Matson Inc

NYSE:MATX

Earnings Call Analysis

Increased Earnings and Positive Outlook for 2024

Matson experienced significant growth in the second quarter of 2024, with consolidated operating income rising by $27.9 million year-over-year to total $124.6 million. This growth was primarily driven by elevated freight rates in their China service, despite higher operating costs. The company's net income increased by 40.1%, with diluted earnings per share up 46.5%. Matson repurchased approximately 1 million shares year-to-date for $121.1 million, returning $237.5 million to shareholders over the last 12 months. Looking ahead, the company anticipates notably higher operating income for Q3 and moderately higher income for Q4 compared to last year.

Introduction and Highlights

During the second quarter of 2024, Matson Inc. exhibited a robust performance driven by various strategic moves and favorable market conditions. The company's consolidated operating income saw a significant year-over-year increase of $27.9 million, reaching $124.6 million. This growth was primarily driven by the Ocean Transportation segment, which benefitted greatly from elevated freight rates, especially in the China services, partially offset by increased operating costs, including vessel fuel expenses and higher SG&A costs.

Business Performance by Segment

Matson's Ocean Transportation business saw marked improvement with a rise in volume in Alaska owing to two additional sailings and continued strong demand for its China services. Despite facing a 3.6% year-over-year decline in Hawaii container volume—attributable to decreased tourist arrivals impacted by previous year’s wildfires—other regions compensated for the shortfall. Meanwhile, the Logistics segment reported an increase in operating income by $1.3 million, credited to heightened activities in supply chain management and purchase order management services in China.

Financial Health and Shareholder Returns

Matson’s solid performance translated into a 40.1% year-over-year increase in net income and a 46.5% rise in diluted earnings per share. The firm generated $608.5 million in cash flow from operations over the past twelve months. Matson directed a significant portion of this cash flow towards shareholder returns, repurchasing approximately 1 million shares year-to-date at a total cost of $121.1 million. The company remains committed to returning excess capital to its shareholders, having repurchased 24.4% of its stock since August 2021.

Debt Management and Capital Expenditures

Matson successfully reduced its total debt to $420.7 million by the end of the second quarter, reflecting a prudent strategy of debt retirement. During the same period, the company received a federal tax refund of $118.6 million along with $10.2 million in interest income. Capital expenditures included $206.9 million on maintenance and other projects, $40.3 million on new vessel CapEx, and $35.8 million into the Capital Construction Fund for milestone payments on the new vessel program.

Forward-Looking Statements and Guidance

Looking ahead, Matson provided insights for the third and fourth quarters of 2024, anticipating significant growth in operating income from its Ocean Transportation segment. The company expects third-quarter operating income to exceed the $118.2 million achieved last year and fourth-quarter income to surpass the $66.4 million from the same period in 2023. For the full year, Matson forecasts depreciation and amortization expenses of approximately $180 million, with interest income expected to reach $45 million and interest expenses to be around $8 million. The effective tax rate is projected at 22.0%, with dry-docking payments approximating $35 million.

Strategic Outlook

Matson remains optimistic about its long-term growth prospects. The firm is well-positioned to leverage the heightened demand for expedited ocean services, particularly for e-commerce and garment shipments from China. While market dynamics are subject to uncertainties such as geopolitical factors, economic conditions, and supply chain issues, Matson is confident in its ability to adapt and maintain elevated freight rates during peak seasons. The company is also exploring potential growth opportunities and stands ready to capitalize on favorable market shifts.

Earnings Call Transcript 2024-Q2

[Operator]

Good day, and thank you for standing by. Welcome to the Matson Second Quarter 2024 Financial Results Conference Call. [Operator Instructions] Please be advised, today's conference is being recorded.

I would now like to hand the conference over to your first speaker today, Justin Schoenberg. Please go ahead.

[Justin Schoenberg, executive]

Thank you, Karin. 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'll make forward-looking statements in the meaning of the federal security 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 Pages 13 to 25 of our Form 10-K filed on February 23, 2024, and in our subsequent filings with the SEC. Please also note that the date of this conference call is August 1, 2024, 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.

