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Alexander & Baldwin, Inc. (NYSE:ALEX)

Q1 2012 Earnings Call

May 9, 2012 5:00 pm ET

Executives

Suzy Hollinger - IR

Stan Kuriyama - President and CEO

Joel Wine - CFO

Matt Cox - President, Matson Navigation Company

Chris Benjamin - President, A&B Land Group

Paul Ito - Controller

Analysts

Sheila McGrath - KBW

Jack Atkins - Stephens

Brendan Maiorana - Wells Fargo

Todd Brockett - Oppenheimer

Steve O'Hara - Sidoti & Company

Operator

Good day, ladies and gentlemen, and welcome to the first quarter 2012 Alexander & Baldwin earnings conference call. (Operator Instructions) I would now like to turn the call over to Ms. Suzy Hollinger.

Suzy Hollinger

Aloha and welcome to Alexander & Baldwin's first quarter 2012 earnings call. On the call with me today are Stan Kuriyama, A&B's President and CEO; Joel Wine, A&B's CFO; Matt Cox, President of Matson Navigation Company; and Chris Benjamin, President of A&B Land Group. Also in the room with us today is Paul Ito, A&B's Controller, who will become CFO of the new A&B upon separation.

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, May 9, 2012. Actual results may differ materially due to risks and uncertainties, such as those described on Pages 19 through 29 of our 2011 Form 10-K and our other subsequent filings with the SEC.

Statements in this call and presentation are not guarantees of future performance. And we do not undertake any obligation to update our forward-looking statements.

Management will be referring to non-GAAP financial measures when discussing results for the first quarter. In particular, we will be referring to non-GAAP net income and diluted earnings per share that exclude the impact of losses from the discontinuation CLX2 and separation expenses. We will also be referring to cash net operating income. Included in the appendix of today's slide presentation are reconciliation of the GAAP to non-GAAP financial measures, a statement regarding our use of these measures and additional SEC required information. Slides from this presentation are available for your download at our website www.alexanderbaldwin.com.

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

Stan Kuriyama

Thank you everyone for joining our call today. The company results were a mix for the quarter. Both our Leasing and Agribusiness segment continued their strong performance and we experienced an improvement in Ocean Transportation operating profit, due to the continued carriage of the entire Guam trade. And improvements in Transpacific volumes and yields, which will offset, however, by lower continued volumes in Hawaii.

The overall year-over-year decline and consolidated earnings was attributable to the timing of real estate sales and to a lesser degree separation cost that we began incurring in the quarter. Excluding results from our discontinued CLX2 operations and separation expenses, adjusted net income for the quarter was $7.2 million or $0.17 a share.

We remain on track to complete our separation into two publicly traded companies early in the third quarter. As indicated on this slide, we have completed our S-4 registration and have submitted our Form 10 to the SEC and our tax-free ruling request to the IRS. The final separation date will be determined by the timing of our receipt of these SEC and IRS approval.

In addition to the regulatory filings, we have increased the amount of financial and non-financial disclosures on our transportation and land businesses, to help investors assess the value and prospects for each of our businesses.

On April 11, in New York City, the A&B and Matson management teams made in depth presentations on their businesses, and we issued an expanded real estate supplement. The presentation materials are available on our website and I encourage you to review them, if you haven't already done so.

Part of the investment thesis for both companies is that Hawaii is at a positive inflection point in the economic cycle. And each company is well-positioned to benefit from an uplift in Hawaii's economy. Recent economic data continues to be positive.

Tourism performed extremely well in the first quarter with arrivals up 9% and expenditures up 14% over last year. Tourism from Japan experienced a strong rebound with March arrivals being the best March in the last five years, and visitors from Korea and China grew by 38% and 24% respectively. The tourism officials now expect that Hawaii will post the best year in the state's history for both visitor arrivals and expenditures.

State unemployment continues to be relatively low at 6.4% and bankruptcy filings declined 21% in the quarter. The Hawaii economy is projected to grow by 2.3% this year and in the mid-to-high 3% range for the next several years.

The Oahu residential real estate market is also performing, with steadily rising home prices and low inventory levels. Based on information released yesterday by the Honolulu Board of Realtors, through April, median home prices on Oahu, have now posted sixth consecutive month of year-over-year increases and the months of inventory declined by 23% from the beginning of the year to 3.7 months.

I'm pleased to report that at our 340-unit Waihonua highrise condominium project near the Ala Moana shopping center, we have to date secured 192 binding sales contract with 10% deposits which should enable us to move forward with construction sometime in the fall.

And as demand for real-estate translates into improvement in Hawaii residential construction, we would eventually expect to see the positive effect on Matson's shipping volumes as well.

Let me now ask Joel to take you through the financials.

Joel Wine

This slide breaks down operating profit by business segment. As Stan indicated, year-over-year operating performance improved for the Ocean Transportation, Leasing and Agribusiness segments. However, the variability and timing of real estate sales impacted consolidating operating which was $8.6 million lower.

