask about the Hawaii side. The volumes are pretty good, and you talked about the first quarter or at least maybe being a little flatter, Omicron, all that kind of thing. Just kind of trying to get my head around what -- how full that westbound tradelane is. If the Hawaii economy continues to recover, given your current mix of assets that are serving that business, what's the capacity to actually do more volume than what you're doing right now?

Yes. It's -- we have sufficient excess capacity with the delivery of our four newest ships in the current deployment as we envision keeping the CCX and our current deployment. We have plenty of sufficient capacity to be able to handle a return to pre-pandemic 2019 or above given the delivery of the sector capacity. So we have plenty of capacity to address market growth.

Okay. That's helpful. Good to know. I'm glad that was an easy one. So I got another one for you. You talked about the acquiring additional equipment, some of that had spilled over into this year. I assume that's primarily containers and chassis. Can you maybe talk through a little bit about where you stand? I mean, I know it's one of the hallmarks of what you do that you control your own equipment in that respect. But you're doing a lot more volume right now. And all we hear is about people not being able to get chassis or other things. How are you positioned at the moment with respect to that part of the business?

Yes, it's a good question. And you're right, and Joel mentioned in his comments that some of the CapEx we're mentioning with regard to the equipment is really just a spillover because of the significant backlogs and getting equipment manufactured and delivered. You'll recall early on in the cycle, we took a step to basically grab every piece of equipment we could get our hands on because we really believe that we were -- this was going to be something that was going to be sustained. And so we have effectively dramatically expanded our container fleet, ordered significant amount of new chassis at least those when available as well. So the equipment that you're referring to is primarily dry containers and refrigerated containers. Those are the two main and also chassis where there's a significant backlog, but we started from a position of relative strength because Matson has a wheeled operation. We had a relatively large amount of chassis in our fleet which gave us a significant advantage and a sustained advantage. The other part I would make with regard to the equipment, and then I'll turn it over to Joel is in this current environment, and you've heard us say this before, the incremental return on a single voyage or said differently, without a box on a single voyage, you can effectively pay for the entire piece of equipment in one or two voyages. So being short of equipment is the economics are so compelling and returns are so short that we definitely didn't want to and have not, up to this point, run out of equipment in our fleet. And then I'll turn it over to Joel to comment on a few of the other items.

Yes. The only other thing, Ben, on the timing point, this extra equipment that we purchased as we expanded our services, especially the most recent one at CCX, we expect that all to come in by the second quarter through the course of the second quarter. So any equipment coming after that is part of our normal annual replenishment of retiring old equipment, new equipment coming in. So we don't have that many more months to go here before we -- all the extra growth-oriented equipment will be online for us.

Okay. Perfect. And I have got one more, if I can. I was pretty shocked by the SSAT contribution was almost doubled from where it was in the third quarter. I know you talked a little bit about the increased level of volume. But I guess my question is, is there anything else fundamentally there, whether it's margin or whatever that it has some staying power such that what we're seeing now, not only for the next tower along this all of this last, but even going beyond this? I mean, is there a reason to think that maybe SSAT is structurally more profitable than what it had been in the past? Or it's just a sign of the times here?

Yes. I think it's a combination of both. Clearly, the economic model of these joint ventures are you pay relatively fixed cost to port authorities to operate these terminals. And the more volume we put over them, there's an outsized incremental return. So the most basic fundamental part of this is it's very sensitive to changes or increases in volume to the extent that these volumes are sustained or sustained when we get to the new normal at somewhat lower levels, depends on your view of the future. We do expect, as in a number of our businesses for these two subside from their current levels when we get to the new normal. But I think these are -- the other thing that I would say about this, and we believed this for a long time, is having control of your own terminals, Matson exclusive terminals and working with the best operator on the West Coast with SSAT creates really long-term sustained value for the Company. And that has proven itself in down markets, but especially in these up markets, these are extremely valuable properties, and we have really confident operators. And it's part of the thing that differentiates our services relative to our competitors. So whether that translates into dollars and cents aren't exactly the same, but we feel really good about our positioning, including our joint venture terminal.

[Operator Instructions] Our next question is coming from the line of Jack Atkins from Stephens Inc.

