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Alexander & Baldwin, Inc. (NYSE:ALEX)

Presentation at the Stephens Fall Investment Conference - Conference Call

November 16, 2011 2:30 p.m. ET

Executives

Joel Wine – SVP, CFO

Matthew J. Cox – President of Matson Navigation Company

Analysts

Operator

We’ll keep it rolling here. Next up we have Alexander & Baldwin, all the way from Hawaii. Ticker is ALEX. Joining us today from the company are Joel Wine, Senior Vice President, Chief Financial Officer, the Treasurer, and also Matthew Cox, President of Matson Navigation, Alexander & Baldwin’s wholly-owned transportation subsidiary. So with that, gentlemen.

Joel Wine

Thank you, Conner. I’m Joel Wine, the CFO and I’ll walk through a company overview before turning it over to Matt to talk about the Matson Transportation business.

Just real quickly, overview for those of you who don’t know the company. Here’s some snapshots of key P&L statistics of 2010; 1.6 billion in revenue and in the middle pie, operating profit, the dark blue portion is Matson Transportation, it’s about 55% of our operating profit last year.

The other main business point is real estate, which we’ll talk about, and then we’re also agribusiness which is a sugar plantation business in Maui. It’s a small operating profit contributor. Assets, 2.5 billion last year at the end of the year.

The thing about our company and our strengths, and what we focus on, I like to describe it in three different ways. First the quality assets. Our transportation business, Jones Act business; 17 vessels, 13 ocean going vessels, and four barges that do our interisland operations in Hawaii, high-quality assets. Matson’s been in business 129 years.

On our landholding base, real estate base, we own 20% of the island of Maui in terms of acreage and 16% of Kauai. Most of these assets is owned for over 100 years with a very low basis of $150 per acre. So incredibly high-quality assets that are essentially irreplaceable by any company today. So it’s all about how do we leverage those assets, leverage those positions into making money over time.

Added to that is a strong balance sheet, investment-grade profile. We’ve got the financial strength to make investments and to weather investments through ups and downs in the economy. And what brings it all together is the brands and the intangibles, essentially of where we at a competitive advantage in Hawaii, doing business in Hawaii, knowing the local market, how to get things done, especially in the real estate business.

So overall, those are the strengths; the asset base, the balance sheet and the local knowledge that brings the company together and allows us to create value.

So from a strategic perspective, how do we leverage those strengths is the question we ask ourselves all the time. On the Matson business, it is the lifeline of transporting containers to Hawaii. So it’s all about how do we extend our customer penetration, leverage our physical assets in to other adjacent trades, lands or other businesses that are value added to our customers.

On the real estate side, it’s about leveraging those historical land bases and utilizing our local knowledge to deploy new investments better as well as manage the whole process of entitlements, development, all the way through sales, and in creating an advantage in the marketplace because of our history of being able to do that over time.

Real quickly on some financial statistics. Net income, this is for the first nine months, through September of this year. On an unadjusted basis, 72 million last year, 33 million this year. That includes losses we had in our CLX2, second string of China service that Matt will talk about, which is a business that we shut down in August of this past year. If you adjust back for that and look at the on-going businesses, we’re relatively flat with where we were last year; 69 million in net income versus 73 last year, year-to-date first nine months.

If you break it down by individual business units and just looked at operating profit for the first nine-months of this year, our overall ocean transportation business is down from 90 million to 61 million of operating profit, primarily because of Trans-Pacific freight rates that affect our CLX1 business, which Matt will talk about.

The CLX2 you can see here we shut that down in August, it was experiencing loss given the difficult environment. And the other on-going businesses have been relatively – relatively flat on the year-over-year basis this year versus last year. We’ll talk about each of those individually. But this gives you some sense about our operating profit contribution and year-over-year type result.

So with that, I’ll turn it over to Matt, to talk about Matson, and then I’ll talk about our real estate business again.

Matthew J. Cox

Okay, well, you have my welcome as well, thanks.

Matson is comprised into two principal units. We have an ocean transportation unit and a non-asset base logistic business. Within the transportation business, we’re divided into three principal segments. The first is, as Joel mentioned, the Jones Act, operating 17 vessels in the core trades of Hawaii, and Guam Mid-Pacific.

The second of our units is a standalone terminal, marine terminal in Sand Island in Oahu. And that serves as our hub for all of the Hawaii and Guam-based cargo. And then lastly, Matson owns a 35% ownership interest in a Stevedoring joint venture on the West Coast that operates six marine terminals. Two in Long Beach, two in Oakland, and two in Seattle.

