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Alexander & Baldwin, Inc. (NYSE:ALEX)

Q2 2008 Earnings Call

July 25, 2008 2:00 pm ET

Executives

Kevin Halloran – VP Corporate Development & IR

Allen Doane – President & CEO

Christopher Benjamin – Sr. VP & CFO

James Andrasick - President & CEO Matson Navigation Company, Inc.

Stanley Kuriyama - President & CEO Land Group; CEO A&B Properties, Inc.

Analysts

Kevin Sterling - Stephens Inc.

Jonathan Chappell - JP Morgan

Christopher Haley – Wachovia

Sloan Bohlen - Goldman Sachs

Operator

Good day ladies and gentlemen and welcome to the second quarter 2008 Alexander & Baldwin earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today's call Mr. Kevin Halloran, Vice President of Corporate Development and Investor Relations; please proceed.

Kevin Halloran

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 July 25, 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 would 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 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; Christopher Benjamin, Senior Vice President, Chief Financial Officer and Treasurer of Alexander & Baldwin; and Stanley Kuriyama, Chief Executive Officer of A&B Properties. James Andrasick, Chief Executive Officer of Matson Navigation is also on board via telephone from Matson offices in Oakland, California.

Slide three 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 another good one for us.

Allen Doane

Thank you Kevin. I am pleased to report that we had another good quarter and we continue to perform well despite difficult economic conditions. For the quarter net income was nearly $30 million, right about even with the second quarter of 2007. Sound performance in our ocean transportation segment and modestly improved financial results from our stable commercial leasing portfolio provided the foundation for the results amid continuing softness in property sales.

However our performance was constrained by a number of external factors particularly the dramatic rise in fuel prices, softening transportation volume, slowing real estate sales and intensified unfavorable weather trends.

Other operational and financial highlights of the quarter include an increase in our annual dividend, the recent affirmation by S&P of our A minus credit rating and a definitive agreement to acquire a regional warehouse and distribution company. All in all good performance for the company.

In second quarter of 2008 our earnings per diluted share was $0.71 and year to date we are 30% higher in earnings per share compared to the first half of 2007. Our operating profit was off 5% for the second quarter, a good result in our estimation. You will note that we booked respectable earnings in all of our core businesses with some showing considerable year-over-year gains like our real estate sales and others showing some modest declines like our transportation segments.

The loss in agribusiness which should not be considered a go forward run rate was a disappointing result to an otherwise good quarter. Now for a few comments on the key operating highlights for each of our units.

At a high level there’s no doubt that the economic downturn we are facing is impacting our operations but I also note that our major units are on solid ground with strong franchises in multiple industries and this multi market approach continues to serve us well.

At Matson Navigation we improved yields and cargo mix and continued to execute cost containment efforts in response to softening volume in our trade lanes. In China where we had a modest volume loss in the quarter we captured rate increases in our annual contracting cycle and were also able to place a fuel recovery mechanism in the contract that will partially offset our fuel exposure going forward.

All of these efforts led to a strong financial result. At Matson Integrated Logistics we continue to experience volume decline from a moderating economic environment particularly in our intermodal business which was also negatively impacted by recent flooding in the Mid West. At Matson Global we began taking our first inbound loads at the Savannah facility and we have a pending acquisition of a regional asset-light warehousing and distribution company so its full steam ahead for us in our third party logistics initiative.

On the real estate front sales are being directly impacted by the overall softening of the markets. Without a doubt the slowing economy tightened access to credit and general buyer wariness has impacted the volume of sales. In this softened sales environment though we will continue to make investments in key projects such as Wailea and Kukui’ula.

In the quarter a major milestone was reached in our Maui Business Park Phase II where we received our entitlement for the 178-acre commercial project. We will continue to invest in these key projects to position us for sales in future years as buyer demand returns.

Our income portfolio continues to perform well with high sustained occupancy levels. We did note some softening in our US mainland office portfolio, most of it in Phoenix, but we remain confident that our broadly diversified asset and tenant base will provide performance strength throughout the year.

