Matson Q1 2025 Earnings Call Transcript

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Provided by Quartr
May 5, 2025

Key Takeaways

  • Q1 consolidated operating income rose 122% year-over-year to $82.1 million, primarily driven by elevated freight rates in the China service and healthy post-Lunar New Year demand.
  • Following implementation of April tariffs, China container volumes dropped ~30% year-over-year, and Matson now expects lower volumes and average freight rates in 2Q and full-year 2025.
  • The company has lowered its 2025 outlook due to significant uncertainty around tariffs, global trade, U.S. economic trajectory and geopolitical factors, forecasting consolidated operating income to be below prior year levels.
  • Matson is diversifying its Asia catchment basin, launching a new direct Ho Chi Minh service and leveraging feeder partnerships in Vietnam, Cambodia, Thailand and beyond to capture transshipment growth.
  • Matson believes its small-vessel fleet is exempt from new USTR-imposed port fees, though it may face higher container equipment costs and remain indirectly pressured by customer-paid tariffs.
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Earnings Conference Call
Matson Q1 2025
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Operator

For standing by, and welcome to Matson's First Quarter 2025 Financial Results Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during this session, you'll need to press star one one on your telephone. If your question has been answered and you'd like to remove yourself from the queue, simply press star one one again. As a reminder, today's program is being recorded. Now I'd like to introduce your host for today's program, Justin Schoenberg, Investor Relations and Corporate Development at Matson. Please go ahead, sir.

Justin Schoenberg
Justin Schoenberg
Investor Relations and Corporate Development at Matson

Thank you. 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.

Justin Schoenberg
Justin Schoenberg
Investor Relations and Corporate Development at Matson

These risk factors are described in our press release and presentation and are more fully detailed under the captioned risk factors on pages 12 through 23 of our Form 10-K filed on February 28, 2025, and in our subsequent filings with the SEC. Please also note that the date of this conference call is May 5, 2025, 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 J. Cox
Matthew J. Cox
Chairman and CEO at Matson

Thanks, Justin, and thanks to those on the call. Starting on slide three, our first quarter financial performance was as expected, with significantly higher year-over-year consolidated operating income. The year-over-year increase was primarily driven by our China service, which benefited from the carryover of elevated freight rates from the fourth quarter of 2024, combined with healthy freight demand following a traditional post-Lunar New Year period. In our domestic trade lanes, we saw higher year-over-year volume in Hawaii and Alaska and lower year-over-year volume in Guam. In logistics, our operating income was lower year-over-year, primarily due to a lower contribution from freight forwarding and transportation brokerage, partially offset by a higher contribution from supply chain management. Looking ahead, we are lowering our 2025 outlook due to the significant uncertainty regarding tariffs and global trade, regulatory measures, the trajectory of the U.S. economy, and other geopolitical factors.

Matthew J. Cox
Matthew J. Cox
Chairman and CEO at Matson

I will now go through the first quarter performance of our trade lanes, SSAT, and logistics, so please turn to the next slide. Hawaii container volume for the first quarter increased 3.2% year-over-year due to the dry docking of a competitor's vessel. Excluding the volume related to the dry docking of a competitor's vessel, Hawaii container volume would have been roughly flat year-over-year. For the full year 2025, we expect volume to be comparable to the level in 2024, reflecting modest economic growth in Hawaii and stable market share. Please turn to slide five. According to UHERO's February economic report, the Hawaii economy remained stable, with a low unemployment rate, strong construction activity, and stable tourism, offset by challenging population growth and high inflation and interest rates.

Matthew J. Cox
Matthew J. Cox
Chairman and CEO at Matson

Hawaii is experiencing solid construction activity from both public and private sector projects, including rebuilding efforts on Maui following the wildfires in 2023, with elevated demand for construction workers. With respect to tourism, international tourist arrivals continue to be well below pre-pandemic levels, and tourist arrivals to Maui remain on a slow recovery path. Moving to our China service on slide six, we saw significantly higher freight rates year-over-year as the elevated freight rates from the fourth quarter of 2024 carried into the first quarter. Matson's volume in the first quarter of 2025 was 1.4% lower year-over-year. Please turn to slide seven. Currently, there is significant uncertainty regarding tariffs and global trade, regulatory measures, the trajectory of the U.S. economy, and other geopolitical factors. Since the tariffs were implemented in April, our container volume has declined approximately 30% year-over-year.