[Matthew Cox, executive]

Okay, Justin, thanks. Thanks to those on the call.

Starting on Slide 3. Matson's Ocean Transportation and Logistics business segment performed well, higher year-over-year operating income in the second quarter. In Ocean Transportation, operating income increased year-over-year. Our China service saw significantly higher year-over-year fee rates and was the primary driver of consolidated operating income.

We had higher year-over-year volumes in Alaska, primarily due to 2 additional sailings. Hawaii and Guam saw lower year-over-year volume. In Logistics, operating income peaked year-over-year on the strength of supply chain management. As a result of our performance in the second quarter and the expected strength of our China service in the back half of the year, we're raising our outlook in '24. Joel will go into more detail on our updated outlook later in the presentation.

I'll now go through the second quarter performance of our trade lanes, SSAT, and logistics. So please turn to the next slide. Container volume in our Hawaii service decreased 3.6% in the second quarter year-over-year. The decrease was primarily due to lower general demand. Tourist arrivals in the second quarter were lower primarily due to significantly lower visitor traffic to Maui as the result of the wildfires last year.

I will go through our full year outlook on the next slide. So please turn to Slide 5. According to UHERO's second quarter 2024 economic report, the Hawaii economy is projected to grow modestly in 2024, supported by low unemployment rate and increasing construction activity. While we're encouraged by UHERO's longer-term forecast of some of the positive factors supporting that growth, our recent performance is reflective of a softer market. We expect volume in 2024 to be modestly lower than the level achieved last year, primarily due to continued challenges in population growth and lower discretionary income as a result of higher inflation and interest rates.

Moving on to our China service on Slide 6. Matson's volume in the second quarter of 2024 was 3% higher year-over-year as we continue to see a high level of demand from the e-commerce and garments customers. We achieved average freight rates that were significantly higher year-over-year.

Please turn to Slide 7. Supportive economic and consumer demand environment in the U.S., coupled with tighter supply chain led to elevated freight rates during the quarter. The supply and demand dynamics we experienced in the second quarter were not consistent with normalized operating environment, we outperform from a freight rating perspective. We expect our China service to continue to see elevated freight rates during the traditional peak season in the third and early fourth quarters.

While we feel good about rate levels during the traditional peak season rate, trajectory after the peak season is uncertain given several factors, including the strength of U.S. economy and interest rates, transpacific supply, the Red Sea situation and its related supply chain effects, the East Coast labor union negotiation, and the U.S. elections. Nonetheless, we expect freight rates to remain elevated as long as the underlying economic supply chain and geopolitical conditions persist.

At some point, we expect rates to normalize, timing of which will likely depend on the duration and the degree to which these factors influence supply and demand dynamics in trade lane. Regardless of the environment, we expect the ongoing shift from air freight to expedited ocean and the continued growth of e-commerce goods to drive long-term demand for our China service. I'm confident in our positioning with the 2 fastest and most reliable expedited ocean services in the transpacific trade lane and our unmatched destination services.

Please turn to the next slide. In Guam, Matson' container volume in the second quarter of 2024 decreased 6.1% year-over-year due to 1 less sailing compared to last year. In the near term, we expect continued improvement in the Guam economy underpinned by low unemployment rate. For 2024, we expect container volume approach to the level achieved last year.

Please turn to the next slide. In Alaska, Matson's container volume for the second quarter of 2024 increased 4.9% year-over-year due to 2 additional northbound sailings compared to last year. In the near term, we expect continued economic growth in Alaska, supported by a low unemployment rate, job growth, and lower levels of inflation. For 2024, we expect Alaska volume to approximate the level achieved last year.

Please turn to Slide 10. Our terminal joint venture, SSAT, increase $2.6 million year-over-year to $1.2 million. The higher contribution was primarily due to higher lift volumes. Although container volumes on the U.S. West Coast systems have been particularly strong in the first half of the year, volume across SSAT terminals has not been as strong. In 2024, we expect the contribution from SSAT to be modestly higher than 2023 due to an expected increase in lift volumes.

