Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Stanley Kuriyama - A&B President & Cheif Executive Officer

Christopher Benjamin - A&B Cheif Financial Officer & General Manager of HC&S

Norb Buelsing - President of A&B Property

Matthew Cox - President of Matson Navigation Company

Suzy Hollinger – Director, Investor Relations

Analysts

George Pickral – Stephens

Sheila Mcgrath – KBW

Brendan Maiorana – Wells Fargo

Sloan Bohlen – Goldman Sachs

Tom Spiro - Spiro Capital

Louis Keith – Year Capital Management

Alexander & Baldwin, Inc. (ALEX) Q3 2010 Earnings Call November 3, 2010 5:00 PM ET

Operator

Good day ladies and gentlemen, and welcome to the third quarter 2010 Alexander & Baldwin earnings conference call. My name is Rancy and I am your operator for today. At this time, all participants are in listen-only mode. (Operator Instructions)

I would now like to turn the presentation over to your host for today’s call Ms. Suzy Hollinger, Madam, you may proceed.

Suzy Hollinger

Thank you, operator. Good afternoon and welcome to Alexander & Baldwin’s third quarter 2010 earnings call. On the call with me today from Honolulu are Stan Kuriyama, A&B President and CEO, Chris Benjamin, A&B CFO and also General Manager of HC&S, and Norb Buelsing, President of A&B Property. And joining us from Matson’s headquarters in Oakland is Matt Cox, President of Matson Navigation Company.

Before we commence, please note that statements in this call and presentation that set forth expectations or predictions are based on facts and situations that are known to us as of today, November 3, 2010. Actual results may differ materially due to risks and uncertainties such as those described on pages 17 through 26 of our 2009 Form 10-K and our other subsequent filings with the SEC. Statements in this call and presentation are not guarantees of future performance.

Slides from this presentation are available for your download at our website, www.alexanderbaldwin.com. You will see an icon at the top of the website to direct you to the appropriate section for download.

This slide provides an agenda for our presentation, after which we will take your question. We’ll start with Stan who will comment on the performance for the quarter.

Stanley Kuriyama

Thank you, Suzy. We are pleased with the company’s performance in the third quarter given the overall economic conditions across the markets we serve. Net income for the third quarter was $26 million, or $0.62 a share, substantially higher than the earnings for the same quarter last year of $9 million or $0.21 a share. With this performance, year-to-date earnings have already surpassed 2009 full year earnings by over 60%.

Third quarter results were driven principally by 67% increase in Ocean Transportation operating profit and the turnaround in Agribusiness performance compared with the prior year’s quarter. Let me now brief you on the third quarter highlights. Our China Long Beach service performed extremely well and was again the principal driver of overall results.

Favorable market dynamics have resulted in significantly improved rates and the peak season surcharge typically levy from August to September was in effect for the entire third quarter. Volumes were also up driving earnings improvement in our stevedoring joint venture SSAT.

The initiation of our second China service, CLX2 is progressing nicely and our financial performance is tracking our previous estimates. Volumes for our Hawaii and Guam trade lanes were relatively stable.

And real estate despite, lower third quarter leasing results, we’ve noted that both occupancies and rates in our lease portfolio have stabilized. And we’re encouraged by the general pickup in leasing interest. In the third quarter, we acquired a 35 acre industrial park on Oahu. And we laid the ground work for the sale of a large warehouse complex in Ontario, California that closed in early October.

And for the acquisition of 142,000-square-foot grocery-anchored retail center in Sandy, Utah which we closed last week. Finally, higher sugar prices and a 23% increase in tons of sugar produced helped further the turnaround in Agribusiness performance. And we’re on course for breakeven, for even modest profitability for the year.

Now before I turn the call over to the other participants, let me briefly comment on the Hawaii economy.

Tourism was up strongly in July and August. Visitor arrivals increased driven by improved visit accounts from the Mainland in Canada. Visitor expenditures of state wide hotel occupancies increased as well. The outlook for tourism remains positive and several airlines have announced an increase in seats to Hawaii.

Year-to-date residential resale volumes were significantly higher than last year and medium prices on Oahu, Hawaii’s largest market were up 4% over the same period. Unemployment dropped from the last month and last year and remains well below the national rate. While these indications are encouraging, economic recovery has not extended to all sectors of Hawaii’s economy and that’s not yet translated into improved performance for some of our business lines.

For example, construction, which is a large driver of Matson's Hawaiian container volumes, remains week. As with past presentations, we’ve included information on Hawaii’s economic performance in the appendix.

With that let me now ask Matt to update you on Matson’s performance.

