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

Alexander & Baldwin, Inc. (NYSE:ALEX)

Q4 FY07 Earnings Call

February 05, 2008, 02:00 PM ET

Executives

Kevin L. Halloran - VP, Corporate Development and IR

Allen Doane - Chairman and CEO

Christopher J. Benjamin - Sr. VP, CFO and Treasurer

Stanley M. Kuriyama - President and CEO, Land Group; Vice Chairman and CEO, A & B Properties, Inc.

James S. Andrasick - President and CEO, Matson Navigation Company, Inc.

Keefe, Bruyette & Woods

Analysts

Kevin Sterling - Stephens Inc.

Jonathan Chappell - JP Morgan

J Habermann - Goldman Sachs

Sheila McGrath

Operator

Good day ladies and gentlemen and welcome to the Alexander & Baldwin Fourth quarter 2007 and Full-Year Earnings Conference Call. My name is Mitchell and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. [Operator Instructions]

As a reminder this conference is being recorded for replay purposes. And I would now like to turn the presentation over to your host for today's conference Mr. Kevin Halloran, Vice President, Corporate Development and Investor Relations. Please proceed.

Kevin L. Halloran - Vice President, Corporate Development and Investor Relations

Thank you operator. Good day and welcome everyone. Before we commence, I will 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 February 5, 2008. Actual results may differ materially due to risks and uncertainties such as those described on pages 16 through 22 of the Form 10-K in our 2006 Annual Report and our subsequent filings with the SEC.

Statements in this call and presentation are not guarantees of future performance. I will also note that slides for this presentation are available for download at our website www.alexanderbaldwin.com. You will see an icon in the upper left and right hand corners of the homepage that will direct you to the slides. Now to the call, joining me today in Honolulu are Allen Doane, Chairman and Chief Executive Officer; Chris Benjamin, Senior Vice President, Chief Financial Officer and Treasurer of Alexander & Baldwin; Stan Kuriyama, Chief Executive Officer of A & B Properties; Jim Andrasick, Chief Executive Officer of Matson Navigation joins from Oakland California.

Slide 3 provides an agenda for our presentation, after which we will take your questions. We will start with Allen who will provide insight in to the performance for the year, which was excellent. Allen?

Allen Doane - Chairman and Chief Executive Officer

Thank you Kevin, good morning and good afternoon. I'm very pleased to say that we had an excellent 2007 with net income of more than 16% from 2006. These results surpassed our own expectations, despite an economic environment that became more challenging as the year progressed. As important as the earnings, we returned $81 million to our shareholders in 2007 in the form of share repurchases and dividends. The combined payout ratio of over 56% of our net income demonstrates our continuing commitment to total shareholder return.

At the operating unit level our real estate business achieved an exceptional 26% increase in operating profit fluctuated by an increase of 50% in real estate sales. This dramatic increase resulted from the sale of several commercial assets in the third quarter and to a lesser degree, the sales in our development pipeline projects. Our transportation businesses recorded an impressive 17% increase in operating profit, driven by our transpacific services. In 2007, our earnings per fully diluted share was $3.30, a considerable 17.4 % increase from 2006.

It is interesting to note that as we began 2007 the analysts’ community pegged our 2007 earnings per share at $2.96 with a range between $2.80 and $3.07, so the $3.30 that we earned was $0.34 above the Street average. For the full year we posted an operating profit of nearly $275 million, an increase of over $41 million in comparison to 2006. This 18% year-over-year improvement was attributable to Matson Navigation into our real estate sales.

You will note the significant results from our real estate sales, which include not only the sale of several income properties, but also earnings from our joint ventures. Both logistics services and our least income portfolio posted modest gains for the year. And finally, our Agribusiness segment posted a breakeven year which is attributable to poor sugar production.

Beyond the financial results, I'd like to make some additional comments about the year notwithstanding the economic headwinds that we are currently facing our major operating units are all on solid ground with sound market position that will serve us well in the coming year. Matson Navigation has clearly established itself as a go to shipping source in the transpacific service and we are beginning to realize the benefit of a broad-based economic search in Guam resulting from the expected ramp of the U.S. Military deployments to that Pacific island.

In Hawaii, a soften but stable market has impacted volume. At MIL, the strategic ship made to higher margin highway carriage served us well as the industry has been adversely impacted by moderation in domestic and global trade patterns. As many of you know, we established the Matson Global subsidiary in 2007 and it made good progress in developing a 3PL framework that fits our other logistic product and service platforms.

On the real estate front, we were able to dispose the three retail centers and two office properties from our income portfolio in 2007 all at highly attractive price points. We are nearing completion of our 42-story 352 unit condominium project. We expect closing to Keola La'i will result in significant cash flow and income in the first half of 2008. We continue to make progress in either sales or other projects, though certainly current market conditions have impacted the pace of such sales. And our income portfolio continues to perform very well with occupancy levels at 97%.

Proceeds from the sale transactions just mentioned have been or being used to purchase an additional 2.3 million square feet of industrial space in core logistic pockets of Dallas and Savannah. We believe these acquisitions are key to an increasing convergence of our transportation and real estate businesses.