Turning now to Logistics on Slide 11. Operating income in the second quarter came in at $15.6 million or approximately $1.3 million higher than the result in the year-ago period. The increase was primarily due to a higher contribution from supply chain management. Our supply chain management service includes purchase order management, origin operation, and destination services and allows us to provide a comprehensive solution from factory floor to destinations across [indiscernible]. For the third and fourth quarters of 2024, we expect operating income to approximate the level achieved last year.

And with that, I will now turn the call over to Joel for a review of our financial performance.

[Joel M. Wine, executive]

Okay. Thanks, Matt.

Please turn to Slide 12 for a review of our second quarter results. For the second quarter, our consolidated operating income increased $27.9 million year-over-year to $124.6 million, higher contribution from Ocean Transportation and Logistics, $26.6 million and $1.3 million, respectively. The increase in Ocean Transportation operating income in the second quarter was primarily due to significantly higher freight rates in China, partially offset by higher vessel operating costs, including fuel-related expenses and higher SG&A costs. The increase in Logistics operating income was primarily due to higher contribution from supply chain management.

In the quarter, we had interest income of $18.8 million, which includes $10.2 million of interest income earned on our 2021 federal income tax refund. The interest expense in the quarter decreased to $0.8 million year-over-year due to the decline in outstanding debt in the past year. Net income increased 40.1% year-over-year. Diluted earnings per share increased 46.5% year-over-year. The difference between the 2 due to a $4.2 million decrease in the diluted weighted average shares outstanding.

Please turn to Slide 13. This 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 $608.5 million, from which we used $41.7 million to retire debt, $206.9 million on maintenance and other CapEx, $40.3 million on new vessel CapEx, including capitalized interest and owners' items, $24.6 million in cash deposits and interest income in the CTF net of withdrawals for milestone payments, $12.8 million on other cash outflows, while returning approximately $237.5 million to shareholders via dividends and share repurchase.

Please turn to Slide 14 for a summary of our share repurchase program and balance sheet. During the second quarter, we repurchased approximately 0.6 million shares for a total cost of $72.2 million, including taxes. Year-to-date, we repurchased approximately 1 million shares for a total cost of $121.1 million, including taxes. Since we initiated our share repurchase program in August of 2021 through June of this year, we have repurchased approximately 10.6 million shares or 24.4% of our stock for a total cost of approximately $877 million.

As we have said before, we are committed to returning excess capital to shareholders and plan to continue to do so in the absence of any large organic or inorganic growth investment opportunities.

Turning to our debt levels. Our total debt at the end of the second quarter was $420.7 million, a reduction of $9.8 million from the end of the first quarter. Two other items to note. On April 19, 2024, Matson received a federal tax refund related to the company's 2021 federal tax return of $118.6 million as well as $10.2 million in interest income earned on the tax refund. During the quarter, we also paid $35.8 million into the CCF related to a milestone payment on our new vessel program.

With that, let me now turn to Slide 15 and walk you through our outlook for the third and fourth quarters of 2024 on the left-hand side of this page. We expect Ocean Transportation operating income in the third quarter of 2024 to be meaningfully higher than the $118.2 million achieved last year. And in the fourth quarter of 2024, we expect operating income to be moderately higher from the $66.4 million achieved in the fourth quarter of 2023. We expect our China service to continue to see elevated rates during the traditional peak season in the third and early fourth quarters.

For our domestic trade lines, we expect volumes to approach the levels in 2023, absent any significant change in the trajectory of the U.S. economy. For Logistics, we expect operating income in both the third and fourth quarters of 2024 to approximate the levels achieved last year.

On the right-hand side of this slide, we expect the following outlook guidance for the full year. Depreciation and amortization to approximate $180 million, inclusive of $27 million for dry dock amortization. Interest income to be approximately $45 million, interest expense to be approximately $8 million, other income to be approximately $7 million, and effective tax rate of approximately 22.0% and dry-docking payments of approximately $35 million.