Okay. Great. And congrats on a great quarter and great year. So Matt, I guess maybe going back to Ben's first question around the capacity available to you in the Hawaii westbound lane to sort of accommodate grow with Hawaii over the next couple of years as the economy fully recovers. If I go back and look at sort of the last, what I would call peak year for Hawaii volume, which was probably 2016 or so, you did about 162,000 or so containers. In 2021, if I normalize for the extra week, you did about 4% or so below that. I know you've had changes to the fleet, a lot of different things kind of going on. I know you don't like to comment on utilization and utilization rates. And so is there a way to maybe kind of talk to -- kind of asking Ben's question a different way, how much available capacity do you have left in the westbound lane, just given how much stronger volumes have been here over the last 18 months or so? Hope that -- I know it's a rambling question. I would hope it makes sense.

Yes. No, yes. And what I would say again is we are not pressed in capacity. We received these four brand new ships, which are step function higher in capacity. And currently, both of these four ships go through California in one case, the CCX that goes through Oakland and then it goes through Long Beach. And in the other case, the other vessels are connected to the CLX service, so they go two and five weeks through Long Beach to Honolulu. So -- and those are step function larger capacities than we had. And so we don't envision needing to add more ships to the fleet as we see a recovery in the Hawaii service. So we have plenty of headroom, and we're very comfortable with the capacity as the market grows without having to add any additional vessels into the foreseeable future.

Okay. Okay. That's helpful. Makes sense. Maybe shifting gears to the transpacific lane for a moment in your services there. If I go back to, I think last week, Maersk had some comments around how they thought the year would sort of play out first half versus second half and rates kind of beginning to softens maybe too strong a word, but just kind of begin the normalization process as we kind of go through the year. Your comments are that we're going to have a strong market through at least peak season in October. Is there a way to maybe think about -- and I understand that market is very unpredictable. But is there a way to maybe think about how you're contemplating first half of the year versus second half of the year? Do you think that we're going to have maybe a little bit of softening in the second half of the year, albeit rates still staying at very elevated levels? Or is it just too early to make that call?

Yes. I think it's too early, but I can give you some color on our thinking about this. And part of this is, Jack, generally with regard to the sort of industry-wide supply and demand fundamentals that are going to affect everyone. And we -- and then -- but then the others are those that are unique to Matson in our service model. And so our view generally is that there's going to be only a slow addition of vessel capacity of new builds that are going to be entering the trade globally and some are going to be deployed in the trade lanes in the transpacific. We see a continued elevated demand. We're hearing from our customers that they're expecting this -- and most of our discussion is with customers and their own thoughts about their planning cycles and therefore, seeing continued strong demand through most of 2022. But I would say also, Jack, tactically, and you pointed to the questions about the seasonal nature -- historically, at least seasonal nature of these trades. So the things that I think are going to drive first half performance. There's always a question about what happens at Lunar New Year. And we're seeing a very shallow Lunar New Year period and short, and we're already seeing factories ramp back up and their demand is -- according to the customers in China are very strong, and there continues to be very strong growth in e-commerce. People have money to spend and they're spending it. And so the other thing that I think happens in the first half, at least from talking to some of our customers is they are aware of the ILWU contract renewal, and many of our customers look to find other gateways or as best they can position inventory in the market. And we don't -- we're not predicting any -- it's difficult to pick what the outcome of the ILWU contract renewal. So we're not saying we do expect an issue, but many of our customers in their supply chain planning are trying to continue to sustain volumes as best as they can, given that uncertainty. And then when we get into the second half of the year, we get into the traditional peak season and holiday period. And so all of that gave us a general feeling that this is going to be sustained. But in particular, given the lack of air freight, given the -- we're sort of in a new phase where these rapid antigen tests are being manufactured by the millions. And a lot of that is going air freight again. And so there really is not significant air freight capacity. And of course, with China being very strict in reopening its borders given its approach to managing the pandemic, we don't really see a lot of belly freight coming anytime soon. So those are just some of the factors that gave us confidence that we should see sustained volume through peak season.