Hawaii commercial markets remain strong and asking rents are holding steady. Before moving on I have a few updates to report.

We continue to cooperate fully with the Department of Justice in its ongoing investigation into the competitive practices of carriers operating in the domestic trades. While we understand that the investigation is currently focused on the Puerto Rico trade it also includes Hawaii and Guam trades. To be clear Matson only operates vessels in Hawaii and Guam.

As is common in matters like this a number of civil lawsuits have been filed following the announcement of the government investigation in which the company and Matson have been named as defendants. As of today we are aware of 14 such suits that have been filed. Over the next few weeks these civil suits may be consolidated into a single action.

We will defend ourselves vigorously in all these matters. At this time however we are unable to determine the outcome or the financial impact, if any, of the Department of Justice investigation or the civil law suits.

On June 30 we reached agreement with three unions that represented unlicensed seamen to man our ships and while we won’t discuss the specific details of the agreement, we believe that we reached these agreements on mutually beneficial terms. As most of you know and has been widely reported we continue in negotiations with the ILWU on West Coast terminal operations.

We are optimistic that we can conclude our negotiations soon. Once the West Coast contract is complete and over the next few months, we expect to conclude negotiations with the Hawaii ILWU workers and be in good shape for the coming years.

In these summary comments I will describe the second quarter operating performance of each unit. Let’s start with Matson which posted a good solid quarter despite showing volume declines in our trade lanes and a historic rise in the cost of fuel.

In our Hawaii service total container volume was off by 8% year-over-year mostly as a result of the general slowdown in economic activity but also to the loss to competitors of lower margin construction materials and in the loss of a canned pineapple business stemming from the shutdown of a major producer in 2007.

In China a modest volume decline was attributable to some aggressive pricing initiatives that we rolled out in parallel with our annual contracting cycle but we are focused here on the bottom line for this important trade lane so we do expect continuing yield and cargo mix adjustments in the year that may lead to some volume variability.

Our Guam service has been a steady performer and we eventually expect the benefit from planned military movements to the Island. And finally we did see a drop in earnings from SSAT our West Coast [inaudible] joint venture that mirrors year-over-year decrease and [lift] volume throughout the network.

Slide 12 depicts the operating profit and operating margin at Matson for the second quarter of 2008 as compared to 2007. You will note that our operating margin percent was 13.9, a high level but lower then the prior year by one-and-a-half percentage points. As we remarked in our last quarterly update as energy becomes an increasingly larger component of our revenue and our cost space reflecting the dramatic rise of the past year, our operating margin percentage will naturally decrease.

This is simple arithmetic. Because we do not seek any profit margin on fuel surcharges the larger this component is of the overall revenue equation the lower our operating margin percentage will be. We do have fuel surcharges in place for our Hawaii and Guam carriage which capture most of our fuel related expense in these markets and in the recent contracting season in China added mechanisms that will partially recover the fuel costs attributable to that trade lane. Net of the impact of the fuel surcharge our margins improved modestly year-over-year.

Moving on to logistic services we posted a decent quarter amid a challenging volume climate that was exacerbated by flooding in the Mid West and some minor highway labor disruptions in Northern California. Intermodal volume continues to be lower which impacted results due to general economic conditions which includes reduced transpacific cargo. As part of our continuing strategic effort to increase our higher margin highway business our in-house sales volume grew significantly, while we did see some overall highway volume declines due to the loss of some of our agent driven business.

At Matson Global we had a very good quarter gaining considerable traction by receiving our first inbounds to Savannah. As mentioned earlier we entered into a definitive agreement to acquire the leading regional asset-light warehouse company with value of base packaging and distribution capabilities specializing in what we call high-touch handling of domestic import and export goods.

The company has a versatile management team, a great roster of clients, and their experience provides an excellent platform for growth in this fast growing market segment. Over the next few years we expect to rapidly scale this operation to renew customer opportunities and entry into new markets.

