Matson, Inc. (MATX) on Q2 2021 Results - Earnings Call Transcript
Operator: Good day and thank you for standing by. Welcome to the Second Quarter 2021 Financial Results Conference Call. At this time all participant lines are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Lee Fishman. Please go ahead.
Lee Fishman: Thank you, Tina. 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.
Matt Cox: Okay. Thanks, Lee, and thanks to those on the call. I'll start with a quick recap of our second quarter results. So please turn to Slide 3. Matson's businesses across Ocean Transportation and Logistics continue to perform well throughout the second quarter as the U.S. economy further recovers from the pandemic. The year-over-year increase in Ocean Transportation operating income in the quarter was primarily driven by continued exceptional demand for both the CLX and CLX+ services. In our domestic trade lanes, we continue to see improving demand as the local economies further reopen with meaningfully higher year-over-year volumes compared to the pandemic volume lows in the second quarter of last year. Logistics operating income for the second quarter increased year-over-year as a result of continued elevated goods consumption and the inventory restocking in addition to favorable supply and demand fundamentals in our core markets. The supply chain environment continues to be marked by widespread congestion and pressure points at critical junctions for both our ocean and overland transportation. At Matson, we remain focused on what we do best which is maintaining reliable trade lane services and helping our ocean transportation and logistics customers manage through this unique and difficult period of congestion. We're also focused on developing new organic growth opportunities that fully leverage the Matson brand and our customer relationships. Please turn to the next slide and I'll discuss a few of these in detail.
Joel Wine: Okay. Thanks, Matt. Now on to our second quarter financial results on Slide 13, consolidated operating income increased $162.7 million from $51.2 million in the year ago period to $213.9 million but higher contributions from Ocean Transportation and Logistics of $158.7 million and $4 million respectively. The increase in Ocean Transportation operating income in the second quarter was primarily due to a higher contribution from the Hawaii and China services and a higher contribution from SSAT partially offset by higher vessel operating costs, higher terminal handling costs and higher depreciation. The year-over-year increase in the China service contribution was result of significantly higher average freight rates and higher volumes in the CLX service and a higher contribution from the CLX+ service due to higher average freight rates and six incremental voyages. We also had three incremental extra loaders compared to the year-ago period. The year-over-year increase in SSAT equity income was due primarily to higher lift volume which Matt previously discussed. The higher vessel operating costs was due primarily to increases in overhead costs and the cost of operating extra loaders. The higher terminal handling costs was due primarily to increase in volumes including the volume from extra loaders and also annual cost increases. The year-over-year increase in depreciation was due primarily to Matsonia entering the service in the fourth quarter of last year and to a lesser extent a full year of depreciation of scrubbers installed on the CLX vessels last year. The increase in logistics, operating income was due primarily to higher contributions from transportation brokerage, freight forwarding and supply chain management. I do want to point out that the year-over-year decline in logistics, operating income margin was due primarily to the increase in transportation brokerage revenue which had a lower relative contribution margin than freight forwarding. Interest expense for the quarter was $5.5 million or $1.8 million lower than the first quarter this year due to lower debt outstanding during the second quarter versus the first quarter and one-time expenses in the first quarter associated with the debt amendments on the revolving credit facility and note purchase agreements that were completed during the first quarter. Lastly, the effective tax rate in the quarter was 22.6%. Slide 14 shows how we allocated our trailing 12 months of cash flow generation. For the last 12 months ending June 30, we generated cash flow from operations of $528 million from which we used $228.5 million to retire debt, $171.8 million on maintenance CapEx, $71.3 million on new vessel CapEx including capitalized interest and owners items and $15.8 million on other cash outflows while returning $40.3 million to shareholders via dividends. I would like to point out that Matson made approximately $75 million in cash tax payments in the second quarter which you will see at the bottom of the cash flow statement in our 10-Q filing. Turning to Slide 15 for a summary of our balance sheet, you will note that our total debt at the end of the quarter was $661.5 million and our total net debt was $644.1 million. During the quarter, we reduced total debt by $37.4 million. At the end of the second quarter, our leverage ratio per the recently amended debt agreements was approximately 0.9x, and we had no outstanding balance on the revolver. On July 7, we terminated the operating lease on the Maunalei and paid approximately $95.8 million which we funded with a combination of cash on hand and borrowings on the revolving credit facility. As a result of this transaction, we reacquired the vessel and we expect approximately $6 million and lower cash operating costs in the second half of 2021 and we expect the transaction to be EPS accretive by $0.10 and $0.19 in 2021 and 2022 respectively. On Slide 16, we have an update of our capital expenditures for 2021 where we wanted to update a few key items, given our use of cash in the last few quarters and what we see for the balance of the year. There is no change in the maintenance CapEx of $60 million to $70 million and scrubber installation payments of $20 million that we previously provided. We expect an increase of $50 million in new equipment such as chassis, dry containers, and reefers to support our new trade lane services like CLX+, AAX and CCX and to increase the availability of equipment across our entire network. We expect $5 million payments on the new neighbor island barge to slip from 2021 into 2022, and lastly, we expect approximately $125 million in lease termination payments to acquire assets in three main buckets. First, the $96 million is related to the Maunalei which I already mentioned, second $15 million is related to the Mauna Loa barge that we paid in the second quarter and thirdly about $14 million is related to the buyout of other leased equipment in our network. On our fourth quarter earnings call in February, we also indicated that we expect to be at the maintenance level of CapEx of $60 million to $70 million next year in 2022. Our CapEx needs next year in 2022 may be elevated as a result of some payments on the equipment spent in 2021 trickling into calendar year 2022 and our efforts to sustain high levels of equipment availability if the congested environment persists longer than expected. With that CapEx update, I'll now turn the call back over to Matt.
