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Executives

Jerome Holland – Director-Investor Relations

Matthew J. Cox – President and Chief Executive Officer

Joel M. Wine – Senior Vice President and Chief Financial Officer

Matson, Inc. (MATX) Q2 2013 Earnings Conference Call August 7, 2013 4:30 PM ET

Operator

Good afternoon, and welcome to Matson's Second Quarter 2013 Earnings Conference Call. For your information, all participants will be in a listen-only mode during the Company's presentation. There will be an opportunity for you to ask questions at the end of today's presentation. (Operator Instructions) The conference is being recorded. I would now like to turn the call over to Jerome Holland, Director of Investor Relations. Please go ahead.

Jerome Holland

Thanks Yusif. Aloha and welcome to our second quarter 2013 Earnings Conference Call. Matt Cox, President and Chief Executive Officer; and Joel Wine, Senior Vice President and Chief Financial Officer are joining me from Honolulu today. Slides from this presentation are available for download at our website, www.matson.com, under the Investor Relations 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 and this conference call. These risk factors are described in our press release and are more fully detailed under the caption Risk Factors on pages 9 to 15 of our 2012 Form 10-K filed on March 1, 2013 and in our subsequent filings with the SEC.

Please also note that the date of this conference call is August 7, 2013, 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, also, references made to certain non-GAAP numbers in this presentation. A reconciliation to GAAP numbers and description of calculation methodologies is provided in the addendum.

With that, I will turn the call over to Matt and Joel, who will take us through the key highlights from the second quarter of 2013 and provide an updated outlook for the balance of the year. Matt?

Matthew J. Cox

Thanks Jerome. And thanks to those on the call today. We had another solid quarter driven by continuing strength in our Hawaii trade, modest volume gains in our other trade lanes and a better result in logistics. These gains were offset to some degree by expected lower freight rates in our China trade and a net modest loss at SSAT, while performance in Guam held steady.

Amid these positive results in June, our Board of Directors authorized a 6.7% increase in our quarterly dividend to $0.16 a share; demonstrating confidence in our ability to continue to return cash to shareholders, while investing in growing our businesses.

As we look to the balance of this year, we expect overall results to modestly exceed the results achieved in the second half of 2012, reflecting a full year cycle of limited economic recovery in the markets we serve.

Turning to slide 4, we show our second quarter EBITDA earnings per share and earnings per share from continuing operations. As you can see, we continued to show improvement across all 3 of these metrics as compared to last year.

In the second quarter of 2013, EBITDA was $53.8 million, a $2.5 million increase from the second quarter of 2012. The increase demonstrates our ability to consistently generate cash flow from operations.

Earnings per share increased from $0.18 last year to $0.47 in this quarter. However, in the second quarter of 2012, we incurred $7.5 million in losses from discontinued operations that negatively impacted the earnings per share. Looking at continuing operations, which is how we think about it internally, diluted earnings per share increased from $0.36 to $0.47 this quarter a 30.1% increase.

Part of that increase was bolstered by a lower effective tax rate in the quarter as compared to last year and Joel will speak to that later in our presentation.

The story is the same when we look at EBITDA and earnings per share for the first 6 months of 2013. We had a solid first half of the year driven by a volume up tick and lower vessel operating expenses. Part of that is due to the benefit we derived from operating in nine-ship fleet this year. In the first half of 2012, as you may recall, we operated a 10-ship fleet during a significant portion of the time due to vessel dry-docking.

Year-to-date EBITDA was nearly $90 million, 18% higher than the comparable period last year, while earnings per share have shown similar gains as well. Net income year-to-date is $29.2 million. All in all a good solid first half of the year with more to come.

Turning now to our individual service lines on slide 6, container volume in our Hawaii service was up by 5.3% on a year-over-year basis and auto volume increased by 11%. The uptick in Hawaii container volume was driven by modest market growth and gains in westbound carriage. We also benefited from the additional voyage that dropped into this quarter.

These volume gains were similar to the gains we had during the first quarter of the year and while we are encouraged by increase in activity in the first half, we still think it’s too early to say that the Hawaii recovery is complete. We continue to operate in 9-ship fleet, which is optimal for present costumer demand and our westbound utilization remains high at approximately 95%.

Looking to the balance of the year, we continue to expect moderate volume gains for the Hawaii trade, in line with the continued expected general improvement in the Hawaii economy and the two solid quarters already behind us. However, market gains can fluctuate depending on specific customer activity, competitive sailing schedules and other factors.

Our new vessel replacement plans are progressing well and we expect to provide much more color once we’ve signed a contract with a shipyard. We expect our decision on vessel replacement to come before year-end.

Slide 7 details some of the key matrix of the Hawaii economy based on recent forecasts by the Hawaii Department of Business and the University of Hawaii. The forecast are roughly the same as the prior quarter and Hawaii continues to see high levels of visitor arrivals, which in turn drives lower unemployment and has driven revenue per available hotel room to record highs. And while the hotels are doing well presently, a key volume catalyst for us is construction activity.