In a quarterly experience, an increase of corporate expenses pre-tax to $8.9 million versus $4.2 million in the first quarter last year. Of this increase, approximately $3.3 million was attributable to separation costs.

On the next slide, cash flows used in operating activities were $20 million in the quarter, due primarily to increases in working capital, majority of which relates to the seasonal build of sugar inventories, and increases in pension contributions. Overall, our first quarter operating cash flows are traditionally lower due to seasonality.

Seasonally affects Matson and freight volumes are usually the weakest in the first quarter of the year and significant working capital investments is also required at HCNS because of the start of harvesting and building of sugar inventories.

Our debt increased $37 million for the quarter, due primarily to these seasonality factors. The bottom of this slide shows a reconciliation of capital expenditures shown on the cash flow statement to total capital expenditures, including amounts invested in joint venture developments and real-estate sale.

Through the first quarter, our capital expenditures amounted to $27mi and included $15 million of development capital for active projects and joint ventures with the remainder primarily for maintenance CapEx.

Slide 10 shows the consolidated balance sheet with total assets of $2.6 billion. From a debt capitalization point of view, we have previously stated that our debt will be allocated approximately 60% to Matson and 40% to A&B.

We are moving forward with our financing plans to put these new capital structures in place. Post separation, we expect A&B funded debt to consist of approximately $250 million of long-term debt and a balance of outstanding debt to be funded from a new five year revolving credit facility.

For Matson, post-separation we expect approximately $300 million of long-term funded debt and a balance of outstanding debt to be funded from a new five year revolving credit facility.

Before turning the presentation over to Matt, I'd like to brief you on our expectations regarding administrative expenses and one-time non-cash charges related to separation.

For the full year 2012, we expect professional fees and other one-time expenses related to this separation will range from $20 million to $22 million pre-tax including $3.3 million of pre-tax separation expenses recognized in the first quarter of 2012. We estimate that Matson's and A&B's shares of the one-time separation expenses will be relatively equal.

In addition to the professional fees and other cash expenses related to the separation describe above, we anticipate recording non-cash expenses arising from the exchange of options held by existing employees that will be replaced with options in the new companies.

Under this exchange, employees will receive replacement options that will retain the same intrinsic value and the same vesting schedules associated with the original options that existed immediately prior to the exchange.

However, we are required to record incremental non-cash expenses for the difference in Black-Scholes values of the original and replacement options. As we get closer to the time of separation, we will get further guidance regarding the potential size of any non-cash expense associated with the Black-Scholes evaluation of the original versus replacement options for either company.

That covers our expectation about each company separation, cost and expenses. With that I'll turn the presentation over to Matt to discuss Matson.

Matt Cox

Thanks Joel. Books in transportation operating profit increase 50% compared to the first quarter of last year, supporting the year-over-year increase was a significant increase in Guam volume which almost doubled and a modest improvement in China volume and rates.

Performance at our Hawaii trade link however, was lower and I'll get into the reasons for that in just a moment. Matson's financial performance was also affected by increased cost related to the vessel and barge dry docks including higher vessel operating cost and outside transportation costs and by higher terminal handling cost.

The ship dry docks were completed in the first quarter and the first of two barge dry docks will be completed in late May at which time, a second neighbor islands barge will be placed into dry docks.

Hawaii volume was down 4% in the quarter, owing to several factors including a customer supply chain shipped to certain international cargo to move directly from Asia to Hawaii, business from 2011 store openings and constructions projects that did not repeat themselves in 2012, and a modest decline in the overall Hawaii market.

Auto volume is down 6% due to the timing of automobile rental fleet replacement and reduced manufacturer volume. For Hawaii, we now expect a flat to modest decline in westbound container volume for the full year 2012 which is in part the result of the diversification of international volumes now moving directly to Hawaii from Asia, mentioned a moment ago and the lack of construction activity which we do not expect to materially improve until 2013.

In Guam, we continue to benefit from the exit of Horizon Lines from the trade last November which explains a significant increase in the volume year-over-year. This increase in Matson volume masks a moderate contraction in the trade itself.

Significant expansion in the trade will occur when construction related to military relocation commences. However, we don't currently see any signs of a near term start of the build up and we do continue to expect that it will be delayed.

You may have seen recent news report conforming that the military relocation to Guam is not anticipated to be as large as it was originally planned. It is now reported that 5,000 marines will relocate to Guam from Okinawa.

They still represents however, a significant expansion in the military presence in Guam and will provide for a more orderly growth of the islands infrastructure. In addition, Hawaii will now benefit from the relocation from Okinawa as of this was also announced that 3,000 marines in planned to be move to Hawaii. Matson's Guam volumes for the full year 2012 will depend on the timing of a new entrant, which we continue to expect in the longer term, but is difficult to predict in the shorter term.

In China, we were pleased to see the improvement in both volumes and spot rates in the first quarter which we believe are result of better capacity management by the carriers in the trade.

However, carriers were unable to achieve meaningful increases in the annual contracted freight rates based on the results of the contracting season that just ended.