Matthew J. Cox
Matthew J. Cox
Chairman and CEO at Matson

Given the pronounced market decline in demand in the Trans-Pacific in April, coupled with limited visibility to our container demand, we expect container volume and average freight rates in the second quarter to be lower year-over-year. At the moment, it's difficult to know if these lower volume levels are transitory or will persist for a longer time in 2025, and the duration of this lower demand period will likely depend on active negotiations taking place across the supply chain and the timing of potential amendments to the tariffs. As such, for the full year 2025, we also expect container volume and average freight rates to be lower year-over-year. We continue to work closely with our Asia transshipment partners as our customers look at options to diversify and grow their manufacturing locations.

Matthew J. Cox
Matthew J. Cox
Chairman and CEO at Matson

Many of our customers moved to a China Plus One strategy a few years ago to diversify their operations, and we expect this trend to continue. We will continue to follow our customers as they reposition and expand their manufacturing footprint in response to changing tariffs as part of our catchment basin strategy in Asia. During the first quarter, we announced a new direct service connecting Ho Chi Minh to our CLX and MAX Shanghai departures. This development is a testament to our brand recognition in Asia and our ability to provide the fastest connecting times out of Vietnam. Ho Chi Minh will be our second direct connection in Vietnam, and our expansion is based on the success and customer feedback we received since launching our inaugural direct service connection from Haiphong two years ago.

Matthew J. Cox
Matthew J. Cox
Chairman and CEO at Matson

As a result, in the near term, we expect higher volume from Vietnam from transshipments as our customers manage their freight in an unsettled environment. We believe we are well positioned with multi-year transshipment relationships to scale up the services as expedited freight volume grow in the region. We expect the uncertain environment to accelerate the diversification of our catchment basin in Asia. In addition to Vietnam, we are already carrying freight originating in Cambodia, Thailand, Indonesia, Malaysia, India, and the Philippines. Please turn to the next slide. We believe we're in the early innings of U.S.-China trade negotiations and expect disruptive conditions in the Trans-Pacific, with ocean carriers blanking China sailings and implementing service changes due to lower volume in response to the tariffs. We have also seen some carriers add port calls and increase capacity and allocation and strings from other Asia origins.

Matthew J. Cox
Matthew J. Cox
Chairman and CEO at Matson

At some point, though, retailers will need to restock their shelves or risk significant inventory issues. We also expect that consumer demand for e-commerce goods will continue to grow. In the meantime, we remain a trusted supply chain partner to our customers and expect to run our business like we always have, with a focus on speed, on-time arrivals, early access to cargo, and customer service. As I mentioned earlier, our solid relationship with transshipment partners in the region provides opportunities for further diversification of where our freight is originated. Lastly, we have the resources and assets to move quickly to adapt to a changing environment and find opportunities. For the last 20 years, our China service has gone through many significant disruptive environments, and time and time again, it has shown to be a critical provider of expedited ocean service to existing and new customers.

Matthew J. Cox
Matthew J. Cox
Chairman and CEO at Matson

I see this period of uncertainty and disruption as an opportunity for Matson to do what it does best for its customers, meeting the evolving challenges and delivering freight fast and reliably, given our competitive advantages. Please turn to the next slide. On April 17, the U.S. Trade Representative finalized its notice of action under Section 301 as a follow-up to the President's executive order on April 9. The announcement confirmed that new targeted port fees will be applied to Chinese vessel owners and operators and Chinese-built vessels. Based on our review, we believe that Matson is part of a group of small vessel operators who received exemptions from the U.S. Trade Representative. The U.S. Trade Representative also proposed additional duties on ship-to-shore cranes, containers, and certain chassis. The proposal is open to comment, and depending on its final form, may impact how we procure our equipment.

Matthew J. Cox
Matthew J. Cox
Chairman and CEO at Matson

In summary, we believe that we are exempt from the USTR for now based on the size of our vessels, but will likely face higher container equipment costs in the future. We also remain negatively impacted directly by lower volume and indirectly by merchandise tariffs paid by our customers. Please turn to the next slide. In Guam, Matson's container volume in the first quarter of 2025 decreased 14.3% year-over-year. The decrease was primarily due to lower demand from retail and food and beverage segments. In the near term, we expect Guam's economy to remain stable with a slow recovery in tourism, a low unemployment rate, and some increase in construction activity. As such, for 2025, we expect container volume to approach the level achieved last year. Please turn to the next slide. In Alaska, Matson's container volume in the first quarter of 2025 increased 4.8% year-over-year.