Matthew Cox

Thanks, Stan, and good afternoon to everyone. As Stan mentioned, Ocean Transportation’s operating profit was up dramatically in the third quarter, compared with last year primarily from the strong performance in our China service. Overall strength in this trade lane also drove income from our SSAT joint venture hire while volumes for Hawaii and Guam were relatively stable.

Before getting into the performance of each of our trade lanes, let me first update you on the launch of our CLX2. So far CLX2 is on track with our previous estimates from both the timing and at financial performance standpoint. In mid September, CLX2 completed its first steady state sailing. Five vessels have been time charted for the service and full deployment of the five-ship string was initiated in October.

Offices have been established in our new China ports of Hong Kong and Shenzhen and we’ve taken delivery of the majority of the containers purchased and leased for this new service. We are pleased with both the pace of execution and the favorable reaction of our customers to this new service.

Now, let me get into specific trade lane performance. China rates were exceptionally strong for this quarter compared with the third quarter of 2009, benefiting from the strong recovery of rates in this trade lane. Favorable market dynamics also advance the typical August to September peak season surcharge into June, allowing that’s into collective surcharge for the entire quarter compared to only a partial quarter for last year.

Volumes were up compared with the third quarter of 2009, due to additional containers carried by our CLX2 and increased year-over-year CLX1 volumes. The excellent performance in the China trade demonstrates our positive operating leverage in an improving rate environment.

We do believe that favorable market dynamics in the China trade will prevail for the balance of the year, however normal seasonality from the end of the peak season in September as well as start up losses for our CLX2 will lower fourth quarter results for this trade lane compared to the third quarter results.

In our Hawaii service, third quarter performance trade lane with the Hawaii trade was relatively stable compared with the same quarter of 2009, container volumes were down 2% primarily due to lower eastbound agricultural shipments. In the fourth quarter, we expect the relative stability in volumes to continue. The adjustments we’ve made to our ship deployment and cost structure over the last year leave us well position to benefit when the economy recovers and demand improves.

Guam volumes were flat compared with the third quarter of 2009 and are projected to grow at a modest level for the remainder of the year. On September 21, the U.S. Navy finalized its environmental impact report on the militaries build up in Guam. This document known as the record of decision allows to be award of construction contracts and the execution of the relocation that commence.

A number of constructing contracts have been awarded, but actual construction is not expected to begin for several months, at which time the company expects volume in the Guam trade lanes will increase. And in anticipation of the military build up, Matson has recently leased of 30-acre parcel near Guam’s harbor for an off-dock container yard.

This facility located couple of miles from the port will allow us to reduce congestion at the port and offer our customers a way to provide storage near the docks. We think this is an important service to provide to them and we think it’ll be especially helpful as construction projects grow significantly.

Our logistics segments operating profit was $2 million, essentially flat with the same quarter a year earlier, principally to the impact of lower highway yields from competition and equipment capacity constraints. Well modest industry improvement is anticipated in 2010 full year results for the segment are expected to be similar to 2009 results. Now the company remains focused on organic growth opportunities in improving operating efficiencies, while thinking to expand into new markets through personnel recruiting initiatives.

I would like now to turn the call over to Norb Buelsing, President of A&B Properties.

Norb Buelsing

Thanks Matt. Let me start with real estate leasing. Our leasing operating profit was $9 million for the quarter compared with $10 million last year, due mainly to lower Mainland renewal rents. Mainland occupancies were up 2 percentage points to 85% compared with last year and relatively flat on a sequential quarter basis. Hawaii occupancy was 91% for the third quarter, lower than last year’s 95%, but nearly all of the decline was due to the recent purchase of an industrial park on Oahu, which currently has a 74% occupancy rate.

Due to the continuing impact of lower lease renewal rents and the timing of 1031 sales and acquisitions, the company expects leasing operating profit for the fourth quarter to be lower than the third quarter. Overall, we are encouraged by the general improvements in leasing interest and stabilizing occupancies.

No significant sales occurred in the third quarter; results mainly reflected $5 million of joint venture gains on the settlement of two mortgage loans, partially offset by operating costs. Although, third quarter activity in our 1031 exchange program was limited to the purchase of Komohana Industrial Park. We continue to capitalize on A&B's core strategy of selling fully appreciated assets and re-deploying the sales proceeds on a tax advantage basis.

In the high quality properties that have good growth potential. At the begging of October, we sold the Ontario Distribution Center for an $18 million gain, fairly maximized its value and taking advantage of the favorable offer. On October 26, we acquired the 142,000-square-foot, Little Cottonwood Shopping Center in Sandy, Utah. Little Cottonwood is grocery-anchored center with strong national and regional tenants ideally located in the desirable growing suburban communities, Salt Lake City.

We expect this center will benefit from job and population growth in the area. We’ve also run two other commercial properties in the Salt Lake City area for several years and have been pleased with their performance.