As a reminder, Matson's China freight is approximately 50% spot rate and 50% annual contracted freight. It's our expectation now that freight rates will be relatively stable with the levels experienced in the first quarter for the balance of the year.

Logistics services operating profit declined in the first quarter compared with last year primarily due to an 8% decline in highway volume, primarily in full truckload services and lower warehouse results due to surplus capacity cause by the loss of two major customers in northern California in 2011 as previously reported.

Domestic intermodal business was up in the quarter, due to a 14% increase in volume which is more than offset, lower international intermodal performance due to the discontinuation of the CLX2 service and the loss of a major customer.

We remain focused on customer retention, expansion and improvement at our warehouse facilities and organic growth in the intermodal and highway businesses to improve profitability of our logistics unit.

One area of emphasis that's underway is the 53-foot container pilot program that we expect to get started in the third quarter of this year. We believe that the use of the private 53-foot containers will help Matson Logistics expand the customer base by meeting shipper preferences for customer ownership.

And that concludes the first quarter transportation update. Chris will now update you on the Land Group.

Chris Benjamin

Thanks Matt. I will start with real estate sales, although sales activity was generally positive in the first quarter and we posted a modest profit, we had a particular active first quarter in 2011 and so our year-over-year comparisons are unfavorable.

Among our first quarter activity as previously mentioned was the sale of four-acre at Maui Business Park to Costco, a $38 a square foot, although the gain on that sale will not be recognized until the third quarter when associated side work is completed.

The real-estate sale segment is always subject to the timing of sales closings and at this time, we anticipate minimal closings in the second quarter with better performance in the latter half 2012.

Since we provided a very thorough update on our development pipeline just a few weeks ago in our investor webcast, I'll provide just a brief update on a few projects.

As previously mentioned, we're seeing significant demand for our Waihonua highrise condo units in urban Honolulu. As Stan indicated, we have 192 binding sales contracts, which equals about 56% of the 341 units available.

We're working on the financing for the development and have commenced the final construction bid process. We feel very good about this project and it's prospects. We're making progress with onsite construction in the first increment of Maui Business Park 2. This will facilitate continued marketing of the project as the year progresses.

And the Kukui'ula momentum continues to build, the steady stream of positive press for the project continues as does traffic to the sales office. We're working with our joint venture partner DMB Associates to modestly expand our vertical program in order to stimulate additional development and we're confident that this will drive more sales.

In April, as an example, we closed the sale of $2.75 million cottage that we had developed, which reinforces the value of having homes available in an environment where lot sales remain slow. In addition to the modest vertical development being undertaken by our joint venture, we have two builder programs underway and another under negotiation.

Moving on to leasing, the Leasing segment continues it strong performance, posting $10.7 million in operating profit and $16.1 million in cash NOI in the first quarter of 2012. Mainland occupancy was up modestly in the quarter to 93% compared with 92% for the fourth quarter and 91% a year ago. Hawaii occupancy was relatively stable at 91%. For the full year, we expect leasing operating profit to be modestly better than it was in 2011.

And finally, Agribusiness operating profit improved 35% in the first quarter compared to last year. The increase is primarily from improvement in operating margins, due to higher power and lease revenue and lower operating expenses resulting from the sale of the coffee operation in 2011.

While it's early in the sugar harvest, which runs from late March through early December, and we have to be mindful of the operational and commodity pricing risks that we face in the sugar business, we do expect the Agribusiness to continue its strong performance in 2012, as favorable pricing has been locked in for about 75% of this year's expected crop. Looking ahead, we also have mitigated commodity risk by locking in pricing for about half of next year's crop.

With that, I'll now turn it over to Stan, for closing remarks.

Stan Kuriyama

Thank you, Chris. Our outlook for the year contemplates modest improvement in Ocean Transportation, driven by increased Guam volume and modest improvement in China rates, but we do expect continued softness in Hawaii volumes through the second quarter.

Logistics, despite a slow start to the year, we expect flat-to-modestly better year-over-year earnings from this segment. But real estate leasing and Agribusiness are expected to continue their strong performance. And due to the variable nature of real estate sales, it's difficult to provide guidance at this point in the year, although we currently expect that most of our sales will occur in the second half of the year.

Overall, the company remains financially strong and our businesses are well-positioned for growth. We are enthusiastic about our prospects of separate companies. We are encouraged by the continuing strong performance of our Tourism industry and what that bodes for the Hawaiian economy. And we are working hard toward an early third quarter closing of our separation transaction.

That concludes our presentation today. And we'll now open up for your questions. Thank you.

Question-and-Answer Session

Operator

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

Sheila McGrath - KBW

Stan, I was wondering if you could just walk through the kind of milestones that we should expect over the next couple months, in terms of the separation. So you're waiting right now on a ruling from the IRS and SEC. Any sense on timing of that? And then, when would the stocks start to trade in the when-issued market?