Matthew J. Cox
Matthew J. Cox
Chairman and CEO at Matson

The increase was due to higher northbound volume, partially offset by an additional sailing in the year-ago period. In the near term, we expect continued economic growth in Alaska, supported by low unemployment rate, jobs growth, and continued oil and gas exploration and production activity. As such, for 2025, we expect container volume to be comparable to the level achieved last year. Please turn to slide 12. In the first quarter, our SSAT joint venture contributed $6.6 million, representing a year-over-year decrease of $6.2 million. The increase was primarily due to higher lift volume. For 2025, we expect the contribution from SSAT to be lower than the $17.4 million achieved last year, without taking into account the $18.4 million impairment charge at SSAT during the fourth quarter of 2024.

Matthew J. Cox
Matthew J. Cox
Chairman and CEO at Matson

Turning now to logistics on slide 13, operating income in the first quarter came in at $8.5 million, or $800,000 lower than the result in the year-ago period. The decrease was primarily due to a lower contribution from freight forwarding and transportation brokerage, partially offset by a higher contribution from supply chain management. For 2025, we expect operating income to be lower than the level achieved in 2024 due to a challenging environment for all of our business lines. I will now turn the call over to Joel for a review of our financial performance. Joel.

Joel M. Wine
Joel M. Wine
EVP and CFO at Matson

Thanks, Matt. Please turn to slide 14 for a review of our financial results. For the first quarter, consolidated operating income increased $45.2 million year-over-year to $82.1 million, with ocean transportation increasing $46 million and logistics declining $800,000.

Joel M. Wine
Joel M. Wine
EVP and CFO at Matson

The increase in ocean transportation operating income in the first quarter was primarily due to significantly higher freight rates in China and a higher contribution from SSAT, partially offset by higher direct cargo expense and operating overhead costs. The decrease in logistics operating income was primarily due to a lower contribution from freight forwarding and transportation brokerage, partially offset by a higher contribution from supply chain management. We had interest income of $9.4 million in the quarter, or $600,000 higher than last year, primarily due to higher balances of cash and cash equivalents. Interest expense in the quarter decreased $500,000 year-over-year due to the decline in outstanding debt. Net income increased 100.3% year-over-year to $72.3 million, and diluted earnings per share increased 109.6% year-over-year to $2.18 per share. Diluted weighted average shares outstanding decreased 4% year-over-year. Please turn to the next slide.

Joel M. Wine
Joel M. Wine
EVP and CFO at Matson

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 $820.2 million, from which we used $39.7 million to retire debt, $182.8 million on maintenance and other CapEx, $161.2 million on new vessel CapEx, including capitalized interest and owners' items, $65.5 million in cash deposits and interest income into the CCF, net of withdrawals for milestone payments, and $13.5 million on other cash outflows, while returning $263.7 million to shareholders via dividends and share repurchase. Please turn to slide 16 for a summary of our share repurchase program and balance sheet. During the first quarter, we repurchased approximately 500,000 shares for a total cost of $69.2 million.

Joel M. Wine
Joel M. Wine
EVP and CFO at Matson

Turning to our debt levels, our total debt at the end of the first quarter was $390.8 million, a reduction of $10.1 million from the end of the fourth quarter of 2024. With that, let me now turn to slide 17 and walk through our outlook for the second quarter of 2025 on the left-hand side of the page. Based on the outlook trends Matt mentioned earlier, we expect ocean transportation operating income to be meaningfully lower than the $109 million achieved in the second quarter of 2024. We also expect logistics operating income to be lower than the $15.6 million achieved in the second quarter of 2024. As such, we expect consolidated operating income in the second quarter to be meaningfully lower than the prior year. On the right-hand side of the slide, we have our expectations for full year 2025.

Joel M. Wine
Joel M. Wine
EVP and CFO at Matson

Starting with ocean transportation, we expect year-over-year operating income to be lower than the level achieved in the prior year, with the amount dependent on the impact and timing of the global trade and macroeconomic uncertainties we have discussed on this call. For logistics, we also expect operating income to be lower than the level achieved in the prior year due to a challenging environment for all business lines. As a result, we now expect consolidated operating income to be lower than the level achieved in the prior year.

