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Alexander & Baldwin, Inc (NYSE:ALEX)

Q1 FY08 Earnings Call

April 30, 2008, 3:00 PM ET

Executives

Kevin L. Halloran - VP, Corporate Development and IR

W. Allen Doane - Chairman of the Board, President, CEO

Christopher J. Benjamin - Financial Officer, Sr. VP, Treasurer

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

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

Analysts

Jonathan Chappell - JP Morgan

Sloan Bohlen - Goldman Sachs

J Habermann - Goldman Sachs

Christopher Haley - Wachovia

Kevin Sterling - Stephens Inc

Brendan Maiorana - Wachovia

Tom Sparrow - Sparrow Capital

Operator

Good day ladies and gentlemen and welcome to the Alexander & Baldwin 2008, first quarter earnings conference call. My name is Amity [ph] and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of this conference. (Operator Instructions).

I would now like to turn the presentation over to your host for today's call Vice President of Corporate Development and Investor Relations Mr. Kevin Halloran. Please proceed.

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

Thank you operator. Good day and welcome everyone. Before we commence, I should 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 April 30, 2008. Actual results may differ materially due to risks and uncertainties, such as those described on pages 16 through 23 of the Form 10-K in our 2007 Annual Report and our other subsequent filings with the SEC.

Statements in this call and presentation are not guarantees of future performance. I will also note that slides from 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; and Stan Kuriyama, Chief Executive Officer of A & B Properties; Jim Andrasick, Chief Executive Officer of Matson Navigation is also on board by a telephone.

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

W. Allen Doane - Chairman of the Board, President, Chief Executive Officer

Thank you Kevin. I am pleased to report we had a strong first quarter despite an economic environment that is becoming increasingly more challenging. The net income of $42 million, up 70% from 2007. These results met our expectations with Keola La'i closings leading the way. And, I should note that these earnings also included $5 million from an insurance settlement. As a portion of the earnings, we returned $62 million to our shareholders in the first quarter of the year in the form of share repurchases and dividends. And just last week, our board of directors authorized an increase in annual dividend of $0.10.

Since early 2006, we've increased the annual dividend by 40%, other highlights include the release of an annual real-estate supplement in late February. The goal of the supplement is to provide an easy to use compendium of ongoing real-estate holdings. Also in late February, we acquired the 1 million square foot Savannah Logistics Park. I have more to say about this property in a moment.

In the first quarter of 2008, our earnings for fully diluted share were $1.1, a considerable 74% increase over the same period of 2007. And our operating profit improved 56% for the same period, you will notice significant impact that real-estate sales had for us in the quarter accounting for over one half of our operating profit. Notwithstanding this impressive performance we also booked respectable earnings from all of other core businesses.

Beyond the financial results, I'll comment on key operational highlights of each of our units. At a high level there is no doubt the economic headwinds we are facing have impacted our operations. But, I also note that our major units are on solid ground with strong franchises in multiple markets and this multi market approach continues to serve us well.

In Hawaii, we have implemented and we will continue to execute several cost containment efforts at Matson Navigation in response to softening volume. In China, we are currently in the annual sales contract process as per early indications suggest favorable increases and some capture of rising fuel prices, which is a key initiatives for us in that trade line. And, I am proud to note that Matson Navigation was once again ranked number one on time carrier in the world out of the universe of 65 international carriers.

At Matson Integrated Logistics, we have experienced volume decline from a moderating economic environment particularly in our intermodal business. We recently signed our first major client at Matson Global or 3PL, which puts us ahead of our expected launch. It is an exciting development that singles market acceptance for that value proposition.

On the real estate for our Keola La'i closing are on pace and have generated over $178 million in revenue in the first quarter. And, while we continue to make progress in unit sales in other projects, certainly currently market conditions have impacted the pace of such sales. In that soften sales environment, we will continue to make investments in key projects such as Keola La'i that will bear significant results in the years to come.

Our income portfolio continues to perform very well with high occupancy levels. In the quarter, we did note some softening in our U.S. Mainland portfolio, but we remain confident that the quality depth and diversity of our asset classes, geographies and tenancy will provide performance strength throughout the year.