Stan Kuriyama

So the key milestone, Sheila, or as you say first we see the IRS ruling on our tax-free request. We've done some initial verbal comments there and awaiting the formal written comments from the IRS. Yes, we're making some progress there. SEC had given us their first round of comments on the Form-10. We've responded. So I think we're in pretty good shape there.

Third item of course is a final Board approval, which we will be seeking at the time that these two items fall into place. And then finally, we want to make sure our financing is also in place of course at the time of separation.

In terms of how it trades, why don't I refer that over to Joel?

Joel Wine

Sheila, so you're question is when will the stocks trade when issued and basically once the final Board meeting is held to determine that everything that Stan just mentioned is in place, and the Board is ready to make the decision to formally move forward with the separation, there will be about a 10-day period of time from that Board meeting to when-issued trading would start. And so we would issue a press release to that time, therefore about a 10-day notification before the when-issued trading started.

Sheila McGrath - KBW

And so this likely will be the last quarter that you announced combined results, is that right?

Stan Kuriyama

Based upon our current schedule, that's correct.

Sheila McGrath - KBW

And then, just a couple on the real estate side, since I probably won't continue to cover on this shipping side. But I was wondering if you, Chris, or Stan comment on the property sales. You said you expect more in the second half. Do you mean land sales perhaps The Maui Business Park or are you expecting to continue to sell improved properties?

Chris Benjamin

It's always hard to say exactly what's going to close, but we would anticipate certainly some land sales. We've got some things that we're targeting at Maui Business Park, still very uncertain as to the timing of closing, whether it would be this year or next. But that's certainly something that's been targeted.

Some other non-core land sales could materialize this year. And then property sales, as we've said before, are really going to be driven more by the timing of acquisition activity. And while we are looking at a number of assets to acquire the exact timing of that is uncertain, and that will to a large extent drive the disposition of any assets, as we seek to transition some of our capital back to Hawaii.

So that's almost as vague an answer that probably could have given. But I would say, the short answer to your question would be, almost certainly some land sale activity and possibly some commercial property sale activity. But that will be driven more by acquisition prospects.

Sheila McGrath - KBW

And then, one specific question. In the press release on the real estate sales segment, in the line item, earnings from joint ventures there was a negative $1.6 million. What's dragging that down, is that Kukui'ula?

Chris Benjamin

I'll ask Paul to jump in, if I get this wrong. But I would think that the vast majority of that and probably all of that would be the ongoing operating expenses. And I've shared them from Kukui'ula. And Paul is not in, so I think I got it right.

Paul Ito

That's correct, Chris.

Operator

And the next question comes from the line of Jack Atkins with Stephens.

Jack Atkins - Stephens

First, on the Hawaii volumes. Matt, I was wondering, if you could maybe comment on sort of the slightly more incremental tone? And it is sounds like you guys have with regard to the Hawaii service today versus your fourth quarter call. Just kind of curious on what exactly has changed there versus the last time you guys spoke publicly about at both at your analyst day and on the fourth quarter call?

Matt Cox

Sure, Jack, I'll take a crack at that. I think you are right to say that we've taken a slightly more measured tone than we did at the yearend call. The thing that changed from our perspective was the significant change in the routing. As I mentioned in comments of non-U.S. international cargo, which was seemed to be rerouted instead of from foreign origins to the U.S. West Coast and then carried into Hawaii, rather carried on, lets say, Asia-Europe water, and then on the weekly service that comes in from Asia into Hawaii and really bypass the West Coast.

And there were a number of reasons out, there was a joint service between three Japanese lines led by NYK that seemed to lower their prices and they caused some pricing and rerouting opportunities for customers. And we did get off to a little bit of a slower start. Of course, we've been patient or at least waiting for the construction activity to materialize. But we hadn't quite really accounted for the fact that the first quarter of 2011, there were some unusual volume increases that didn't repeat themselves.

And when we start looking into, getting into a weaker start for the year, in fact there were some one-time store openings and other things that inflated volume. So I think we're taking a more measured tone. I think we're still quite upbeat about the prospects for the Hawaiian economy. We just got off to a slower start than we thought.

Jack Atkins - Stephens

Just have a curiosity. I was wondering if you guys could maybe quantify, of that 4% decline in your volumes to Hawaii. Could you maybe breakout the rerouting issue versus the store openings, the construction projects last year versus just underlying demand? I think that'd be helpful.

Stan Kuriyama

Sure, what I would say is we've listed in order of significance, the three items. So the largest was the rerouting. But I think it's also fair to say that about a third fell into each category, just accounting for the small difference in weighting among the three.

Jack Atkins - Stephens

And as far as the Hawaii service, what was your utilization rate in the first quarter?

Stan Kuriyama

Our utilization in the first quarter was in the low-to-mid 90%.

Jack Atkins - Stephens

And then shifting to the SSA Terminals joint venture, I didn't see this in the 10-Q. But could you maybe give us the hard dollar contribution to operating income from the joint venture on a quarter?

Stan Kuriyama

Yes. I'm going to ask to Paul or Joel to help me with that. I don't have it right at my fingertips.

Joel Wine

And let me get back to you there and I'll provide the answer to that, Jack, in a minute or two before the end of the call.

