Transportation Talks October 14, 2024 ft. Matt Cox, Chairman and CEO of Matson

Hi Michelle, how are you?

Okay, sure, happy to do it and happy to be here. So thanks for giving me the opportunity. I went to school at UC Berkeley and graduated with a degree in accounting and finance, so I started off on a finance track. I went to work for one of the then big eight accounting firms, and after a couple of years decided that was not what I wanted to do as a career. I went to work for one of the companies that I was on the audit for, which was at the time American President Lines. I worked for APL for just under 15 years, started off in financial roles and then moved into operating roles. I was the Managing Director for West Asia, which included Africa, the Middle East, and the Indian subcontinent. After about 15 years, I got a call from Matson, whose CFO was retiring at the time, and I decided to come and work for Matson. This was about just under 25 years ago. I started in as the CFO, but after four or five years they gave me an opportunity to move on to the operating side. I've had a number of different operating roles including the Chief Operating Officer, the President, and then became CEO. Matson was spun off from our longtime Hawaii-based public company Alexander and Baldwin about 13 years ago, and we became our own New York Stock Exchange separately listed company. I was retained in that role as the Chairman and CEO, and that's where I am today. So it's been a really fun journey. I look back on it, my grandfather was a marine architect and my great-grandfather was a ship captain, so I like to think that I have some of it in my blood. I didn't quite exactly know at the time the linkage, but as you said in your comments, the transportation industry is fun, exciting, ever-changing, challenging, all of that. So it's been a wonderful, interesting career and I'm just so fortunate to be part of the Matson organization.

Sure. Matson was founded by William Matson in 1882, so 142 years ago. He was an orphan, left Sweden on a ship, made his way to San Francisco, and started this company between San Francisco and the Kingdom of Hawaii on various vessels including a four-masted schooner. As the state grew from a kingdom to a territory to a state, Matson has sort of been there from the beginning in serving Hawaii. When I joined almost 25 years ago, Matson was primarily a US West Coast to Hawaii ocean carrier. The majority of its revenue and operating results were tied into serving the Hawaiian economy. When I arrived, it was clear we had a very large market share presence in a very slow-growing, finite market. If we were going to grow, it was not probably by growing more in Hawaii, so we began to look at ways to grow. Over these last 23 years, we've started a service from the West Coast to China, first through Guam and Okinawa. We have services from China, we now have multiple sailings a week. We acquired the Alaska business from Horizon Lines, so now we're one of the two primary Jones Act carriers into Alaska. We acquired businesses in the South Pacific, and we also have a ports and terminals joint venture that operates eight marine terminals on the US West Coast with Carrix Company, which both operates Matson's dedicated terminals on the West Coast but also has four terminals that are used by international ocean carriers to load and unload their ships. Importantly, Matson has grown a separate sister company, Matson Logistics, which is the rail and truck broker, warehousing, freight forwarding. We've grown that business very substantially over the last 25 years. We've grown from maybe an $800 million a year in revenue carrier to a $4.5 billion in ocean revenue, and same with our market cap. 12 years ago we were $800 or $900 million market cap, and now we're at $4.5 billion in market cap. So we've been able to grow over 25 years, but since we spun off, we've grown rather substantially. So it's been a really fun journey.

Yeah, it's a good question. We get questions like that from investors and from customers. The Jones Act, as you said, was enacted in its current form in the 1920s, but if you look further back to the Second Continental Congress, it reserves shipping basically since the founding of our country. Another word for it is cabotage, which reserves shipping between points within a country's possessions to the flag of that country. If you look at the top 75 economies in the world, the vast majority, 90 plus percent of industrialized countries around the world, reserve shipping for its own flag territory, so it's a very common globally set of rules. It also has different forms. For example, in the US airline industry, you can't fly between two points in the United States unless you're a US flight carrier. International carriers can land in the United States, but you can't fly from San Francisco to Chicago on Japan Airlines. It's reserved. So it takes its form in different ways. To your point about the critics and the supporters of the Jones Act, the Jones Act enjoys wide bipartisan support in Congress and the last six or seven presidential administrations. In my simplified take, Republicans like the idea of national defense, of trained US citizen mariners in time of a national emergency. Because the Jones Act requires the ships be built in the United States, it keeps the US shipyard infrastructure intact, which allows for dual-use Navy and commercial shipyards. It helps provide employment opportunities for those shipbuilders. Democrats have traditionally liked the high-wage, unionized, middle-class jobs and the opportunity it creates. When we go to Congress and tell our story to a new member of Congress, it tends to show a lot of interest by members of both parties. Questions are asked time to time, it's a very old law, but it's still relevant. We think it really is. I would just make another point: during the pandemic, there was all the pain around the congestion that occurred. What we found, whether it was in Puerto Rico, Alaska, Hawaii, for our services in Hawaii and Alaska, we did not miss a single sailing in three years. In the midst of the congestion, in part because we had our own dedicated terminals, we and our competitors in the different Jones Act trades were able to operate in a very normal way to keep cargo flowing to these remote territories that really depend on a regular service. So just a couple of ideas about it.