We have fully integrated our $1.3 million square foot acquisition in Dallas and as noted earlier have tenanted a majority of our Savannah space ahead of expected timelines. With those summary comments complete, I will describe first quarter 2008 operating performance at each of the units.

Let me start with Matson Navigation, which posted a relatively good quarter. Matson's performance reflects the strength of our China's service and we sell essentially full for most of the quarter. Fuel costs however, have dampened profitability. In Hawaii, total container volume was up by 7% and there are a number of reasons. Our westbound carriage represented about 2/3 of the total volume drop as a result of somewhat weaker market conditions, the lost to competitors of lower margin, construction materials, cargo and the timing of some cargo shipments. Our Eastbound carriage was up considerably due to the loss of the pineapple business stemming from the shutdown of the major Hawaii producer in 2007. We anticipated much of the container volume moderation; so very early in the year we implemented a series of cost containment measures. Coupled with favorable mix and higher rates, our performance in this important trade line was moderately down, but still stable. In Guam, we are holding steady and seeing a bit of choppiness in volume growth, pending projected major increasing demand as the U.S military begins its relocation from Okinawa to Guam.

Slide 11, depicts the operating profit and operating margin by quarter. For the first quarter of 2008 compared to 2007, you will note that our operating margin percentage was 6.5% lower than the prior year by about 1.5 percentage points. As energy becomes increasingly larger component of our revenue and cost space, reflecting the dramatic rise in energy cost over the past year, our operating margin percentage will naturally decrease. This is simply arithmetic, because we do not seek any profit margin on fuel surcharges. The larger this component is of overall revenue equation, the lower our operating margin percentage will be. The precipitous increase in cost of the fuel has dampened somewhat and otherwise steady quarter for Matson.

However, we do have fuel surcharges in place for Hawaii and Guam carriage, which capture most of fuel related expenses in these markets. And in addition, we are optimistic that we will recover a greater percentage of our fuel costs in the China trade as a result of new annual contracts going forward.

Before turning to logistics, as many of you know we had received a subpoena for documents from the Department of Justice related to investigation into the domestic trades. We will fully cooperate with the DOJ in this matter.

Our logistics services posted a decent quarter and made a very challenging volume climate. In particular intermodal volume was lower throughout the beginning of the year, which impacted results partly due to fewer inland moves from Matson's owned China service.

In 2007, we also had a nonrecurring legal settlement, which favorably impacted results early in that period. We continue to migrate toward higher margin highway business, which was stable during the quarter and continue to build out our in-house sales expertise.

At Matson Global, we had a very good quarter, as we signed our first major client at the Savannah Logistics Park. So far, we've reported only the cost of ramping up Matson Global but in the second half of the year, we expect to see the first earnings streams materialize, and we also expect to build on this early proof of concept success in the future.

For the Keola La'i Logistics Service top line that is revenues was flat, in spite higher fuel surcharges. What this means obviously is that our overall volume was up off in our case 7% with most of it concentrated in our intermodal business, where the environment for growth continues to be mixed. We continue to push towards the highway segment, and continue to push hard on several potential acquisitions, no gain changers, but editions that will grow out our core services and geographic footprint.

As mentioned a few times, we think Savannah provides an excellent long-term plan, logistics, complements are growing, national logistics footprint and provides another critical note in our real estate and transportation network.

With a new contract, we now have the key for holding this growing market and have extended customer relationships to the East coast. In our real estate leasing unit, we have sustained high occupancy levels and a diversity of assets, geographies and tenancy that we expect we will serve us well in the coming year.

We did see some moderation in our US, mainly in occupancy as a result of general market conditions. But, we are not overly concerned about the health of our portfolio. In Hawaii, the markets remain stable and strong and price points continue to trend higher as Kevin will outline later on in the presentation.

From a financial view point, we did see a modest reduction in operating profit attributable to higher depreciation resulting from our heritage acquisition in late 2007, and to the moderation and occupancy in the mainland.