Slide 9 provides a detailed breakdown of our operating profit by segment for the quarter. As you will note, operating profit was up 26% or $14 million led by gains from our real estate sales segment as we sold two properties on Maui during the quarter to the State of Hawaii. We did experience some margin compression at MIL during the quarter in line with recent industry trends and our leasing segment was up modestly, but only as a result of favorable one-time items that we booked in the fourth quarter of 2006.

With those comments complete, I will now describe full-year 2007 operating performance for each of the units. Let me start with Matson Navigation, which posted another excellent year. Matson's favorable performance reflects the strength of our China service and we sell essentially [inaudible] for most of the year. We also benefited from contract rate increases. That said; our performance was dampened by the escalating cost of fuel. As of note, the transpacific carriage did not assess a fuel surcharge from most of 2007, though Matson along with other industry competitors has taken steps to move on this issue in the coming year.

In Hawaii container volume was off marginally and only in the second half of the year did we see a surge in auto volume. Unfortunately, the surge is most likely only a temporary benefit from rental fleet replacements and not a permanent return to higher volumes. We anticipated that container volume moderation would occur, so very early in the year we implemented a series of cost containment measures. Coupled with a favorable mix in higher rates, our performance in this important trade link was stable.

In Guam, the rising market hide [ph] enable us to post very strong results. Finally, we saw a decrease in live volume at our west coast stevedoring joint venture in the second half of the year, which impacted our financial performance modestly. The volume disparity erodes from the loss of a single customer SSAT Seattle Terminal at mid-year, but we expect that other new customers will help to offset that loss in the coming year. Slide 12, depicts the operating profit and operating margins by quarter for the year. First, you'll note that Matson surpassed 2006 performance in every quarter and year, which is impressive.

For the full year, we had an operating profit margin of 12.6% above historic norms. Moving forward, we believe that, given the economic climate we are facing, we would likely to see a return to our normal band of 10% to 12% margin.

I would like to conclude, the Matson Navigation section with a slide on its bunker cost for the last 24 months. The precipitous increase in the cost of this most basic operating commodity dampened somewhat an otherwise excellent year at Matson. However we do have fuel surcharges in place for our Hawaii and Guam carriage, which capture most of the fuel-related expenses in these markets.

Our logistics services hosted a good year with a modest increase in operating profit, despite volume declines in their highway and intermodal sectors for the year. Not surprisingly, we did see some margin compression in the fourth quarter that accompany the volume declines. We continue to shift our business mix towards higher margin highway sectors and saw a positive movement in our expedited service lines.

During the year, we also made progress at Matson Global in terms of creating a flexible framework; that best unites and leverages are other operating platforms. While Matson Global start-up were absorbed in the second half of 2007, we expect to begin seeing positive results in 2008 as new customers are on boarded and product offerings are expanded. There is a large and growing market for such services and we intend to leverage the prestige and financial capability of the Matson brand to capture our share of its growth.

As you will see from slide 15, we experienced steady year-over-year growth through the first three quarters of 2007, but finished the year with lower quarterly operating profit. Due to some margin compression, IT related launch expenses and start-up costs associated with Matson Global, our full-year operating margin registered a healthy 5% the highest we have recorded reflecting the continuing shift to the higher margin highway services.

In 2007, our real estate leasing segment posted another fine year with a modest increase in operating profit and sustained high occupancy levels. Kevin will speak more about this later, but the commercial markets in Hawaii are robust with vacancy levels at or near historic lows. Our Mainland properties are performing equally as well and provide a natural hedge to any Hawaii exposure we might encounter. We had modest tenancy impact from the sub-prime fallout with a few small mortgage company defaults or delinquencies.

We have also increased the size of the industrial property component in our portfolio. With the conclusion of the Dallas Heritage Industrial Park and our expectation of a close on the Savanna Logistics Park we will have turned over nearly 25% of our portfolio square footage in the past 100 days. This is in line with our strategic plan, which articulated the value proposition and earnings opportunities of an increasing convergence of our real estate and transportation businesses.

In the fourth quarter, operating profit was off, but this was due to one-time favorable adjustments in 2006. Absent these adjustments, our fourth quarter profit would have increased modestly.

Operating profit for our commercial property portfolio is as you can see from slide 17 remarkably stable overtime. Historically variances have come from the timing of acquisitions and dispositions along with adjustments to straight-line revenue... rent revenues and other one-time adjustments.

In the fourth quarter of 2007, we entered into an agreement to acquire the Savannah Logistics Park, 1 million square foot park, which is nearing completion. We expect to close this transaction in two tranches in February and March. We are high in this investment for number a number of reasons, we think Savannah provides an excellent long-term play in logistics and compliments a growing national logistics footprint, more to come on this later on in the year, but suffice it to say that Savannah provides another critical node in our real estate and transportation network.