Joel M. Wine
Joel M. Wine
EVP and CFO at Matson

In addition to this full year operating income outlook, we expect the following for the full year: depreciation and amortization to approximate $200 million, inclusive of $26 million for dry docking amortization, interest income to be approximately $31 million, and interest expense to be approximately $7 million, other income to be approximately $9 million, an effective tax rate of approximately 23%, and dry docking payments of approximately $40 million. Moving to slide 18, the table on the slide shows our CapEx projections for the full year of 2025. Compared to what we previously provided on our fourth quarter call in February, our range for maintenance and other capital expenditures has been lowered by $20 million to $100-$120 million for full year 2025. Our estimate for expected new vessel construction milestone payments in 2025 remains unchanged at $305 million.

Joel M. Wine
Joel M. Wine
EVP and CFO at Matson

Again, milestone payments for new vessel construction are expected to be paid from our Capital Construction Fund, which already covers approximately 91% of the remaining obligations, excluding future interest income and accretion earned on cash deposits and treasury securities. We currently expect our next cash contribution into the CCF for milestone payments to not be until 2028. In the second quarter, we expect to make approximately $36 million in milestone payments from the CCF. In the third and fourth quarters, we expect to make milestone payments of approximately $71 million and approximately $118 million, respectively. With that, let me turn the call back over to Matt for closing remarks.

Matthew J. Cox
Matthew J. Cox
Chairman and CEO at Matson

Thanks, Joel. Please turn to slide 19, where I'll go through some closing thoughts. We are navigating, like many, in an unsettled and rapidly evolving environment.

Matthew J. Cox
Matthew J. Cox
Chairman and CEO at Matson

For the last two decades, we've operated our expedited ocean service through significant periods of uncertainty and disruption. We've come out of those periods better for it, as we demonstrate what we do best for our customers, which is to be a trusted supply chain partner with a consistent, reliable, and fast service. We believe we are in the early innings of U.S.-China trade negotiations and expect a deal to be reached, although timing is unclear. At some point, the largest and second-largest economies will find a way of working together. The stakes are too high for both countries. Despite the current uncertainties, we remain quietly confident in our long-term prospects due to the diversification of our business and cash flows, our focus on serving niche markets where we're an integral part of the supply chain, and the strength of our balance sheet.

Matthew J. Cox
Matthew J. Cox
Chairman and CEO at Matson

Our businesses are durable and capable of withstanding short-term fluctuations while creating long-term shareholder value. We remain committed to maintaining the reliability of our vessel operations and providing high-quality service to our customers and the communities that rely on us. Matson has over 140 years of operating history, and has historically performed well during periods of supply chain disruption, given our competitive advantages and the reliability of our services. We remain committed to looking for growth, either organically or via acquisition, and are prepared to act quickly if an opportunity presents itself during this period of uncertainty. Last, we expect to continue to return capital to shareholders through dividends in our share repurchase program. Our share repurchase program remains a core tenet of our capital allocation strategy, and we continue to expect to be steady buyers of our shares.

Matthew J. Cox
Matthew J. Cox
Chairman and CEO at Matson

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

Operator

Certainly. Our first question for today comes from the line of Daniel M. Brown from Stephens. Your question, please.

Analyst

Yeah. Hey, good evening, guys. Thanks for taking our questions. Sure. Maybe a couple started on the ocean side. Obviously, a lot of moving pieces here, quarter to date. Matt, but if we think about Vietnam and the catchment basin you have built out, just curious how much capacity is down there? I think you said you set up a second direct service in the quarter.

Analyst

I guess if we think about the infrastructure down there being less familiar, how much volume could you pick up if those two direct services really ramped relative to offsetting maybe what's coming out of China, as we just think about what you're building and the ability to maybe expand into new markets to offset the China weakness?

Matthew J. Cox
Matthew J. Cox
Chairman and CEO at Matson

Yeah. Good question. Thanks, Daniel. The first thing I would say today out of Vietnam, approximately 20% of our current volumes week by week with the recent introduction of Ho Chi Minh is originated in Vietnam. We have the ability to increase that volume to the extent that they're pretty significantly. We're in regular dialogue with our feeder partners in Asia. They have the ability to swap out for larger vessels if needed and to meet our requirements for connection over Shanghai.