We currently expect to reinvest the $40 million plus $1 million in proceeds from the sale of Ontario Distribution Center. No significant additional sales from improved commercial properties are planned for the remainder of 2010. In our existing development pipeline, construction progress continues at Kukui'ula and activity as Maui Business Park II is accelerating. These long-term multi phase projects, together with other projects in various stages of design and permitting will help ensure that we’re well positioned to meet demand when the market returns.

Chris Benjamin will now update you on Agribusiness Business results and financial matters.

Chris Benjamin

Thank you, Norb. I’m very pleased to report that the turnaround in the Agribusiness segment has been sustained and then our outlook for the full year has continued to improve. When we began the year, we expected to narrow our Agribusiness losses for the year to under $10 million from roughly $30 million last year. As the year has progressed and both our operating performance and the price of sugar have exceeded our initial expectations we’ve gradually updated our outlook and now believe that we will breakeven this year or possibly show a modest profit.

For the third quarter alone, we posted a $15 million improvement over the same quarter in 2009. As noted our performance is being driven by higher sugar prices and by a 27% year-to-date increase in sugar production, which should grow to 35% by the time we finish the harvest in two weeks. This higher production allows us to spread our mostly fixed cost across more tons of sugar thereby improving our margins.

So that concludes our operational updates and I will now comment briefly on financial matters. Our balance sheet remained strong with solid assets relatively low debt levels and as you can see at the bottom of this slide, ample liquidity. After two years of relatively modest investments due to market conditions, we’ve invested more capital into our businesses this year. But because of our strong operating cash flows, out total debt is only increased by $29 million since year end.

But our cash flow statement reflects only $39 million of GAAP capital expenditures. We measure CapEx more broadly to include investments into real estate developments and our commercial real estate portfolio including 1031 exchanges. Well, not all of this is new cash. It is a better reflection of the level of capital commitment management has made into the company’s businesses. By this measure through September, we’ve invested $225 million.

Slide 25, shows the breakdown of that $225 million as well as the full year estimate of capital expenditures. Material expenditures anticipated in the fourth quarter include roughly $50 million for the startup of the CLX2 service and $65 million of 1031 reinvestments including the October acquisition of Little Cottonwood and the anticipated reinvestment of proceeds from the Ontario Distribution Center sale.

In total, we expect to invest almost $400 million of capital into our businesses this year more than double our deployment of capital in 2009. In transportation, we’ve returned to a normalized level of maintenance capital and/or of course investing in the start up of the CLX2.

In real estate, a higher level of 1031 replacements and ongoing Kukui’ula and project x investments are the primary drivers of increased capital while Agribusiness capital remains low.

With that, I’d now like to turn the call back to Stan for closing remarks.

Stanley Kuriyama

Thank you, Chris. Overall, we are pleased with the company’s performance in the quarter. China results have been exceptional and Agribusinesses performance has improved significantly.

Stable performance of our other business segments also is noteworthy in light of current economic conditions. We except the strong performance of the first three quarters to continue for the fourth quarter though on a sequential quarterly basis; there will be a decline in Ocean Transportation operating profit.

The decline is due to normal seasonality, which typically results in about 30% sequential decline in the third quarter to the fourth quarter for the segment and the CLX2 startup losses shown here.

Our logistics performance for the full year as mentioned earlier should be roughly comparable to last year’s results. The sale of Ontario Distribution Center will drive fourth quarter property sales performance although leasing portfolio results will continue to trend downward because of lower Mainland renewal rents and the timing of portfolio sales and acquisitions.

We expect our turnaround in Agribusiness to be even better than originally anticipated and now we expect to achieve breakeven or even modest profitability for the year.

Finally, we continue to deploy capital to support the company’s future performance and as always remain focused on growth opportunities in our core businesses that create long-term shareholder value.

And that concludes our presentation this afternoon, we look forward to the next call we’re excited reporting on the full year’s performance, we will provide you with our outlook for 2011 as well. Thank you.

Suzy Hollinger

Operator, we are now happy to answer any question.

Question-and-Answer Session

Operator

Thanks Madam. (Operator Instruction) Our first question comes from the line of George Pickral from Stephens.

George Pickral – Stephens

Hey good morning guys and good quarter. Stan question for you just briefly on kind of the outlooks for Q4 you said seasonality of 30%, what exactly do you mean by that, revenue operating profits?

Stanley Kuriyama

Operating profit.

George Pickral – Stephens

Operating profit, okay, just wanted to make sure. So kind of take, is the right way to think about it take Q3 down 30% and then take out the losses from CLX2?

Stanley Kuriyama

That’s right.

George Pickral – Stephens

Okay, I’ve got a few more transport questions for you. Hawaii volumes down about 2% year-over-year, but they were up a little sequentially. In the press release you talked about tourism being out at least through August I think.

