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Executives

Suzy Hollinger – Investor Relations

Stan Kuriyama – President and CEO

Chris Benjamin – President of A&B Land Group

Joel Wine – A&B CFO

Matt Cox – President, Matson Navigation Company

Analysts

Sheila McGrath – KBW

Brendan Maiorana – Wells Fargo

Alexander and Baldwin Inc. (ALEX) Q3 2011 Earnings Conference Call November 8, 2011 5:00 PM ET

Operator

Good day, ladies and gentlemen. And welcome to the Third Quarter 2011 Alexander & Baldwin Incorporated Earnings Conference Call. My name is Amicya [ph] and I will be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator Instructions)

I would now like to turn the call over to Ms. Suzy Hollinger. Please proceed.

Suzy Hollinger

Thank you, operator. Hello and welcome to Alexander & Baldwin’s third quarter 2011 earnings call. On the call with me today are Stan Kuriyama, A&B President and CEO; Joel Wine, A&B CFO; Matt Cox, President of Matson Navigation Company and Chris Benjamin, President of A&B Land Group.

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 8, 2011. Actual results may differ materially due to risks and uncertainties, such as those described on pages 17 through 25 of our 2010 Form 10-K and our other subsequent filings with the SEC.

Statements in this call and presentation are not guarantees of future performance. We do not undertake to any obligation to update our forward-looking statements. Management will be referring to non-GAAP financial measures when discussing results for the quarter. In particular, we will be referring to adjusted net income, adjusted diluted earnings per share and adjusted Ocean Transportation operating profit, which excludes the impact of losses from the operations and shut down of our discontinued CLX2 service.

Included in appendices of today’s slide presentation, is a reconciliation of the GAAP to non-GAAP financial measures and a statement regarding our use of these measures. Slides from this presentation are available for your download at our website www.alexanderbaldwin.com. You’ll 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 questions.

We’ll start with Stan, who will comment on the performance for the quarter.

Stan Kuriyama

Good afternoon, everyone, and thank you for joining our call. Earlier today we announced third quarter net income of $9 million or $0.21 a share. However, excluding losses from our discontinued second China-Long Beach service, the company’s net income for the third quarter was $26 million, slightly less than the $27 million earned on a comparable basis last year for an adjusted EPS of $0.63 a share compared to $0.65 a share in 2010.

Both of our China-Long Beach services have been challenged by lower rates due to overcapacity in the transpacific trade lane and high fuel prices. However, unlike CLX2, our first China service has the advantage of carrying westbound cargo from the U.S. Mainland to Hawaii and Guam and thus remains profitable even in this difficult environment.

Hawaii continues to be a bright spot for Matson. Container volumes in our core Hawaii trade lane were up 3% in the quarter completing four consecutive quarters of year-over-year growth.

Real estate also performed well. Leasing operating profit was consistent with last year, despite the impact of a tenant bankruptcy. Mainland leasing activity has improved all year, and occupancy across our pleasing portfolio has stabilized above 90%. Real estate sales were up slightly in the quarter, due primarily to the sale of an industrial property on Maui.

Agribusiness continues to be on track for an exceptional year. Better operating performance has resulted in higher sugar production and we continue to see favorable sugar and power prices. We continue to pay close attention to our operating and overhead costs and have instituted a number of cost-saving initiatives throughout the company.

Among the more significant of those measures, is a decision to freeze benefits under the traditional defined benefit pension plan for non-bargaining unit employees, effective December 31. Going forward, we will be applying a cash balance formula. This transition is consistent with industry trends and will better position us financially and competitively for the years ahead.

The outlook for Huwaii’s visitor industry continues to be promising. Visitor expenditures have been strong all year and are up nearly 15% compared to 2010. Tourism officials continue to forecast $12.6 billion in visitor expenditures for 2011, second only to 2007’s record of $12.8 billion.

September visitor data also shows a modest year-over-year increase in visitors from Japan, the first monthly increase since the March at earthquake and tsunami. The Asia Pacific Economic Cooperation summit cut underway on [indiscernible] yesterday. The conference will attract more than 20,000 attendees including President Obama and heads of state from 20 Pacific Rim economies including China, Russia, Japan and Korea.

With over 2,000 global media representatives covering this event, this will be a unique opportunity to showcase Hawaii as both a business and vacation destination to the world.