Notwithstanding the higher depreciation, operating profit for our commercial property portfolio continues to be stable overtime. Historically, variances have become from the timing of acquisitions and dispositions along with adjustments, straight line revenues, net revenues and other one-time adjustments. And, we've had both positive and negative one-timers in the quarter that essential offset each other

We had a very strong first quarter in real estate sales led by the closings Keola La'i, sales at our Kai Malu joint venture property, sales in Valencia and to the earlier referenced insurance settlement.

We have included updated cumulative sales accounts at major ongoing projects. You will note since the last quarter, we had continued to sell units, but there is no doubt that the pace of these sales has slowed and is expected to continue slow.

On the development front, we are making good progress at Keala'ula with our infrastructure and commercial segment build out. These are important continuing steps in this long-term project and represent our confidence in the project and our partner. And finally, we did benefit in the quarter as previously referenced, from an insurance gain attributable to a 2005 fire at Kahului Shopping Center.

In addition to the positive impact earnings, we planned to use these cash proceeds on a tax deferred basis to partially finance our Heritage acquisition.

Slide 18 provides an overview of Keola La'i closings and the significant revenues and cash flows generated in the first quarter at this project. We expect the closings will continue on pace through out the balance of the year and note that by virtue of the closings in the first quarter, we have recovered all of our invested capital in this project.

The next slide depicts the quarterly operating performance of our real estate sales. You will note 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 results from our agro business unit reflect higher power volume and prices which are attributable to higher cost of fuel. As such the power sales provide a fuel hedge for our other agribusiness operations.

And, while we did increase our first quarter production level, this is mostly due to the timing of harvesting, early field yields indicate that production should be similar in 2007. On another note, we are seeing early signs in our move toward specialty sugar will bear fruit, as we are in negotiations with a number of national food manufacturers for delivery of evaporated cane juice over the course of the year.

Let me conclude with a few comments on the year in whole. We remain confident that we will have a good year, thanks to our mix of businesses and franchise strength. Based upon the current environment, our full year earnings per share are anticipated to be in a range of 5% higher or lower than the prior year.

In February and March, we qualified our guidance based on the risks of a changing environment and it has indeed changed. Fuel cost continued to be a particular challenge in the single most difficult variable to predict that we have. In light bus companies, we are also watching other economic trends closely.

With all the challenges we have noted, we also see opportunities particularly with possible logistics acquisitions in MIL and with strategic real estate investments and dispositions. Should these materialize, we expect them to positively shake future results.

With that I will turn the presentation over to Chris Benjamin.

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

Thank you, Allen. I would like to follow those comments on our earnings prospects for the year with some comments on our financial position, which is excellent. Not only do our cash flows and healthy balance sheet position is well, but we are taking actions to ensure prudent allocation and investment of capital while implementing appropriate cost controls. These actions range from a reduction in capital spending on containers and related transportation equipment in light of moderating volumes, two, taking a hard look at overhead and G&A expenditures. Our first quarter operating cash flows were significant at $160 million. We did invest the large portion of this back into our businesses especially real estate. And, we returned $62 million to our shareholders in the quarter, but still end of the quarter with a healthy debt-to-debt plus equity ratio of 31%.

This positions us well for future plan and opportunistic investments. Our CapEx slide shows where much of this investment will take place. As always, our estimates for the year include both known projects which are generally development pipeline and maintenance capital expenditures, as well as acquisitions or other investment that are currently unidentified. Roughly one third of the estimated full year capital falls into this later category of unidentified strategic investments.

The actual spending therefore will depend on how many opportunities we identify for the year. I can tell you that we are actively looking for investment opportunities in logistic sector and of course in real estate. We would be happy to exceed these figures, if we find the right opportunities.

Moving to the cash flow side. I have already noted the very strong operating cash flows achieved in the first quarter as a result of the Keola La'i closing, and the previous slide described the capital expenditures. Also notable on this slide, is the $62 million of repurchases and dividends during the quarter. And finally, here is an updated look at our repurchases for the first quarter of 2008 as well as the repurchases executed in 2007. We will continue to evaluate repurchases, and as you can see we have existing authorizations for more than 2 million shares.