Just to give you a sense of our routes, and what you see here, this first part of the build is the services that we operate from the U.S. West Coast of Hawaii. We have five departures a week off the U.S. West Coast, one from Seattle, two from Oakland, and two from Long Beach. Those go into our Sand Island terminal in Oahu. Not shown here is our neighbor island barge network that would carry that part of the cargo that leaves – or that is required to go to one of the Hawaiian neighbor islands, Maui and Kauai and so forth.

Then a few years ago we started in 2006, we extended one of our strings to Guam, and it sails – one of our strings from Long Beach sail on to Guam. We then have a smaller feeder network that will carry cargo from Guam to the Marshall Islands, Micronesia, and so on to support those mid pacific island trades.

And then finally, one of those strings of sails on it from Long Beach to Honolulu, then on to Guam will sail on to three ports in central China, Xiamen, Ningbo and Shanghai and a weekly service which I’ll touch on a bit later.

Joel mentioned in his introductory comments that we had elected to discontinue a second China service which we started in 2010, discontinued it a little less than a year later. And we had chartered – time chartered five foreign built and non-U.S. flag vessels. We have – since we made this election to shut the service down, we’ve been able to off-hire three of those five vessels. We’re looking to sub-charter the remaining two vessels that were on initially two year charters. And those charters expire in 2012, July.

We on hire some equipment for this second string. We’re in the process of off-hiring it. We’ve off-hired just about half of the 9,000 containers that we picked up for this service. And we did acquire some owned containers that were not leased, that we’re repositioning into other services. And if you followed our third quarter call, we did incur a charge of $18 million after tax in the third quarter, and that should cover most of the remaining expenses around the shutdown.

The good news here is while we did expand or attempt to expand into our China market, the discontinuation really doesn’t affect any of our other businesses, including our other China business.

So let’s just touch on, starting with China, our remaining China service was started in 2006. As I mentioned, we served three central China ports. Over the last six years, we have built simply an outstanding reputation for both transit times, cargo availability, and we believe we offer between a three and five day advantage in terms of cargo transit relative to the standard industries trade transit times.

Why is that important? What we’re able to do is to focus our service offering from all segment of cargo that’s moving from Central China, that demands, and needs and would value a high service requirement. So who do we have on our ship? We have the who’s who of retailers in terms of garments. These are very high fashioned brand, electronics. Anything that’s very value, who can’t withstand a very long transit, would want to get into our service. So it’s a consequence. Our service remains very popular, it remains very full, much fuller than on average, and commands a higher freight rate than the market freight rates.

Unfortunately, we’re not completely immune from these market cycles. And as Joel mentioned, we did see some year-over-year erosion in our results associated with the weak freight rate environment and the high fuel cost environment that we were operating.

Such on Guam service. So Guam has been a service that we’ve served for a number of years. Just like Hawaii, we are the life line of Guam, and we have weekly services there. We also have invested, we’ve invested in new cranes as they’ve been needed, and also have invested in the long-term lease on some property right near the port facility to be able to accommodate changes in peaks in cargo flows at Polaris Point.

Earlier in the year, you can see the chart here that our volumes year-to-date were down compared to the prior year, I think that was a function of two things. One of an overall market that was relatively flat to contracting. And a service change by our primary competitor to shorten their transit time. But most recently, our principal competitor there has announced and has actually discontinued their service to Guam, and leaving us, at least for the short time, being the only carrier to Guam.

Now while we do fully expect another carrier to eventually emerge in Guam, and we will certainly be in a position to carry all of the Guam market and I think in the longer-term, dispose well for Matson.

Hawaii service. The Hawaii service story has been not bad. Our vault freight lines were up west bound about 5% year-to-date. That is relatively healthy, the overall markets grown 1 to 2%. And we’ve grown a little faster than the market. Joel mentioned the stats. We have 17 Jones Act vessels. The average age of our active fleet is 18 years, which is relatively owned by Jones Act standards. We do make periodic investments in our fleet to keep the average age young, and keep the surface reliable. We do have dedicated terminal operations both on the West Coast and in Hawaii. And we do have the best frequency, the most arrivals, the most neighbor island connection, and are really the 129 year long standing principal carrier to Hawaii.

So in this environment where cargo is moving, by growing at a relatively slow rate, our quality service remains paramount, and our current deployment of nine ships is operating at about a 95% utilization. So while cargo is down over the last few years, we have been able to resize our fleet, and keep our utilization relatively high and enabling our operating results.