Our 2007 operating profit from real estate sales were exceptional and represent an improvement of nearly $25 million or 50%, much of this is due to well-timed sales of three commercial properties occurring in the second half of the year. In addition to these commercial sales, we had significant unit sales at our three major residential developments, while these sales were not immune to softening on the residential markets they do reflect an underlying strength in quality properties both primary and resort residential.

In the year we also made good progress in construction, we're moving steadily ahead keeping an eye on cost containment and a shifting sales landscape. With all that said, we expect to complete construction of Keola La'i in March and begin closing thereafter. Slide 20 provides an overview of Keola La'i. As you will note significant cash flow and earnings are expected in the first half of 2008. Keola La'i is one of our project ex-initiatives that is opportunistic developments with relatively quick return capital. Remember that we only purchased the site in the third quarter of 2004 and expect to have the full impact of our investment hit our P&L this year. Projects like this, while difficult to source provide a compliment to our multi-pronged approach to development.

The next slide depicts the quarterly operating profit of our real estate sales. As you see, there is great variance in quarter-to-quarter in these results, simply due to the timing of sales. We don't manage our development efforts for quarterly results, but instead measure ourselves against annual targets. The operating profit from our Agribusiness unit was disappointing as a result of poor sugar production. And while drought conditions exacerbated low yields for the year improvements in our farm and ergonomic practices will be implemented in the coming year to increase sugar production. On a positive note, our power generation and coffee sales offset the adverse impact of lower sugar production.

Let me conclude with a brief comment on 2008. We expect earnings of $3.40 to $3.60 per share fully diluted. We are mindful of the economic uncertainty in the markets we serve, but are confident that we have solid businesses and a strong balance sheet. One byproduct of the current uncertainty may be an increase in opportunistic investments. For us many of our best investments have been made in times of economic challenge. We do expect 2008 to be a good year in which we will create near and long-term value for our shareholders. With that, I will turn the call over to Chris Benjamin.

Christopher J. Benjamin - Senior Vice President, Chief Financial Officer and Treasurer

Thank you Allen. I'd like to begin with a few financial takeaways from 2007 that I think are particularly important. First, we were able to invest nearly $340 million in our businesses and return over $80 million to our shareholders in 2007, not only increasing our debt by a little less than $70 million. This reflects not only the prodigious cash flow generated by our operating businesses but also the cash and tax advantage means through which we finance many of our investments and I'm speaking specifically of our use of 1031 exchanges in the capital construction front, two valuable tools that we put to good use in 2007.

Second the investments we made were sound and they support our diverse earnings base, $80 million in 2007 Keola La'i spending will pay off in 2008 as we complete that building and sell most or all of the condominium units, while our other real estate pipeline investments will pay off over the next several years. The Mokihana garage significantly enhances our auto operations and will reduce our operating cost for more than a decade. And our tax-deferred investment strategies realized in 2007 through our heritage and our pending Savannah acquisitions, provide additional strength to our income portfolio.

And looking forward, we are on solid footing to fund continued planned and unplanned or opportunistic investments will be enabled to weather any economic challenges. Slide 26 summarizes our capital spending in 2007, as usual the top of the slide reflects what we consider to be our true investment level by business unit, while the bottom reconciles this number to the GAAP measure of CapEx and our cash flow statement. You'll note that our expected spending in 2008 nears our 2007 spending. As noted in our November 2007 webcast, about $75 million of the $300 million budget is maintenance capital, while the balance is split evenly between committed growth capital and undesignated growth capital.

The cash flow statement on slide 27 shows that we produced $124 million in cash from operations, returned $48 million and $33 million to shareholders via dividends and repurchases respectively, and increased our debt by $66 million while reducing our cash balances by $28 million. One result of our effective capital discipline and strong cash flows is that we continue to be able to execute opportunistic share repurchases.

In October, we reported that we had repurchased about 300,000 shares of our stock through the end of the third quarter, since that time, we purchased nearly 1.5 million additional shares as noted on the slide bringing our 2007 and 2008 total to 1.8 million shares at an average price of $45.88 per share or an aggregate cost of $82.3 million. Since May 2006, we repurchased nearly 3.5 million of shares at an average price of $44.66. And with just over a 200,000 shares left on our previous repurchase authorization our Board this past week approved an additional 2 million share authorization, giving us the ability to evaluate future repurchases as conditions warrant.

With that, I'll turn the call over to Kevin who will take us through an economic and market outlook.

Kevin L. Halloran - Vice President, Corporate Development and Investor Relations

Thank you Chris. As you'll note on slide 30, the Hawaii economy is stable, despite a modest adverse impact of a reduction in visitor arrival accounts. We put up the most recent annual forecast for key metrics in the health of the Hawaii economy to demonstrate the stability and also to describe the favorable underlying fundamentals of this economy. You should pay particular note to the exceptionally low unemployment rate that this state enjoys.

