Good day, and thank you for standing by. Welcome to the Matson's Third Quarter 2023 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question answer session. [Operator Instructions] Please be advised that today's conference is being recorded. And I would now like to hand the conference over to your speaker today, Mr. Lee Fishman, Vice President of Finance. Sir, please go ahead.

Thank you, Chris. 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 14 to 24 of our Form 10-K filed on February 24, 2023, and in our subsequent filings with the SEC. Please also note that the date of this conference call is October 30, 2023, 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.

Okay. Thanks, Lee, and thanks to those on the call. Starting on Slide 3. Matson's Ocean Transportation and Logistics business segments continued to perform well despite a challenging business environment and relatively difficult economic conditions impacting the U.S. consumer. For the third quarter, within Ocean Transportation, our China service experienced solid freight demand despite the muted peak season in the Transpacific tradelane, but generated lower year-over-year volume and freight rates, which were the primary contributors to the year-over-year decline in our annual -- in our consolidated operating income. We also saw lower year-over-year volumes in Hawaii, Alaska and Guam compared to the year ago period. In Logistics, operating income decreased year-over-year primarily due to lower contributions from [Transpacific] brokerage. I will now go through the third quarter performance of our tradelanes, SSAT and logistics. So please turn to the next slide. Hawaii container volume for the third quarter decreased 1.9% year-over-year primarily due to lower general demand. Volume in the third quarter of 2023 was 0.8% higher than the volume achieved in the third quarter of 2019. Please turn to Slide 5. In August, Maui experienced a significant economic disruption from devastating wildfires. According to UHERO, September -- September's economic report, tourism to the islands may not fully recover in the next several years and the rebuilding of homes and businesses may take many years. Demand for construction workers is expected to increase with the rebuilding efforts in Lahaina and other areas in Maui. In the near term, Matson expects economic growth in Hawaii to moderate as tourism and visitor arrivals slowly rebound from the effects of the Maui wildfires. Moving to our China service on Slide 6. Matson's volume in the third quarter of 2023 was 1.3% lower year-over-year, primarily due to no CCX service in the quarter, partially…

Okay. Thanks, Matt. Please turn to Slide 12 for a review of our third quarter results. For the third quarter, consolidated operating income decreased $203.2 million year-over-year to $132.1 million with lower contributions from Ocean Transportation and Logistics of $97 million and $6.2 million, respectively. The decrease in Ocean Transportation operating income in the third quarter was primarily due to lower freight rates in China and a lower contribution from SSAT, partially offset by higher volume in the CLX+ service and lower operating costs and expenses, including fuel-related expenses primarily related to discontinuation of the CCX service, which occurred in September of last year. As Matt noted, the decrease in Logistics operating income was primarily due to a lower contribution from transportation brokerage. We had interest income of $9.3 million in the quarter due to higher cash investment rates on our cash and cash equivalents and cash deposits in the CCF as compared to the prior year period. Interest expense in the quarter decreased $2.6 million year-over-year due to the decline in outstanding debt as compared to the prior year period. The effective tax rate in the quarter was 14.5% compared to 20.4% in the year ago period. Please turn to the next slide. The slide shows how we allocated our trailing 12-months of cash flow generation. For the LTM period, we generated cash flow from operations of approximately $568.5 million, from which we used $81.5 million to retire debt, $168.9 million on maintenance and other CapEx, $102.6 million on new vessel CapEx, including capitalized interest and owners' items, $24.1 million in cash deposits and interest income in the CCF, net of withdrawals for milestone payments, $24.5 million on other cash outflows, while returning $253.2 million to shareholders via dividends and share repurchase. Please turn to Slide 14 for a…

Okay. Thanks, Joel. Please turn to Slide 16, where I'll go through some closing thoughts. We expect consolidated operating income in the fourth quarter of 2023 to be higher than the level achieved in the first quarter of 2023. Normal seasonality trends have returned to our domestic tradelanes and logistics. For our China service, we expect continued solid freight demand with some seasonality in the post-holiday time frame. We also expect CLX and CLX+ freight rates in the fourth quarter of 2023 to be well above pre-pandemic rates. Lastly, as I mentioned in our last earnings call, we are beginning to see consistency in our demand levels post pandemic and therefore, continue to evaluate the return of our annual financial outlook with the release of our fourth quarter earnings in February. And with that, I will turn the call back to the operator and ask your questions.

[Operator Instructions] Our first question will come from Jack Atkins of Stephens.