Matthew J. Cox
Matthew J. Cox
Chairman and CEO at Matson

We have pretty good ability to size that up if that's where the market goes. I think it's interesting as we reflected on it because Vietnam itself, of course, has grown very rapidly, in part as in my prepared comments, we're talking about the increase in Vietnam, the China Plus One strategy that was implemented under the first Trump administration as people tended to de-risk. Vietnam has grown rather significantly, but Vietnam has some of the same issues as many fast-growing Asian economies. They've got shortages of power. They have shortages of labor both in the north and south. They're pretty busy before this significant tariff change to begin with. It's not obvious to what extent the country itself can scale over such a short period of time. As I said in my comments, we're going to follow our customer.

Matthew J. Cox
Matthew J. Cox
Chairman and CEO at Matson

If our customers are able to shift some of their production there, we will be following them. Maybe I have overanswered your question, but we do have the ability to scale. The only other thing I would say is Ho Chi Minh, our newly started service, also has pretty good connection into Cambodia, where quite a bit of production has been growing rather quickly as well. As I said, we are going to follow our customers as this evolves.

Analyst

That is helpful. These transshipments that are going through Shanghai show up in the China containers. Maybe just a clarifier, that down 30 on the quarter-to-date China volume, is that directly out of China, or is that including the positive effect of seemingly some probably more growth out of Vietnam?

Matthew J. Cox
Matthew J. Cox
Chairman and CEO at Matson

Yeah.

Matthew J. Cox
Matthew J. Cox
Chairman and CEO at Matson

I think initially, and again, we have so few data points with which to extrapolate, but in Vietnam, initially, we saw actually out of all origins a reduction of volume in that period as there was some uncertainty with regard to whether tariffs were going to be rolled back. Even the temporary ones, it was not obvious exactly how long those were going to stay in place. We saw reductions out of all origins initially. In the weeks that have followed, we've seen volume out of Vietnam grow, again, partly because of the addition of our Ho Chi Minh service, but we've seen them grow back to sort of the general levels that we experienced before the discussion of tariffs.

Analyst

Great.

Analyst

Maybe last one for me, sorry for being more near-term here, but I know you're not wanting to quantify maybe pricing movements historically, but given the volatility and also the increased disclosure around Q2 volume so far, can you talk about rates and maybe how those have developed? What kind of rate pressures or actions have you seen in the market in response to these tariffs and subsequent volume drop-off?

Matthew J. Cox
Matthew J. Cox
Chairman and CEO at Matson

Yeah. I would say it's been a little bit all over the place. I think what you've seen, and I'll touch on market dynamics, and then I'll comment on Matson. I think what we've seen, the international ocean carriers have blanked a significant amount of sailings in response to the lower as they attempt to resize their fleets for the lower shipments and capacity that is in demand.

Matthew J. Cox
Matthew J. Cox
Chairman and CEO at Matson

We've seen some ocean carriers hold the line on rates as they have seen their efforts to reduce capacity. I think we've seen in some cases ocean carriers have increased the rates in other non-Chinese origins. We've also seen some cases where we've seen lower rates in the market. Those are tracked through the SCFI, so you can kind of see. It's interesting kind of since it's all happening in real time, the market is still in the early parts of readjusting to whatever the new normal is. It is quite disrupted. I would say from Matson's perspective, and we said this or Joel said it in his comments, we expect both lower rate and lower volume out of for the second quarter and for the full year. We expect, again, not to be immune to these.

Matthew J. Cox
Matthew J. Cox
Chairman and CEO at Matson

We still command a very significant premium to the market, but our rates will move in sympathy with the overall market direction.

Analyst

Great. Appreciate all the color. I'll hop back in the queue. Thanks.

Matthew J. Cox
Matthew J. Cox
Chairman and CEO at Matson

Okay. Thank you.

Operator

Thank you. Our next question comes from the line of Jacob Lacks from Wolfe Research. Your question, please.

Jacob Lacks
Jacob Lacks
VP and Equity Analyst at Wolfe Research

Hey, Matt. Hey, Joel. Thanks for your time.