Can you maybe talk about any lag effect or if you are starting to see inventory replenishment from the increase in tourism or not and maybe talk about kind of spend per tourist and the trends you are seeing there and I guess basically I am asking, because we see a delayed pick up here in volumes from the increase in tourism this summer.

Matthew Cox

Hey, George, this is Matt, how are you?

George Pickral – Stephens

Good.

Matthew Cox

Good, let me take most of that question and if Stan wants to add some thing on some of the other tourism in general economic and result, I’ll let him do that, but I think we have seen a gradual flattening of our declines, if you look at our westbound volumes that is setting aside the reduction in our eastbound agriculture shipments, which drove the overall number, we were about flat westbound for the third quarter and I think from our perspective the increase in tourism and arrivals and hotel occupancies are all good signs.

They don’t often translate into a ton of freight. So while there maybe a lag effect I think it’s just as likely that, let’s just say our expectation from this point on is that we would see very modest recovery from here. It’s really as Stan mentioned in his earlier remarks, construction materials and other things, which are going to be a, if and when they occur, will be a much bigger driver. So you might be right that there maybe a small pick up in growth in westbound container volumes, but at this point we are going to be a little bit cautious and say those numbers will be relatively modest…

George Pickral - Stephens Inc

Fair enough, I imagine its pretty long lag time between these pick up in tourism and how that translate to kind of building and spending on the island. Sticking with you Matt, auto volumes have basically been flat for five quarters in a row now. And I think, I asked this on the last call, but any sort of view into the rental car replacement cycle, this time around, sounds like it’s inevitable, but does it happen in Q4 or they are going to delay that until next year?

Matthew Cox

Yes, I think we typically see as you know George, a couple of peeks per year in those volumes we saw one earlier this year, and whether the second one falls into this year or right after the, sometime into the first quarter, it sort of remains to be seen. We don’t have any early indication, that there was any dramatic pick in car volumes at this point. So we are kind of expecting to see relatively flat volumes as we’ve been talking about until we see a broader recovery in the economy and people’s personal finances and rebuilding their personal balance sheets and, but I would say increases in visitor arrivals are good sign for, or a leading sign for eventual fleet replacement, there is no doubt about that.

George Pickral – Stephens Inc

Okay. Thank you. Last question and I’ll get back in line. For Stan and Norb, in the press release you said, you are starting to see a pick up, an improvement in leasing interest. When you’re out talking with potential customers, how much pushback are you getting on rates, terms, can you maybe just talk about what sort of demand you are seeing in the market right now?

Norb Buelsing

George, this is Norb Buelsing. I think we quantified it as improving environment and that’s true, that what we are seeing is a steady decline in the spread between the expiring rent and the rent that, we are negotiating as a new term. And that’s gone down consistently this year. And the last quarter spread was down to a 2%, so I think that speaks to, the market has stabilized, tenants are realizing that, this is the new normal and they can’t expect to see further discounts.

George Pickral – Stephens

So the way I look at it is kind of on an absolute revenue per square footage basis, that’s actually ticked backup for the first time in a few quarters. I think maybe we bottomed out in Q2. Is that kind of what you’re saying?

Norb Buelsing

The general feeling that, sometime this summer, we reached that bottom and tenants realized it as well.

George Pickral – Stephens Inc

Okay. Thanks for the time and great quarter again.

Matthew Cox

Thanks.

Norb Buelsing

Thanks George.

Operator

And our next question comes from the line of Sheila Mcgrath from KBW.

Sheila Mcgrath – KBW

Good afternoon. I was wondering Matt, if you could talk to us about, on the transportation side. The margin of 15% was certainly higher than we had excepted. When you look at it versus last year, do you consider that trend in terms of margin improvement continue into fourth quarter and into 2011?

Matthew Cox

Sure, yeah I can answer that Sheila. I think we did have as we’ve said an exceptional quarter in part driven by the recovery and freight rates in the Transpacific and those freight rates as you know dropped right to the bottom line in terms of the rate recovery in the PCs and surcharge. So there are no additional expenses that go along with those improved prices and this is largely a recovery of rates that occurred during the 2009 economic cycle.

Now as it relates to moving forward, I think Stan has given you his – our thoughts on where we think the fourth quarter is going to end up, and that’s going to translate into, of course a lower operating margin. And I still think long-term that historic 10% to 12% kind of operating margin on annual basis is probably a good one and is one that I would stick to for now.

Sheila McGrath – KBW

And then on the start up losses for CLX2, do you expect that will continue, how far until ’11 should we except to kind of a drag?