The next slide offers a detailed snapshot of our outlook for the commercial real estate in Hawaii. Before jumping in though, it is important to note that while approximately half of our leasing portfolio is in mainland markets, the preponderance of our real estate activity and indeed almost all of our development activity is right here in Hawaii. With that in line, you should note the strength of the commercial markets in Hawaii, as Allen has referenced earlier, with vacancy rates that are either the lowest or among the lowest in the nation, as well the per monthly asking rent rates offer attractive financial returns. We therefore expect, based on the strong demand and the continuing shortage of commercial space in Hawaii that our performance here will remain strong.

Residential markets offer a different story. Hawaii, like the rest of the country, is experiencing significant turbulence on the residential front. But unlike other markets, excess inventory tends to be absorbed more readily due to lower volume of new home starts. This may explain why the median price for single-family homes on Oahu actually rose modestly in comparison to a year earlier period and is currently near its prior highs. The story is essentially the same for condominium resales, a mixed market depending on individual properties throughout the islands.

Maui and Kauai have seen return to long-term price increase trends. That said, the Oahu condominium market where the majority of these sales occur has demonstrated strong price since support since mid-2005. This stability underscores the supply constraints that characterize most real estate activity in Hawaii. And with those remarks in hand, I would like to turn the call back to Allen for closing commentary and remarks.

Allen Doane - Chairman and Chief Executive Officer

Thank you, Kevin. I really don't have much to add other than the fact that while it's obvious to everyone these aren't the best of economic times, A&B is in really good shape as we enter 2008. So, I just want to make that final comment and open it up for your questions.

Question and Answer

Operator

[Operator Instructions] And your first question comes from the line of Kevin Sterling of Stephens Inc. Please proceed.

Kevin Sterling - Stephens Inc.

Good morning, gentlemen.

Allen Doane - Chairman and Chief Executive Officer

Good morning, Kevin.

Kevin Sterling - Stephens Inc.

With the significant cash flow projected from your condominium project, what's your preference for deploying this cash? Is it continued stock buyback, acquisitions, maybe you could talk about that a little bit?

Allen Doane - Chairman and Chief Executive Officer

Yes. Our number one priority is to find good investments and to grow the business. So that… to the extent that we are able to find those opportunities as we go through the year, we will do that. Obviously, we have a certain amount of maintenance capital that we have, Chris described in the budget. And then, we look at the attractiveness of repurchasing, as Chris also mentioned, in terms of all the other alternatives. One thing that we don't do, because we don't think it is in our shareholder interest, we don't think it's good to telegraph exactly what we will do when in terms of share repurchases. Hence we blocked quite a few you shares in the last few months in the marketplace in an... on an open basis.

Kevin Sterling - Stephens Inc.

Okay. Thank you Allen. After your expansion, into Dallas and Savannah, do you foresee additional opportunities along the East coast at these ports, continue to expand their container throughput and count.

Allen Doane - Chairman and Chief Executive Officer

Stan?

Stanley M. Kuriyama - President and Chief Executive Officer, Land Group; Vice Chairman and Chief Executive Officer, A & B Properties, Inc.

Kevin. Yes, I think we will continue to explore opportunities, you know Savannah was the farthest east we had gone. But we like the opportunity there, and so far we've been encouraged by what we are seeing. So, I think we're going to continue to look at the opportunities in those types of good logistic carriers.

Kevin Sterling - Stephens Inc.

Okay. Thank you. And in your Guam market, were you at all affected by the Saipan garment factory closings in Guam?

Allen Doane - Chairman and Chief Executive Officer

The answer is yes. Jim, please if you could respond?

James S. Andrasick - President and Chief Executive Officer, Matson Navigation Company, Inc.

Yes. It probably had a bigger impact in late '06 and early '07 than had during the second half and we really have at this point in time, and looking forward very little exposure to that market.

Kevin Sterling - Stephens Inc.

Okay. Thanks a lot, and hanks for your time and congratulations on a nice quarter and year.

Allen Doane - Chairman and Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Jonathan Chappell of JP Morgan. Please proceed.

Jonathan Chappell - JP Morgan

Thank you. Good morning guys.

Allen Doane - Chairman and Chief Executive Officer

Hi, Jonathan.

Christopher J. Benjamin - Senior Vice President, Chief Financial Officer and Treasurer

Hi Jonathan.

Jonathan Chappell - JP Morgan

Allen I'm curious and maybe even Stan and Jim can pipe in too, just about your outlook for '08, you've mentioned choppier environment in the press release. You did your outlook call about two months ago. How would you say the headwinds in both of your businesses have changed or have they not change from the November 30, call?

Allen Doane - Chairman and Chief Executive Officer

No, they are little different, we kind of sort of have an evolving set of targets and plans to reach them, they change fairly regularly. There has not been a real material change since the call at the end of November. But, certainly we know that given some of the recent surprises that have occurred, that there is always the possibility of that in the future. But, we just haven't seen anything in our residential markets or in the transportation markets, that are really that materially different than what we spoke about a couple of months ago.

Jonathan Chappell - JP Morgan

Okay.

Allen Doane - Chairman and Chief Executive Officer

And I guess, that's good news.

Jonathan Chappell - JP Morgan

So, the growth range is by division would be the same that you put in that November presentation?