Logistics revenue increased by 3% as a result of higher fuel surcharges in the quarter while operating margin was off more considerably as shown on slide 15. The decline in operating profit and margins was due mostly to a 7% decline in volume. But overall our gross margins per unit held up relatively firm.

Moving to slide 16 our real estate leasing unit had a solid quarter and our portfolio continues to have very high industrial, retail and office occupancy levels and a broad base of property type and geographies that we expect will serve us well in the coming year.

In the past quarter though we did see some moderation in occupancy levels in our office properties as noted primarily in Phoenix but overall the condition of our portfolio is sound. We tenanted Building A in Savannah, over 11 hundred thousand square feet that will positively shape results moving forward.

In Hawaii commercial markets remain strong and rents continue to be stable as Kevin will outline later. From a financial viewpoint we posted a modest improvement in operating profit attributable to the overall portfolio strength and to tenanting the larger of two buildings at Savannah in the quarter.

Given the current economic climate we feel good about the sustained occupancy levels in our portfolio and just as good about the limited exposure we have to any single tenant, industry or region. I may also note that historically year-over-year variances have come from the timing of acquisitions and dispositions along with adjustments to straight line rent revenues and other one-time items.

We had another favorable quarter in real estate sales but we do note the pace of our sales activity is certainly slowing as a result of market conditions and due to the lifecycle of some of our projects. For example, at Keola La’i, Kai Malu and Keala’ula, our projects are nearing their lifecycle end so sales are naturally slowing as we close out these projects.

For the quarter we had 18 sales at Keola La’i, three sales at Kai Malu, eight sales at Keala’ula, at Kukui’ila we had three sales in the quarter. In addition to ongoing residential development sales as outlined on slide 18 we sold a multi tenant residential rental property and several small non-core land parcels on Maui resulting in over $9 million in operating profit.

Looking out however we do see dimmed prospects for near-term sales in line with the general sales climate and the completion of the aforementioned residential development. On the development front we continue to make steady progress on our projects in Wailea and Kukui’ula with investments in those master plan communities’ infrastructures, specifically project subdivision improvements in Kukui’ula at our commercial property.

I mentioned earlier an important milestone reached in the quarter with the entitlement of the 179-acre second phase of Maui Business Park located in Kahului, Maui. It’s not entirely reflected in this slide but the entitlement was a decade-and-a-half in the making and will provide much needed lift to commercial space capacity for the businesses on Maui.

We provided our current timeline which calls for lot sales to commence in 2011, the construction to conclude in 2016 or so. It’s a great project for us and for the community of Maui.

Next slide depicts the quarterly operating profit for our real estate sales. As you will note there’s a great variance from quarter to quarter in these results simply due to the timing of sales. As we’ve stated many times we don’t manage our property sales for quarterly results but instead measure ourselves against annual targets.

Slide 21 depicts key elements of our agribusiness operations for the quarter. A combination of operating and timing issues resulted in a nearly $5 million loss and while we did see higher power volume and prices which reflects the rise in fuel prices our incurred costs in agriculture have also increased. We also decreased our sugar production forecast for the year stemming from lower yields in our fields due to an extended dry weather. It’s of historic portions how dry it’s been. Our agronomic practices which are improving and which we are addressing.

What this means is that we will have higher cost per ton of sugar for the year and this is reflected in a loss that erased the gains we had booked in this segment in the first quarter. As we cautioned then and as we are today the variability in these early year reported earnings stems from the timing of harvest, forecasted yields and costs. For the full year we anticipate a modest loss in this segment. On a final positive note we are making good progress in sales of our specialty sugar business.

I would like to close my portion of the call with a few comments. Our franchise transportation and real estate businesses are feeling the effects of a noticeable decline in economic activity and we are doing our best to manage through it, particularly sensitive to current conditions our real estate development and commercial sales activity.