Matthew J. Cox
Matthew J. Cox
Chairman and CEO at Matson

Yeah.

Jacob Lacks
Jacob Lacks
VP and Equity Analyst at Wolfe Research

With China volumes down so dramatically, does it make sense at some point to start temporarily canceling some MAC sailings similar to what we see during Lunar New Year?

Matthew J. Cox
Matthew J. Cox
Chairman and CEO at Matson

Yeah. It's a very good question. I think our view, I think there's a duration question here.

Matthew J. Cox
Matthew J. Cox
Chairman and CEO at Matson

I think our brand is to not blank any sailing at any point in time because it's our view that in four to eight weeks when a lot of inventory runs out, that our customers had tried to preload or whatever, the individual circumstances of our customers, cargo is going to need to move. There is a lot of activity going on right now, as we understand, between the manufacturers of product, the importers, and the retailers about how to cover these costs of these tariffs. Our customers are loath to have empty shelves to the extent that they can help it. We think that a significant amount of cargo will be moving at the last minute. We have seen lots of changing patterns of demand as all of this capacity and supply and demand come into balance.

Matthew J. Cox
Matthew J. Cox
Chairman and CEO at Matson

It is really our goal to, when our customers look back at this very disrupted period, to know Matson in our franchise stands for on-time arrival, no blank sailings. If economic circumstances come to pass that we need to evaluate that, then we'll evaluate it when we cross that bridge. That is not at all where our heads are at right now.

Jacob Lacks
Jacob Lacks
VP and Equity Analyst at Wolfe Research

Got it. That all makes a lot of sense. Thanks. I know it has just been a few days here, but have you seen any changes from the elimination of the de minimis exemption from last week and any changes you expect to see?

Matthew J. Cox
Matthew J. Cox
Chairman and CEO at Matson

Yeah. I mean, I think we understood, and you may have seen the announcements with Temu, who has canceled or discontinued its direct shipments from China.

Matthew J. Cox
Matthew J. Cox
Chairman and CEO at Matson

They're all, I guess their strategy is really to convert itself from outwardly looking in to more of an Amazon-like model where they're going to have cargo that is going to be available in the U.S. and to be shipped from U.S.-based warehouses and distribution centers, different from air freighting. There has been a significant reduction, as we understand it, in air freight demand and carriage associated with Temu's change in business model. I think we do see more of that air cargo now converting into ocean. That may be a long-term opportunity for us as e-commerce continues to grow. That's the most obvious one that we've understood has happened just over the weekend with the ending of the de minimis exemption.

Jacob Lacks
Jacob Lacks
VP and Equity Analyst at Wolfe Research

Got it. Thanks for your time.

Matthew J. Cox
Matthew J. Cox
Chairman and CEO at Matson

Okay. Thank you. Thanks, Jake.

Operator

Thank you. Our next question comes from the line of Omar Nokta from Jefferies. Your question, please.

Omar Nokta
Omar Nokta
Managing Director and Senior Equity Analyst at Jefferies

Thank you. Hey, guys. Good afternoon. Good discussion and a couple of questions or a couple of follow-ups from my end. Maybe just on this last point of the de minimis exemption, I know it's still very early, but do you think maybe perhaps longer term indeed that this could be an opportunity to grab market share perhaps more permanently from air freight? Is that kind of the thought process? I know it's, again, still early, but is that kind of the thinking here long-term?

Matthew J. Cox
Matthew J. Cox
Chairman and CEO at Matson

Yeah. I mean, I think the de minimis exemption, in my personal view, is not going to be negotiated away with an eventual settlement with China. I think that's not coming back. There will be those business models were sort of built on this exemption.

Matthew J. Cox
Matthew J. Cox
Chairman and CEO at Matson

Now that they're gone, it necessarily will have the effect of increasing the ocean market through the closure of this loophole. In a certain portion of that e-commerce, just like our other e-commerce category, we're going to get a shot at a portion of it that wants to or needs to move quickly to replenish. I do think that's an opportunity. It'll be interesting to see exactly how the air freight markets reset because there's going to be, at least in the short term, significant excess capacity for air freight. That market itself will need to, the capacity will need to move and get reoriented. Yeah, I think that change is here to stay and will produce more opportunity for the ocean carriers.

Omar Nokta
Omar Nokta
Managing Director and Senior Equity Analyst at Jefferies

Okay. Thank you.