Historically there has been a lag between permitting and when construction materials are actually shift. So we look at the forecast in permitting and hiring is positive signs moving forward. The Hawaii real gross domestic product has been a solid indicator of general container volume growth and you can see that its forecast to be up by 2.4% for 2013.

Slide 8 shows the results for SSAT, our terminal operations joint venture. SSAT is an essential component of our service capabilities and value proposition to customers. The dedicated terminal SSAT operate provided the straight competitive advantage for us in on loading and off-loading our vessels, as well as receiving-delivering cargo.

The performance in the quarter was negatively impacted by past customer losses that resulted in lower lift volume. But there is positive news ahead. We have recaptured a modest portion of those past customer losses and with aggressive expense control initiatives are beginning to take hold.

We also expect port volume to increase in the second half of the year. A recent forecast by Global Port Tracker, forecast volume increases at 7 U.S. West Coast ports to increase by 2% and 6.6% on a year-over-year basis in the third and fourth quarters of 2013 respectively. As a result, we continue to expect SSAT to operate at a breakeven level for the second half of the year.

Many of you may have seen recent announcement by Port of Oakland, with the Port and SSAT have agreed to a significant expansion of operations.

The graphic on the right of slide 9 shows the current and future footprints of Matson and SSAT terminal operations at the Port of Oakland. There are currently two separate terminal operations with the Matson operation in the innermost harbor.

In the future the operations will be comprised of three terminals including the present SSAT terminal to create a single mega terminal with approximately 350 continuous acres. This new terminal will be the premier terminal in Northern California and will allow access to deep-water berths, which in turn broadens the potential customer base for SSAT and larger capacity vessels.

In addition, under the new lease that runs through 2022, SSAT will utilize 14 post-Panamax cranes to service its customers. We expect to move Matson’s dedicated terminals to a larger footprint from our current 50 acres at (inaudible) terminal to 80 acres, sometime around year-end. We do not expect any disruption in service and expect improved productivity as a result.

And while the near-term financial impact of the expansion is expected to be minimal, we think that moving forward this terminal expansion positions the joint venture well, to capture growth in the West Coast volume.

Turning to our Guam service on Slide 10, container volume increased by 5.2% in the quarter on a year-over-year basis relating primarily to the timing of select shipments. The increase was minimal, only 300 containers. Overall, the market and the global economy are stable. So we continue to expect flat volume levels versus 2012, assuming no new competitor enters the market.

Our China expedited service continue to perform well in a more challenging Trans-Pacific market to the modest improvement in volume on what is essentially a 100% utilization on our eastbound carriage. Our ability to run our ships full is a function of the strong command we continue to see for our expedited service.

We’ve spoken about before that this service is unique in the industry with exceptionally fast transit times, a dedicated terminal in Long Beach for efficient offloading and superior on-time performance.

As a result, while spot rates stumbled significantly on a year-over-year basis, by 15%. We’ve not seen nearly that reduction in our rates. We did see some modest erosion as we expected. But I also note that the modest rate erosion only impacts by half our book of business, which is the stock rate book.

Looking to the second half of the year, we expect the similar dynamics to erode rates modestly from earlier levels. We’re headed into the peak season for this trade and while there has been some industry focus on extracting a premium during this period. We are not expecting these increases to be sustained. We also expect flat container volume for the balance of the year. Because, we expect our ships to continue to run essentially full.

Turning to Slide 12, we had a better in Logistics during the second quarter driven by higher intermodal and highway volumes, lower G&A expenses and continuing progress at our Northern California warehouse operations. It’s probably a bit too early to say that we turn the corner completely in logistics, but we are encouraged by the 2.1% operating income margin we posted during the second quarter.

Due to the same factors that led to a positive quarter, we expect that our operating income margin for the second half of the year will be 1% to 2% of revenues. This will significantly surpass our performance for the same period in the prior year. We are probably in the fourth quarter of 2012. Logistics incurred $3.9 million one-time loss associated with its Northern California warehouse operations.

I will now turn the call over to Joe for a review of our financial performance and consolidated outlook for the second half of the year. Joe?

Joel M. Wine

Thank you, Matt. As shown on Slide 13, Matson’s consolidated operating income for the quarter was $36.5 million, as compared to $32.5 million for the second quarter of 2012. The improvement in results was driven by higher volume on all trade lines, most notably in Hawaii and an improved result in our Logistics segment.

Second quarter 2013 Ocean Transportation operating income was $34.3 million, an increase of $3.1 million over the prior year. The increase in operating income was principally due to higher volume in the Hawaii trade, the absence of $5.8 million of separation costs during the quarter, and improvements in operating expenses partially offset by higher terminal handling expense and higher general and administrative expenses.