Historically, visitor industry conditions have been a leading indicator for the Hawaii economy, with other economic indicators are still suppressed, resulting in a mixed overall economic outlook. Additional information on the States economy has included in the appendices to our presentation.

Now let me turn the call over to Joel to provide a financial update. Joel formally joined A&B in September but has been involved with the company for nearly a decade having served as a key advisor to me and the Board during his tenure at Goldman Sachs. Joel’s transition to CFO completes the broader set of management changes that began in February with the announcement of Norb Buelsing’s retirement and the promotions of Chris Benjamin and Rick Volner.

I’m pleased with the team we have in place and the smooth transition they’ve made to their new roles. And with that, let me turn it over to Joel.

Joel Wine

Thanks Stan. Slide eight shows the impact of CLX2 on a net income and earnings per share basis by quarter since inception. Most of the CLX2 losses were recorded as discontinued operations. However, there were 6.1 million of losses related to the repositioning of containers in the third quarter of 2011 that did not qualify as discontinued operations. Therefore, we wanted to disclose this 6.1 million to show the full income statement effect of CLX2 to investors in order to provide information necessary to compare ongoing operating businesses with both prior periods and future results.

This next slide nine shows operating profit by business segment. Excluding CLX2, Ocean Transportation operating profit was impacted by lower rates and higher fuel costs for CLX1 and lower SSAT volumes which were the primary factors leading to a year-over-year decline of 8 million in operating profit. The performance of our other business segments was relatively consistent with or slightly higher than last year’s performance.

On slide 10, operating cash flows through September decreased 39 million compared to last year principally due to lower results in Matson CLX1 and CLX2 services. Moving to slide 11, through September, capital expenditures excluding 1031 exchanges were 82 million and have mainly consisted of container purchases and real estate development project costs.

Since our last earnings call, we have revised our expectations for capital expenditures excluding 1031 exchanges downward by 39 million from 158 million to 129 million primarily to eliminate 30 million that was previously designated for opportunistic real estate investments based on our outlook for the timing of new real estate investment opportunities.

We now expect total capital expenditures for the year to be 129 million before 1031 exchanges and 160 million after 1031 exchanges. Compared to last year, capital expenditures excluding 1031 exchanges have declined significantly due to the absence of startup costs for CLX2 and the completion of amenities at Kukui’ula in 2010.

Slide 12 shows our condensed balance sheet. Debt levels increased by 48 million during the first nine months of the year due mainly to CLX2 operating and shut down losses. Despite that fact, our balance sheet remains strong and our leverage remain low at 33% debt to debt plus equity.

Now let me turn the presentation over to Matt to begin operating – to begin the operating segment updates.

Matt Cox

Thanks Joel. Before we look at performance for the quarter, let me spend a few minutes updating you on the shut down of CLX2.

Joel discussed a historical financial impact of the CLX2 shut down, from an operational perspective, we off-hired three of the five time charted vessels and nearly half of the 9,000 containers leased for the service. We continue to work on subletting the remaining two vessels that are on charter until July of 2012 and reposition owned containers for use in our other services.

And consistent with the guidance we provided on our last earnings call, in total from the third quarter on, we expect to record between $20 million and $25 million of operating – million of losses net of tax related to the operation and shut down of CLX2. This estimate considers the possibility that we maybe unable to sublease the remaining two vessels. 18 million net of taxes was recorded in the third quarter and the balance of the remaining losses, are expected to be recorded over the next several quarters.

Excluding the CLX2 losses, Ocean transportation posted an operating profit of $35 million in the quarter compared to an operating profit of $43 million last year. The $8 million decline is due principally to reduce performance from CLX1 which faced the same headwinds of lower freight rates and higher bunker fuel costs as we experienced with our CLX2, but a decrease in earnings from our SSAT joint venture due to lower volumes was also a factor. Better year-over-year performance in our Hawaii trade lane however, help partially offset the decline.

Transpacific fundamentals remain weak in the third quarter. Vessel overcapacity and taped demand continue to keep freight rates down, resulting in a nominal peak season in impacting CLX1’s performance in the quarter.

Volume was modestly higher due to an increase in west bound containers. However, because of CLX1’s operating advantages of having both an east and west bound head haul, it remains a fundamentally profitable and sound business for us.