Norb Buelsing

Yeah. Okay. That’s a good question. I think we still believe, we said when we started it up that we were going to suffer these $10 to $15 million as start-up losses as we built our business and that we expected to be modestly profitable in 2011 primarily in the second half. So the implication is, there might be some losses that are obviously smaller than those that we have seen in the fourth quarter, but that would for a full year allow us to make money on that service. And so our thinking really hasn’t changed in terms of the quantum we are thinking in that regard.

Sheila McGrath – KBW

Okay. And then with rates up a lot in the China lane are you seeing on the horizon more competition?

Norb Buelsing

Well, I think what we have seen in 2010 is a gradual restoration of services in the Transpacific as the freight rate environment in the general amounts of volume has returned in the market. So there have been a fairly sizeable increase in Transpacific capacity added, which has been roughly inline with the increase in demand. So we’ve seen a fairly balanced supply and demand equation in the Transpacific. So I would just note that there has been a rather significant increase in capacity in 2010 and despite that we have seen a relatively strong or stable pricing environment.

Sheila McGrath – KBW

Okay, and a couple of quick question on real estate. Norb, maybe you could tell us, at Kukui’ula, has there been any good sales activity the past couple of quarters?

Norb Buelsing

In 2010, we did have one sale and we restarted our sales program in July. And we got a new sales team in place, extensive experience and they’ve re-started their marketing program, so that was the nature of our program in 2010, but certainly going forward we expect results from this initiative.

Sheila Mcgrath – KBW

Okay and last question on just Norb again for you, your outlook for acquisition opportunities in Hawaii?

Norb Buelsing

We continue to look at, I think we get exposed to every decent sized acquisition opportunity and as going through 2010, there were fewer opportunities than we had initially expected, but we are seeing more of them starting to come around. And if they meet our criteria, we’ll be eager to participate.

Sheila Mcgrath – KBW

Okay. Thank you.

Operator

You have a question from the line of Brendan Maiorana from Wells Fargo.

Brendan Maiorana – Wells Fargo

Thanks. Good morning.

Matthew Cox

Hey, Brendan.

Brendan Maiorana – Wells Fargo

Hey, so on Ocean Transportation, Matt, were they are any of the start-up cost that in Q3?

Matthew Cox

Brendan, yes. We had just a small amount we said that the majority of those start-up cost or losses were going to be incurred in the fourth quarter, so there was a very small amount, and we do expect the majority of those to be incurred in the fourth quarter.

Brendan Maiorana – Wells Fargo

And then, Matt, your comments about, and you still think that 10% to 12% operating margins, is the reasonable target for your Ocean Transport business, is that inclusive of CLX2 or would CLX2 kind of drive the overall margins down to maybe a little bit of a lower margin business just given a time charter?

Matthew Cox

Yes, my comments around the margin were really reflective of our full year and our fourth quarter, I think moving forward, moving forward as Stan mentioned we’ll comment on where we see our view of the world with once we complete our internal operating budgeting process and be in a position to do that on the next call. So my comments are really more reflective of where we’re going to end up the full year in 2010 rather than trying to project out into 2011.

Brendan Maiorana – Wells Fargo

Well, I guess, I am not really looking for guidance for 2011, I am just kind of thinking about a big picture, I mean is 10% to 12%, still achievable with CLX2 just say running at normalized levels whenever it gets there?

Matthew Cox

Very much so, I mean, I think we’ve said that it could comprise when the business is up and running up to 10% of our operating profit in the Ocean Transportation segment, how that exactly translates into our margins in total, I haven’t done but, I still think 10 to 12, there is no reason to think we couldn’t continue to earn in that range over the long-term.

Brendan Maiorana – Wells Fargo

Sure, and then can you give us a sense of what you think the opportunities at for the growth at Guam as if you are, we call it running at the 3500 containers a quarter now how much more can that go?

Matthew Cox

I would answer it in one way from a capacity standpoint, which is to say from a cargo carrying capability when that vessel arrives in Guam, that it is carrying only a small traction less than 50% full of cargo destined for Guam so from a container capacity standpoint, we don’t need to add any additional capacity to be able to carry the increase in volume as and when they come.

As to the harder question about exactly what all this military spending translate things into in terms of actual container volume counts, it’s a little hard to tell Brendan, I think our view is that they would go up just how quickly the military build up occurs, the environmental impact referred to record intuitions that I referred to in my comments on Guam, also talks about trying to mitigate negative community impacts in Guam and was open to the idea of spreading out some of the bills in order to mitigate some of the negative local community effects, which might indicate that there is a tolerance for spreading out that bills over a longer period of time.

So there is just a lot of, I guess, what I am saying is sort of there is a little difficult to tell, we know it’s going to be more, but it’s difficult to be precise about what that could turn into.