Allen Doane - Chairman and Chief Executive Officer

Yes. I won’t say they are the same, but I would say from a materiality standpoint directionally, we are still doing in the same direction.

Jonathan Chappell - JP Morgan

Okay. The question about the transpacific fuel surcharges, you said you're making some developments on that. Is there any guidance as to when that might be implemented, how much are being incurred on the fuel surcharge in that transpacific business and what potential surcharge could save as far as cost in '08?

Allen Doane - Chairman and Chief Executive Officer

Jim will respond to that.

James S. Andrasick - President and Chief Executive Officer, Matson Navigation Company, Inc.

Yes. Hi, Jonathan.

Jonathan Chappell - JP Morgan

Hi, Jim.

James S. Andrasick - President and Chief Executive Officer, Matson Navigation Company, Inc.

We have plans to institute fuel surcharges as a part of our contract renegotiations, which as you know, I think affect May 1st of this year. And most of our business in the transpacific is still under contracts for the effect of those dates. I would say that various recent announcement has certainly influence the… all carriers that engage in that trade line and as you may know, I think do know a have basically said they are absolutely going to insist and enclose calculated surcharge on all shipments in the transpac, you can go on their website and figure out what that is.

We certainly don't attend to mimic that, just we've got. Our plans indicate that we should be able to institute such a charge, it probably will be floating in some respects and that remain to be seen just how the overall negotiations evolve and how comparative of all carriers are and what kind of capacity that will actually exist different times a year in that trading line.

Allen Doane - Chairman and Chief Executive Officer

And John, this is Allen again I just want to make a comment we generally don't get real high marks for over advertising ourselves, but I have to tell you that we got a lot of doubt and criticism when we enter the transpac market into China and now that we've been in almost two years not quite yet, but our second-year results are as good or better than what we'd planned to do with five years. So this has been a really and a great story for the company not only as an investment but in terms of the portal it gives us in the future on a long-term basis. So I haven't said that before, but it... and lucky for us because as you can tell from the results here the Hawaii market is definitely flattened and China has been really good, despite the fact that we were the 20 or 21st player to come into the market in Shanghai.

Jonathan Chappell - JP Morgan

Yes I'd agree with that. Just a follow-up… I'll finish of that fuel surcharge thought is there any estimate as to what the fuel impact from that service might been and how much of that you could maybe potentially callback with these new contracts renewals in May?

James S. Andrasick - President and Chief Executive Officer, Matson Navigation Company, Inc.

There is an estimate, but we can't provide it publicly for competitive reasons.

Jonathan Chappell - JP Morgan

Okay. Last one for Chris, on a modeling standpoint, the tax rate little bit lower in the fourth quarter than we've been estimating or that we've seen in the last few quarters, any guidance as to what we should be looking at for '08 there, and also the interest expense a little bit higher, I notice you did take on some debt obviously, but was almost $8,000 higher than the third quarter so just wondering on outlook for interest expense?

Christopher J. Benjamin - Senior Vice President, Chief Financial Officer and Treasurer

Yes, first of all on the first question John. One of things that has happened with the advent of FIN 48, which is driving our tax accounting and our tax rate estimates is that it creates a lot more volatility in the tax rate, makes it increasingly difficult to predict the tax rate. We did have some FIN 48 related benefits in the fourth quarter related to some fairly esoteric things, I'm going to be conservative going forward in '08 and say that I still think that you should be thinking probably in the mid 38 range, 38.5 or in terms of tax rate I wouldn't necessarily model in a repeat of the 37 and three quarter percent rate for '08 hopefully it will be pleasantly surprise but it does become increasingly difficult to project the uncertainty.

As far as interest expense, little bit tough to give a specific guidance right now but I would say that the fourth-quarter impact was to a large degree driven by the fact that we did a large number of share repurchases in the third and early fourth quarter. The other thing that I would say is that given that we've purchased since year-end another 1.1 million shares you can do the math yourself and figure out what that will do to interest expense. But the full year expense is going to be driven by so many things including the timing of the return on our Keola La'i investment as well as other opportunistic investments we make. So, it's really premature right now to be giving any '08 estimate for the full year.

Jonathan Chappell - JP Morgan

Okay. Thanks, Chris and thanks Allen and Jim.

Allen Doane - Chairman and Chief Executive Officer

Thank you.

Christopher J. Benjamin - Senior Vice President, Chief Financial Officer and Treasurer

Thank you, John.

Operator

Your next question comes from the line of J Habermann of Goldman Sachs. Please proceed.

J Habermann - Goldman Sachs

Hi guys here with Slone [ph] as well.

Allen Doane - Chairman and Chief Executive Officer

Hi, guys.

J Habermann - Goldman Sachs

Nice to see the guidance obviously broken out in a very specific with the $3.40 to $3.60. I am just curious, implies roughly sort of 3% to 10% growth year-over-year. Can you walk through some of the key drivers? Is it really the Hawaii volumes that you see obviously the variance that could get you to the low end? And I am just curious if the U.S. recession does emerge is that low-end risk?