And with that I will 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, very much Chris. As you will note on slide 28, the Hawaii economy is beginning to feel the impact of a moderating US mainline economy. Strong fundamentals are still in place in Hawaii and we do have modest growth, but clearly there has been a slowdown in the past few months. As well, the Hawaii economy has experienced recent and what we believe will be temporary turbulence as the result of a shutdown of Aloha Airlines and ATA.

This has disrupted airlift capacity and jumbled the tourist equation a bit. New forecast expect a small decline in tourism for the year as a result, as well you can see that present forecast offer essentially flat real personal income growth and a slight uptick in the unemployment rate.

The next slide, slide29 offers a detailed snapshot of our outlook for real estate in Hawaii. There continues to be strength in the Hawaii commercial markets with very low vacancy levels and attractive asking rents. Office vacancy in Hawaii has drifted upward slightly over the past three months, while industrial vacancy today is at an exceptionally low level, even well pricing in this asset classes has remained constant. Based on these strong fundamentals, we do expect to strengthen the commercial markets locally. However, we also know that the full brunt of the economic slowdown may not yet be reflected in these vacancy levels.

The Hawaii residential markets have clearly plateaued in terms of pricing. While volume levels are up, we've not seen the price deterioration that has characterized most US mainline markets. Any access inventory in Hawaii tends to be observed more readily due to lower volume of new home starts. And Oahu, for example where the majority of sales occur, prices have been at, or above $620,000 for 11 consecutive quarters having reached a peak of $665,000 in early 2007. The story is essentially the same for condominium re-sales, a mixed market depending on individual properties throughout the islands. Maui and Kauai have seen a return to long-term price increase trends and the Oahu condominium market has demonstrated strong price support, since the mid-2005 period. This stability underscores the supply constraints that characterize most real estate activity here in Hawaii.

With those remarks in hand, I would like to turn the call back to Allen for closing commentary and remarks.

W. Allen Doane - Chairman of the Board, President, Chief Executive Officer

At this time I would just like to open it up for your questions.

Question and Answer

Operator

(Operator Instructions). Your first question comes from the line of Mr. Jonathan Chappell with JP Morgan. Please proceed.

Jonathan Chappell - JP Morgan

Thank you. Good morning, guys.

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

Yes, morning John.

Jonathan Chappell - JP Morgan

Good afternoon Jim. Couple shipping questions, so Allen or Jim take them as you see fit. The first one Kevin made a quick comment in his remarks about the airline shutdowns, and I'd imagine there is some cargo capacity lost by those shutdowns as well the passenger capacity loss. Is there any opportunity for Matson to benefit from any air cargo capacity shrinkage, or have you just not seen that yet?

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

Jim?

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

Certainly, we're still with the Aloha Airlines. I think fairly well published cargo operation cessation as of the yesterday or the day before. Matson's charter does not allow it to carry cargo interisland in Hawaii, so really there is nothing for us to gain as a result of that particular dislocation. As far as passenger seats disappearing, there is very little cargo capacity on those planes. That ATA and Aloha were operating, so we don't see much of an affect there either.

Jonathan Chappell - JP Morgan

Okay, fair. Second question, this is kind of probably pretty timely given where we are right now in the calendar. Any update on the labor negotiations on the West Coast? I guess you are making a little bit of noise about the work stoppage tomorrow, which isn't going to happen, but how does that going to be reflected in the negotiation processes, and do you see it finishing on time?

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

Jim, that's a good one for you as well.

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

Yes, in fact, I just got off a call earlier today on this very subject and the negotiations continue. We have a news blackout of course on distinct issues that are the subject of those discussions. There is still optimism that we will conclude prior to the expiration date on January 30th. And you are also correct Jonathan than that there is indication that there may be, either a slowdown or a work stoppage tomorrow by the ILWU regarding issues that are really unrelated to the contract discussion, discussions themselves.

Jonathan Chappell - JP Morgan

They are pretty much unrelated to their jobs, period, but that's another story. Last one, I guess, well, I'm going to throw two more in there really quickly. You mentioned cost containment. I think everybody pretty much mentioned that in their comments. But then Allen, you also said, on the volume side lost some of the lower margin construction business. Is some of the cost containment efforts focused on losing kind of lower margin business to kind of save on fuel, and are there any fears that that could potentially hurt market share longer term even when the economy does bounce back?

