UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D. C. 20549
FORM
8-K
CURRENT
REPORT
Pursuant
to Section 13 or 15(d) of the
Securities
Exchange Act of 1934
Date
of
Report (Date of earliest event reported): November 21, 2006
ALEXANDER
& BALDWIN, INC.
(Exact
name of registrant as specified in its charter)
|
Hawaii
|
0-565
|
99-0032630
|
|
(State
or other jurisdiction of incorporation)
|
(Commission
File Number)
|
(I.R.S.
Employer Identification
No.)
|
822
Bishop
Street, P. O. Box 3440
Honolulu,
Hawaii 96801
(Address
of principal executive office and zip code)
(808)
525-6611
(Registrant's
telephone number, including area code)
Not
Applicable
(Former
Name or Former Address, if Changed Since Last Report)
Check
the
appropriate box below if the Form 8-K filing is intended to simultaneously
satisfy the filing obligation of the registrant under any of the following
provisions (see General Instruction A.2.):
|
□
|
Written
communications pursuant to Rule 425 under the Securities Act (17 CFR
230.425)
|
|
□
|
Soliciting
material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
|
|
□
|
Pre-commencement
communications pursuant to Rule 14d-2(b) under the Exchange Act (17
CFR 240.14d-2(b))
|
|
□
|
Pre-commencement
communications pursuant to Rule 13e-4(c) under the Exchange Act (17
CFR 240.13e-4(c))
|
Item
8.01. Other Events
On
November 21, 2006, Alexander & Baldwin, Inc. (the “Company”) conducted a
live webcast, “2007 Business Outlook,” which included a discussion of operating,
strategic, and financial matters. The webcast was previously announced in a
press release and was broadly accessible to the public. A replay of the webcast,
with the accompanying slides, was available on the Company’s website at
www.alexanderbaldwin.com for approximately one week following the webcast.
The
Company believes that the information contained in the webcast may be of
continuing interest to shareholders. Accordingly, the transcript of the
presentation and the accompanying slides, edited solely for the correction
of
errors, are furnished as exhibits to this Form 8-K. The information set forth
in
these materials speaks only as of November 21, 2006.
In
addition, as previously announced, Matson Navigation Company, Inc. (“Matson”) is
proceeding with the conversion of one of its C-9 containerships, MV Mokihana,
to
a combination roll-on/roll-off (ro-ro) and container vessel. The total cost
of
this conversion is estimated to be $30 million, which includes a $17 million
contract with Atlantic Marine Alabama, LLC announced in September of this year
by Matson. The conversion of the Mokihana is part of a previously announced
$45
million upgrade of Matson’s ro-ro service capabilities in its Hawaii service,
which includes shoreside facility improvements and investments in information
technology.
Statements
in this Form 8-K and the attached exhibits that are not historical facts are
"forward-looking statements," within the meaning of the Private Securities
Litigation Reform Act of 1995, that involve a number of risks and uncertainties
that could cause actual results to differ materially from those contemplated
by
the relevant forward-looking statement. Factors that could cause actual results
to differ materially from those contemplated in the statements include, without
limitation, those described on pages 16-21 of the Form 10-K in the Company’s
2005 annual report. These forward-looking statements are not guarantees of
future performance.
Item
9.01. Financial Statements and Exhibits
(d) Exhibits
|
|
|
99.1
|
Transcript
of Webcast, November 21, 2006.
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|
|
|
99.2
|
Slides
Related to Webcast, November 21,
2006.
|
SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
| Date: November 29, 2006 | ||
| ALEXANDER & BALDWIN, INC. | ||
| |
|
|
| By: | /s/ Christopher J. Benjamin | |
|
Christopher J. Benjamin |
||
| Senior Vice President, Chief Financial Officer and Treasurer | ||
Exhibit
99.1 to Form 8-K
Alexander
& Baldwin, Inc.
Transcript
of “2007 Business Outlook”
November
21, 2006
Allen
Doane -
Alexander & Baldwin, Inc. -
Chairman,
CEO
Aloha.
Welcome to Alexander & Baldwin’s 2007 business outlook presentation webcast.
This is Allen Doane in Honolulu, and I’m joined today by Jim Andrasick, Matson
Navigation Company President and CEO; Stan Kuriyama, A&B Land Group
President and CEO; and Chris Benjamin, our CFO.
In
addition, I’m joined by a group of equity analysts and shareholders. The slides
for today’s webcast are available on our homepage at www.alexanderbaldwin.com.