Congratulations on just executing really well in this tough environment. So I guess, Matt, if I could maybe kind of start with your -- one of your closing comments there, which is around fourth quarter consolidated operating income being above the first quarter. I guess, directionally, that helps a lot. But I guess when I go back and think about kind of normal seasonality, sort of pre-COVID third quarter to fourth quarter typically saw earnings decline, call it, 45% or 50%, something like that, just with normal seasonality. Would there be any reason why you would expect this year to be materially different? If so, could you maybe kind of help us think of the puts and takes there?

Yes, sure. I'd be happy to try to do that, Jack. So I would say, firstly, we still do expect the seasonality that we saw pre-pandemic return. And so -- and as we -- as you know, in our business, the second and third quarters are our busiest and our fourth and first are weaker, just because of the amount of cargo in the market given the seasonality of purchasing and holiday periods in our market. It always has been and it always will be that way to a certain extent. But one of the verticals, Jack, that might be just a bit different coming out of the pandemic and going in, as we've talked about this on last quarter's call was the growth in e-commerce. And there's an element we believe, although we don't know exactly what it is yet, but there -- some of that e-commerce moves year round. There's less seasonal pattern. It's recurring items that people purchase rather than holiday gifts or back-to-school or a seasonal element to it. And so that may explain why we -- the difference is both, frankly, in our fourth and first quarters may not be as seasonal as we've seen pre-pandemic, but we still overall affect the seasonality pattern to remain pre- and post-pandemic, if that helps.

Okay. So if anything, maybe there's a little bit less seasonality. And I understand we're still trying to understand what the new normal looks like, but perhaps maybe there's a little bit less seasonality in the business going forward than there has been in the past just based on that e-commerce factor.

That's right. Yes.

Okay. Got it. That's helpful. I'd also love to maybe touch on a comment that you made, Matt, around the kind of the thoughts around the 2024 Transpacific trade. I think one of the questions we get a lot is just folks kind of trying to understand what's happening with inventory balances and have we kind of reached a new normal from an inventory destocking perspective. I guess, what are your customers telling you about how to think about that going into next year? It sounds like they're expecting relatively stable volume, but do you feel like we're kind of through the destocking phase of this last, call it, year, 1.5 years?

Yes. I'm going to answer that in two ways, Jack. To answer your question directly, we are hearing from many of our customers that this inventory overhang that they had when there was a very sharp decline in the year ago period. Most of our retailers have worked through those inventories. And so now there are exceptions, and there are SKUs or product lines that they are still surplus on. But our general feeling is that retailers have done a really good job of working through their overhang. But the other context point here at the risk of over answering your question, Jack, is where -- from our perspective, how we see the Transpacific market. And in our prepared comments, we refer to 2019 as a benchmark, the world changed over the last few years. And so if you look at the imports into the United States for the first 9 months of 2023, compare that to the first 9 months of 2019, and cargo volumes into the United States, both East Coast, West Coast, from all foreign origins is close to 7% higher than 2019. So while it's true that there were significant declines in the year-over-year period and when and how we lap the bad news, just from a context standpoint, when we talk about seeing a new normal and are we there? We see the inventories have largely been absorbed these excess inventories to your first part of your question. And we see growth from that those levels. So it's just another data point in our own thinking about us having reach an equilibrium and it's also why we think that 2024 is going to look a lot like 2023, given those underlying factors. So just again, at the risk of over answering your question, I wanted to provide some context into our thinking.

No, that's really helpful. Maybe one more for me, and I'll hand it back and jump back in queue, just to make sure everyone can jump in. But I guess we think about we're trying to kind of frame up the "new normal" one area of the business that's underperforming relative to pre-COVID, the SSAT joint venture. And obviously, it had some really good years there during the supply chain disruption but it's losing a little bit of money now on a quarterly basis. How do you think about the normalized earnings power for that part of your business? And I guess what level of import activity do we need to see to be able to get back to a stable level of profitability there? I know you don't own that asset outright. I'm just trying to kind of get a gauge for that.