Moving to Slide 16. The table on the slide shows the CapEx projection for 2024. Compared to what we previously provided on our first quarter call in April, we increased our capital expenditure outlook for LNG installations and reengining projects by $15 million to $85 million to $95 million because of higher parts and labor associated with the LNG installation of Manukai. All other line items remain unchanged. Milestone payments for new vessel construction are expected to be paid from the capital construction fund, which already covers approximately 71% of the remaining obligations.

I will now turn the call back over to Matt.

[Matthew Cox, executive]

Okay. Thanks, Joel. In closing, Matson performed well in the first half of the year. For the remainder of the year, we expect higher year-over-year financial performance, driven largely by elevated freight rates and the China service. At some point, we expect supply and demand activity in transpacific trade lane to trend towards normalized operations. And while we acknowledge a number of factors in the China surface outlook remains uncertain, we remain confident in our ability to respond to changing market conditions to serve our customers at an extremely high level.

And with that, I will turn the call back to the operator and ask for your questions.

[Operator]

[Operator Instructions] Our first question comes from Ben Nolan of Stifel.

[Benjamin Nolan, analyst]

Good quarter, guys. I've got a couple. Can I do 3? Is that allowed?

[Matthew Cox, executive]

Sure. Sure, Ben.

[Benjamin Nolan, analyst]

Okay. I appreciate it. So first of all, it was breaking up a little bit, but Matt, did you say that SSAT, while there was a lot of volume moving through the West Coast SSAT did not have as much as some of the other ports, is that what you had said?

[Matthew Cox, executive]

Yes. Yes, Ben, you can say that.

[Benjamin Nolan, analyst]

Can you maybe explain that a little bit?

[Matthew Cox, executive]

Yes, sure. So we operate a portfolio of 8 terminals along the U.S. West Coast that is the SSAT joint venture does. And 2 of those are in L.A. Long Beach, 2 are in Oakland with the balance being in the Pacific Northwest, both our Tacoma operation and 3 terminals in Seattle area. And what we saw as the volumes increase generally in the transpacific, that cargo historically and in this case, the same generally fill up in Southern California first and then migrate north to Oakland and lastly go to the Pacific Northwest, and it's really in the Pacific Northwest is where most of that volume really did not appear and has not yet appeared. And so that was the explanation for why we didn't see the averages move up given the portfolio and the geographic location of those terminals.

[Benjamin Nolan, analyst]

And then sort of on the same -- in the same vein. It's been interesting to see what's happening on the freight side. And I thought you guys would probably be really well positioned to talk to. But we've seen a lot of freight coming into the ports, but the trucking market has not been great, the domestic logistics market has not been great. There's -- I've talked to a lot of people who just don't know what's happening to all of this freight. It doesn't seem like it's building up in inventories. Can you maybe talk through what you're seeing, what the type of freight that's moving is? Where is it going? Anything that can maybe help demystify this a little bit?

[Matthew Cox, executive]

Yes. I'll try. It's a complicated question, Ben. But I think what we're seeing -- let me first comment on the market more generally before we go to Matson specific customer sets and dynamics, which we think are a little bit different. But I agree with you that it's interesting to see how the international freight markets are performing much better than the U.S. domestic markets and trade.

What we're hearing from customers have probably been some of the same things you're hearing, and you mentioned it in your question, which is there don't appear to be surplus inventories and our customers are continuing to take very close or pay very close attention to their inventory levels. And so we're not seeing other than seasonal getting ready for peak season changes in inventory levels. So that remains pretty steady.

I think the parts -- if you look at the consumer, as we know, the consumer is hanging in there and consumer spend has held its own. And so broadly, we're seeing a pretty good level of demand that supports the increase in imports. What has been interesting is really the changes around excess of supply, the trucking side, and other things that are holding down some of the pricing mechanisms in the domestic trades. We're seeing it in our intermodal brokerage as well. So we're seeing the same thing, and there has been a lot of downward pressure on rates because of that surplus capacity.