This next chart, slide 14 is our [inaudible] chart. It shows that we have won, we just learned we won one for the ninth consecutive year the logistics magazine Quest for Quality award, in the Ocean Carrier category. And it’s for the ninth consecutive award. So we’re not a one-timer, we are consistent high performers. And in 2011, we were rated as the number one carrier in the world in terms of operations and equipment.

So we operate in a very big place to be recognized as the most important carrier in the world, most reliable, best services. That’s something we take great pride in.

So to sum up where we are in the Ocean Transportation side, what are we trying to do in this environment. Probably like many companies, as the overall freight environment is relative cloudy, while I think we have hit bottom, we have no clear signal for growth yet. Cost control initiatives are paramount. Over the last few years we’ve eliminated about 20% of our positions. We’ve had to resize our fleet to accommodate the lower level of freight volumes, and are extremely vigilant in keeping an eye on our cost.

Secondly, we’re always looking to expand into adjacent Jones Act trades that we’re not in today, and other businesses. And also, although I glossed over it in the Guam slide, we do believe that the longer term plans for the U.S. Military to relocate 8,000 Marines and their dependents from Okinawa, in to Guam. And the building that’s required to accommodate those marines and related units will be a, I think, a positive catalyst for growth in Guam over the next few years, although it’s a knowledge that will happen a little slower than we earlier thought. We do, over time, think that’s going to be a very positive factor. And again, I mentioned several times, the high quality of service that we – the reputation we have and that we try every day to earn.

The second of our principal units as I mentioned in my introductory comments are the non-asset based Matson logistic unit. Within it there are several lines of business where the ninth largest U.S. freight brokerage firm with the national footprint. We also are an [inaudible] market company. We offer flatbed LTL expedited services as well. We also have a contract warehousing distribution service segment that we’re also very excited about as well. So in that unit, what are we focused on? We’re focused on incremental organic growth at this point, rather than acquisitions. And we’re looking to expand organically into warehousing distribution through wins with fortune 500 customers, and also to continue to extend the Matson brand into market that we don’t serve.

And with that, I will turn it over to Joel to touch on the land group.

Joel Wine

Thank, Matt. So in our real estate business, just a couple quick statistics to put it in perspective. We’re the fourth largest property land owner in Hawaii, about 87,000 acres, primarily focused on two main businesses; commercial development, residential and resort development, all throughout the island. And then the second business is a commercial income portfolio.

The commercial income portfolio has about – had last year about 56 million of NOI, that was shown by about 24 million in Hawaii on the various islands, and 32 million mainland. So two main businesses there.

And the other business in our land group is the sugar plantation business based in Maui, 35,000 acres. In addition, we have 4,000 acres leased on Kwai, it used to be coffee plantations that we ran and managed, but now we dumped it onto a long-term lease and enjoy the benefits of having derisked that business and just have a long-term lease with the new manager of that asset.

In addition, by virtue, and I’ll talk about this as we get into agriculture a little bit more, but by virtue of our land holdings, we also are very uniquely positioned to produce space in emerging renewable energy areas, like biofuels and solar, which I’ll talk more about a little bit later.

Bring down our main business, though, the real estate business, what are our strategies? How do we create value? I’d say there’s three pieces to it.

Number one, maximize value of our core land holdings. We’ve owned these lands, in some cases, for over a century. So manage and hold the process of entitlement, development, building, selling, all the way through value creation. You know, in Hawaii, it can take a long time. And we have deep experience and expertise across all sorts of different projects, whether residential, resort residential or industrial.

So we’ll continue to do that overtime and leveraging our asset base in our position to create value.

Secondly, we’ve built up a very significant income portfolio, and where did that come from. As we developed lands over the decades, when we sold them, there’s a very large taxable gain unless we utilize 1031 Exchanges and identify a property within 45 days and then close on it within 180 days. It’s essentially an order to avoid very large taxes over time from our properties. We have bought other assets, income producing assets through 1031 Exchanges. That portfolio that I referenced earlier now throws off 56 million a year in NOI and it’s growing. So that in and of itself has become a very strategic, large, important asset to us. And so continuing to manage that and be a good property manager, and through 1030 Exchange transactions create value over time is a very important focus of ours given the magnitude of that asset.

And the also, we’re in the investing business. So we have deep knowledge in Hawaii. We have a view about markets. We have a view on a micro basis within a market like [inaudible], both within Honolulu and the exterior and the other neighboring islands. So if we see opportunities, we’ll step in and buy assets, redevelop them, we would buy debt, [inaudible] down the balance sheet wherever we see these real estate opportunities. So we’ll continue to do that over time. It’s very important to the balance sheet that we facilitate that type of investing business.