Allen Doane - Chairman and Chief Executive Officer

Let me address just the last part of the question. I will ask Chris to talk about the first part. We implicitly assumed a softening of the economy, but not anything deeper for long. So, clearly, if we have a real downwards spike in economic activity and that has a major influence on Hawaii, which it will to some degree, then yeah… I mean the number could be at risk. Right now, we are looking at a pretty moderating picture in Hawaii but not one that has a huge down that will limit to it.

J Habermann - Goldman Sachs

Okay, and just… in terms of on the real estate side, do you have any of the leased assets sort of teed up for sale similar to last year or is it really going to be the condo sales this year?

Allen Doane - Chairman and Chief Executive Officer

I would ask Stan to responded to that on the real estate side and then Chris will have just a comment on sort of the earnings drivers for '08.

Stanley M. Kuriyama - President and Chief Executive Officer, Land Group; Vice Chairman and Chief Executive Officer, A & B Properties, Inc.

Yeah, J we go through with our annual process of reviewing our portfolio and identifying properties that we think where values have matured and where we think we can reinvest in properties having greater appreciation potential. So, we've gone through that exercise and there are properties that we have identified as good candidates for sale. So that would be an addition to our Keola La'i sales.

Christopher J. Benjamin - Senior Vice President, Chief Financial Officer and Treasurer

I think J, with respect to the drivers of the $3.40 to $3.60 range, I think that obviously Hawaii volume and fuel cost from Matson are probably the two biggest drivers. There are things that we have done and will continue to do to try to match capacity to volume if we did have softness that was greater than what we anticipate now. But there is a bit of stair step function there, you can't take your cost, sorry about that interference. You can't take your cost down linearly with volumes. So, our ability to manage that would be one driver there.

And of course, fuel costs we've already talked about. I think on the real estate side we always have the uncertainty as to exactly what transactions will take place. But I do think that as… that as indicated earlier, we looked at the markets, we feel pretty good about how the markets in Hawaii particularly are shaping up and the commercial markets on the Mainland. So, while there is sensitivity there,

our view of the market gives us the confidence to provide that range and are hoping to see what transpires.

J Habermann - Goldman Sachs

And I guess just going back to the real estate, you’ve reinvested more into the industrial asset class more recently. I guess just potential weakness in economy and the weakness we’ve seen in ISM. Do you change then sort of the investment mix going-forward?

Allen Doane - Chairman and Chief Executive Officer

J, we still have... even with the addition of the Dallas and Savannah properties, the mix in our portfolio is really nicely balanced, even with those acquisitions J we are looking at retail being about 45% of our portfolio, office 25%, and industrial 35%. So although the square footage is large we are by margins not overweighed in any segments, we like retail and we will continue to explore industrial [ph] make sense both as a real estate investment as well as potential synergies with logistics.

J Habermann - Goldman Sachs

Okay and just remind me, sorry your cost basis in the Keola La'i project?

Allen Doane - Chairman and Chief Executive Officer

We have provided that, I can’t tell you exactly what number we have stated I would...

J Habermann - Goldman Sachs

Offline, that's fine. Yeah there is one question for Stan. With regards to the sales of leased assets you may do in Hawaii, is there any one property type you are looking to sell, and if you could also give us some color on what cap rates have done?

Stanley M. Kuriyama - President and Chief Executive Officer, Land Group; Vice Chairman and Chief Executive Officer, A & B Properties, Inc.

There is no one particular type, we would be pretty opportunistic I think in terms of any Hawaii properties we sell. Hawaii cap rates have held up fairly well, I know there has been some softening that is taking place on the Mainland, but right now we haven't seen that in Hawaii and as you know it's largely due to the scarcity of product we have here.

Allen Doane - Chairman and Chief Executive Officer

Yeah. I think that's definitely right there has been a... even there was a little bit surprisingly very little retraction in values in Hawaii.

J Habermann - Goldman Sachs

Okay thanks guys.

Allen Doane - Chairman and Chief Executive Officer

I guess the one other comment I would make, at this stage it is somewhat speculative but it is kind of interesting we are seeing for the first time in many, many years some, fairly significant Asian investment in Hawaii. So that's pretty new, hasn’t happened in quite a long time. And the major wave of that investment is at the moment coming from Korea and its significant and a small type asset with a number of different parties, but given the some of the changes in exchange rates that are occurring this might be something that gets larger in the future, but it is the first time in... it is my 10th year in this job and its the first time I have seen it happened in Hawaii about 18, 20 years ago. But this is kind of new.

J Habermann - Goldman Sachs

Is this commercial or residential?

Allen Doane - Chairman and Chief Executive Officer

Primarily commercial, but it is also residential investment in what will be some of the residential high rise property and… so it is little of both.

J Habermann - Goldman Sachs

Okay thank you.

Allen Doane - Chairman and Chief Executive Officer

Mostly commercial.

Operator

Your next question comes from the line of Sheila McGrath of KBW. Please proceed.