Yeah, I mean, I think we would stay in our lanes. I would think that if there were lower cost competitors that entered the markets that don't pay US taxes, don't employ US citizen crews, I think there would be price competition and it would be a disruptive period. But I think we have strong market positions in all these markets, and we would, I'm sure it would be disruptive, but I think we certainly would, we think we're good at what we do and would continue. Just to repeat a note, I really don't see that happening. There's just so much support in Congress and presidential administrations. People understand that while it's a niche part of our network, it's an important part of our network. Why would we turn over whether it's up to Mississippi, the Great Lakes, and all the other elements? Would we be turning these jobs over to foreign crews? It's just not something that I think would ever happen.

Yeah, it is. But it's an election year, who knows what? People ask, it's a fair question, especially for an old law. Is it still relevant? We think it is.

Yeah, it's been interesting. Just like you at Home Depot, we were asked the same thing by customers like Home Depot, by investors: 'Hey, what are you doing?' We're in the transportation business, we're emitting emissions as part of, whether you're in air, ocean, truck, we're consuming fuel to carry our heavy loads. What was our goal? What were we trying to do? We looked at what we were doing and felt we needed to be more ambitious in setting our own goals. Four years ago, we set a Scope 1 reduction in CO2 of 40% by 2030. We have been active in working our way through that. We published our most recent, fourth sustainability report. We're about 20% there towards our 40% goal by 2030. We're in the process of building three new vessels. We have converted a number of vessels, potentially five, that we have the opportunity to convert from conventional fuels to LNG. We believe we're starting with LNG because it's available at scale, it emits about 20% less CO2 than conventional fuels. We're also using alternative fuels like hydrogenated vegetable oil and other clean diesels that have a really good footprint. We believe we're going to get to our 40% goal. It's been a challenge, it's required a bunch of investment, but it's obvious that the climate is changing and everybody has to play their role in reducing our carbon footprint. Conceptually, it's an interesting question. At the time, we said, because LNG is considered a transition fuel, it emits less CO2, but the question for us was: do we do nothing and wait for these drop-in fuels, or do we take a baby step in the right direction towards reducing our footprint instead of waiting for the perfect fuel to arrive without investment? Our own decision was let's start our journey. We think a 40% reduction is meaningful, and our belief and hope is that these alternative fuels are going to come to help us get the rest of the way there by 2050.

Sure, happy to. These other elements are just as important. In the area of diversity in ESG, we've made a significant amount of effort. We've expanded our executive leadership and development programs, really for opening up opportunities for high potentials to participate and grow. We've also rolled out some diversity leadership scholarship programs at transportation programs around the United States, with alumni leading the scholarship programs. We've started a number of employee resource groups based on direct feedback from our employees. We've also updated our performance management system to do check-ins for a greater focus on career development. Importantly, we've done audits of both gender and racial pay to make sure that we're paying people who do the same work the same. It's been interesting because we've really been focused. We don't have a specific goal of women or minorities, but we've said generally we'd like our management team's mix to look a lot like our employee base. We operate in places like Hawaii that has one of the most diverse populations in the country. We track how close we are getting towards creating opportunities for both women and minorities. Transportation is a very male-dominated industry. Matson is about 70% union of our base. The question is how do we bring women more prominently into leadership roles. We've been really active and making really good progress there over the last few years. The other thing we do on a regular basis is check-ins with our employees by using engagement surveys. We're in the process of completing one over the last couple of months. We were proud of the fact that we've had 85% participation of our employees in these surveys. The survey vendors tell us if you can get 50 to 60% of employees to respond, that's a good standard. What it meant to us is that people will take the time to give us feedback, helping us figure out not only how we're doing but most importantly what we can do to help. We're proud of the fact that in our last survey, 86% of those who responded, which is about 85% of those who work here, rated Matson a great place to work. But it's easy to say 'wow, that's great, there's not a lot we need to do.' We had an open-ended section for ways we can improve and we got 1,800 suggestions, which is fabulous. People like working here and we want to do more. We're really quite proud of this. We're not the biggest company, but we really work hard at communication. We have regular town halls and other ways we're always checking if our communication strategies are working, if they're getting tired, if they need to be revamped. We invest a ton of time in communication and trying to make this a good place to work.