And what ties it all together, I referenced before, is our vision, having been in the islands and having deep experience and expertise, and respecting the community is very important. We’ve said we’re going to develop something, we’ve gone ahead and done that over time in good markets and bad markets and that makes a difference as you go through the real estate development process, especially in Hawaii.

On the Ag business side, I would sum up or strategy in a couple key points. First of all, we had a turnaround operation that was required, both our crop fields and our efficiency in our mill in Maui was not where we wanted it to be and three or four years ago we implemented new management and we’ve had dramatic improvement in both of those key elements, both the crop field itself and the throughput in our manufacturer plant. That along with rising sugar prices has turned that business from an EBITDA negative business to a strong EBITDA positive business. Going forward this year and going forward with maintaining those operations is step one.

Step two is derisking sugar – you probably don’t follow the sugar market, but sugar pricing has moved up significantly in the last three years and so now as we look forward into 2012 and 2013 and beyond, it’s important for us to derisk by selling forward. So the majority of our crop in 2012 has already been sold and we’re looking at significant portions of 2013 as well.

So lowering costs, improving yields and selling sort of high prices really derisks that business in a nice way. It’s not a big value creation engine for us. We’re focused in real estate and transportation so we want to turn that into a business that’s steadier and more reliable.

And the third piece I referenced earlier is to position ourselves for option value in the bio – energy and biofuel markets. Our strategy there is to essentially sit back and wait. We don’t have the capital nor the resources or expertise to be on the leading edge of renewable energy development. So what we’ll do is by virtue of our big land position, we’re the largest farmer in all of Hawaii, we’ll be able to see the emerging technologies. We do have terrific relationships with the public utilities and so as we see opportunities that are proven, well, then we’d be a good position to take advantage of that over time.

One small example of that was over on Kwai where we recently entered into an agreement for a solar farm to be put on our land which will give us very good economics over the life of the 20-year power purchase agreement. And that only comes from our expertise – you know, our experience and credibility in the market and our land holdings allow us to take advantage of those kinds of opportunities.

So overall, before we go into Q&A, just a quick summary. Matt talked about transportation where we’re going forward looking for adjacent markets where we can leverage our core positions whether it’s off our core ocean transportation business or logistics where we can incrementally invest and grow but we’ve got a strategic advantage.

In real estate, the focus is on Hawaii where we’ve got expertise, whether it’s continuing along entitlement processes off our existing lands, or looking at new investments based up on our real estate view I the markets themselves. These are the greatest opportunities to create value. And in Ag business, it’s a derisking strategy.

But you can’t sit and wait just for the markets to rebound, you’ve got to obviously, size your business and your expense base as efficiently as you can. We’re continuing to focus on our cost base and we did take a recent important step forward in that we announced on our third quarter call a couple weeks ago, which is we had a long-standing defined benefit plan, which we made the tough decision to freeze, which will go into effect January 1 next year. So the P&L impact of that is about 8 to $10 million a year. So a tough decision for us, we’ve got a tremendous workforce and employees that are very loyal to the company, but we felt like it was the right thing to do to make ourselves competitive long term. We’ll continue as a management team to focus on that and make sure that we’re as lean and efficient as we can be as we position ourselves for the economy as it rebounds.

So with that, I’ll turn it over to Q&A.

Question-and-Answer Session

Unidentified Analyst

[Inaudible].

Unidentified Company Representative

So the question was, on the real estate business, how do we think about the value proposition, what’s going to move it forward in terms of value creation and how to value it.

Joel Wine

There’s different components, so I think, you know, I mean, I don’t want to tell people how to value our company, but I would say that it’s logical to use a sum-of-the-part approach. You know, the way you think about a land asset that’s not necessarily producing cash flow today, it’s probably on some kind of per-acre metric of what it’s worth in the marketplace. The cash flow business, you could value on NOI for instance, for the income portfolio cap rate, NOI, et cetera.

What’s more difficult to value is the development of property sales. So if you – if we think about our business and what are the real catalysts over the next five years, in our pipeline, we have four big projects. The first is Kahoolawe, which is in Kawai. It’s about 1,500 residential units in a high-end residential community environment that we’ve invested about $245 million to date. And our partner, DMV, which is a private real estate developer on the West Coast, has about $220 invested. So over – about $440 million invested in the project. The 1,500 units will be sold over 10 to 20 years. I mean, generally, these are units that would go for about $1 million for the dirt and then – it’s to high-end folks looking for a second residence in Hawaii, and then they would build their own home and have access to the club house, the golf course, et cetera. So that’s a very high end – it’s te highest end residential resort property being developed on the island today. So that has its own set of issues.