We have performed very well in the first half of 2008 but realize conditions are weakened. But we have not changed our 2008 earnings per share guidance which remains in the range of 5% higher or lower then the prior year. We are expecting to be in the lower end of the range given our current economic conditions.

We do anticipate the likelihood of increased strategic and opportunistic investment activity in the next six to 12 months both in real estate and in logistics. With that I will turn the call over to Christopher.

Christopher Benjamin

Thank you Allen, I would like to follow Allen’s comments on our earnings prospects for the year with some comments on our financial position, which is excellent.

I’ll start with the recent affirmation of our A minus credit rating by Standard & Poor's. In its recent update last week S&P said that the rating reflects the company’s strong competitive position in ocean shipping, favorable real estate asset quality and solid financial profile. S&P also cited the company’s moderate financial policies in maintaining a stable outlook for the rating.

Our year-to-date operating cash flows have been significant at $181 million and we’ve invested a large portion of this back into our businesses and returned nearly $75 million to shareholders year-to-date. We are implementing appropriate cost controls ranging from a reduction in capital spending on containers and related equipment in light of moderating volumes to taking a hard look at overhead and G&A expenditures.

We also are being patient with respect to real estate investments looking for the right time to add to our development pipeline and commercial portfolio. And with the debt to capital ratio of 30% we are well positioned for future investments both planned and opportunistic.

Our CapEx slide shows where much of this investment will take place. As always our estimates for the year include both known projects, generally our development pipeline and maintenance capital as well as acquisitions or other investments that are currently unidentified. We have about $50 million earmarked right now for logistics acquisitions which include the pending acquisition Allen talked about and a similar amount for project X developments. But our actual spending will depend on how many opportunities we identify for the year.

As you can see from the slide we have invested $134 million year-to-date or 43% of our target for the year which is right on par for mid-year spending. I’ve already noted the very strong operating cash flows achieved in the first half of the year. Recall that we had a banner first quarter with sales at Keola La’i and have coupled those sales with ongoing cash generation from our operating businesses.

CapEx appears higher then last year but much of that was invested in Keola La’i and has been very quick turned capital. And as I mentioned a moment ago, we have been able to return $75 million to shareholders year-to-date through dividends and share repurchases while reducing our debt by nearly $20 million.

With that I’d like to turn the call over the Kevin who will take us through an economic and market outlook.

Kevin Halloran

Thank you Christopher, we’ve added a few metrics for this quarter to better describe some of the underlying shifts underway in the Hawaii economy. We’ve also included a few more that appear in the addendum to our presentation.

As you will note on slide 27 a sharp drop in visitor arrivals is expected in 2008 as a function of the recent shutdown of Aloha Airlines and ATA before retuning to slow growth in 2009. The unemployment rate is expected to march higher, some of this in direct lock step with the airline shutdowns to a level of over 4% in 2009.

You will also see that the high level of inflation in Hawaii for 2008 which again is driven in large part by fuel costs, is expected to drop considerably in 2009 and that there is significant growth in real personal income expected in 2009 from a flat level forecast for this year.

The Hawaii commercial markets have remained strong throughout 2008 as is shown on slide 28. There has been a small uptick in vacancy levels most notably in the office sector which is attributable to a large degree to the shutdowns of the support operations of the airlines I mentioned.

Despite the modest uptick average asking rents are remaining relatively stable. Therefore we expect that our Hawaii commercial properties and the Hawaii commercial markets will perform well for the balance of the year.

Slide 29 compares single family home and condominium prices and resale volume since 2001 for the island of Oahu where the company’s Keola La’i property is located. You will note the stability in pricing since mid 2005, a full three years despite the volatility and downward trend in volume that has occurred over this same period.

The same story is shown for single family and condominium resales on the island of Maui where the company has multiple projects underway. Here some modest price erosion has occurred in single family homes and condominium sales. This trend in condominium pricing is probably more reflective of the type of condominium projects that have come to market over the past three years then to demand.