Yes. So first, I'll say firstly that we're going to have more to say about that in our year-end earnings call, but I can give you my thoughts at this point. So 2023 has -- we don't think not been a year yet of normalization in the joint venture. I think we'll see a normalization occurring in 2024. And there were a couple of reasons for that. First of all, this inventory overhang that put -- in the year ago period, a lot less cargo into the overall market has been impacted. But we also had a couple of other factors that we think were suppressing volumes during that period. One was the ILWU contract that was, as you know, extended. Finally now has been ratified and in place. And we think that cargo was diverted as our customers kind of derisked by bringing cargo either through the Suez all water route from Asia or in the Panama Canal. But for 2024, I think there's a couple of things that should happen. First of all, the inventory overhang will be largely behind us. There are some issues with the Panama Canal that with regard to the drought, which is causing on the margin of reduction of effective capacity for the U.S. Panama all water services from Asia. And then thirdly, there is a contract renewal for the ILA, which will occur in 2024 and some of the derisking that our customers did with the ILWU renewal in 2023, we think are likely to play and be a factor on the margin again, derisking. Those are, I think, factors that are going to allow a more normal level of performance in 2024 for the SSAT joint venture, but obviously not at levels, pandemic-area levels where there was significant cargo that was on the terminals and unable to be picked up by their customers because their warehouses were full. So you would probably want to look back to an earlier year of SSAT profitability pre-pandemic and I don't have those numbers in front of me. And again, we'll have more to say about that in the next quarter's call.

And our next question will come from Jacob Lacks of Wolfe Research.

So your China volumes took another step up to around 39,000 containers this quarter. So it seems like you're tracking well above the 120,000 to 130,000 annual run rate you gave a couple of quarters ago. Is this sustainable? Or how should we think about these moving forward?

Yes, Jake, it's Joel. It was a strong quarter for us, but we still think there will be seasonality. So the fourth quarter will have some light periods of time relative to the third quarter. So I would say don't just take our 39,000 for the third quarter multiple-times something near 4 and assume that's the annual rate. So we're still sticking with the 120 to 130 total volume for the -- 120,000 to 130,000 for the whole year. We'll see how the fourth quarter plays out. And if we feel like adjusting that in 2024 basis, we can talk about that in February. But definitely caution that's not going to be the run rate every quarter.

Sounds good. And then it looks like share repurchases a little in the quarter. I guess, how should we think about the cadence there moving forward?

Yes. I mean we're going to continue to be steady buyers. And so if you -- I would look at our last 12 months, 9 months through the course of the year, that's probably a decent run rate for us on an annual basis. And there'll be sometimes we're up a little bit, down a little bit on that. So I wouldn't read much into it. Other than just we're encouraging all investors to take a long-term view, our view is long term, and we want to be steady on a long-term basis.

Okay. And then one last one for me. I know you aren't giving guidance today, but if the 2024 trade dynamic is similar to 2023, does that mean Matson's earnings should be stable? Or are there some puts and takes for Matson specifically that you're able to call out?

We haven't put all of our own thoughts yet together, frankly, on '24. We did comment that we think that the Transpacific trade and one of our more important drivers of earnings is going to be look a lot like it did this year, which was, frankly, pretty good. We talked about the beginning of a normalization of SSAT or joint venture that will be up. There could be others that are down, but we're saying we'll have more to say. I don't know, Joel, would you add anything to that?

Yes. Exactly. There will be some pieces up and down a little bit. But overall, we're saying it's shaping up to be a year that looks similar to 2023. And we made that comment specific to operating income.

And our next question will come from Ben Nolan of Stifel.

I have a handful. I wanted to circle back on the China volumes. And Joel, I appreciate that it's seasonal always is. But I think, Matt, you made a comment in the prepared remarks when referencing the CLX that there was greater capacity on it. I was curious if you could flesh that out a little bit in terms of, are you now -- I don't know -- given the chartered in vessels or whatever, you're now able to carry a little bit more than you had been able to?

Ben, it's Joel. It's not -- no, it's not significantly different. What happens sometimes in any given quarter, when you have 12 or 13 sailings, you may have a couple of your larger ships that hit twice or even 3x versus the smaller ships. So from an overall quarter basis, we don't expect it to be significantly different. Where we're at today is we have 5 ships on charter today, 4 are similar size, one slightly larger of those 4, but then we have a fifth ship that's a little bit smaller. So it oftentimes depends on how often that smaller ship hits in any given quarter. I'll also note that we chartered a sixth ship that we'll take on here in a few weeks to have an additional ship to maintain the highest level of on-time performance that we can. And that larger sixth ship will be similar size to the other 4. So I think any given quarter, the capacity is going to really blow down to how many times that smaller ship sales in a 12- or 13-week quarter.

Okay. So well, with that, two things, first of all, adding a sixth ship, I would assume if you're not releasing one or even if the one that you're chartering is a little bit bigger, should add capacity. So as long as there's demand that [120 to 130] (Sic) [120,000 to 130,000] should have some upside. Is that fair? And then along those lines, how much of that Shanghai-based expedited market, do you think that you've captured right now? And is there room to go if you did have a little bit more capacity?