Jack Atkins - Stephens

And then, just kind of moving on to another question on SSA. I noted there's been a customer that SSA lost in the Seattle terminal and I think moved to over to the Port of Tacoma. And I was wondering, if you could maybe comment on the impact of that event would potentially have on your operating income in 2012 or would you expect sort of increase throughput to the west coast ports to help offset that.

Stan Kuriyama

As you pointed out, we did announce in our Investor Day that volume move from SSA's terminal and Seattle to another terminal in Tacoma. That's going to happen at mid-year, so it hasn't actually happened yet. So we do expect the second half year to be somewhat compressed because of it and our share of that loss to customer is expected to be at the Matson level of about $1 million for the rest of 2012.

Jack Atkins - Stephens

Do you expect part of that to be offset though by maybe an increase throughput at the west coast ports or would you think that the overall SSA contribution would be about $1 million less?

Joel Wine

I think we're still looking for relatively flat year-over-year results and there are also some cost savings opportunities that we're going to be implementing as part of this loss and so if we have a relatively healthy peak season. I think that will be very helpful in potentially moderating it. We're just going wait and see how that plays out as the year progresses.

I can also now give you the information on SSAT. For the first quarter 2011 year to date, our contribution was $1.2 million and the first quarter contribution for SSAT in first quarter of 2012 is about $800,000. So there is about a $400,000 reduction in year-over-year profitability.

Jack Atkins - Stephens

For the Logistics business, could you give us an update on your efforts to backfill the empty warehouse space to California? Just out of curiosity I'm wondering the progress you're making with that effort?

Stan Kuriyama

I think it's fair to say at this point that our sales pipeline is much fuller than it was even three and four months ago. We're talking to a number of prospects and in addition we actually are working on our sales pipeline for our facility in Savannah as well.

So I think we feel much better about our prospects for filling it, exactly when the sales cycles for these warehouses can be six or nine months or a year. But we are seeing a lot of interest and activity and we're working very hard to fill it up. So we're encouraged at least by the sales pipeline.

Operator

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

Brendan Maiorana - Wells Fargo

Couple of questions for Joel, on the procedures. So first on expenses, what do you think gets incurred pre and post-split out of the 20 to 22?

Joel Wine

The majority of it will be pre-split or essentially at the time of split, Brendan. And I think the vast minority of it will be after the separation. And the reason for that is that 75% or slightly more is essentially outside professional fees, one-time fees, audit fees, banking fees, legal fees, et cetera. And the vast asset majority of that will stop at the time of separation.

Brendan Maiorana - Wells Fargo

So a lot of it will be incurred in the second quarter?

Joel Wine

That's what we expect.

Brendan Maiorana - Wells Fargo

And then a question, with your comments with respect to the options and the non-cash expense. Just for my understanding, if there is an option out there with a strike price on ALEX shares let's say $40 or something like that. Does that option then get split into two separate options? And let's say if the A&B or Matson are split roughly evenly and it's a $50 combined price or its $25 and $25. Does that option and get split into two, and it's got a strike of $20 for A&B and a strike of $20 for Matson?

Joel Wine

You could do it that way. We chose not to do it that way and take any given employee and have all of their options struck in the new company that they'll be continuing on with. So in our example, in our situation, the answer is no. That core embedded intrinsic value, Brendan, will not change, but that will all be replaced with the appropriate number of new options with the same aggregate intrinsic value in the company we'll be working for in the future, because we wanted essentially all employees to have all their skin in their game going forward in the company that they would continue to work for. That was the choice we made.

Brendan Maiorana - Wells Fargo

And the intrinsic value, just so I understand, let's say that one example of $50 share price versus the $40 strike in ALEX, how do you allocate the new strike of the option for A&B versus Matson?

Matt Cox

You said, $50 stock, $40 strike, that's what you said, let's just say, let's call that $10 intrinsic value. So what we'll do is we'll look at the day of separation, those essentially be three data points. They will be Alexander & Baldwin and the combining company closing price. And then we'll look at the when-issued market for the A&B stock in the ex-distribution market for the Matson stock. And you'll look at each of those and you'll determine what percentage of each individual company contributed to the overall value of ALEX, literally on that one day.

And then you'll be able to determine what the percentage needs to be of the new stock. And then essentially you'll deduct, let's say, that equated to, as an example, A&B were $25 and you'd essentially have the $10 of intrinsic value for the A&B option. Will be then replaced with the new option of A&B at struck at $15 where the stock was determined to be at $25. So you still have that $10 intrinsic value, but only be in one stock in that example, A&B. That made sense?

Brendan Maiorana - Wells Fargo

And then, I have a couple of real estate questions as well probably for, Chris. First, the NOI improved sequentially from the fourth quarter by about $1 million. It didn't seem like there were a lot of movements, I think you guys picked up retail parcel on Oahu at the end of last year, but that was pretty small.