A number of higher end projects in Wailea on the east end of the island have also influenced the median pricing levels. And with that I will turn the call over to Allen for any closing remarks before we take your questions.

Allen Doane

I think at this we are just going to open it up to your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Kevin Sterling - Stephens Inc.

Kevin Sterling - Stephens Inc.

Regarding the DOJ investigation do you anticipate any legal expenses going forward and if so maybe can you give some color as to how you’re thinking about some of the potential legal expenses relating to that investigation?

Allen Doane

We do expect some legal expenses and we’re just not in a position at this point to estimate what they might be.

Kevin Sterling - Stephens Inc.

With your China service, it looks like you said you were partially recapturing some of your fuel costs, do you think you’ll be able to improve on this going forward, where does it stand in anticipation of recapturing maybe some more?

James Andrasick

As you may recall we have most of our businesses under annual contracts which open each year on May 1st, and in those 200-odd contracts every one of them has a fuel escalation charge or mechanism within it. This mechanism is fixed. Some of them operate monthly, some quarterly, and it’s a, to a certain degree a play against the base rate. Overall the market is sensitive to supply and demand conditions for every trade lane in the transpacific.

So we expect more or less to continue at the same margin level of performance that we experienced for part of the second quarter. Obviously everything depends on fuel prices whether they continue to rise of fall as they recently have, but we believe that the mechanisms we have in place will serve us well in this trade.

Kevin Sterling - Stephens Inc.

Some of the cost containments that Allen talked about in the presentation that you implemented at Matson in response to the softening markets could you give us some specifics and talk about some of these cost containments some more?

James Andrasick

We literally have 25 different initiatives running right now at Matson’s and I can assure you that we’re looking under every rock for more in this kind of environment. But the principal way we can control cost is by matching our capacity to the demand that’s out there. So we have made some significant modifications to our deployments, principally in the Hawaii service and by so thrifting, again without impacting our customers, most of the cost savings that we can generate will come from that particular kind of activity.

But it doesn’t stop there. There are numerous G&A actions, there are terminal activities, equipment control is a big area for us because we own and obviously run a lot of containers and chassis so I think it’s—I would just leave you with the thought it’s a very comprehensive program.

Kevin Sterling - Stephens Inc.

How much do you have left on your buyback program?

Christopher Benjamin

We have 2.2 million shares remaining on the authorization, that’s 200,000 shares from an authorization that expires the end of this year and then 2 million from an authorization that will expire at the end of 2009.

Operator

Your next question comes from the line of Jonathan Chappell - JP Morgan

Jonathan Chappell - JP Morgan

We’ve heard a lot from the international shipping community about slow steaming regardless of what sector they’re in, with your service initiative on the China trade does that enable you to slow steam at all to offset some of the fuel cost that your surcharge can’t recoup?

James Andrasick

Going westbound it does offer some opportunities where we have a bit of slack in our schedule, Hawaii, Guam, and Ningbo. But coming eastbound which of course is the primary leg for our service; we’re selling a premium service that is expedited so really there is limited opportunity to save fuel. And of course we get a premium for the speed of that and reliability of that service. So no, I wouldn’t say that slow steaming in the transpacific is a significant cost reduction benefit to Matson at this point.

Although we do it obviously whenever we can.

Jonathan Chappell - JP Morgan

Do you feel that you were rewarded for that premium service in the May contract renewals, both with just average rates and with the surcharges?

James Andrasick

Yes, we do feel that way.

Allen Doane

Yes, we definitely feel like we’re being rewarded for the premium service.

Jonathan Chappell - JP Morgan

You mentioned that you don’t manage your real estate sales for the quarter but you do manage them towards annual targets, without asking you to give the back half of 2008 targets for that real estate sales, would it be fair to say given the kind of lower expectations that you spoke about that maybe the second quarter is a good run rate for revenue and sales, all else being equal in the real estate sales division?