Statements
in this presentation that set forth expectations and predictions are based
on
facts and situations that are known to us as of November 21, 2006. Actual
results may differ materially due to risks and uncertainties such as those
described on pages 16 to 21 of the Form 10-K in our 2005 annual report, and
our
other subsequent filings with the SEC. Statements in this presentation are
not
guarantees of future performance.
Our
presentation today will last approximately 40 minutes, at which time we will
entertain questions. There are four major topics in our presentation and each
of
us will touch on various aspects of them. We will discuss ways that A&B
continues to create sustained shareholder value. We will describe tangible
initiatives underway that allow us to manage in a changing economic environment
in our various business segments. We will outline major growth initiatives
that
leverage our businesses, relationships, and assets, and expertise. We will
provide a business outlook for 2007.
We
are
excited about our prospects for 2007, as we proceed along a strategic evolution
that commenced a number of years ago. There are five critical ways that we
have
and will continue to create shareholder value. These five themes will serve
as
an outline for today’s discussion as we talk about both what we have done and
what we will do to create value using these principal business drivers.
The
foundation of our success has been and will continue to be developing sound
strategies and executing operational excellence in the implementation of these
strategies. Our track record here is clear, with the Company having undergone
a
strategic and dramatic set of changes since the late 1990s, while achieving
consistently improving performance.
Today,
our
immediate challenge is to adapt to a changing economic environment, and our
actions must include what I call appropriate defensive measures. But just as
importantly, they must not neglect offensive actions to identify new sources
of
earnings growth. One of our primary objectives today is to share with you how
we
are approaching these growth initiatives.
Finally,
we believe that an essential role is the effective allocation of capital. We
will discuss our philosophy of capital allocation.
This
slide, which is a similar one to one that you have probably seen before,
highlights the most significant elements of our strategic evolution.
Historically, we had leveraged our key value drivers, most notably our expertise
in entitling and developing historical land in Hawaii and our primary Hawaii
trade.
Our
strategic shift began in the late 1990’s as we expanded our footprint to
non-Company-owned lands and grew our non-asset-based intermodal businesses
to
vertically extend Matson’s value chain. More recently, we have convincingly
broadened our market reach to a diversified pipeline of commercial, residential,
and resort properties and a significant presence in China.
We
feel
good about the direction the Company has taken, confident that we are pointing
our compass in the right direction. There will be further evolution for A&B,
and we continue to build on our strengths. But the steps we have already taken
position us well for the future.
These
steps, we believe, are a primary driver of the excellent results we have
achieved over the past five years, including an 18.9% annual total return to
shareholders. We acknowledge that the last 12 months have been challenging
for
our stock, even as we have exceeded market expectations with our financial
performance. We have faced a headwind created in part by macroeconomic factors,
pressure on residential real estate companies, and our transition from the
APL
alliance to our China service. But we are proud of our performance of this
year
in delivering results.
Without
effective operating execution, strategies are worthless. We take note of the
superior performance that has consistently characterized our operations. In
the
latest full-year 2005, Matson was ranked fifth of 28 publicly-traded shipping
companies globally in operating margin. Our China services established a superb
record of having 93% of its eastbound cargo ready for pickup on Monday morning
after a Sunday evening arrival in Long Beach. Matson Integrated Logistics is
a
success story in every dimension and will complete this year having generated
over 60% compound annual earnings growth since 2001.
In
our
real estate business, our commercial portfolio currently has 97% occupancy
levels. Lastly, A&B Properties’ development projects have achieved superior
returns.
While
it
is most important that our efforts translate into superior financial performance
for our shareholders, we also appreciate the recognition by many organizations
for the good work that we do.
A
third
theme is our ability to adapt to changing conditions. As the year has progressed
we have experienced a moderation in the growth of Hawaii’s economy, as well as a
more substantial change in Hawaii’s residential markets. Both Matson and A&B
Properties have been affected. We have adapted and continue to adapt to a
changed environment; and we should end 2006 with better financial performance
than expected when the year began.
Why?
Several of our businesses have not been affected, including the commercial
portfolio and Matson Integrated Logistics. In those businesses that have been
affected, actions have been taken to reduce the impact. At Matson, a gap program
was instituted in the second quarter to realize increased efficiencies in Hawaii
and Guam. At A&B Properties, careful project underwriting, presale
requirements, and other risk mitigation measures have, so far, minimized the
financial impact of a pronounced shift in residential markets.