But beyond that, I can't give you much more insight generally into the trade. But I could say the matches story is a little bit different. And as it has been, we have been in -- we seek to and have been consistently the fastest and most reliable on the service for the e-commerce for last-minute orders for late production for all of the reasons why someone would be willing to pay a premium to get their particular cargo to market, the congestion and air freight. All of those things are pointing to very strong demand in the expedited market and in particular, very strong demand for the massive services. So that's only half an answer, Ben, but it's probably the best I can give you.

[Benjamin Nolan, analyst]

I'll take it. I appreciate it. All right. And then last, and I appreciate you hanging in with me for this. So this is the first time that I remember you guys calling out your supply chain management business. I could be not remembering, but is that -- would you say as you're thinking about your logistics business, an area of increased focus? If so, are you looking to expand on that, either organically or inorganically? Or can you maybe just talk me through how that fits as part of the puzzle and where you think it's headed?

[Matthew Cox, executive]

Sure. Yes. Happy to. And you're right. I believe it's the first time we've called it out. And I would also just note for qualification that the changes in profit for logistics are very small. So it tends to amplify things that typically are not part of our core story. But it does highlight the synergies between Matson Logistics and Matson's Ocean Businesses with regard to our China service. Matson Logistics operates in multiple locations inside of China.

It also, as you know, moves the intermodal cargo once it arrives in our Long Beach terminals to the final destinations in Chicago and Memphis and Dallas and other locations. So -- but the supply chain services we called out are those services that we provide to customers in China that are less than container load that would be consolidated, moved into -- onto a Matson container and on to Matson's expedited service offering. And that has been sort of a very slow and steady organic growth build over the last -- well, I mean, it's been really accelerated since the pandemic and is now approaching the radar, again with the acknowledgment that the numbers are relatively small in the Logistics business in terms of its relative change in profitability. So that's the story there, Ben.

[Benjamin Nolan, analyst]

Okay. And just to round that out, how do you think about sort of the trajectory in it?

[Matthew Cox, executive]

I see it like many of our other businesses continuing to grow organically. We have an unbelievable brand in China. And for customers that have 3.5 container loads of cargo, they want to have that last half of the container loaded into an LTL box consolidated by Matson and delivered. And we're going to continue to see growth in that segment as our China businesses continue to perform well.

[Operator]

Our next question will be coming to us from Jake Lacks of Wolfe.

[Jacob Lacks, analyst]

So a couple on the guide. I just wanted to see if you could give a little more perspective on the degree of outperformance in Ocean that you're thinking when you say meaningfully. I know it's a little more specific than you typically get, but we've seen a pretty big spike in rates. So any thoughts there would be helpful as we just think about recalibrating our models?

[Matthew Cox, executive]

Yes, Jake, I mean, you've got to take meaningfully. We're just saying meaningfully higher. So I can't really elaborate on that. Just use your best estimate based upon that. I would say though that this quarter we just had is meaningfully higher than last year's second quarter, but we're just going to leave it with the language you chosen meaningfully higher.

[Jacob Lacks, analyst]

And then in 4Q, are you assuming a pretty full rate normalization there?

[Joel M. Wine, executive]

Yes. I think at this point, Jake, we're expecting a more traditional peak period, meaning after the first week or so of October, we will get into our traditional start to see that normal market adjustment factors of excess in surcharge to subside. And as we get second half of the fourth quarter return to a more post-peak season environment. So it's really more of a traditional return -- seasonal turn to a seasonal pattern, subject to all the qualifications about other external events that may impact that [indiscernible] positive and negatively.

[Jacob Lacks, analyst]

And then one more for me. You guys spoke about long-term demand growth and conversion from for your expedited Ocean service, how close or how far are we from demand being there for -- to reintroduce sort of a third expedited service?

[Joel M. Wine, executive]

A third, you're asking about a potential third…

[Matthew Cox, executive]

Okay. I got it. Thanks, Jake. Yes, it's a good question. We certainly -- it's on our long-term planning radar. I would say it's unlikely that we would see the demand in this time horizon if the market opportunity presents itself, we certainly -- we have a track record of being able to respond to those changes to be able to take advantage of it. Vessel charter -- there aren't a ton of vessels on charter available to put together a service that would need 6 vessels or something like that, but in the transpacific trade lane. But our view is that it remains an option to us under different market conditions, but not likely expected to be under the current conditions and the way we're thinking about it.