Brendan Maiorana – Wells Fargo

Sure, and then Chris, on the CapEx outlook it look like on the transportation side, the CapEx budget went down by about $15 million relative to your expectations in Q2 and then on the real estate side, excluding the 1031 exchanges that went down by around $10 million, what’s driving the reductions there?

Chris Benjamin

Well, I think the reduction on the real estate side is really driven by the number of opportunities we found in project x and while we’ve been more active pursuing project x, we had been in the last couple of years. As you know we put in a fairly big aspirational target, I think we had included about $75 million of target this year and we gradually reduced that as we went through the year, we still have some hope that we will place some more project x capital this year, but we reduced our expectations as the years gone on just based on what we’ve seen in the pipeline and on the transportation front, actually compared to.

Brendan Maiorana – Wells Fargo

$75 [ph] million in your presentation for Q2 and that sounded $90 million today.

Chris Benjamin

Yeah, I don’t think, that the short answer is I don’t think there has been any material change in the business we may have fine tuned. I think we’ve talked about $50 million to $60 million in CLX2 we maybe coming in a little bit more towards the lower end of that there may have been some marginal changes, maybe a little bit less in containers, but there hasn’t been any material change in our outlook for Matson or our plans there that I can recall it grow that and Matt is signaling that he agrees with me on that.

Brendan Maiorana – Wells Fargo

So if – just lastly if I look at it, at kind of the CapEx spend that you’ve got in Q4 about $105 million again outside of the 1031 exchanges that’s projected and if I look at kind of where, our estimates are for cash flow we call it as the active dividend payment you probably going to have around $30 million of retained cash flows so called a $75 million increase of leverage of that, you feel pretty comfortable in terms of [Inaudible] we’ve obviously got the capacity but just in terms of…

Chris Benjamin

Yes, I think that you are in the right ballpark in terms of the leverage impact in the fourth quarter that would still put us below, probably in the 33%, 34% range of leverage we’ve talked before about being comfortable, even going up 35% to 40%. So that’s not going to stress us, that’s not going to should be a problem for us.

Brendan Maiorana – Wells Fargo

Okay. Alright, thank you guys.

Operator

Our next question comes from the line of Sloan Bohlen from the Goldman Sachs.

Sloan Bohlen – Goldman Sachs

Hi good morning guys. I got most of them, but maybe just a couple for Matt and one for Norb. Matt, just on the new China service in the sort of expectations you guys have for profitability. Does the change in rates, does that accelerate that at all or how should we think about that?

Matthew Cox

The improvement in rates over last year, I think those were known to us through the May 1 contracting cycle we had and that was one of the factors that allowed us to have the confidence to make this investment decision. So those rate improvements were factored in when we made our decision to start off CLX2 and are also factored into our estimates of the losses and profits as we mature the service.

Sloan Bohlen – Goldman Sachs

Okay. But the rate, the improvement has had from just what happened in May that there is many change in demand that makes you feel like things are happening quicker or slower.

Matthew Cox

No not really. We’ve gotten to the end of the peak season, which is September 30, October 1 and volumes has slacken because there is a big peak to get the merchandise in our customers warehouses in the U.S. for the holiday seasons and volumes have slowed and I’d say the market is very normal. It’s a normal slowdown that we see every year. So nothing unusual to report or no significant change in circumstance.

Sloan Bohlen – Goldman Sachs

Okay and then just on the Guam opportunity, the decision to I guess lease the off-dock container yard one I’m curious that the, what the cost drag is I don’t know that it will be anything that big but why the decision now and what that means relative to, how quickly you think things could come together?

Matthew Cox

Yeah, I think it’s first to say, this is really a longer-term opportunity I think the idea here is that as the construction commences in Guam that we will see an interest in flat plans that is immediately adjacent to the port area as a rate of stage construction projects and also to provide an off-dock container yard as the volumes commence and we could offer a service, which allows our customers to pickup this cargo 24 hours a day, 7 days a week and just another feature so this is really part of our long standing investment in Guam as exactly when it’s starts it’s unclear.

Although, I’d say wheels turn rather slowly in Guam approval and government approval process. So we knew we needed to get started early in order to have it ready when the construction begins.

Sloan Bohlen – Goldman Sachs

Okay, that’s helpful. And then just one for Norb, kind of a step down in the real estate operating income in the fourth quarter, could you maybe help us size that I mean you said almost couple of things in there, one is just from some lower rolls and then I guess the distribution at 1031 acquisitions of disposition. Is it more the former than the later meaning more is it just a gradual roll out of rates or is there a big deal that we should expect in there to move the number.

Norb Buelsing

Well, one of the things that as Stan mentioned with the sale of Ontario Distribution Center in the first week of October, well we expect it to replace that, that’s not occurred in certainly that was a large contributor to leasing operating profit. So that, in the fourth quarter, that will be a primary driver. There are some other lesser amounts that will impact it as well but as we said if we do expect it to be lower than what we achieved in the third quarter.