Omar Nokta
Omar Nokta
Managing Director and Senior Equity Analyst at Jefferies

Just to follow up, just back to the 30% decline you've seen in China volumes since the tariffs were announced in April. Obviously, everything's moving very quickly. It's only been maybe four or five weeks since that liberation day. From maybe your vantage point, have you noticed any? I know you were talking about Vietnam in the prior question, but from your perspective, have you noticed any changes from, say, on the China volume specifically from, say, the first couple of weeks of April when things seem to have come to a standstill globally to now maybe over the past week or two? Have you noticed any changes specifically on that China-U.S.?

Matthew J. Cox
Matthew J. Cox
Chairman and CEO at Matson

Yeah, I can make some general comments. I want to be careful not to bring my 30% forward. These are just sort of the average few weeks.

Matthew J. Cox
Matthew J. Cox
Chairman and CEO at Matson

What we understand are there are significant activities underway between our retail customers and the importers or manufacturers of this product, as I mentioned earlier, about resetting pricing, what can move at what price, how does the burden get shared between those three actors, and ultimately gets passed through to the end consumer. As more time has passed in having these negotiations, more cargo will begin to move. We also had noted in the trade press that some of the largest customers in the market, the big box guys who initially just held or shipped nothing, are beginning now to direct cargo to move again. I do think we'll see an eventual cargo needs to move. There needs to be cargo on shelves to sell.

Matthew J. Cox
Matthew J. Cox
Chairman and CEO at Matson

Our view is that we will, I don't think we'll see a normalization until the tariffs are set at a more permanent level, which it's hard to know exactly how long that process is going to take. There is cargo moving, and more cargo is moving for two reasons. One, as we get into the more traditional, busier times of years. I would just give you one example. For example, if you're a manufacturer of swimsuits, the swimsuit season is a very short one. If you don't reach agreement over a very short period of time, whether it's that season or it's back to school, cargo moves and is ordered months in advance. People still need to move and try to negotiate between the retailer and the different parties. That's all going to happen. It's happening urgently.

Matthew J. Cox
Matthew J. Cox
Chairman and CEO at Matson

Some cargo will move, although it'll be lower until we get to a normalization of the tariffs, which we hope happens soon.

Omar Nokta
Omar Nokta
Managing Director and Senior Equity Analyst at Jefferies

Got it. Very good. Thank you. I'll pass it back.

Matthew J. Cox
Matthew J. Cox
Chairman and CEO at Matson

Okay. Thank you. Thank you, Omar.

Operator

Thank you. As a reminder, ladies and gentlemen, if you do have a question at this time, please press star 11 on your telephone. Our next question comes from the line of Ben Nolan from Stifel. Your question, please.

Benjamin Nolan
Benjamin Nolan
Analyst at Stifel

I appreciate it. I also appreciate you guys being forthright with respect to sort of how all of this is happening. First of all, can you maybe talk through, are there anything that you can do to sort of help mitigate? I mean, obviously, there's the catchment basin thing and picking up volumes from Vietnam. It doesn't sound like you're going to be doing any blank sailings.

Benjamin Nolan
Benjamin Nolan
Analyst at Stifel

Are there other things on the cost side or just anything else that can maybe be a toggle that can be pulled to help offset the impact of what's going on here?

Matthew J. Cox
Matthew J. Cox
Chairman and CEO at Matson

Yeah. I think, Ben, the question for us is what's the duration of this and what does it look like when we get back? We have done what I think every company in the United States has done, which is we have looked at our capital spending to see which can be deferred. We have put a headcount freeze in place. We have curtailed our spending levels. We are doing everything we can while we determine where the new, once things settle out. The hope here is that the U.S. economy can avoid a recession. If we find ourselves in one, there are other changes and costs that we could undertake.

Matthew J. Cox
Matthew J. Cox
Chairman and CEO at Matson

Certainly, having done this for a long time, we know how to do it. Our view now is to do those things which are obvious but allow us to retain the optionality to recover. You'll recall from the pandemic that when the normalization occurs, there's likely to be a snapback of activity. We want to be ready with our deployments to be able to take advantage of that when it occurs. The bigger the snapback will be, the longer that this goes on. I think we don't want to downsize and reduce our ability if we can't put it back in place relatively quickly. I think we get brand points for having looked back and said we didn't blank any sailings. We were there as a trusted partner. I think that for long-term value creation is there.