[Operator]

Our next question will be coming from Daniel Imbro of Stephens, Inc.

[Daniel Imbro, analyst]

Joel, I want to follow-up maybe on the guidance. I think you guys talked about expecting pricing to stay strong through peak season. But how are you thinking about volume through the prime peak season? Maybe with some of the strength in 2Q a pull forward? Do you still think we'll see a normal kind of growth sequentially? Just curious how you're feeling about the volume growth side as you talk to your customers for the back half?

[Joel M. Wine, executive]

Yes. Thanks, Daniel. We expect to be full. I mean as you know, pretty much year round CLX and MAX were full other than off periods around holidays, Linder, New Year, et cetera. So we expect to be full here in the third quarter in the and also into the early -- the end of the peak season, as we said, early fourth quarter.

[Daniel Imbro, analyst]

And then on the balance sheet, I think you took up CapEx guide a little bit here for this year. I guess is that just a pull forward on some of the investments from next year. And then as you think about the windfall of cash with stronger pricing, how do you think about deploying that cash between growth, buyback, any other investments you're looking at?

[Joel M. Wine, executive]

Really no change in all of that, Daniel, to be honest. So the only thing we changed was because of actual costs that are coming through on our Manukai project, our LNG reengineering project, we bumped up that line item by $15 million just due to that one specific project. So really, it's not a pull forward of CapEx from one period to another or things like that. And last quarter, we gave numbers for 2025 and 2026, and we've made no change to that either. So overall, the CapEx picture, I would describe is unchanged other than just some higher costs on one specific project.

[Daniel Imbro, analyst]

Let me add a third one for me just to come back near term. I know hard to give too much color on 3Q, but did I hear you right? You described the 2Q growth as meaningful that's a decent bogey when you guys think about meaningful?

[Joel M. Wine, executive]

Yes. If you compare last year's -- we talk about operating income performance for each of the segments in consolidated. And yes, clearly, this year's second quarter for Ocean and then, therefore, consolidated as well were meaningfully higher than last year's second quarter. So I'm not saying it's going to be -- that's not -- don't read that as Reena the exact amount, but it qualifies as meaningfully higher.

[Daniel Imbro, analyst]

And then one more follow-up. When you think about adding the new string of ships, whether it's South China or North Vietnam, I guess, would you be looking to add company owned ships? Could you lease ships like you do with the MAX line, would that make it easier to do financially? Just think about what are the considerations? Or how long would you need to see this growing demand to decide it is worth setting up a new string of 6 ships?

[Matthew Cox, executive]

Yes, Daniel, this is Matt. I'll answer that one. I think our view is -- and as I said, it's not right on our radar at the moment. But if we were to add it to the third string, they would very likely be chartered vessels, foreign build chartered vessels, like we have with our MAX service. Those are comprised of chartered vessels that we would do it that way. And some of the factors that, of course, would go into it on the -- as I mentioned a moment ago, the availability of chartered ships and you need to charter 6 of them to be able to have a weekly service.

But the other factors are in each of these markets, especially the growing markets like Vietnam, and in other places, the question is not so much whether there's a demand for Matson's product, but is there enough demand that would be willing to pay a premium price that would allow us to operate that service at a level of profits that would make sense for us to do. And so it's not that there isn't cargo there. But in some of these smaller markets, there's a smaller segment.

So for example, in Vietnam, we have a regular service at a Haiphong which connects with one of our trusted theater partners that move a couple of hundred loads a week out of Vietnam, Haiphong in particular, that meets up with our line haul ships on the CLX and MAX. And so we need to be confident that those markets will be able to accommodate a much greater percentage of the capacity to make those voyages profitable.

[Operator]

This concludes the question-and-answer session. I would now like to turn it back to Matt Cox, CEO, for closing remarks.

[Matthew Cox, executive]

Okay. Well, thanks for being on the call today. We look forward to catching up with you on the third quarter call. Thanks. Aloha.

[Operator]

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.