Okay. No. That makes sense, Matt. And I really appreciate that. That really helps to add a lot of color in there. Maybe kind of following up a bit. If I think back what you guys have sort of told us about CLX+ and some of the other services in the transpacific is that you're kind of skewing that capacity, at least you have been skewing that capacity over the last year, 1.5 years more towards the spot market than the contractual side. As we sort of enter 2022 and go through the contract negotiation period here over the next couple of months, several months, as you're thinking about contract versus spot mix changing at all as you look forward, can you maybe help us think through that?

Yes. And I think looking back is a good place to start. I mean, we've been at this, as you know, Jack, for 16 years with our expedited transpacific service. And we have always skewed towards the spot market. And the reason for that is that there is a significant premium that we can achieve over the contracted rates. And we have confidence after all these many years that while we can't exactly predict what -- where the customer demand will come from, what is clear is that every customer at some point has a production problem, has a late order, has something that happens in their supply chain that causes them to meet an expedited treatment. So if you fast-forward that in today's context, what we can say now is that even with the expected higher annual contracted rates that are being achieved or talked about, that is still significantly below where our spot contracts are. So we're really comfortable that we're positioned well and have been for, again, a long time, we're trading a little bit of uncertainty for a significant, significant rate premium, and we think it's worth and appropriate.

No. Okay. No, totally makes sense. So I guess, maybe shifting gears here. Well, staying with China just for a moment. I'm just kind of curious as we sort of think forward, bunker fuel prices are higher here with oil moving up. The demand on charter assets has been high, but I know you guys have done a great job securing those leased-in assets or chartered in assets under longer-term commitments. I'm just sort of curious how we should be thinking about broadly the economics and maybe the margin profile of CLX and CCX as we sort of kind of move into 2022. Not asking for specific tradelane margin profile, obviously, but do those factors sort of maybe impact the profitability of those services on a year-over-year basis? Or is that just kind of overthinking it?

Yes. I mean I guess what I could say, Jack, and I'm not sure this is exactly answering your question, and maybe, Joel, you could comment as well, is that right now, we operate the three fastest services in the transpacific. All three of our services are rated one, two and three in terms of where people go to. And as I said, that translates into a significant premium. And our goal really is to sustain these three services until the market normalizes. And so we have confidence going -- extending the CCX until we said October. And if the market still is looking for that level of service, we may extend beyond 2022 into 2023. We'll see. We'll see where the demand is there. And we've already said our goal and our belief is that the CLX+ is permanent. And of course, that complements our core CLX products. So we're feeling really good about where we are. We're getting again significant premium to the markets. And our goal is to make sure these are the three fastest services, and we have confidence in our ability to do so. But what would you add to that, Joel?

Yes. Jack, I'd just add that the rate impact and whatever the market rates are is going to have a much, much greater impact than where those charter rates are. The charter rates are important. And yes, they have gone up. So the cost will be higher in 2022 and 2023 because we extended duration on a number of vessels out two, three years because that's what the market required. So those will be higher cost. It's something actually we pay very close attention to. But those will be very small factors compared to wherever rates are -- have gone and where they might go in the future. So it continues to be a market that where the profitability and the margin is going to be vastly determined by where rates have gone up. That helps you?

No, no, that absolutely does. Maybe just a couple more questions, and I'll turn it back over. But just kind of thinking about the timing of a potential order for some additional Aloha Class vessels. Obviously, that would be very exciting in terms of the ability to add the capacity and some of your capacity constrained lanes and obviously refresh the fleet in -- or to some degree in Alaska. Just sort of curious, do you think that decision is more of a 2022 decision? And is there any way to kind of think about, roughly speaking, how much of the cost of a new build Aloha Class vessel gone up over the last six, seven years since you placed those orders in 2015?