W. Allen Doane - Chairman of the Board, President, Chief Executive Officer

Jim, you are very popular right now.

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

No that's a, yeah, I greet question as usual. It's accurate to say that our first quarter did see some share loss to competitors in the building materials sector, which itself is down overall. Whether or not that would be permanent, I guess is an issue for the future that I can't comment on, but I would just say not necessarily. We fully intend to maintain our service delivery, and our capability. And, most of the cost containment activities as I described before are in trying to match our liner capacity with each of our respected trades, and we have had to ship out sidelined for the entire first quarter or most of the first quarter, and we expect that to continue. We've also taken very discreet and targeted G&A actions throughout Matson & Association transportation operations to affect the same kinds of cost reductions. So it's a broad based program. It's active, underway and we expect results in the future.

Jonathan Chappell - JP Morgan

Okay. Last one and then I'm sure some one wants to ask some real estate questions. After Mat mentioned yesterday or today about their new building order book and for the first time that I can remember a little while, that Mat mentioned about getting some containership, join that containership orders, and what's you timeframe for ordering containerships, and if you can just refresh my memory too, after you bought the last couple from Arthur [ph], I believed you had some right of first refusal on containerships, when do those expire, do they last in next decade?

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

If you like, I will continue Allen.

W. Allen Doane - Chairman of the Board, President, Chief Executive Officer

Yeah, Jim, please.

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

I believe they expire in 2009 or 2010. So, they do not stretch into a period of time when Matson is likely to be placed in Jones Act orders. And I believe, we have previously disclosed that we are taking -- we are in the very early stages right now of addressing our fleet needs for the next 5 to 10 years out. And, we do have two or three vessels, which are certainly approaching potentially the end of their economic lives during that period.

So, we are in the 2012 and 2015 timeframe in terms of actually requiring replacements Jones Act capacity.

Jonathan Chappell - JP Morgan

Okay, Thanks a lot Jim.

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

You're welcome.

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

Thank you, James.

Operator

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

Sloan Bohlen - Goldman Sachs

Hey, good morning guys. It's actually Sloan. Just a quick question for Chris, as you look forward to capital budgeting for the rest of the year, can you guys talk a little bit about how you look at performing your investment in logistics versus say, hard assets in the real estate sector?

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

Can you clarify the question, J in terms of how do we make those investment decisions or from our budgeting side?

Sloan Bohlen - Goldman Sachs

From a return perspective, as you look at the cost of fuel versus what's going on in the economy, how do you weigh investing in logistics business versus an industrial asset?

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

Well, I'm not exactly sure how to answer the question other than as with all of our investments, we look pretty carefully at the expected cash flows from the investments. And obviously, we are going to be risk adjusting our cash flow projections based on potential volatility that we expect and then I think that probably our bigger focus is on making sure from a portfolio standpoint that we've got a good mix of investments in different industries from the standpoint of having a diverse risk profile and a diverse earnings stream, but always complimenting our existing capabilities. So, I don't think that -- I think certainly our view point on volumes in these trades, trade patterns considerations with respect to West coast trade versus East coast and other all factor into that. But, I think that investment decisions are fairly well.

W. Allen Doane - Chairman of the Board, President, Chief Executive Officer

Yeah, this is Allen. They are fairly separate. With the logistics side, you have the added variable of truly having some system wide benefits that you can realize when you incorporate certain sorts of acquisitions into a company like MIL.

So, it really doesn't, maybe get to the philosophy of sort of how you benchmark them. But, the most of the real estate investments are more finite, while the potential benefits that you get you can receive on logistics acquisitions can sometimes permeate through a larger part of a operating cost structure -- cost in a business. So, there are different kinds of investments, but we feel both of them are quite good.

Sloan Bohlen - Goldman Sachs

Okay. And then switching gears, question for Stan if he come online. With the closings at Keola La'I, can you remind us of how many of those were kind of tied up early on in the quarter and where the market maybe now, now the things are slowdown a little bit?

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

Okay. J we did close 300 of units.

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

Sloan, we both are calling him J. Sorry about that.