Yeah, and it's what we do because as good as we think we are, there's always room for improvement.

Thank you. This is a personal passion of mine, so I'm very happy to hear what you're doing about that. So thank you for that.

Yeah, so in the 25 years I've been here, we've identified emerging leaders and this has been one of our key programs to send future leaders to this program. It's been interesting because we've grown with the program over the years and with the leaders. Just in talking to our graduates, they're so enthusiastic, they feel that it was so worth their time. Giving people with a lot of potential this educational background where they can take some time away from work, the professors are outstanding, they're teaching them real-world items, they get to hone their leadership abilities. I think of all the pieces of this, what's most heartening to me and what I've heard consistently is the ability to interface with others in the industry and build or expand their peer network. People keep in touch, everyone has good ideas, and people regularly communicate with the alumni in their cohorts as their careers move within Matson or Matson Logistics. They keep in touch with people working in complimentary industries or customers. So it's the quality of the program, the ability to teach new skills, and the peer cohort that are really drivers of making this program so successful over the years, in my opinion.

Yeah, each of us in our own worlds have a distinct culture, right? Culture is so important. I've worked for a few different companies. The thing that I like about our culture, I'll give you just a little bit of an example. My job's based in Honolulu these days, I'm there about one week a month. To this day, if a vessel is delayed and there's no milk in the milk section, they hang a sign up saying 'Matson ship is late, no milk today.' So there is accountability. It's in our culture. We're serving these remote economies, first Hawaii and then Alaska and other things. It allows us to have an unrelenting focus on on-time departures and on-time arrivals. It matters. We've set for ourselves an on-time target within 59 minutes of the scheduled arrival. In Hawaii, for example, there are trucks lined up at our gate. There's not much warehouse infrastructure in Hawaii because land is so expensive, so the vast majority, 90 plus percent, go directly to an individual store to be unloaded that morning and delivered. People go shopping, and if there's some snag, it's not there. So there's this culture of on-time, I don't want to say an obsession, a healthy obsession. We meet every morning, find out where every one of our vessels are, do we have an issue, how did this port work last night, did it achieve its goals for unloading the ship, is our gate turn time less than 20 minutes so the cargo moves quickly outside of our gates. That's an element of our culture. The other part of the culture that's been infused because of our Hawaii origin, we call it the 'Aloha culture.' What I mean by that is people work really hard on being on time, but it's a very collaborative culture, there's a kindness in which we operate. We have problems all the time, we're in transportation, we've got to solve them, but there's an understanding and a mutual respect that permeates our culture. I think that's one of the reasons why people think it's a great place to work. Bulls in a china shop do not last in our company. It's not the loudest, it's not the... we're going to work through this and there's a mutual respect. It's a very special culture. What we found is as we've expanded from our Hawaii roots, whether it's in Alaska or importantly in China, we've applied those same on-time metrics and focus on delivering to those markets. The Horizon Lines acquisition in Alaska, fortunately the culture was very similar in terms of reliability. What was interesting for us as we expanded into the international trades, it's less critical that cargo arrive on time for some reason that's unclear to us. So we said we're going to be the fastest and most reliable. We're a small player in these very giant markets in China, but we are without exaggeration the go-to carrier if you've got a production problem, if you've got a late order, if you're trying to take some cargo out of air freight and move it at a fraction of the cost of air freight. We're the go-to carrier in the central China markets we serve, and it's allowed us to be very successful. I think from the cultural roots, people notice whether you show up on time, and if you don't, they're going to call you on it by putting your name on a milk container. So that's a little insight into our culture which makes us, we think, unique and different from other places that I've worked.

Thank you.