A
fourth
theme is our fundamental commitment to profitable growth. While the defensive
measures I have just described are important, we are equally focused on playing
offense and seeking growth opportunities in our existing businesses. We must
maintain our commitment to growth, as we see many potential opportunities
now--as many or more than we have in the past.
Earlier
this year, I initiated half a dozen growth initiatives within the Company,
and
more are being established as we speak. We are completely focused on core
growth, not getting into new businesses where we have little or no expertise.
We
leverage what we already know, and are increasingly leveraging the connections
between our businesses.
As
you
know, we are in the implementation stage on a number of growth
initiatives--Matson’s China service, A&B Properties’ Project X, with
acquisitions in Hawaii, Matson Integrated Logistics’ acquisitions, and specialty
sugar expansion. I could spend the entire 40 minutes on new growth initiatives;
but instead, I will ask Jim and Stan to describe our specific initiatives in
a
few moments.
The
key
takeaway is our commitment to continue growing the Company through the
identification, evaluation, and implementation of new ways and new places to
leverage our expertise. Depending on how they are defined, we have seven to
10
new growth initiatives under evaluation at this stage.
The
majority may not pencil out, but several will. As initiatives either move
forward to implementation or are dropped, others are identified. What is
interesting here is the linkage between several of our businesses, Logistics
and
Real Estate being the most obvious.
The
fifth
and final theme is capital allocation. There is no more important job we have
than to allocate your capital. At the heart of this process is a fundamental
decision about how much cash is retained in the business and how much is
returned to shareholders. We take this seriously and have demonstrated a record
of returning cash via dividends to shareholders, while not hesitating to make
large, strategic investments in the business. Allocations among our core
businesses, and then within them to individual projects, are made by following
a
disciplined and comprehensive approach that results in the highest and best
use
of capital.
Let
me
conclude with brief comments on the 2007 outlook. You can expect that Jim,
Stan,
and Chris will also comment on 2007. The earnings outlook for 2007 is relatively
favorable, as we are just completing our 2007 business plans. Of course,
underlying the relatively favorable description are assumptions that market
conditions will be stable, similar to current conditions. As these conditions
have moderated in 2006, we are forecasting neither a material improvement or
a
deterioration in the environment.
We
expect
to deliver very good growth at A&B Properties and MIL, and more modest
growth at Matson. Most importantly, we are fully committed to delivering both
short- and long-term value to our shareholders. With that, I will turn the
next
part of the presentation over to Jim Andrasick. Jim?
Jim
Andrasick - Matson
Navigation Company, Inc. -
President,
CEO
Thank
you,
Allen, and aloha. It is my pleasure to provide an update for Matson’s two major
businesses, Ocean Transportation and Logistics. I would like to begin by
highlighting the strong performance that Matson has achieved in the recent
past.
We
have
delivered top-tier margins in Ocean Transportation by continuously reinvesting
in our operations; and not just with new assets, but with new processes and
information systems. The result has been superior operational efficiencies
and
award-winning customer service.
In
2005,
as Allen has highlighted, Matson ranked fifth among 28 public shipping companies
worldwide for operating profit margins according to a report by American Shipper
magazine. But more importantly for our shareholders, we continue to make
excellent progress in our China service, and our margins for the year have
been
improving steadily thanks in large part to the growth of that business, as
well
as moderating fuel costs and seasonality.
This
is
noteworthy considering the transition we made in 2006 to all-new Guam-China
deployment. As many of you know, the China deployment we developed, which
provides revenue-producing leg, 7/8 of the way across the Pacific and offers
market-leading transit times on our return, does create great opportunity for
us
to leverage in the future. By the way, I should point out that the lane is
profitable for us after only 10 months from a dead start.
Matson
Integrated Logistics has produced record earnings so far in 2006. We have an
enthusiastic and experienced management team that really does excel in solving
customers’ problems. We will continue to grow our highway and expedited service
lines, which directly impact our profitability.
Our
West
Coast stevedoring joint venture, SSAT, has introduced leading-edge information
systems at its six terminals at Seattle, Oakland, and L.A.-Long Beach, improving
productivity; and it’s well positioned to capture rising Asian export volumes in
the future.
To
effectively manage the changing market, we are well along in exploring a wide
range of ideas to improve operational efficiencies. Through these efforts,
we
hope to stay ahead of the curve and, of course, ahead of our competition.