Was there anything else that drove the sequential change? And if look at NOI for the quarter, is it fair to annualize that or do you think you have a couple of headwinds on expenses or something like that that may cause the numbers to move back more towards the fourth quarter number?

Chris Benjamin

On the first question, the drivers of the sequential improvement in cash NOI, I think $15.2 million in the fourth quarter to $16.1 million in the first quarter. It was primarily in the retail asset class and the majority of it, just over half of it, was from the non-recurrence of a write-off at our Rancho Temecula property in the fourth quarter of last year. So about $600,000 write-off in the fourth quarter do not recur. The balance of $500,000 or so, again attributable to retail primarily and it was a combination of percentage rent collections that were favorable in other kind of first quarter true-ups CAM reconciliation and other things.

So that sort of a segue into the next question, which is to what extent can you extrapolate the first quarter. I think that generally we feel good about the way the portfolio is performing. And I think that kind of on a normalized basis, we would expect that to continue. But I would say that there are some first quarter anomalies from CAM reconciliations and other things that boost profit a little bit. So I wouldn't necessarily multiply the 10.7 by 4, but I think we will have relatively good performance.

Brendan Maiorana - Wells Fargo

And then, the 79 acre non-core parcel, I think that was on Maui. Can you give us a sense of where pricing fell for that sale?

Stan Kuriyama

I have to admit I've forgotten the pricing on that. You know what, Brendan, I think I'd have to get back to you on that one rather than throw it out from memory.

Brendan Maiorana - Wells Fargo

It sounds like Waihonua has continued to progress well and you guys expect to start construction on that later this year. The Kakaako site that you guys have under I think option with Kamehameha. Is that sort of a next one to move forward, given what sounds like an improving condo market on Oahu?

Chris Benjamin

Yes, that's a great question, Brendan. And one, we're spend a lot of time on right now. The good news is that our success in Waihonua is clearly indicating that there is a market there for the product. And we feel great about Waihonua.

The situation in Kakaako right now is that there are over a dozen sites that are potential sites over the next call it five to 10 years for condo in Kakaako. Now that they'll all be developed certainly and the demand probably wouldn't be there for all of them. But the point is there is going to be a fair amount of competition.

So we have to do is figure out both, depth of the market at various price points and determine how quickly we could get that project to market. We actually feel fairly good that we could get that product to market shortly after Waihonua and still be toward the front of this next wave of condos. And so we're pretty optimistic about it.

But those are the questions we're going to be asking. We're going to do some more market studies and evaluate that before we're at a point, where we have to take down the land. Unfortunately, the way we structure the option agreement, we have the luxury of that time to do that further evaluation.

Brendan Maiorana - Wells Fargo

Just a follow-up, would you guys then be under the way the option agreement struck? Would you then have a 100% ownership and an economic interest in the site, after you take the land out or would be a partner with Kamehameha?

Chris Benjamin

Yes, just in general terms, I don't want to give any specific deal terms. But we would own the land after we take it down. Though there would be a modest profit participation in the way we structured the deal there would be modest profit participation for Kamehameha Schools in the deal.

Brendan Maiorana - Wells Fargo

And then, do you guys think the product type or price point would be a higher likely than what you're trying to do at Waihonua, or do you think it's more likely to be that mid-price kind of product?

Stan Kuriyama

I think it's more likely to be more kind of mid-price not significantly below Waihonua price points but modestly, so probably smaller unit sizes and comparable to slightly lower price per square foot. And Brendan, the pricing on that parcel was 44,000 an acre, that 79 acre parcel that you asked about.

Brendan Maiorana - Wells Fargo

And was there water on that site or was it non-water?

Stan Kuriyama

I'm pretty sure there was no water on that site.

Operator

And the next question comes from the line of Ian Zaffino with Oppenheimer.

Todd Brockett - Oppenheimer

This is Todd on for Ian. Can you guys talk a little bit more about routing of the non U.S. cargo and is the seasonality there kind of somewhere to the regular business, is that kind of call it 1% and 1.5% drag on volumes as we go through the year.

Stan Kuriyama

It's a good question. I don't think it's fully played out, Todd. But what we do know is that for European origin cargo that's bound for Hawaii. Let's say beer, European beer, for example which is a major moving commodity into Hawaii. What happened was the Asia, Europe rates, that is the Europe to Asia leg, was significantly lower that it had been historically.

If you follow the trade present, the international carriers were loosing a significant amount of money. They lost over $6 billion in part, because of there Asia, Europe deployments.

So the rates from Europe to Asia were very low. And then on top of that because of the arrangement that NYK had with two other Japanese carriers, there started being as significant amount of pricing pressure on the Asia into Hawaii leg.

And the freight rates dropped by we understand several thousand dollars a container. And just last month or in the last quarter, we've seen Asia, Europe freight rates declined dramatically. We have also seen that the arrangement that NYK had with the other two Japanese carriers has ended, so that NYK will be again the only carrier from Asia into Hawaii.

We think both of those things and the implications on those freight rates will put at least some of that cargo back into play over the West Coast as a routing where historically it did wanted to go. So it's hard to say whether or not it happens over a quarter, but we do think that some of that cargo that shifted will shift back over the West Coast routing.