Sheila McGrath - Keefe, Bruyette & Woods

Good afternoon. On timing of closings at Keola La'I, should we assume that most of those will happen in second quarter?

Christopher J. Benjamin - Senior Vice President, Chief Financial Officer and Treasurer

I think you can assume that... if we get our stick [ph] occupancy at the time we expect closings would… majority of closings probably will occur in the first quarter with a substantial number occurring in the second quarter.

Allen Doane - Chairman and Chief Executive Officer

This is one where it is hard to call. We are right on the edge of one quarter versus the other. So, that's why we count this as first half because it's just kind of on a razor edge, there are a lot of units there and your ability to just process everything is a little bit unknown.

Sheila McGrath - Keefe, Bruyette & Woods

Okay. Allen, can you also give us an update on the union negotiations on the West Coast.

Allen Doane - Chairman and Chief Executive Officer

Jim?

James S. Andrasick - President and Chief Executive Officer, Matson Navigation Company, Inc.

Yes, this is Jim. I will just paraphrase what was very recently reported in the Journal of Commerce on the subject that both union and management intend to engage in face-to-face discussions about two and a half months earlier when they did the last time around, and that would mean early March for first meeting, this would be after the union caucuses and management has prepared what it needs to do in terms of positioning.

I believe it is public information that major issues will be healthcare costs and certainly productivity both through technology and continued flexibility in work rules. The union has its own agenda [inaudible], which have been presented in any form or way yet and that is what will happen when the parties sit down to begin the dialog, so that is the status. I believe there is optimism on both sides that there will not be a disruption to court operations on the West Coast and certainly the desire of both parties to have that occur.

Sheila McGrath - Keefe, Bruyette & Woods

Okay great and the last question is for Stan. I was just wondering if you could give us an update on the Maui Business Park status?

Stanley M. Kuriyama - President and Chief Executive Officer, Land Group; Vice Chairman and Chief Executive Officer, A & B Properties, Inc.

Sure. We had a couple of zoning committee hearings in January and our next hearing is going to be scheduled for February. We are just logging through the process there and I am optimistic anyway that we will get a final zoning decision sometime in the first half of this year.

Sheila McGrath - Keefe, Bruyette & Woods

Okay. Great. Thank you.

Operator

[Operator Instructions]. And your next question comes from the line of Chris Haley of Wachovia. Please proceed.

Unidentified Analyst

Hi. good morning guys. It is [inaudible]. For either Allen or Jim. Allen, I heard your comments that you are expecting margins at Matson to return back to the, kind of, 10% to 12% range, if it been historically. I look at this quarter and they were 11.5%, that seems like there was some headwinds in the quarter, rising fuel costs, you had some dry-docking expenses and it's also seasonally a little bit slower quarter than some of your other quarters. So, I'm just wondering, normalizing for those items, it would seem that you would be at least at the high-end of the range, maybe even higher, what would kind to get even to the middle of that range going into '08.

Allen Doane - Chairman and Chief Executive Officer

Jim, I don't think we can answer the answer question specifically, but why not give some color.

Christopher J. Benjamin - Senior Vice President, Chief Financial Officer and Treasurer

The first element of course which we have described and shown in one of the charts is that we were really chasing rapidly increasing fuel expenses during the fourth quarter of this past year and due to way we recovered in the Guam and Hawaii services, there is always a lag in that situation. And then historically, you are correct that the fourth quarter, usually the second week is for ocean transportation, the first quarter is by far the weakest from the volume and profit point of view followed by the fourth, and then second and third being the strongest, the second next. So I can't answer the question as far as trying to normalize all that to an annual margin figure, but just we would revert to the statement made earlier that we expect the range to be as stated.

Unidentified Analyst

I am not sure that addresses the question, if I can just jump in. So if you... recognizing the lag nature of price recovery or expense recovery from the fourth quarter into the first quarter just the normal lag, I believe you believed in that the base run rate going into the year is actually better than where that margin level is or your range is. So, are you just simply just trying to be conservative or is there something that we should be seeing in your next one or two conference calls, in your earnings release is that will pressure those margin.

Allen Doane - Chairman and Chief Executive Officer

Is this Chris?

Unidentified Analyst

Yes sir.

Allen Doane - Chairman and Chief Executive Officer

Yes this is Allen. If you go to slide 12, you can look at the... you can kind of look at the numbers there and just to show you and I think that’s what Jim was alluding to is that seasonally the first quarter is always a very weak quarter. So, I don't think that we have and I don't think we are going to start providing quarterly guidance on an operating margin level, but if you kind of look at our pattern in the past you will just see that, that is the case. You can't make perspective statements about recovering fuel costs when you are not even sure what the cost are going to be and then you got a... in our time generally [ph] about a months lag from when we announce it to when it becomes implemented. And so I wish we could give you more specificity but we just can't.

Unidentified Analyst

If I just listen to the body language and read the release it sounds as though at least these... there is a little bit more resiliency, a little more confidence in the trajectory in the shipping business than your other major business lines. Is that a fair way to think about it?