At
Sand
Island, our main terminal in Honolulu and the gateway through which every ship
we operate passes, we’re looking at expanding our network capacity and improving
our transshipment productivity. These enhancements may include acquisitions
of
cranes for placement in neighbor island locations, which would be a first;
conversions of one or two of our largest vessels, the C-9, to what is called
an
open-top design, to add to productivity; and adding more parking stalls and
land
area for a more efficient on-dock operation. Of course, we could not do any
of
this without the full cooperation of our ILWU workforce, which also has been
stretched by the demands of more frequent vessel calls, both cargo and
passenger.
In
addition, we are instituting new processes for managing our containers, for
greater utility throughout the entire system, which now extends from inland
China to all destinations across the U.S. mainland. This container effort really
has been a successful collaboration between MIL and the Ocean operation’s teams.
Our
experience in China has opened new opportunities for us that would never have
been available prior to entry in this market. What we have learned in extending
our service is that there are a number of areas where we can engage and expand
our core expertise, not only in shipping, but in our Logistics and even real
estate development knowledge.
It
is well
known that there is a fundamental lack of infrastructure in China for efficient
overland transportation, port warehousing, and logistics. We are exploring
a
number of potentially high-margin solutions to these needs with prospective
partners. What I can say from the ground is that the chokepoints in China will
not be in ocean transit, but in getting goods from factory to ship, and ship
to
end-user, in an expedited fashion.
As
part of
our new Honolulu-Guam-China investment, we have become more involved in the
islands of Guam, the Federated States of Micronesia, and the Marshalls. It
is no
surprise that we are very good at serving island communities. We quickly
understood the dynamics of those specific island states. More importantly for
our future, we have established a solid reputation in the trade, offering a
seamless single-bill solution that incorporates ocean, truck, and rail transport
of goods to and from Guam.
In
speaking at a recent conference here in Honolulu related to business
opportunities in the region, it was clear that there is a growing interest
in
this market. I was also encouraged by conversations I had with our contacts
in
the military about use of our vessels as a primary provider. In addition, we
believe that with modernization of the port, irrespective of who operates it,
Guam will emerge as an important transshipment hub for points east, China and
the Philippines, as well as South Indonesia. Matson is well placed to lead
this
growth in the area of Ocean Transportation.
As
Allen
said, Matson Integrated Logistics continues to perform exceptionally well and
provides ample opportunities for us going forward. We will continue to grow
the
business organically through focused sales initiatives and integration of new
volume we’re seeing as a result of Matson’s China service, which lends itself to
an expedited service model. It is estimated that two-thirds of the goods coming
out of China to the U.S. end up east of the Mississippi.
You
will
note from the slide that the operating profit through the first three quarters
of 2006, which is highlighted in green on this slide, has eclipsed the entirety
of operating profits from MIL in 2005.
I
would
point out the graphic, in the upper right of the slide, we showed it two years
ago. This has proven out that this business truly is scalable.
As
you can
see from this map of our U.S. operations, we have established a true nationwide
logistics and sales network. I think we are in a prime position to leverage
existing assets, to meet the demand for cargo transportation services. We will
continue to actively pursue the purchase of regional logistics-based companies
when the multiples are right, the people are right, and when the product service
extension is spot on.
We
also
are actively exploring on-time guarantees from China as part of a suite of
expedited service offerings. With just-in-time inventory requirements becoming
more demanding daily, we are certain that there is a premium to be realized
for
the provider who can deliver on-time results without resorting to air cargo,
which is eight times as expensive. We intend and hope to be that provider.
Turning
to
the outlook for 2007, we believe it to be good. We expect modest single-digit
growth in our core Ocean transit services, growth in our Logistics segment
that
will be attractive, but not near the record pace of growth achieved in 2006.
As
Allen
has indicated, we are assuming market stability, but are prepared to meet any
competitive pressures that may arise as a result of a moderation in the Hawaii
economy. Just like the seas, the economy can be a fickle master. With that
said,
opportunities do surround us, in expedited service offerings, acquisitions
to
extend our logistics value chain, Guam transshipment expansion, and in the
collaboration of A&B Properties with our Pacific and China strategies.
With
that
as a segue, I will turn this podium to Stan Kuriyama, who will speak about
properties and real estate. Stan?
Stan
Kuriyama - A&B
Land Group -
President,
CEO
Thank
you,
Jim. Despite our share of challenges, 2006 has been a strong year for A&B
Properties. Provided our remaining sales in escrow close as scheduled, we expect
to meet or exceed our earnings guidance for 2006 of a 13 to 15% increase over
2005, exclusive of the onetime insurance gain from a fire at one of our shopping
centers early last year.