Sloan Bohlen – Goldman Sachs

Okay, more of that single deals and roll down of rates in the other assets in the portfolio.

Matt Cox

No, and as I mentioned earlier, to an earlier question, what we’re seeing in fact is an improving ratio between what our expiring rents are and what the new renewal, the renewal of those tenancies are. And we’ve seen a significant decline over 2010 whereas in the first quarter, we were ranging up to 20% differences. And in the third quarter, our difference was down to 2% and that was a steady decline throughout the year. So we certainly expect that improving rent market, rent stability of, we’ll be there through the fourth quarter.

Sloan Bohlen – Goldman Sachs

Okay. I apologize. Maybe I heard that wrong. And then, so does that mean that our market rates relatively flat? And then I guess, second, is what’s your expectation of occupancy in the near-term, I guess?

Matthew Cox

Occupancy, I guess, there’s two questions. One on occupancy, I’ll answer first, we on our Mainland portfolio, we did see a year-over-year, quarter-over-quarter, increase of two points. And we’re seeing an improving leasing environment where certainly the opportunities for us to capture new deals are much better now than they were even six months to nine months ago. So we’re positive on it. That’s always very difficult to predict, but certainly we are seeing good activity.

In regards to rates, what we’re seeing is that the rates are stabilized, we’re no longer, well we’re seeing to a much lesser extent. Prospective tenants or even existing tenants coming in and expecting or demanding significant discounts from their current rents it seems that the parties have understood that these are the rates that are, that have established and we’re going, from this point forward, we’re going to see it out for trajectory.

Sloan Bohlen – Goldman Sachs

Okay. Alright. Thank you guys.

Operator

Our next question comes from the line of Tom Spiro from Spiro Capital.

Tom Spiro - Spiro Capital

It’s Spiro, good afternoon.

Stanley Kuriyama

Hey Tom, how are you?

Tom Spiro - Spiro Capital

Hi. Question one, Matt, regarding CLX2, I’m curious, what are we shipping west and does the capacity utilizations very much eastbound versus westbound?

Matthew Cox

Hi Tom, yes, it does rather significantly, the commodities that move westbound that is from the U.S. to Asia are typically scrap metal, waste paper, basic commodity seeds and those cottons, those types of commodities, and the westbound market typically is a smaller market than the eastbound that for example, on our CLX1 and on our CLX2, our goal would be to fill the ship every slot out of our China markets in the westbound direction into China, because this cargo tends to be much heavier.

We tend to fill the ship to about 50% of it’s container capacity and then we did weight out and the rest of it were carrying empty containers to reposition to China for that eastbound leg and that’s very typical, it’s what all the Transpacific carriers experience and expected into pro forma in terms of our approach on making these decision to move ahead.

Tom Spiro – Spiro Capital

Thanks, and Chris, as it relates to agriculture, how is the weather these days?

Chris Benjamin

Well, it’s been a very dry year. So we are having some good rainfall for about a month, month and a half early in the year and then we had a very, very dry summer. We are certain to get a little bit more rain now, which would be well time. We got about two weeks left in our harvest, and once we are done harvesting we’d love to have all the rain we can, yes, but it’s been very dry. We, it hasn’t been quite as dry as 2008 and of course 2008 is what led into 2009, we think we are going to be better positioned going into next year, than we were going into 2009, but there is always the unpredictability of the weather.

Tom Spiro – Spiro Capital

And how is our research in to the alternative energy area?

Chris Benjamin

It’s going well, I think the good news for us is that the sugar prices and our improvement in production give us a little bit of breathing room hopefully provide us a bridge to a new model that we are still in the process of trying to define. We have kicked off a lot of the federal research that we announced earlier this year, for some of it the funding cycle hasn’t quite started yet, but will be within the next few weeks.

And so we should have everything going in earnest within the next month or so. And so it’s going extremely well, that’s the government funded side, and then we also have a number of initiatives that we are doing with other private companies, testing various technologies using our sugar feed stock and doing other things. So a good momentum there.

Tom Spiro – Spiro Capital

Thanks a lot and good luck.

Chris Benjamin

Thank you.

Operator

Our next question comes from the line [Louis Keith] from [Year Capital Management].

Louis Keith – Year Capital Management

Hi good afternoon, guys. I am a bit new to the company so I want to ask three questions on your Ocean Transportation segment. First, you’ve made comment on the outlook for the China trade for the fourth quarter with the discussion of the increased capacity during 2010, can you comment qualitatively on the outlook of 2011?

Matthew Cox

I am not really in a position to do that, I think part of this will be determined as we move into our traditional slack season and what happens with capacity changes both in the Transpacific and in other international markets. So it’s a little early to tell and I think we are going to be much better positioned to make some comments on our views of 2011 on the next call.