Logistics operating income was $2.2 million for the second quarter of 2013, an increase of $0.9 million over the prior year, driven by higher intermodal volume, favorable receivables collection, and lower general and administrative expenses. As we showed earlier, SSAT posted a modest loss for the quarter. These losses are embedded in the Ocean Transportation figures.

The next slide on page 14 shows our year-to-date results. For the first six months of 2013, Ocean Transportation operating income was $52.8 million, an increase of $15.8 million over the prior year, driven by lower vessel operating expenses, higher volume in the Hawaii trade, and the absence of separation costs, partially offset by higher terminal handling expense associated with higher volume and higher general and administrative expenses.

Logistics posted operating income results of $2.4 million for the first half of the year.

On slide 15, looking at our condensed Income Statement, total revenue increased by nearly 5.7% on a year-over-year basis, while our total operating costs and expenses increased by 5.1%.

One item of note, selling, general and administrative expenses rose by $5.9 million, was about one half of the increase attributable to the additional cost of operating as the standalone publicly traded company.

Majority of the remaining increase in SG&A is related to our recent acquisition of the assets of reshipping in the South Pacific and to IT initiative consistent upgrades, we rolled out to improve the efficiencies throughout the organization.

Our effective tax rate during the quarter was 38.9%, which was significantly lower than the 50% rate we had in the second quarter of 2012. As you may’ve recall in that quarter, the majority of the $5.8 million of one-time separation cost did not qualify for tax reduction, which therefore resulted in a higher than normal effective tax rate.

Turning to EBITDA, the company generated $53.8 million of EBITDA during the quarter and in the last 12 months, we’ve generated $182.7 million of EBITDA. The steady strong cash generation is it attributable to the strength of our core market positions and improving economic conditions.

Turing to the next slide on page 16, we continue to generate significant level of cash from our operations which we deploy in a variety of ways. The waterfall graphic on the right-hand side of this slide shows our primary resources in using the cash year-to-date. Cash flow from operations for the first six months of the year was strong at $79.5 million. $9.8 million was used for our maintenance CapEx and we use $13 million to pay dividend. I would note that this figure will increase inline with our recently announced bump in the quarterly dividend from $0.15 to $0.16.

We also paid down funded debt by almost $27 million during the first half of the year. At this point, we have reduced our revolving bank debt to zero and our annual long-term debt amortization is in the $20 million to $30 million range per year for the next four fiscal years.

So at this time, we have begun to accumulate cash on our balance sheet which totaled $39 million at the end of the quarter. Going forward, we expect our cash balances to increase and than eventually we utilize for payments toward our new vessel program over the next several years.

Turning to the balance sheet on slide 17; we ended the quarter with total debt of $292.4 million of which $12.4 million is current. Since the separations from our former parent company last year, we have reduced our total debt by over $80 million. Our net debt to LTM EBITDA ratio of 1.39 times is below our optimal level in the low 2 times area, but I will note when we finalize our vessel new build plans, we would expect to incur additional debt during the multiyear construction base.

The planned pay down of debt since separation along with increases in cash balances were designed to maximize our flexibility of capital sourcing options during the vessel new build phase.

Turning to slide 18, for our updated outlook for the second half of the year; we expect overall results to modestly exceed the results achieved in the second half of 2012, reflecting a full year cycle of limited economic recovery in the markets we serve. We expect Ocean Transportation operating income to be flat to modestly higher for the balance of the year, although we know that there may be some variance in compared to quarterly performance.

On volumes, we continue to be expect moderate increases in Hawaii volume and relatively flat Guam and China volume. In China, we expect modest erosion of freight rates in total.

We continue to expect Logistics operating income to be 1% to 2% of revenues for the balance of the year based on modest volume increases, expense controls and improvements in the warehouse operations.

Our maintenance CapEx was approximately $10 million in the first six months of the year and we expect the second half of the year to be only an additional $10 million to $15 million, bringing our expected 2013 level to be approximately $20 million to $25 million. This level of annual CapEx is down from our previous outlook of approximately $30 million for the year.

With that, I will turn the call back to Matt for closing remarks.

Matthew J. Cox

Thanks Joe. We continued to be optimistic about our current operations and prospects. Hawaii volume growth is for solid second quarter and first half year results and we posted better results in logistics, a reflection of a lot of hard work we put into the business in terms of expense control in approving operations.

We are also very excited about the expansion of terminal operations at SSAT in Northern California, which will better service Matson, will also meet the needs of the growing customer base. All of these contribute to solid earnings and cash flow generation that give us the confidence to pursue new growth opportunities, increase our dividend and make significant progress on our new build investment plans.

As always, we remain focused on continuing to operate all of our businesses at high levels while positioning ourselves for a stronger future.

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

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) There are no questions. I would like to turn the call back over to Matt Cox for any closing remarks.

Matthew J. Cox

Okay. Well, thanks everybody for your attention. We look forward to catching up with you next quarter. Aloha.

Operator

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.

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