Todd Brockett - Oppenheimer

And so is that, what you guys are referring to when you talked about kind of volume headwind in the second quarter?

Stan Kuriyama

Yes, exactly. That's one of the elements. And just in generally there is some general softness in the market. Here that we hope firms up. And as always said, we continue to be quite encouraged by the direction of the Hawaiian economy. And as we have said several times before, it's great to see tourist arrivals, but construction activity drives a lot of incremental growth rather than tourist arrivals are great.

They are great leading economic indicator. They provide lots of jobs and tax receipts and other benefits and perhaps our leading indicator for hotel owners and other owners to renew and expand properties overtime. So it's all good. It's just haven't translated into volumes yet.

Todd Brockett - Oppenheimer

And then, I just to follow-up on that non-acre or that non-core acre parcel that you guys sold for $44,000. Can you give me any other color on where on Maui it was located?

Chris Benjamin

This was adjacent to our sugar plantation, but it is land that was not suitable for farming. It's kind of a little bit of a remnant parcel that was kind of for us anyway awkwardly configured. It didn't have some ready access to water. So I would describe it is, again, some of our non-core land that wasn't utilized in sugar. It was just wasn't in the upcountry area, but it was just outside the footprint of the plantation sort of as you starting to go up the hill towards Kula if you are familiar with Maui.

Operator

And the next question comes from the line of Steve O'Hara with Sidoti & Company.

Steve O'Hara - Sidoti & Company

Can you just talk about maybe your capacity plans? I thought you'd laid them out in terms of the shipping business at the Investor Day, and I'm just wondering has that changed that all. And then maybe, I don't know if you touched on this, if you, did I apologize. But what you're seeing in terms of competitor capacity both on the China lanes and then on Hawaii as well.

Stan Kuriyama

Our capacity plans as we laid them out in our deployments in our Investor's Day remains unchanged. That is we continue to expect to be in a nine-ship deployment, although, periods to dry docks, we will add a tenth ship, but we are effectively in the nine-ship deployment as was outlined in our route map.

As it relates and we operate, we continue to expect to operate our Hawaii fleet at the low-to-mid 90% utilization. And we continue to be out of China affectively full every week. We have a weight list if you will or low pool as we call it. And we're limiting bookings every week by virtue of our customer commitments in our yield management processes that are in place.

With regard to the overall market in China, we have seen relatively good discipline from the other international ocean carriers in trying to match capacity and demand. And I think as a result overall utilization in the Transpacific trade, as it around 90%, which is relatively good.

What remains unclear, there are several carriers who have announced some expansion of capacity as we get into the busier time of year. And the question will be given that a number of surplus ships are laid up or idle or available, will the capacity management that has served the international ocean carriers well in the first quarter, be undermined by over introduction of capacity.

A part of it will be dependent on carrier behavior and in part it will be dependent on the underlying strength in the markets. And so there continues to be some uncertainty as to whether the carriers will undermine their own efforts and rate stability.

But if they stay disciplined, then there could be some up tight to our forecast. But we're expecting kind of a mix result that's why we see only modest improvement year-over-year in our China trade in terms of an economic result. I don't know if I'd answered your question and five others or not, but you can let me know if that answer to your question.

Steve O'Hara - Sidoti & Company

That's fine. I guess some clear on there, I guess, guidance or maybe the thoughts on Matson. Year-over-year, you've been looking for a modest improvement, is that what I'm should take out of this?

Joel Wine

I think what we said was, we see improvements. We kind of gave land specific information. We expect improvements year-over-year in China, modest.

We expect strong improvements year-over-year in Guam for that period of time in which we're the only carrier. And we're expecting flat to modestly down in Hawaii. And our logistics business, we expect flat to a modest improvement.

And so I don't think we've try to string all those together. But I think we're expecting to see a mix picture, where Hawaii is a lager and the other trades are flat to up in variant degrees. That's kind of the way we expect the year to shake out.

Steve O'Hara - Sidoti & Company

And then one last, what I mean, in general, would you expect to see improvement in construction and maybe you expect to see improving GDP, state GDP. I mean how does the cycle play out, I mean, is this typical or is this a little bit different than the normal?

Chris Benjamin

Well, I'll answer part of it. And then other people who are here who also very closely follow-up can comment. But from our perspective, what we're looking for and I think what's important to us is to focus on the permitting activity.

And of course the permitting activity is a good leading indicator for eventual construction. And we do see improvements in permitting process, but of course there is some time lag between the permitting and getting the financing together to the actual construction and translation into containerized freight volumes that we care about.

So I do think we see positive signs. We see positive signs on the relocation of the marines, those additional marines to Hawaii. Stan, spoke about some macro indicators for Hawaii which all continue to look very positive. And so the question is just how quickly could those translate into meaningful increases in westbound container volumes.

And our view is that that's not going to be meaningful move until 2013. That at, will be a lot of permitting, some improvement, but it will be getting more traction in 2013.