Matt Cox: Thanks, Joel. Matson's businesses had a solid first half of the year. We're focused on ensuring our new and existing ocean services maintain reliability and that we are engaging with our customers in Ocean Transportation and Logistics to manage through the complexities of the current environment. We also remained vigilant on finding new opportunities either organic or through acquisition as the post-pandemic environment continues to evolve. And with that, I will turn the call back to the operator and ask for your questions.
Operator: Our first question is from Ben Nolan with Stifel.
Ben Nolan: Yes, hi guys, congratulations on the good quarter here. I've got a few, so bear with me for a minute. I first want to talk a little bit about the evolution of some of the China business, specifically the most recent addition, the CCX going into Oakland. This is an area that I think we've thought about before and maybe expanding the footprint beyond simply Long Beach, can you maybe talk through a little bit about what you're hearing from your customers in Oakland and maybe the demand for that and I know that initially you sort of outlined that it's, you're doing it through the New Year. But the CLX+ are initially only a temporary thing . At what point do you think customer demand or what you're hearing from your customers that give you confidence to be able to -- how that CCX do something a little bit more permanent as well.
Matt Cox: Okay. Sure. Thanks, Ben. So as we approached, clearly there's a lot of pressure in the transpacific trade and frankly all the global ocean trades right now and effectively every ship in the world that's available is in use and deployed carrying cargo somewhere in the world. And so Matson had a couple of reserve vessels but for us the part of the construction of our services are, we have a criteria that they have to be highly differentiated and if possible have to leverage Matson's unique strengths in controlling assets, both the ports and be able to berth on arrival, do we have adequate equipment chassis to have access to off-dock container facilities. So that we're not just putting out a generic service, but that one that truly differentiates itself in the marketplace and so our CCX was a result of that. We have our own dedicated berth in Oakland. We will have the fastest transit time from Shanghai, Ningbo into Oakland. We will have zero waiting on arrival and be able to get access to it when as soon as it arrives. And as a result will be a super highly differentiated service, so our goal is to avoid chartering a bunch of ships to produce a market level service, but something that's truly differentiated which we think has enduring value to customers. We have seen a very warm reception to our Oakland offering. We have significantly oversubscribed relative to the demand on the first voyage and we think that will be sustained. With regard to the question Ben that you asked about the duration of the CCX. I mean I think our thinking is that this service can be extended beyond Lunar New Year 2022, if the market demand requires it. And so what we're saying is that based on what we're hearing from customers, our own understanding of the macro economy, additional stimulus, sales to inventory ratios, all the metrics, we think at least through Lunar New Year, but if the market wants it and needs it longer, we can do that. So, those are just a couple of us to your questions answered.
Ben Nolan: Okay. And along those lines, it's appreciating now all of your spare or effectively all of your spare ships are utilized, it's really expensive to get third party assets. For the moment, are you kind of tapped out in terms of being able to add new services or creative, innovative, distinctive businesses for the moment?
Matt Cox: Yes, I think the answer to that is yes. Until the charter market changes and as you point out the charter market -- charter rates are extremely elevated given to the strong demand and effectively all of Matson's vessels are effectively deployed that isn't to say that if other vessels become available at some point in the future as market conditions change, we won't reevaluate that but at this moment in time other than, let's say, extra loaders for dry-dock return voyages or chartering others vessels on a one-off basis, but effectively this puts all of Matson's existing owned and chartered fleet to use.
Ben Nolan: Okay. So, and Joel, let me shift to you one of the things that I hear a lot and I suspect that you do to is, okay, great things are good, but where do we go from here. I'm sure you guys have some thoughts on this. But the business is somewhat different than it used to be, you have all of these Chinese expedited businesses that will likely keep volumes at much higher elevated levels than they were in the past. There are a lot of moving parts. Can you maybe walk me through what you think sort of free cash flow might look like under a normal rate environment, but with the elevated volumes, just sort of stair-step me through sort of what's different but with more freight.