In Guam, we continue to see the impact of a change in Horizon line schedule earlier in the year to sale directly to Guam and declining overall market demand on container volume for the quarter, which was down 3% compared to last year.

As you may know, Horizon recently announced the discontinuation of their service to Guam effective November 10th. In the near term, we are prepared to fully service any displaced customers and no new fleet deployments will be needed to maintain the current level of customer service. While we fully expect a new entrant to succeed Horizon lines in the Guam trade, we will be able to provide the needed stability in the trade over both the near term and long term.

As Stan mentioned, our Hawaii service continues to be a bright spot for Matson. Container volume was up 3% for the quarter compared to last year reflecting the impact of a connecting carrier agreement with an international carrier and other customer gains. This makes four straight quarters of year-over-year volume, which is encouraging as the Hawaii trade represents a majority of our total container volume.

Vessel utilization in this service remains high at 95%. On slide 18, I’m also happy to report that Logistics Management magazine recently chose to honor Matson with its quest for quality award in the Ocean Carrie category for a ninth consecutive year. This award, which is based on an annual survey of customers, is regarded in the transportation and logistics industry as the most important measure of customer satisfaction and performance excellence.

At Matson, we take great pride and our reputation as a quality carrier and a leader of pacific shipping, so it was particularly gratifying to be acknowledged for our continued excellence in operations and customer services.

Lastly, an update on logistics. Matson logistics results were modestly higher in the quarter compared to last year due principally to higher inner model volumes. So far this year, performance has been driven principally by increased international inner model volumes, but increases in domestic inner model and expedited margins have also contributed.

We continue to expect that full-year 2011 performance will be consistent with 2010. And now let me ask Chris to update you on Real Estate and Agribusiness.

Chris Benjamin

Thank you, Matt. I’ll start with real estate leasing, where third quarter operating profit of 9.2 million was relatively flat compared to last year. Gains from improving Mainland occupancies were offset by the impact of a tenant bankruptcy in the quarter.

At 92%, Mainland occupancy was up significantly from last year’s 85% level and stable compared to 93% for the second quarter. Hawaii occupancy has been steady, holding at 91% for the quarter, the same as for the second quarter and for last year’s third quarter.

Market rents both on the Mainland and in Hawaii remain relatively stable in the quarter. Thanks to recent stability in market rents and improved occupancy in the company’s Mainland portfolio. We expect modest improvement in overall full year leasing results as compared to 2010. However, performance for the fourth quarter is expected to be relatively flat with last year.

Moving now to real estate sales. Second quarter operating profit from real estate sales was $600,000 higher than last year due to the September sale of the commercial property on Maui. There were no comparable sales of commercial properties last year. Although last year’s result benefited from $5 million of joint venture gains on the settlement of two mortgage loans. Sales in the fourth quarter are expected to be minimal due to the timing of our closings.

In the third quarter, we acquired the Issaquah office center in Washington State. The property is well located east of downtown Seattle in close proximity to the headquarters and offices of a number prominent company. The property is fully occupied by Siemens. With this acquisition, the company’s commercial real estate portfolio is now 7.9 million square feet.

And now I’ll turn to development activity. In our existing pipeline, development of the Maui Business Park 2 project and Waihonua project and sales at Kukui’ula are all progressing. By year-end, the upside infrastructure work from Maui Business Park is anticipated to be completed and the onsite work will have commenced.

Favorable construction bids were received for both onsite and offsite work. A sales team was selected and marketing is expected to begin in early 2012. As we mentioned on our last call, we anticipate that marketing and presales at our 345 unit Waihonua high-rise condominium development on [indiscernible] will commence in December.

We believe this project is well positioned and well timed to take advantage of steady market demand for high-rise condos, admit a shortage of new condo product. Presale activity will gauge the strength of this demand and help us determine the optimal timing of construction.

And marketing efforts at our Kukui’ula joint venture continue to ramp up and are beginning to bear fruit. With two binding sale contracts recently executed for cottages, we’re pleased with the positive momentum we’re seeing and attributed partly to the broader promotional campaign we’ve launched.

In addition to favorable progress by a developer that we’ve partnered with on a bulk parcel who has commenced construction and is offering 15-house in lot packages for sale, we’re actively negotiating with two other developers for similar agreements for bulk parcels.