I mean, we started this project literally in the late 80s and early 90s. From a scoping perspective, that’s how long it takes to get things done in Hawaii. And we started investing significant dollars into the build out in ’07, ’09 and we stopped it with the difficult times.

If we would have had a crystal ball, we would have delayed it, but we didn’t it and given who we are in Hawaii, it’s important that we stick with it and we will stick with it.

But like I said, it will be 10 to 20 years to sell all those lots, but that will be a driver over time and it will slowly improve over time.

We also have a very big – two big projects [inaudible] Pipeline in Maui. Maui Business Park, which is not far from our sugar plantation and was on – has been developed on historical sugar plantation land. It’s light industrial, it will – and retail, so we’ll have tenants like SafeWay and Wal-Mart, et cetera. And we’ve been slowly building out that over years and that’s got a nice pipeline to it.

And then over in Wailea, which is historical land, so the company owned and developed it in the ‘70s and ‘80s, we still own assets and lots there that have a very nice pipeline over the next five to eight years. That’s three.

And then there’s one large project in Downtown Honolulu, which is not company owed. We bought two parcels not far from Alamowana, not far from Waikiki, you know, Honolulu and we’re going to build a 42-story residential condo development there. It’s not high-end, it’s actually geared towards the local market. The price points will be around 600,000 to 800,00 per unit. So it’s a very, very different market.

There’s other developers that are eyeing the Honolulu market that are looking to build product that’s 1.5 to 2 million, which would be sold to international buyers looking for a second home or condo in Honolulu. That’s not the market that we’re – we’re more bullish on the local market.

But that’s a good example of our pipeline today; three of those – two of those assets came from our [inaudible] company land. The Wailea assets we own now, we developed over time and then sold in the late 80s to a Japanese buyer and then bought them back about 14 years later and see opportunities going forward. And then the Downtown Honolulu, which is an opportunity that we saw in the marketplace and we bought and we’re going to develop. So we’ll look at anything. That’s a good example of a portfolio approach and our approach is to maximize our land, but then also look for investments across the islands, across any category where we see opportunity because we think we’ve got a competitive advantage in the marketplace.

But those are the catalysts going forward for real estate.

Unidentified Analyst

[Inaudible].

Joel Wine

So the question was about CLX 2 and what assumptions did we make going into I that turned out – proved to be not true, or not correct?

And the two principle things that happened on CLX 2, again, we had been in the China business with our CLX 1 service for five years. We’ve been asked by our customers to look for ways to expand our expedited service offering into South China. One of the assumptions that proved to be true was that we were able to get the ship filled. We filled the cargo. We filled the ship with cargo, with brand named customers, many successfully services. We operated the service very successfully.

The two key units or elements that proved to be – to not work out were fuel bunker cuts rose about 45% in a year, which was dramatically higher than we’d expected. And at the same time, because of a significant amount of over building in the Global Trans-Pacific and global container markets, there was a significant amount of overcapacity and freight rates dropped by 30%. So we did not expect both of these to happen at the same time. We had seen environments were fuel had spiked. We’d see environments were freight rates had gone through a trough, but not at the same time.

And just as importantly, we didn’t have the vision moving forward to hang with losses for short periods of time because we just didn’t have the conviction that things wouldn’t get better very soon. So those were the principle activities and it was hard to envision. I think most people missed it. I know many of the ocean carriers who had made investment decisions in new capacity didn’t see it either.

But fortunately for us, we did time charter and leased the assets rather than commit to a significant purchase, which allowed us to get out while the losses weren’t significantly regrettable. We were able to get out rather orderly and in a sensible way.

Unidentified Analyst

[Inaudible].

Joel Wine

So the question was, what would have been different for us to decide to remain with the conviction? I think the main – to extend or to continue, I think we just did not have visibility to where the future direction of the market is, how quickly were fuel prices going to recede, or were they going to recede at all. And secondly, the main issue was around the international ocean carriers’ behavior in terms of rational pricing behavior and that one was even more – we were more pessimistic about the fundamentals there. But I think we went out, while it was a significant negative impact for us, I think our customers understood. We didn’t do really any significant damage to ourself in the market and in fact, have gotten quite a bit of understanding and sympathy and respect from customers who understand we need to make money if we’re going to provide and expedited service. We just couldn’t put it together.

Unidentified Company Representative.

Guys, I think we’ll have to leave it there. Thank you very much. There’s a breakout next door. We can continue this conversation.

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