Yes, Ben, this is Matt. So to the two parts of your question, the sixth ship we're adding is primarily intended to be used to always have a ship to be able to sail on time regardless of if there's a weather event or a port closure. So it's really more about ensuring we have the same number of sailings. And so the primary purpose is not to get an extra 6 or 10 voyages in the year. But rather to ensure that the 52 voyages we have are nearly perfect. And so it's really more of an insurance policy so that we can look at our customers in the eye and say we have a reserve ship. We're not going to have a miss-voyage, and we're sort of taking the exact office attack that the rest of the market seems to be taking. So just to clarify that one aspect of the question. And then, Joel, do you want to comment on the second part of the question?

Yes. And also, Ben, the comment I was making and because you asked about the charters that was all specific to CLX+, is 5 and 6 ships. But the same is true on our regular CLX service with our Jones Act. Not all those 5 ships have the same capacity either. And we have sometimes a smaller vessel. So it also -- the same point about the capacity and number of sailings for the smaller vessels in any quarter can skew the capacity, both for CLX and CLX+.

Right. And with respect to the amount of the market share that you think that you've captured?

Yes. I think we're very focused on that expedited market share each week coming out of Shanghai. We still feel like our -- the CLX and CLX+ service is the #1 and #2 service is capturing the majority of that but not all of that. But we do believe we've got the majority of the expedited freight out of Ningbo, Shanghai on a weekly basis.

And then Joel, I was going to ask on the $119 million tax refund. We've been kind of waiting on that for a while. Do you have any clarity, I mean do you expect it by the end of the year? Or is there some sort of dispute associated with that?

No, there's -- I can't say -- we don't know when we're going to get it. We do still have the highest level of confidence that we will get it whether it comes before the year-end or not, we just don't know. Our understanding it's just taking time to process it within the IRS. It's related, we think to the CCF, deposits that we made that we've talked about that was $565 million last year. So it's a tax-effected amount there. And because that doesn't show up in the automated IRS systems, it has to be done manually, and it's just taking time for them to review and make that adjustment manually is our understanding.

So if we're waiting on the IRS, it could be a few more years, got it. The -- just kidding there for technical purposes. The -- two more, if you'll indulge me. I was going to ask -- I know there was a reengineering switching over to LNG of some of the ships and we haven't really heard much about that lately. Just curious how that process is going and how you're thinking about the learnings from that.

This is Matt, Ben. So the first vessel that we have installed LNG on that it's now operating on LNG is the Daniel K. Inouye. And it was -- it went through a conversion process, adding tanks and manifolds and all that. As you know, the engine was already set to consume or burn LNG fuel when we ordered it. So that vessel is out, and it's on way. The second vessel that's going to go through a gas conversion or a gas and engine conversion is in the shipyard now. And we have another vessel going in next year in 2024. We'll talk more about the timing of that. But we're very much underway with our conversion projects in addition to the 3 new vessels that are not yet cutting steel, but that will be delivered in a couple of years. Those will also be LNG ready. So we do have -- the plan is rolling out just the way we expected and the timing, very consistent with our original timing on the conversions.

And then lastly, I was going to ask, as it relates to Hawaii -- and obviously, there's the horrendous strategy in Maui. As we think about that longer term and is this something that just purely from a freight and volume perspective that could actually lift volumes for you guys as rebuilding happens and so forth. And in the near term, there are some headwinds from tourism, but just trying to think through what might be the volume impacts of that for you?

And it's a sensitive subject because, obviously, we're focused on the tragedy and which it never happened. But in the short term, I think you've got it right. It's going to be a situation where in the near term, there are some headwinds and -- but over the longer term, and the rebuild process we expect, as we mentioned in our prepared comments, the recovery will occur in the medium term, the rebuilding could occur over the longer term. So -- but eventually, I think there will be a rebuild. I know the residents in Maui and the leadership in Maui want it to be rebuilt, and that will translate into freight volumes at some point into the future.

[Operator Instructions] And speakers, I am seeing no further questions in the queue. I would now like to turn the conference back to the CEO, Matt Cox for closing remarks.

Okay. Thanks, operator. Thanks for listening in on our call today. We look very much forward to seeing everyone on our year-end call. Aloha.

This concludes today's conference call. Thank you all for participating. You may now disconnect, and have a pleasant day.