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

Sounds alike. We did close 300 units. Most of those were in contract for some period of time. As you know we did go into presales at the start of construction and we were very successful in pre-selling most of the units. So those closings are a reflection of the presales that were conducted year, really, over almost two year period. We have of course a few more units remaining in Escrow and right now approximately 20 unsold units. So, and that's out of 352 units. So, we are in a really good shape. But, the market has slowed. Clearly the market has softened and we are going to do our best to sell out the remaining 20 units this year. But there is no question that in condom markets as well as almost all of the other residential markets in Hawaii, conditions have softened.

Sloan Bohlen - Goldman Sachs

And, can you quantify if that just softened in terms of velocity or have you seen some impact in softening prices.

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

I think you see them in both fronts. I mean, Kevin had referred to the median prices on Oahu that have held up very well. In fact, if you look down a quarter, year-over-year on a quarterly basis, median prices really in all the markets have either remained consistent with 2007 or have gone up. But, underlying that is a continuing decrease in the number of sales transactions. And, you know at some point that's going to start having the impact on prices. But, you know what essentially props up prices here is the continuing scarcity of supply. Demand has dropped, but supply remains low, prices continued to be stable. But overall, I would say you do see definitely a deceleration in number of transactions and you will see a softening in prices.

J Habermann - Goldman Sachs

Yeah Stan, it's actually jay. Sorry we confused you before. Now that reverse the order of question here, but on Kukui'ula, the 75 lots closed to date. Can you just remind us of obviously how much is technically available for sale at this point, so sort of what you effectively sold as a percentage of what is available for sale?

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

Yeah. We had released 123 lots. So, we've sold 75 of those lots. And, we've closed 8 this year and clearly Kukui'ula is a reflection of the softening real estate market. The good news is we continue to make progress on construction site, and I think as we said before as we get closer to starting a vertical construction, completing the resort amenities, the golf course etcetera that we will receive a favorable market response to that. We did start Vertical construction of our commercial center, and we had an open house there and the reaction was very positive as people could begin to finally see and touch the product that will be built, got to see the location and view etcetera. We got a very positive response and as we complete the rest of the resort amenities, I would expect to receive similar type of response down the road.

J Habermann - Goldman Sachs

And just one last question for me. With regard to the subpoena, is your sense to focus is really more Puerto Rico rather than Hawaii or are they -- is the DOJ really going to look at those?

W. Allen Doane - Chairman of the Board, President, Chief Executive Officer

This is Allen. We believe that the documents that the Subpoena for document supplies to all the domestic trades, which would in addition to Puerto Rico include the Alaska, Guam and Hawaii.

J Habermann - Goldman Sachs

Okay. Thanks guys.

Operator

Your next question comes from the line of Kevin Sterling with Stephens Inc. Please proceed.

Kevin Sterling - Stephens Inc

Good Morning.

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

Good morning Kevin.

W. Allen Doane - Chairman of the Board, President, Chief Executive Officer

Good morning.

Kevin Sterling - Stephens Inc

The Hawaii automobiles were up this quarter, how should we think about these going forward? Should we expect to see them level off or even decline?

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

Jim?

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

This was a matter of timing principally for rental car returns from Hawaii back to the mainland. So, we would expect those absolute numbers to decline in the second and third quarters. And, as far as the new car registrations, I don't Know if that was mentioned in the economic forecast, but those are trending down as well, which would put a little more downward pressure on that segment of the business

Kevin Sterling - Stephens Inc

Alright thanks Jim. You guys also talked about intermodal being weak in the first quarter. How should we think about this going forward? Will we continue to see a shift to Hawaii expatiated?

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

Yes definitely

W. Allen Doane - Chairman of the Board, President, Chief Executive Officer

That is correct. That's our intent as well as where the actual performance has been. So, you are going to see a gradual shift. It might be accelerated, if we're able to make good acquisitions.

Kevin Sterling - Stephens Inc

Right, thanks Allen. And, Allen you guys, you've had some initial success with your Savannah property, where you're integrating both your real- estate and transportation expertise and this become a big strategic initiative for you. How does the pipeline look for additional properties and are you focused on geographic locations, east of the Mississippi?