Now let me update you on Agribusiness. I’m happy to report that Agribusiness continued its strong performance in the third quarter posting an operating profit of $4 million compared to $1 million in same quarter last year. The year-over-year earnings improvement resulted primarily from higher power sales margin and specialty shipping margins compared to last year.

We expect our strong performance to continue through year-end with earnings for the quarter likely approximating last year’s fourth quarter. Despite the non-recurrence, I’m sorry, it’s going to approximate last year despite the fact that last year we had a federal disaster lease payment that will not recur this year.

I’ll now turn the call back over to Stan for closing remarks.

Stan Kuriyama

Thank you, Chris. Aside from the CLX2 losses, the company’s overall performance in the third quarter was relatively consistent with last year which speaks of ability of our core businesses to generate stable earnings despite a difficult economic environment and we continue to be well positioned for a market recovery.

For the balance of the year, we expect Matson’s performance to continue to be tempered by soft transpacific rates for CLX1 and lower container volumes for SSAT. Stable year-over-year performance in logistics and real estate leasing, lower property sales, and continued strong performance in agribusiness.

And that concludes our presentation this afternoon. I would be happy now to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) And the first question comes from the line of Sheila McGrath with KBW. Please proceed.

Sheila McGrath – KBW

Hi, yes. Good afternoon. Stan or Matt, I was wondering if you could give us some more insight on how you think fourth quarter is shaping up thus far in Ocean Transportation. And specifically do you see a retail related customers being more cautious on inventory levels?

Matt Cox

Hi, Sheila. Let me take a crack at that and then Stan wants to supplement, he can. I think the story is a little different by trade lanes, I’ll touch on each. In the transpacific east bound, I think we’ve seen our customers be very cautious about inventory level. In fact we thought that during the good part of this year our main customers have done a pretty good job of reducing inventory levels given what I think is the macro uncertainties. I think that is one of the factors that it led to the relatively soft demand picture in the transpacific trade.

I mean I think in the Hawaii trade, I think we’ve seen it as relatively stable. We’ve – we did see some modest growth earlier in the year but overall I think we’re seeing a relatively flat and again cautious buying picture emerging in the Hawaii trade overall.

And then in our broader logistics business, the peak season there I think has been relatively modest as well I think owing to the same kind of fundamentals that we’re seeing in the transpacific east bound.

Sheila McGrath – KBW

Okay, and Matt, could you also give us anymore specific insight on how you expect Horizon’s exit from the China Guam service? How that will impact Matson going forward?

Matt Cox

Sure. I mean I think the short answer is that it’s a little too early to tell. We do fully expect another competitor to enter the Guam trade. As you’ll know it does require U.S. lagged service and at that point we’ll see who steps in and what kind of service they provide, but in the mean time we are ramping up and are able to carry the entire market for as long as needed and we’ve assured our customers in Guam that we’ll be able to carry all of the freight during this transition period. But as I said, it’s just a little early to tell who may come in and when and what kind of service, but in the meantime we’re fully capable of handling the trade.

Sheila McGrath – KBW

Okay, and then Chris, on the builder arrangements that you had mentioned. Do you expect impact from actual sales this year like in fourth quarter at Kukui’ula or is that more a good closings in next year?

Chris Benjamin

Well Sheila it will be somewhat gradual. We will have some cash coming in from those sales this year. The revenue recognition and profit recognition as you know is subject to percentage of completion so it will, it will stretch over the next few years actually. But the cash will begin to come in this year. Typically the way these deals are structured is that there is a minimum guaranteed payment for the lot in the arrangements with these builders. And then there is also profit participation on the back-end. So we’ll begin to get the guaranteed payments this year and then we’ll hope for more upside down the road on these deals. But the impact especially from two sales will not be significant this year.

Sheila McGrath – KBW

Okay, all right. Thank you.

Operator

And the next question comes from the line of Brendan Maiorana with Wells Fargo. Please proceed.

Brendan Maiorana – Wells Fargo

Thanks. So Chris just to follow-up on that Kukui’ula with the builders, the minimum payments, how does that kind of compare to the lot pricing which I think going to average with 1.2 million per lot that you guys were expecting? How does that kind of compare if you look at the minimum versus the profit participation?