Allen Doane

It’s not fair to say that. Our sales are like a calliope. They can be really big in one quarter and really small in another and it is true that on an annual basis we do set objectives and actually even more importantly on strategic plan basis we set objectives for value creation that go over a multi year period. But probably the toughest thing to do is to try to figure out in any one quarter because something could close on October 1st instead of September 30th and it’s not in the quarter and it could be a material transaction. I think that basically trying to get a sense of our annual guidance is better then looking at one quarter versus the next.

Stanley Kuriyama

If you look at our first quarter results in property sales they were very high, we would consider the second quarter results to be low and I wouldn’t extrapolate anything from the second quarter.

Jonathan Chappell - JP Morgan

Can you remind us what those annual targets were for 2008?

Allen Doane

Actually we provided a little different approach this year; we provided EPS guidance within a range where in past years we provided individual segment targets. So even though we’ve talked about our segments and sort of estimated growth rates being either modest or larger, we haven’t been as specific about the targets. We did provide some numerical background but no specific numerical targets.

Jonathan Chappell - JP Morgan

On the leasing portfolio according to the supplemental there’s about 31% up for renewal in 2009 given the current conditions how do you feel about your renewal capabilities for next year?

Allen Doane

We feel pretty good about that. Actually if you [balance] as of the end of the year, if you add back in Savannah, that rollover represents about 25% of our square footage and a much smaller percentage of revenue. Half of that rollover is represented by four large industrial tenants. We have no indication that those tenants won’t be renewing. The balance consists of just normal ordinary course of retenanting and while clearly the economy is softening we don’t expect to encounter any unusual problems.

Operator

Your next question comes from the line of Christopher Haley - Wachovia

Christopher Haley – Wachovia

On the property side, if I think about the Savannah transaction in terms of the timing of the transaction and then the sale of this multi family property in the quarter what type of leasing operating income should we look for, for the second half of 2008?

Allen Doane

I won’t give you any specific numbers there but looking out for the balance of 2008 we do expect continued stable, strong performance in our portfolio. We don’t have any major vacancies or defaults that we anticipate in our portfolio. Occupancy rates are high. We expect to maintain that for the most part. I mentioned earlier office market in Phoenix is pretty soft, but that represents on a square footage basis just 5% of our portfolio.

When we say lower vacancies, we’re still talking about vacancies in the 80% range and we expect to do better. So I would say for the balance of the year we expect continued good performance in our lease portfolio.

Christopher Haley – Wachovia

Was there any variance sequentially from first quarter to second quarter on the leasing operating income line?

Allen Doane

There was, there was a reduction quarter to quarter and that was because in the first quarter we had a business interruption insurance payment for the 2005 fire at our Kahului Shopping Center.

Christopher Haley – Wachovia

And then we should see the full 90 days from Savannah, when does that start hitting?

Allen Doane

That was reflected in the second quarter.

Christopher Haley – Wachovia

Okay but the lease, actually cash rent, were you able to recognize rent during the second quarter?

Allen Doane

Yes the second quarter was [FAS B] recognition of rent.

Christopher Haley – Wachovia

On the shipping side, I’m just trying to reconcile your comments with a little bit of a cautionary outlook but the results in the quarter which I think you mentioned were pretty strong and better then expectations even though there were some headwinds in the quarter some of the vessel repair and dry dock costs, and rising fuel costs, can you just help reconcile what I thought were pretty good results in the quarter on the shipping side with some of the cautionary outlook comments that you made.

Allen Doane

You’re right, we feel good about the quarter given all the things that happened. And we actually I think Matson made a good step ahead in China with its renewals and with getting some if not complete protection on the fuel side. So that’s all good. But anybody who’s not cautionary in this environment isn’t reading the news every day. And given the really high volatility in fuel prices, given what has been a fairly substantial slowing in economic activity in Hawaii in general that started to be more visible in the second quarter, we feel it’s prudent to be cautious.

I think the expression of caution doesn’t mean that as James had indicated that we’re not doing everything we can to manage through a cyclical downturn because we are.