Okay. So I'll take the timing part of that first, and then I'll hit the cost point, Jack. So we -- first of all, let's focus on the vessels that we need to replace are the Alaska vessels, which turn age 40 starting in 2026 and 2027. And we said there's no bright line. Sometimes you want to place assets before they turn 40 of age or potentially longer. So we've always felt like maybe on the early side 2025 delivery or '26 delivery and the later side '27 - '28 delivery. And generally, it's about 3 years and sometimes 3.5 years from when you sign a contract to when the vessel would get delivered. So the answer is if we want something delivered towards the end of 2025, then that would be a 2022 decision. So the way we're progressing is doing the work, talking to shipyards so that if we want to make a decision, we can make a decision in the second half of this year to move on that time table. We may decide not to move on that time table, but our attitude is let's get ready and be prepared and then make the decision when it's offered to us. So we will be prepared and had done the work we expect to be able to make that decision later this year if that's what we choose to do, where we might defer. From a cost perspective, I can't tell you what the exact -- what inflation costs have gone up. That will all be dependent upon pricing and shipyard capacity and those sorts of things. But what I can tell you is just remind everybody what we've paid for the last set of vessels, which was 250 to 270 in that range per vessel. And remember, we didn't outfit those four vessels, the two Alohas and the two kind of Aloha Class vessels with the final tanks and pipes for LNG installation. That's what we're doing now. And as we have said, that's about a $35 million to $40 million cost per vessel. So if you look at what we paid plus those installations back on five year ago cost basis, it would be $300 million or slightly above that. So that gives you a ballpark of what the full installation costs would have been for vessels in the past of this size. So we'll see where the new cost comes out for new vessels if we decide to go to Aloha cost.

Okay. Okay. No. Thanks for all that context, Joel, really appreciate that. Last question, I'll hand it back over. But as it relates to -- I don't know if you want to look at this from a potential M&A perspective or if you want to just maybe talk about this in terms of just the strategic direction of your logistics business more broadly. But you guys obviously have a lot of cash flow that's coming in and that has come in and that will be coming in over the next couple of years at least and beyond from the strength of your business and the limited CapEx requirements that you have. When I think about your logistics segment, we don't really talk about your intermodal business within that very often. But I know it's a non-asset based business. There seems to be like -- there seems be some shifts taking place in the market that will sort of prefer and preference the asset-based IMCs kind of moving forward. Would you guys have any interest in whether it's acquiring or really sort of scaling up your owned container fleet within your intermodal business and logistics segment> How do you think about that? Because it feels like there may be some opportunities to make some purchases there on the M&A side that could maybe accelerate that. I'll just kind of leave it open-ended and would love to get your thoughts.

Yes. Okay. Great, Jack. I think the -- and you know, Jack, we have a fleet of seven 53-foot dry band of intermodal boxes that operate in the U.S. rail network today. And as you can imagine, those are performing really well. Part of our decision to do that some years ago was we wanted to put ourselves in a position with the railroads and with customers who prefer to deal with asset owners themselves and not through primarily -- strictly through brokers. So we've addressed that with many large customers by investing over time in this 53-foot fleet. The question is, would we consider expanding that? The answer is yes, we certainly would. I would be in discussion with the railroad to determine whether or not the terms and conditions would be favorable to allow us to earn a return. And you know this well, Jack, the domestic markets right now, logistics markets, there's a lot of money that are chasing deals. As a result, in our deal flow, we're seeing a lot of elevated prices and prices that I would just say are fully priced or overpriced. And we've maintained a discipline that we're just not going to overpay for an asset at the peak of the market because everything has to go right and nothing can go wrong, and that's not the way the real world works. But having said that, we're going to stick to niche businesses. We're going to look to grow organically. There could be a tuck-in acquisition, those kinds of things. But we are not going to buy an airline because we have money to do it. I mean, a freight cargo airline. We're going to stick to our knitting. We're going to stick to what we know. We're going to look for logical extensions, organic growth opportunities, but we're going to keep our feet on the ground. And so we make it out bid or we may not find things that where we meet on the valuations, and that's just fine with us. So we've shown our ability to grow over time. And part of this return and approach we have -- maybe we missed one or two deals, but we do not make mistakes and we do not overpay. And that's not going to change.

Well, that makes a lot of sense. And you guys have done a great job building shareholder value over time. No doubt about that.

[Operator Instructions] And I'm showing no further questions at this time. I would now like to turn the call back over to Mr. Matt Cox for closing remarks.

Okay. Great catching up with everyone. Sorry about our technical difficulties. I was first thinking it might have been Ukraine or Russia, but I don't think so. But I hope everyone stays safe, and we look forward to catching up with everyone next quarter. Thanks. Aloha.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.