Matthew J. Cox
Matthew J. Cox
Chairman and CEO at Matson

We'll watch this as it goes. We're not making any permanent decisions. Everybody's kind of flexing. Obviously, every company, including ours, has been doing a lot of planning and strategic planning and scenario planning. We're not going to act until it's appropriate. It's obvious that we need to do something and are not afraid to do that.

Benjamin Nolan
Benjamin Nolan
Analyst at Stifel

I think I know the answer, but is it possible? I know you said 30% volume decline in April. Is it possible to contextualize what that might mean with respect to your operating income and the marine transportation business?

Joel M. Wine
Joel M. Wine
EVP and CFO at Matson

Ben is chill. I'll take that one. We won't give anything specific, but the 30% decline, you can look at our numbers. That's a year-over-year phenomenon that we quoted in April.

Joel M. Wine
Joel M. Wine
EVP and CFO at Matson

The best way I can contextualize it for you is to say, look at our second quarter numbers last year. Assume April's down 30% year-over-year and then make your own estimates of what you think the rest of the quarter will be for our China business. Of course, layer on it what you think the incremental contribution would be. That would be the consolidated operating income impact of it. That's the best way to think through it and conceptualize it.

Matthew J. Cox
Matthew J. Cox
Chairman and CEO at Matson

The only other thing, Ben, this is Matt, that I would say is at this point, we don't know if this 30% won't gradually get better. We don't know if China and the U.S. may pause these tariffs or take a big step backwards or to some other level before the end of the quarter. That may cause some changes.

Matthew J. Cox
Matthew J. Cox
Chairman and CEO at Matson

Frankly, everyone's crystal ball is a little cloudy at this point. As Joel mentioned, that's the approach that you should take algebraically to try to figure out how we might look.

Benjamin Nolan
Benjamin Nolan
Analyst at Stifel

Right. Okay. If I can sneak one last thing, you talked about 20% of the volume that's running through China originating in Vietnam. Is there any thinking about maybe running a direct shipment from Vietnam?

Matthew J. Cox
Matthew J. Cox
Chairman and CEO at Matson

Yeah. I think, Ben, we think that the feeder strategy with our trusted partners, feeder partners in the region, gives us the ability out of Haiphong and Ho Chi Minh to have the fastest service to the U.S. West Coast, even with the feeder connections because the feeder connections in Shanghai arrive immediately before our departure. Do we have the ability to move ships around? Certainly, we do. By definition, we do.

Matthew J. Cox
Matthew J. Cox
Chairman and CEO at Matson

I think we can have our cake and eat it too in the sense that we still will have the fastest connections in Haiphong and Ho Chi Minh through our feeder network and still retain the capacity to depart from those ports on which we have very long-standing relationships, and they provide us simply outstanding service.

Benjamin Nolan
Benjamin Nolan
Analyst at Stifel

Okay. I appreciate it. Thank you, guys.

Matthew J. Cox
Matthew J. Cox
Chairman and CEO at Matson

Let me answer it a different way too. There is significant congestion at the large ports in Vietnam. We do not have long-standing relationships. Our own vessels may go there, and we may not be able to move as effectively or as reliably as we do the smaller ports for the feeder vessels that we are currently operating. That is just another way to say the same thing.

Benjamin Nolan
Benjamin Nolan
Analyst at Stifel

Got it. All right. I appreciate it, guys.

Matthew J. Cox
Matthew J. Cox
Chairman and CEO at Matson

Thank you, Ben.

Joel M. Wine
Joel M. Wine
EVP and CFO at Matson

Okay. Thanks, Ben. Thank you.

Operator

This does conclude the question and answer session of today's program. I'd like to hand the program back to management for any further remarks.

Matthew J. Cox
Matthew J. Cox
Chairman and CEO at Matson

Okay. Thanks for your attention today. We look forward to connecting with you at the end of the next quarter. Thank you.

Operator

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.

Executives
Analysts
    • Analyst
    • Jacob Lacks
      VP and Equity Analyst at Wolfe Research
    • Omar Nokta
      Managing Director and Senior Equity Analyst at Jefferies
    • Benjamin Nolan
      Analyst at Stifel
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