Christopher Haley – Wachovia

You mentioned that you took one vessel I think out of the string at least for a portion of the quarter do you have sense in terms of what your utilization rates were for some of the mainland to Hawaii on that trade route?

James Andrasick

We don’t really manage to that because its—we run 10 ships right now and every ship is 10% of your capacity basically so utilization is not an important metric for us in that particular trade lane. But more important to the point is that we did take one ship out for the complete quarter and have attenuated other voyages and done other triangulations which had the result of even reducing capacity further. So that’s about as specific as I can be on that subject.

Christopher Haley – Wachovia

You had the announcement about the biodiesel potential JV, a couple of years ago you talked about doing a couple of energy initiatives. One was the ethanol initiative and the other was potentially increasing power sales via the gas, the sugar waste product. Are you still considering those potential initiatives and if so, what would be possible timing on those?

Christopher Benjamin

The short answer is yes, the longer answer is we did evaluate those, you’re right. We talked about those a couple of years ago and they were two opportunities, one was ethanol and one was to increase the amount of fiber that we bring into the factory to burn to produce electricity. Both of those projects at the time did not pencil out and we made that evaluation, made that determination. Obviously the world has changed quite a bit, energy prices have gone up so we are now actively in the process of reevaluating those.

So I don’t have a date that I can tell you that we will make a decision. Its on ongoing evaluation and its based on a lot of factors that keep moving including most particularly on ethanol just the price and markets for ethanol. But we are actively looking at it.

And the LG announcement while its very preliminary and there’s still technology to be worked out to make that viable is part of the overall energy portfolio we’re trying to help develop both for our sake and our shareholders’ sake as well as the sake of the State of Hawaii to increase renewable output.

Christopher Haley – Wachovia

On Keola La’i in terms of the profit recognition on that, are you recognizing the pro rata portion of the profit for each closed sale or are you, you have to recognize the full cost of construction and then only recognize profit to the extent that there are sales above your total cost?

Christopher Benjamin

We do prorate our costs among all the units.

Christopher Haley – Wachovia

Okay so the remaining 30 or so units that have to close we would expect a comparable margin from the sales of [inaudible] that already closed.

Christopher Benjamin

Correct.

Operator

Your next question comes from the line of Sloan Bohlen - Goldman Sachs

Sloan Bohlen - Goldman Sachs

With regards to the improvement in shipping margins at Matson could you maybe, I guess of the 25 cost initiatives which one really provided the most benefit to the margin? I think at the beginning of the year you maybe talked about margins on average for the year somewhere in the high single-digits and just trying to get a good idea of what a run rate going forward might be.

James Andrasick

The biggest contributor was taking ships out of service in other words sidelining service. I’d say the second biggest is reducing third party transportation expenses and probably the third equipment management throughout the network.

Sloan Bohlen - Goldman Sachs

Could you provide a cap rate on what the sale of that rental apartment unit was?

Stanley Kuriyama

It would be astronomical actually because this was—the property we sold was actually a low income housing project. We built it using federal tax credits. The credits had run out so it was time to dispose of it. There was no operating profit.

Sloan Bohlen - Goldman Sachs

I guess asked a different way is there a capital still out there or with regards to your comment about sort of modest sales from the real estate sales segment going forwards, was that with regard to your development properties or with regard to any leased properties?

Allen Doane

With regard to both.

Sloan Bohlen - Goldman Sachs

With regard to the Maui Business Park, is there an earmarked amount of capital outlay for the next couple of years, I know lots don’t start selling until 2011 but what should we be looking for there?

Stanley Kuriyama

It’s really going to be a fairly nominal amount of capital.

Sloan Bohlen - Goldman Sachs

There aren’t any infrastructure costs or anything there?

Christopher Benjamin

There are certainly infrastructure costs but it’s a question of ramping up, getting the appropriate construction permits and the like. I think we’ll be able to give more insight into that in a few months once we’ve completed our 2009 planning but suffice it to say that over the next couple of years it’s not going to be a real large number.

