Matson Looks Northward to Find Earnings, Revenue Growth

Image: Matson.

The logistical network that moves goods across the U.S. is impressive in its own right, but when you add the complication of crossing thousands of miles of the Pacific Ocean, getting things to and from Hawaii poses additional challenges. Matson has specialized in shipping between Hawaii and mainland ports on both sides of the Pacific, and coming into Tuesday afternoon's second-quarter financial report, Matson investors were excited about the company's recent moves to add exposure to a brand new market. Matson's results included some extensive one-time charges, some of which were related to the key acquisition, but overall, the company seems poised to enter a new phase of its development. Let's look more closely at Matson's results and see what the completion of its latest merger means for the shipping company going forward.

Matson is going to AlaskaMatson's second-quarter results were mixed in some investors' eyes. As we've seen in past quarters, revenue growth was subdued, with a 2.6% gain to $447.6 million falling a couple percentage points short of the growth rate that most of those following the shipping company had expected. On a GAAP basis, the bottom line looked even uglier, with net income cut nearly in half by extraordinary charges. After making appropriate revisions for those items, though, Matson posted adjusted net income of $34.8 million, and that equated to adjusted earnings of $0.56 per share, a nickel better than the consensus forecast for the company.

Two charges were responsible for the disparity between GAAP and adjusted results. First, Matson incurred $13.5 million of additional overhead costs because of its acquisition of Horizon Lines, which will give the company its first exposure to the Alaska shipping market. Also, Matson had to pay $11.4 million in connection with a settlement with the Hawaiian state government because of a molasses spill in Honolulu Harbor in 2013.

Looking at Matson's segments, the key Ocean Transportation division saw sales climb 8%, but an even larger increase in operating costs led to a 4% drop in operating income. Shipping volumes dropped in nearly all of its key destinations, with Hawaii, China, and Guam all posting declines of between 1% and 9%. Only traffic to Micronesia and the South Pacific posted gains, which amounted to nearly 23%, but those units make up only around 5% of Matson's total shipping volume. Still, much of Matson's one-time charges got allocated to the Ocean Transportation segment, artificially reducing operating income to some extent.

Meanwhile, Matson continued to see weakness in its logistics segment, with a 12.5% drop in revenue stemming from lower intermodal and highway volume. Operating income fell more than 20% to $2.3 million, with a lack of international intermodal traffic contributing to the shortfall.

CEO Matt Cox still pointed to some successes for Matson. Cox cited "continued levels of exceptional demand for our premium expedited China service, yield improvements in Hawaii and Guam, further improvements at [terminal joint venture] SSAT, and for the first time, operating results from our Alaska acquisition."

Will Matson see the northern lights?Cox also thinks that the integration of Horizon Lines is going well, saying that the work is "off to a good start" and is proceeding on schedule. Matson believes that it will have to incur another $25 million in the second half of the year because of the acquisition, but it still thinks Horizon should be fully integrated within a couple of years.

More broadly, Matson sees several factors affecting its overall performance in the second half of the year. It believes that Hawaii trade growth will continue higher, while it should maintain its volume to China and improve its performance in its Guam trade. Matson thinks that it should be able to sustain the same level of shipping to Alaska that Horizon achieved in the second half of 2014. Best of all, the company said that for the Ocean Transportation segment, "operating income for the full year 2015 is now expected to be substantially higher than 2014" once you take out one-time charges.

Matson investors didn't react strongly in either direction to the shipping company's latest results, with shares unchanged in the first few hours of after-market trading following the announcement. Investors are looking forward to seeing how the Horizon acquisition affects Matson's overall results, but for now, the shipping specialist appears to be enjoying smooth sailing ahead.

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