Louis Keith – Year Capital Management

Understood. With the flat, I think it’s slightly declining, slightly lower volumes in the third quarter in the Hawaii and Guam containers. Where you guys able to push through any rate increases on those containers on that trade or was the revenue increase on the segment driven entirely by the Chinese trans?

Matthew Cox

Well, our approach on pricing in the Hawaii and Guam trade lanes is to implement small annual increases rather than, as you’ve seen the very volatile Transpacific markets where rates fall dramatically and then go up, rather dramatically as well. And in 2009 and in 2010, we announced and actually realized small rate increases that largely offset our increases in labor and other costs. And so from that perspective, we were able to achieve real rate increases, more or less inline with our increasing underwriting costs.

Louis Keith – Year Capital Management

Understood. And with the increasing containers, increasing volume that is expected for the second half of 2011 from Guam. Any opportunity to improve or to withstand additional market shares since they are running 10% capacity utilization on those containers per day?

Matthew Cox

Yes, I would also note that I did not, that our main competitor in that trade lane also operates with same level of the utilization. There are two principle carriers, ourselves in the other line. And we don’t really envision any dramatic shifts in market share, we do however, respect the overall market to list our prospects in the second half of 2011.

Louis Keith – Year Capital Management

Great. Thank you very much.

Matthew Cox

You are welcome.

Operator

And we have a follow-up question from the line of George Pickral from Stephens.

George Pickral – Stephens

Chris, anyways and why Agribusiness would lose money in the fourth quarter?

Chris Benjamin

Well.

George Pickral – Stephens

I am just, it’s a data question, but I am just trying to.

Chris Benjamin

Yes, there is a lot of, sort of [Inaudible] or weird things that happen with across the county and because you’ve got certain things that are period cost and certain things that are assigned to the crop and when you have the inventory, that you carry over, you can have some strange things happen from period to period. But as a general rule, certainly our expectation right now is not for a loss in the fourth quarter. But I would, also I can’t project, any material profit in fourth quarter either.

George Pickral – Stephens

Okay. I was trying to reconcile because you’ve made $1.5 million in freight income to come. So and you said breakeven despite the profit. And also on the general corporate expenses, the spike up there from a payment to, I guess Allen

Matthew Cox

There were - these increases related to a couple of things. There are, we had a number of executives that retired in the past year and we did have some settlement expenses related to those retirements and then we also based on better performance year-to-date and versus the prior year, we do have some increases in incentive accruals as well as some other smaller items.

George Pickral – Stephens

Okay. I wasn’t picking on him. I’m just trying to figure out what it’s going to look like going forward. Should we see kind of a similar number? Or should that tail off and go back to the part between, anywhere between $4.5 million and $6.5 million run rate that it’s been on?

Matthew Cox

Yes, little bit stuff for me, I don’t have a good run rate to give you. What I would say is that to the extent that there was a year-over-year impact from any retirement, those are behind us. Those settlements all occurred between the first and third quarter. So that should not reoccur in the fourth quarter.

I would expect year-over-year in the fourth quarter, we would be a little bit above the prior year anyway, just because of some of the better incentive accruals. And we also, there are other discretionary things that we do from year-to-year related to foundation contributions and other things. And so there could be other modest things that might drive the number up a little bit next quarter. But it should not be significantly different from year-over-year. It shouldn’t be a huge variance.

George Pickral – Stephens

Okay. And then last question, maybe this is for Matt. And I just got to ask it bluntly. The $10 million to $15 million guidance for the impact, it’s kind of a big range. Any idea if that’s going to be closer to the 10 or closer to the 15?

Matt Cox

That’s a great question. When we first put it together, of course as we learned in our CLX1, we’re building this book of business from scratch and we’re now eight weeks into it and week-by-week we’re building our business. So it’s a little hard to say George, but I’m pretty sure we’re going to end up in that range somewhere. And that’s about as good as I can do.

George Pickral – Stephens

So maybe if you say you’re on schedule, a fair way to think about it would be kind of right in the middle of that range.

Matt Cox

Or you’d be the least far off if you pick the middle.

George Pickral – Stephens

That’s my goal. Thanks guys, appreciated.

Matt Cox

Alright. Thanks.

Operator

And that concludes today’s Q&A portion of our presentation. I’d like to turn the call over to Suzy Hollinger for closing remarks.

Suzy Hollinger

Thanks everyone for your time and attention today and your questions. If you have any further questions, please contact me at 808-525-8422. Thank you.

Operator

Ladies and gentlemen, we thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect and have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Alexander & Baldwin Management Discusses Q3 2010 Results - Earnings Call Transcript
This Transcript
All Transcripts