W. Allen Doane - Chairman of the Board, President, Chief Executive Officer

It's a good question. We're just getting started right now. So, the pipeline is just beginning to be built. The Savannah was just a sort of stage one. We expect that this is going to be a multi -year process and it's going to be kind of sequential in nature. But, we think that over the next several years that we'll able to find more opportunities. We really like savannah, we like the real estate and we like the logistics opportunity. So, this was a good way to start. We also need to kind earn our spurs on the performance side now. So, it's going to be very important for us to take the Matson reputation, which is quite strong across the traditional transportation industry and extend it into third party logistics. So, it's not going to provide any huge uptick in the immediate future, but it's really part of the longer term strategic plan just as MIO was when we got that going in a big way six, seven year ago.

Kevin Sterling - Stephens Inc

Okay, are you focused to East of the Mississippi or to would you look at any other?

W. Allen Doane - Chairman of the Board, President, Chief Executive Officer

I won't its East to the Mississippi. It will be in a number of attractive logistics trade related locations.

Kevin Sterling - Stephens Inc

Okay. And, one last question. Your '08 guidance of plus or minus 5% from the 2007 level, how are you thinking about shipping volumes, does this assume a decline in volumes from '07 levels?

W. Allen Doane - Chairman of the Board, President, Chief Executive Officer

It definitely assumes what we think is going to be a pretty moderate environment with a little bit of shortfall on the volume side. So, it's not a – at the low-end it's obviously not a very upbeat forecast, and as you get to the higher-end it becomes little more optimistic. But, it's really going to depend on the economic conditions in Hawaii. We've had a few events in the last month that have created more uncertainty than we had just a couple of months ago. So, fairly high profile actions. It have happened with the airline industry and we'll just wait to see how this affects tourism and then how that affects rate flows.

Kevin Sterling - Stephens Inc

Okay. Well, thanks a lot for your time today.

W. Allen Doane - Chairman of the Board, President, Chief Executive Officer

Thank you.

Operator

(Operator Instructions). And your next question comes from the line of Chris Haley with Wachovia. Please proceed.

Brendan Maiorana - Wachovia

Hey, good morning guys, actually Brendan Maiorana here with Chris.

W. Allen Doane - Chairman of the Board, President, Chief Executive Officer

Morning Brendan.

Brendan Maiorana - Wachovia

Hi, guys. First question is a follow-up on the last one, in terms of your guidance, and may be the initial guidance that I think you guys provided kind of late last year and I think we're down about may be 5% of the mid point to mid point. How would, looking at the buckets, the transportation, the real estate, the leasing commercial portfolio, the residential and then the agribusiness, how would you say if that has the expectations have changed since the initial guidance was put out.

W. Allen Doane - Chairman of the Board, President, Chief Executive Officer

Yeah, we are not going to provide specific guidance by the different business units, but we really have not made any material change in our views about 2008 in real estate. In transportation, there has been some softening, as you've noted in our volume levels and actually the pricing situation has become a little more, the pricing of, the cost of fuel has become a little bit more difficult. I do think and I want to give chairman opportunity, I think we probably feel a little better now than we did a weak ago in China, because we're making some very good progress there in terms of the May 1st contract renewal and Jim why you don't just -- if you could comment on that, then I will make a final response to the question.

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

Yeah, thank you Allen. Yeah that the contracting season for transpacific is just about done, most of the new deals go in to effect on March 1st. And, I would say we've had a very successful season and we're going to see very strong year-over-year increases, we can't disclose for confidentiality reasons in the contracts themselves the details of them, but I'm pleased to report that all the contracts now have fuel recovery provisions built in versus a year ago, when only one that of about 200 had such a provision. So, that's a real progress and should insulate us somewhat from the ups and downs of fuel for the balance of this calendar year and first quarter of next year in the China trade.

And also our volumes are expected to remain strong even though the economy is flattening in the US and imports are down somewhat, at least for the first quarter, because we have one ship a week out of China and we've managed two. I think our improving reputation for reliability and our ability to serve customers kept that ship relatively full, and we expect that to continue for the rest of the year.