Joel Wine: Yes. Ben, I think it's going to be proportionately to what you're seeing right now in terms of, if you look at our second quarter. I would just make the observation, there's nothing unusual about our cash flows and the cash flow, we generated and therefore the free cash flow generated. We're paying cash taxes announced, we've talked about that. We are dry docking schedule and outflows for dry docking is nothing unusual that's pretty regular, fluctuate a little bit based on the number of ships, but nothing dramatic. We did have big increases in working capital, which is consistent with the growth. When a company is growing adding new service lines and higher revenue levels, you'll see more investment required in working capital to fund those receivables which grow more than your payables. So you'll see cash outflows right now and things stabilize on a rate level and volume levels in the cash outflows, working capital will normalize, you get a little bit of a benefit. So in other words, as we launched the CCX here, one investments you'll see is negative working capital to fund those receivables in Q3. So there'll be some positives, but the big picture is where is the EBITDA, so, I mean I think we're not giving outlook on EBITDA. But it's still will be the biggest driver of determining of free cash flow will be what is that EBITDA generation level, but all the deducts for working capital type items, other cash taxes, those sorts of things which should really be pretty similar to what you're seeing here on a proportional basis, Ben. And then, the question is, where is the CapEx and that's why we actually took time to really detail that CapEx and give you a fulsome update here in this deck for this quarter and what to expect this year and we should be getting close to that maintenance CapEx next year except for some of the investments that will spill over from this year into next year on equipment purchases and/or some of the scrubber projects and things like that. But overall, all those are the regular drivers of free cash flow and I think they're going to stay relatively proportional depending upon that.
Ben Nolan: Okay. So maybe let me comment that a slightly different way, when you look at your current EBITDA how much of that would you attribute to rates that are elevated versus as you're saying just sort of, hey, this is the new normal.
Joel Wine: Yes, that would be beyond what we disclose with respect to rates as you know Ben, so I mean if you look at our, 706, that's the number and obviously has been a rising rate environment over the last 12 months, but we can't comment with any more precision on the rate impact of that.
Ben Nolan: Okay, all right. So then I told you I had a few for you, but now I wanted to address sort of the, what I was getting to a little bit ago, we're making a lot more money than you really have. The share price has kind of flat lined a little bit here despite numbers rising and the business growing and et cetera. About a month ago or so you announced 3 million share buyback program. Can you maybe talk me through sort of how you think about that? I know in the past, Joel, you had said that you were, it was just going to be serious, many year and the previous buyback program, it wasn't going to be sort of aggressive. It was just part of normal course of business. Is there a point where you say we have money to spend here, we feel like our shares are cheap when we're just going to go at it.
Joel Wine: Yes. I'd say Ben we're right now really sticking with our plan, so I think that's the most important message. It's just happening a bit earlier than we thought. We thought we'd be probably buying shares back in '22 and '23, are looking at various methods of returning capital to shareholders in that timeframe it has just happened earlier because of the really strong performance in the business in the growth opportunities that we've had, but our overall plan is not changing, is just accelerated. So for instance, it’s been on share buyback, our approach will be subject to market conditions and be judicious about it, but we do want to get at returning this capital back to shareholders, so the overall philosophy of that is not changing. It's just been accelerated from a timing perspective, I think it's the best way to think about it.
Ben Nolan: Okay. And then, last one, this is -- I'm asking on behalf of someone else on this and I hopefully there is no one else in the queue, but the question that came in to me was as the air freight or as people begin to travel a little bit more and I realize that we're still not back to normal by any means, but more belly capacity becomes available on passenger airlines and there has been some additions to air freight. At what point there maybe some of the people who had switched over from air freight to business. Switchback and I guess the question is, how confident or how comfortable are you that the supply chains have permanently shifted and even want to become a little bit more available, it doesn't go back.
Matt Cox: Yes, it's a great question, Ben. This is Matt. I think the way we're thinking of it now is how we had before. There is an element here now of extreme congestion and frustration on behalf of our customers trying to get their supply chains and products move to their end markets for retail consumption. And if every airplane in the world, air freighter in the world is full every -- as I mentioned earlier, every vessel is full, there is congestion on the U.S. rail network, there is congestion on the China rail network, there is insufficient labor to demand warehouses through our customer supply chains and trucking all of the elements. I think that this gradually or eventually it's a better word gets unwound, I don't know when that is, there aren't any really clear signs that's happening anytime soon, but of course obviously eventually it will. But I think what we're left with is a change environment where we see customers reassessing the amount of inventory and stocking and safety stock, I think you'll see customer behavior changing with regard to the explosion of e-commerce and importantly, the expectation of a quick delivery of products into those end markets which favors expedited services. And so, we remain convinced that when we get to the new normal first of all, it's not going to be like the old normal and it's going to favor Matson service offerings and where we end up there and when exactly, it's unclear. And in the meantime, we're working hard to help our customers navigate this highly frustrating supply chain environment.
Operator: I will now turn the call back over to Matt Cox, CEO for closing remarks.
Matt Cox: Okay. Well, thanks everybody for listening and we look forward to catching up with everyone on the third quarter call. Aloha.
Operator: Thank you, again for joining us today. This does conclude today’s conference call. You may now disconnect.