Steve O'Hara - Sidoti & Company

Do you see this as temporarily difficult?

Stan Kuriyama

Well, I mean if you look at back to last 30 years or 40 years, we've seen economic cycles typically what will happen is that we'll see multiyear modest recovery, which is typical of a Hawaii recovery if you can believe past cycle.

So I mean I think we're at the early stages of a recovery. And our believe based on history is that these tend to be multiyear modest recoveries, just the way we've describe them and I don't see any reason at this point to believe that they would be anything but that.

Operator

And the next question comes from the line of Jack Atkins with Stephens.

Jack Atkins - Stephens

Just a couple quick follow-ups here for you, Matt. I know you talked about bidding season in the Transpacific lane, and you said that contract rates were up modestly year-over-year and they weren't as significant as the spot rate increases that we've seen. I was wondering if maybe you could comment on sort of the contract rate increase, is it up in the mid-single digits, up in the low double digits, just any sort of color on that I think would be helpful?

Joel Wine

I would say the contracted rates, if you carve out changes in variable bunker surcharges which move with bunker markets that we're effectively no increases. It was year-over-year flat on the contracted freight.

The actual contracted freights were up because the bunker indices are up and the variable pricing mechanisms are up. And that was disappointment.

But the meaningful increases we got were on the non-contracted freight or the NVO or frayed forward segment where we have seen fairly healthy increases in that part of the business.

Jack Atkins - Stephens

And given that you have, essentially 100% capacity utilization on that service, are you planning at more successful than typical in your efforts to pass through the increases bunker fuel cost that we've seen over the last several months.

Stan Kuriyama

I think we have been effective in getting bunker surcharge mechanisms in effectively all of our contracts. That is a process that we've been at for the last few years. And on the margin, we were probably modestly successful. Let's just say, for example, last year we might have been 90% of our contracts would have had bunker surcharge mechanisms and now we're at 98% or something.

So on the margin there is some further improvement in putting in place bunker surcharge mechanisms. And I think that's true for the trade in total, so that's been a plus. And we certainly have moved to the vast majority of the trade using those bunker pricing mechanism. So on margin, I think it has been a plus.

Jack Atkins - Stephens

And when you talk about the rate being relatively consistent, going forward throughout 2012 with the rate that you saw in the first quarter, on your China service, is that $1,900 of box spot price that we saw or that we've seen over the last month or so. Is that a good sort of base line assumption to use further for the base spot rate or is it a little bit above or below that?

Joel Wine

What I would, Jack, without giving you a specific number, for competitive reasons we don't want to share that. We do enjoy a significant premium over the spot rates in/and over the contract rates in the trade given our cargo and service advantages. What I would say is if you broke our book of business down into 50% spot, you could track the spot indices plus a premium for that part of the business.

And then on the annual contracted freight we do enjoy a premium, both in the commodity mix and for the same commodities in our service and we've talked about that $300 to $500 premium overtime.

I would say now, post May 1 that the spot rates are above of the market that is not for Matson are above the contracted rates by few hundred dollars.

Jack Atkins - Stephens

And you would expect the strength that we've seen throughout the first quarter with increasing rate to, I guess, we maintain as we move throughout 2012. Is that the way, I should take your commentary from your prepared comments?

Stan Kuriyama

Yes, you should. Now, of course, there continues to be uncertainty as I mentioned in an another answer which is to the extent that carriers introduce significantly more capacity than the market can take. Of course, that would have a downward effect on pricing. We don't expect that to happen.

And to the extent that we see significant increases in demand that could take the rates up. We also don't expect that to happen. But those things could happen. But that's the background on our context for relative stability from the first quarter.

Jack Atkins - Stephens

Matt, could you give us an update on the 50 throughput box program? I know you mentioned it in your prepared comments. But can you just talk about sort of the progress that you're making getting that program off the ground and when should that begin to contribute. I know it's a small program at first, but when should that begin to contribute to Logistics segment 2012?

Matt Cox

Our initial program is for 253-foot boxes. Those boxes are in the process or nearly being completed there construction. They are on there way. And will be in-service at the beginning of the third quarter of this year. And the numbers of 200 boxes are relatively small and as you know our goal is to prove out the concept in terms of its utilization, the number of turns, the lanes in which we'll operate them, the number of empty legs and so on and so forth.

And once we prove that out, I think we'll to extent that it has a satisfactory outcome. I think it will drive earnings more meaningfully in 2013. So I see a modest impact in the financial results in the second half of 2012. But to the extent that we're happy with the pilot of 200 boxes, we would certainly look to expand that into the thousands, if in fact the pilot is successful. And when we do that it will have a more meaningful impact on the results of that logistic sector.

Operator

Ladies and gentlemen this concludes the question-and-answer session for today's call. I will now like to hand the call over to Ms. Suzy Hollinger, for closing remarks.

Suzy Hollinger

Thanks, everyone for joining our call today. If you have any further questions, please contact me at 808-525-8422. Thank you.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect.

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