W. Allen Doane - Chairman of the Board, President, Chief Executive Officer

Yeah, just to kind of summarize that, if we go back to the, these are the broad characterizations that were in the slide 10 for Matson in the markets. The Hawaii service has definitely weakened volume wise, and that's a little more uncertain for the rest of the year than we thought a couple months ago. Guam service is pretty steady and thankfully the China service is doing quiet well. And, we appear to be getting some very good information on the new contract season. So, I think that's probably the best to recap of Matson we can provide.

Brendan Maiorana - Wachovia

Jim and Allen, so it sounds as though it's more volume assumptions then it is rate assumptions?

W. Allen Doane - Chairman of the Board, President, Chief Executive Officer

Well, in Hawaii its volume assumptions. I'd say in China it is clearly rate assumptions.

Christopher Haley - Wachovia

Do anything more you would like to add to the department of justice? We've published some different perspectives on our rate movement between different trade lines and how you try to price your or at least apply your surcharge, is there anything else you'd like us to consider giving you guys the floor now that you have your conference call, what you might us to consider?

W. Allen Doane - Chairman of the Board, President, Chief Executive Officer

Not really at this time. Chris I just think that, we receive the subpoena and the request for documents, requirement for documents does deal with all of the domestic trades as we have read it. And, we're co-operating and that's I think all we are able to say at this time.

Christopher Haley - Wachovia

And please one more question.

Brendan Maiorana - Wachovia

Yeah, for stand just a last one. On the residential projects and the stuff that you've got in Q kind for '08, you know it's progressing well and you guys and good closings on Keola Lai and Kai Malu. First one on the future projects, I guess the page wasn't put in the presentation just to go around, should we be assuming that some of the projects that are kind of '09 and 2010 would be push down a little bit? How are you guys thinking about the philosophy on this?

W. Allen Doane - Chairman of the Board, President, Chief Executive Officer

Yeah. I mean few comments on the pipeline. I mean, looking forward to '09, there are probably six to eight development projects that will be contributing income for us. Some of these obviously are carry over from what we have now. Few will be new projects, but clearly nothing is going to raise the level of earnings that we got from our Keola La'i project. And, I will continue to have our program of selling appreciated properties from our income portfolio, and we're investing in properties having higher appreciation. We will have opportunistic land sales. But yeah, I mean unless the market and economy recover, I mean 2009 will be a challenging year. Like all the real estate companies we are cyclical and we've been, have a great track record of growth and we expect to continue a long-term growth, but it won't be linear. But it's really too early, really too early to say what predict what are estimates of providing guidance at this time of '09.

Christopher Haley - Wachovia

Without asking specifically on '09 and 2010, could you give us a sense as to what are the projects that you are planning to initiate or will initiate sales or initiate cash for recognition as you see it today over the next two years?

W. Allen Doane - Chairman of the Board, President, Chief Executive Officer

Before Stan answers that question, I generally don't answer questions that haven't been asked but I should tell you this is one time, we bought a lot of things when we should have, and I feel pretty good now that we haven't bought a lot of things in real estate in the last couple of years. So, I think that the discipline of the company has been pretty strong, and because of that I feel pretty good about where we are in this cycle in terms of investments. But, I'll just ask Stan to kind of give any final response to that question.

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

Yeah, Chris. Actually if you go through our supplemental disclosure that we issued in February, gives a pretty good overview of the projects. The ones that we would expect to come on line in 2009, 2010 would be projects in Kahului projects and Wailea projects.

Christopher Haley - Wachovia

Thank you.

Operator

Your next question comes from the line of Tom Sparrow with Sparrow Capital. Please proceed.

Tom Sparrow – Sparrow Capital

Hello, it's been asked and answered. Thanks.

W. Allen Doane - Chairman of the Board, President, Chief Executive Officer

Hey, thank you Tom

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

Hi, Tom. Thank you.

Operator

(Operator Instructions)

W. Allen Doane - Chairman of the Board, President, Chief Executive Officer

Okay, sounds like we have no questions and if there are no other questions, thank you very much for your participation today.

Operator

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

.

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Source: Alexander & Baldwin, Inc. Q1 2008 Earnings Call Transcript
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