Allen Doane - Chairman and Chief Executive Officer

No, I don't think so. I think we feel very good about ocean transportation, and I think that the logistics business after having gone through five years of tremendous growth experienced a bit of plateauing, but the real estate business as we think is solid as well. There are few more economic challenges in the real estate business on the development side, but we have also done a pretty good job at mitigating by some pretty careful structuring of how we proceed on our investment. So I won't say that is the case. I think that the only area where we are really disappointed is in agriculture. That is not a real happy story right now but otherwise I think the other businesses are performing well?

Christopher J. Benjamin - Senior Vice President, Chief Financial Officer and Treasurer

If I could just reinforce that. It is Chris, Allen indicated earlier that while we are not going to update the specific guidance that we gave in November 30, call on a unit-by-unit basis he did say that materially there really have been swings and if you go back to that guidance, I would say that the realistic guidance was very positive.

Unidentified Analyst

Just two more follow-ups.

Allen Doane - Chairman and Chief Executive Officer

Chris still watching our body language here Chris?

Unidentified Analyst

Looking for that video screen I can’t see you though, I wish I was there with you.

Chris in terms of the guidance, on the Savannah acquisition, are the cost going to be for the debt associated with that acquisition going to be fully expensed though the P&L in ‘08 or you're going to capitalize those cost [inaudible] acquisition until the asset stabilizes and then what baked into your guidance?

Christopher J. Benjamin - Senior Vice President, Chief Financial Officer and Treasurer

First of all, remember that if the good portion of that acquisition will be funded with 1031 exchange so there won't be, and I don’t think we have the final figures yet, but there won't be the preponderance of that investment will be funded from 1031, so there won't be an increase in debt. But I will answer the second part of your question which that, it would be our intend to… consistent with GAAP accounting rules we would begin to recognize the depreciation and related expenses on that property once it is ready for occupancy, so because there are a number of additional enhancements done in improvement so we have to make to the property after we close the acquisition and it will be some period of time before we begin recording it probably to coincide when it is occupied by tenant so we won't the eating significant amount of cost prior to occupancy of the building.

Unidentified Analyst

And can you refresh my memory in terms of what the… how long that period to stabilize the asset?

Christopher J. Benjamin - Senior Vice President, Chief Financial Officer and Treasurer

I don't think we have given guidance other than to say that we underwrote very conservatively and that we actually underwrote on the bases of the occupancy beginning after 2008. We certainly hope that we have upside there.

Unidentified Analyst

[inaudible] come back. Thanks

Allen Doane - Chairman and Chief Executive Officer

I'm sorry we didn't hear that. Okay, thank you.

Unidentified Analyst

Yield [ph] the floor and will come back

Allen Doane - Chairman and Chief Executive Officer

This is Super Tuesday here.

Christopher J. Benjamin - Senior Vice President, Chief Financial Officer and Treasurer

Chris, it looks like there is nobody else in the queue, so if you want to come back...

Unidentified Analyst

Jim when you have, you got May coming up, you will have a first quarter earnings by then but I would be interested in your take as to how you might position yourself going into this May’s… April/May discussion time period versus last year.

Christopher J. Benjamin - Senior Vice President, Chief Financial Officer and Treasurer

Certainly, actually I feel a lot better this time around than we did in the year ago because we have a much better fix I believe on our customer base and we know the seasonality of that customer mix, so it is all about yield management in ’08, we are going to be picking and choosing, we have that luxury because we are capacity constrained, as you know. And I think, our strategy as we've discussed a bit earlier in the call is not just to get some relief on few ups and downs but also at a high grade the cargo. And it all revolves around that; we don't have any specific projections that we can release for again competitive reasons. But, I'm lot optimistic that the major carriers in this trade will control their capacity in line with demand and that nobody is going to do anything crazy.

Unidentified Analyst

So, the... excluding the gains that you've made year-to-year, and the more established po000000sition you ran in '08 versus 07, excluding that we should be commended is the competitive position. How would you… how would you put together the supply and demand or pricing efforts into '08 in transpacific versus '07 excluding your efforts?

Allen Doane - Chairman and Chief Executive Officer

All I could say is, the major players have pre-announced. And that’s the TSA and Maersk. And all of them are continuing to drive on recovering their inland cost with intermodal moves. So, it's... we just to have that... we don't control the market, we are not price leaders. And so, absent changes in mix will be subjected to the same kinds of competitive forces. And I can't really say anything more than that because, we're still several months away from part negotiations with our customers.

Operator

Ladies and gentlemen that does conclude the question-and-answer session. Now, I'll turn it back to Allen Doane for closing remarks.

Allen Doane - Chairman and Chief Executive Officer

Thanks everyone for your participation today. And Kevin, you'll be available after the call for any follow-up clarifications or questions that you may have. Thank you.

Christopher J. Benjamin - Senior Vice President, Chief Financial Officer and Treasurer

Thanks very much.

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

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

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

Source: Alexander & Baldwin, Inc. Q4 2007 Earnings Call Transcript
This Transcript
All Transcripts