Operator

Your next question is a follow-up from the line of Christopher Haley – Wachovia

Christopher Haley – Wachovia

We’ve gotten a fair number of questions regarding changing logistic modes in light of oil prices particularly and I’d be interested from your logistics businesses recognizing that you have truck capabilities, you’ve got water capabilities, you don’t necessarily have air, and rail but I’m sure that your logistics professionals inside your firm would be helpful and have given you color on this. Where do you see over the last six months and those that are planning over the next 12 to 24 months where are you seeing the shifts to modes? Are you seeing more push to rail because of cost difference? I recognize there are some idiosyncrasies with everything but just generally speaking I’d be interested in your views as to what type of modes of transportation are being viewed more favorably today.

James Andrasick

My answer may be shorter then the question. First of all on the air side, there’s been a lot written that air is becoming less and less competitive but there’s not a lot of air capacity now in the primary ocean markets that we serve. If we’re seeing anything it’s hardly worth mentioning. On the rail versus truck side domestically I think that’s where the big play is. It really goes to the pricing practices of the rails and they’ve been pretty stiff in the last three years, consolidating their positions and despite that fuel costs overall probably affect the truck side more so I think there has been somewhat of shift to intermodal where the logistics of it, point A to B make any sense at all.

But it goes back and forth. Its seasonal, it’s by product line.

Christopher Haley – Wachovia

Rail competition at the margin, you’re saying their economics haven’t changed much but you’re at the same time saying that the trucking economics have changed to the detriment relatively speaking and generally speaking but in terms of the logistics customers are dealing with, do they want more rail? Are they more apt to use rail today then they were six to 12 months ago? Or more apt to use trucking?

James Andrasick

I think it’s really a cost issue and they don’t care for the most part whether it goes by rail or truck. And of course distances are important as well. So that’s a tough one to answer. I think it varies clearly customer to customer and it’s more a function of cost then it is speed.

Allen Doane

Let me make one observation that ties the transportation and the real estate business together, I think the one thing that’s certain is that the change in the basic energy equation is going to create over a period of time some fairly significant and fundamental network changes in how people distribute. What people are going to do is they’re going to be much more attentive to the transportation component of the equation and not use a blunt instrument in terms of dealing with logistics.

I wouldn’t say its been a blunt instrument totally in the past but its going to be a lot more refined and when you see some dramatic differences where if you can land something on the east coast in a vessel and have a very short haul to an east coast market because of much shorter lane there, you’re just going to find that changes like that are going to be fundamental and profound and sort of where you locate your real estate and how you do your distribution patterns is going to be really, really key.

We do believe that our early experience in Savannah would suggest that people are going to start looking for ways because the energy equation is so important to really, really refine their logistics network structure. So I think you’re just going to see—you’re going to see a tremendous amount of instability and change over the next three to five years.

Christopher Haley – Wachovia

Is there an energy equivalent or a unit measure that logistics providers or logistics analysts use saying the cost per ton moved or cost per product moved? Is there a way to think about this in a very simplistic means?

Allen Doane

I’m not aware of it but we’ve got some transportation analyst on the call that might have the answer to that.

Operator

Your final question is a follow-up from the line of Sloan Bohlen - Goldman Sachs

Sloan Bohlen - Goldman Sachs

Could you give us an update on the traffic or interest level for the remaining space at the Savannah property?

Stanley Kuriyama

We’ve had a number of parties expressing interest in that space either in whole or in part. We haven’t consummated a deal yet and we continue to work with Matson Global there. They may have an expressed an interest in the balance of that space as well.

Operator

I would now like to turn the call over to Allen Doane, Chairman and CEO.

Allen Doane

Thanks everyone for participating today and we hope to continue to report results that we feel are good for our shareholders in an environment that is obviously a lot tougher then it’s been in the past. So thanks a lot.

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