Matson, Inc. (MATX)

Q3 2012 Earnings Call

November 7, 2012 4:30 PM ET

Executives

Peter Hyleman – Corporate Secretary

Matt Cox – President and CEO

Joel Wine – SVP and CFO

Analysts

Jack Atkins – Stephens

Michael Webber – Wells Fargo

Kevin Sterling – BB&T Capital

Steve O’Hara – Sidoti & Company

Ian Zaffino – Oppenheimer

Presentation

Operator

Good afternoon and welcome to the Matson, Inc. Q3 2012 Earnings Conference Call. All participants will be in listen-only mode. (Operator instructions) After today’s presentation, there will be an opportunity to ask questions. (Operator instructions) Please note this event is being recorded.

I would now like to turn the conference over to Mr. Peter Hyleman, Corporate Secretary. Mr. Hyleman, please go ahead.

Peter Hyleman

Thank you, Denise. Hello and welcome to our third quarter 2012 earnings conference call. Matt Cox, President and Chief Executive Officer is joining from Honolulu; Well, I and him open today with Joel Wine, Senior Vice President and Chief Financial Officer. Slides from this presentation are available for download at our website www.matson.com under the Investor Relations tab.

Before we begin, I’d like to take this opportunity 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 statement, 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 19 through 29 in the 2011 Form 10-K filed by Alexander & Baldwin, Inc. on February 28, 2012, and in all of our other subsequent filings with the SEC.

Please also note that the date of this conference call is November 7, 2012, and any forward-looking statements that we make today are based on assumption 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 descriptions of calculation methodologies is provided in the addendum.

With that, I will turn the call over to Matt, who will take us through the key highlights of the quarter, as well as an outlook for the fourth quarter. Matt?

Matt Cox

Thanks, Peter. And thank you to those on the call and for your continuing interest in and support of Matson. Third quarter was marked by steady financial and operational results with mixed performance by unit, as I will describe throughout our presentation.

As we expected, our expenses rose during the quarter due primarily to dry docking, one of our largest ships and one of our neighbor island barges. These dry dockings not only impacted our fleet deployment, but additionally led to higher outside transportation cost.

In place of the large vessel in dry dock, we turn to a 10-ship deployment to meet our customers’ demand and our own high service standards for on-time delivery of cargo. We expect to return to an optimal fleet structure that is a 9-ship deployment in the fourth quarter and that dry docking related expenses will be reduced for the balance of the year.

During the quarter, we also noticed some encouraging, but very early signs of Hawaii volume increasing. This slight uptick was outpaced by strong volume gains in Guam and rate and volume increases in China, on a year-over-year basis. Just as important as our operational performance, we made good progress in paying down our debt during the quarter, a reflection of strong cash from operation generation, as well as a reduction in some cash reserves we held. All in all, a steady satisfactory quarter for Matson.

As shown on slide 4, Matson’s consolidated operating income for the quarter was $34.2 million as compared to $30.9 million for the third quarter of 2011. I note, however, that not of all the separation expense from our former parent company, Alexander & Baldwin and shutdown costs associated with our CLX2 service, operating income decreased marginally by $2.5 million during the third quarter on a year-over-year basis.

For the first nine months of 2012 as compared to 2011, operating income rose by $9 million accounting for the expense of separation and shut down. These are good results driven by solid performance in our Ocean Transportation segment, offset by lower results in our Logistics Group, more on that later.

Moving to slide 5. Ocean Transportation’s operating income for the quarter was $32.9 million as compared to $28.9 million for the third quarter of 2011, and operating income margin was 10.7% during the quarter. Our operating income margins continue to improve, but we are still below where we want them. As we’ve said before, we target a 10% to 12% annual margin on average and while we improved during the quarter, we are below our target level. From a top line perspective, revenues increased by over 9%, driven mostly by net volume growth and the increases in freight rates in the China trade. Similarly, revenues increased by nearly 12% year-to-date for the same reasons.

SSAT, our terminal operations joint venture is included in operating income for Ocean Transportation segment, while it appears as a contra expense on our consolidated income statement. For the third quarter, SSAT contributed $700,000 and year-to-date that amount was $3.1 million. These levels are off by over $2 million and nearly $4 million from prior-year levels due to the loss of volume of several major customers.

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