Chris Benjamin

Well first of all, yes, a little bit hard because the 1.2 million is sort of an average and these are actually cottage lots that that the ones that I’m referring to right now and so those are – the market price for those lots is a little bit lower than 1.2 million. But I think its fair to say that that these minimum payments are the vast majority of what would be normal market value for these lots and then there is, there is a lit bit at risk and then some upside, but I would guess Stan you might want to jump in here but I would guess there probably 80% of traditional market values.

Stan Kuriyama

Right. So Brendan, there would be some discount to retail sale prices. But the big value we get from these deals is that these developers and builders are building homes. And as you know, it’s a lot easier to sell a built product than a vacant lot. So it’s a really our objective here to get as much vertical home construction activity going as possible and that’s why we really like these deals with these particular developers and builders.

Brendan Maiorana – Wells Fargo

Right. That’s helpful. And then in terms of the CapEx for real estate that is down now because I guess the opportunities that may be is a little bit lower than what you guys had expected previously? Is that because you’re pulling back a little bit or your return requirements are moving higher or is it just that the opportunity of – the opportunity side of investments out there is lower than what you guys had forecast three months ago?

Stan Kuriyama

Yeah, I think that – I mean it's probably more the latter. I don’t think that our return expectations have changed significantly overtime. In fact that’s one of the things that we’ve prided ourselves on that we weren’t making investments in the 2007/8 timeframe when we just couldn’t meet those investment objectives. And so I think on that front we’ve been fairly consistent. It’s really been more about identifying opportunities that are attractive to us. We do have some things that that we’ve been looking at and that are in the pipeline, but it just hasn’t been as plentiful – the opportunities has haven’t been as plentiful as we had hoped and as you know we always talk about budgeting at somewhat aspirational level hoping that we’ll be place a significant amount of capital. We do that for capital budgeting purposes, but we always acknowledge that that’s completely subject defining the right opportunities.

Brendan Maiorana – Wells Fargo

Sure. And then Chris, on the Agribusiness, if I look back at operating profit over the past kind of five years or so, it sort of bounced around a lot but, but probably peaked out before this year at somewhere around 6 million or 7 million. This year it seems like you guys are probably going to be, give or take, 20 million or depending on what happens at Q4? There has kind of been a lot of adjustments in that line of business over the past few years. Given the market dynamics that are out there, given what’s happened in the portfolio of investments and operations that you have is what you’re doing this year sustainable as you look out over the next few years, is this a reasonable level of profit that we could expect?

Chris Benjamin

Yeah, Brendan the short answer, but I’m going to give you a slightly longer answer. The short answer is, it really depends on what happens with the sugar prices but what I will say is that what we’ve tried to do over the last couple of years is address the volatility of the earnings and in the Agribusiness segment. We’ve done a number of things to try to reduce volatility. With our farming practices, we’ve implemented much more consistent farming practices that I think will avoid a situation where we have a huge drop off in production like we did a few years ago. So I think on the production side, we’ll have much more stability. As you know, we undertook the transaction with our coffee operation to remove the volatility from that and increase the – not only increase the earnings but increase the stability.

And we’re taking a lot of steps to try to remove some of the volatility from the pricing side as well. We’ve priced out through most of our crop for next year as already priced at very attractive levels and we’re very actively working right now on trying to extend that pricing out for at least a couple of more years. So we’re trying to do everything we can to minimize volatility and do so at very high levels and so it looks good for next year and hopefully it will look good for the next year too after that. But we have to always remember that we are subject to sugar pricing and that’s the – that’s the unpredictable thing as you go further out. We see some things in the pricing markets, in the sugar markets that we like and suggest more sustainable high prices but they are still commodity markets and anything can happen. So to predict continued 20 million profit going forward is tough for further you go out but I do feel good about next year and hopefully the next one or two years after that.

Brendan Maiorana – Wells Fargo

Okay, great. That’s helpful. Thanks.

Operator

(Operator Instructions) Okay ladies and gentlemen, this concludes the question-and-answer session for today’s call. I would now like to hand the call over to Ms. Suzy Hollinger for closing remarks.

Suzy Hollinger

Thanks everyone for being on today’s call. If you have additional questions, please call me at 808-525-8422.

Operator

Ladies and gentlemen, this concludes the presentation for today. You may now disconnect.

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