As
you can
see from this slide, earnings from real estate operations have grown at a
compounded rate of 16% a year since 2002. Our lease portfolio generates
approximately 50% of our real estate income, and continues to perform superbly.
Occupancy at the end of October averaged 97% of our mainland properties and
98%
for Hawaii. Although these high rates cannot be sustained indefinitely, we
expect our superior performance to continue for the foreseeable future.
Entitling
and permitting remains challenging, but it is a daily activity for us and one
we
perform well.
Of
course
the story in the past few months, both in Hawaii and across the nation, has
been
the dramatic slowdown in the residential markets. The impact from this slowdown
for A&B vary considerably from project to project. Over the next couple
years, we will continue to move forward on projects that occupy strong market
positions, which are long-term projects that will naturally encounter down
market cycles like we’re now experiencing.
On
the
positive side, we also expect that a softening market will create favorable
new
investment opportunities for us, allowing us to capitalize on our strong
financial position and our extensive local network.
Our
lease
portfolio consists of high-quality properties in good locations. We focus on
market niches not generally served by large institutional investors or REITs.
We’re able to generate above-average returns by funding our acquisitions
primarily with tax-deferred 1031 proceeds and a strong asset management program.
Our properties are well diversified by geography and product type, which
provides protection against location-specific downturns or slowdowns in the
development side of our business.
Complementing
the steady performance of our lease portfolio is a strong and diverse
development pipeline that will yield bottom-line results for a number of years
to come. The aggregate capital commitment for the 15 projects shown on this
slide is expected to range somewhere between 700 and $900 million.
We
actively manage our capital risk through a variety of vehicles. For development
projects, for example, we mitigate risk through self-imposed pre-sale or
pre-leasing requirements, phased development, and joint ventures with other
developers. JVs allow us to share expertise, expand our development reach beyond
our existing land holdings, and leverage our capital and staffing resources.
One
of the
hallmarks of how we do business is a highly disciplined underwriting process,
which is based on our local knowledge of the Hawaii markets. Approximately
$500
million of capital is invested in our lease portfolio of44 quality
high-occupancy low investment risk properties. Another $250 million of committed
capital is represented by development projects which, due to their low-cost
basis, pre-sold status, or other attributes, are investments we consider to
bear
relatively low development risk. That leaves about $150 million of committed
capital for development projects bearing higher but typical development risk.
With 85% of our invested or committed capital therefore occupying the lower
end
of the risk spectrum, we feel very comfortable with the overall risk profile
of
our real estate investments.
We
have a
continual assessment of how best to enhance the value and monetize our
significant land holdings. As most of you know, the entitlement process in
Hawaii is long and difficult, but it is a fundamental building block for value
creation. The entitlement process will be further complicated by a new workforce
housing ordinance passed by the Maui County Council in early November, which
requires 40 to 50% of the units in new projects to be sold at affordable and
gap
prices.
Over
the
near term, the ordinance will not have a material impact on us due to the
diversity of our portfolio, and affordable and gap projects we already have
begun planning. However, the ordinance could deter new projects from being
built
on Maui; and we therefore will continue to work with other developers and our
elected officials to amend the ordinance in a manner that strikes a better
balance between market and workforce housing.
Complementing
our entitlement activity is a program of systematically evaluating our non-core
lands for sale to third parties. By non-core, we mean lands that are not used
in
our agricultural activities, have little or no development potential, and are
not located in the conservation district. Sale of these non-core lands, as
well
as opportunistic sale opportunities that regularly occur, all contribute to
a
diversified portfolio capable of generating income growth for the Company even
during down market cycles.
Project
X
is an internal term we use for our ongoing program of investing in real estate
outside of our historic Hawaii land holdings. It is an integral part of the
Company’s strategic evolution and has enjoyed considerable success.
Some
of
our investment criteria are presented in broad terms on this slide. The next
slide shows that we have made 25 Project X investments in Hawaii since 1999,
representing an aggregate capital commitment of over $650 million. The program
is successful because of our market knowledge and contacts, and a strong
competitive advantage provided by our financial strength. The vast majority
of
these 25 Hawaii investments shown on this slide were either privately negotiated
or properties that were not publicly listed for sale.
As
mentioned earlier in the presentation by Allen, many of our growth initiatives
are based on opportunities that leverage core expertise and relationships.
During a period of declining residential opportunities in Hawaii, we will
continue our search for good investments outside of the state. For example,
we
will again be partnering with Intertex, our partner for several of our
successful initiatives in Valencia, California, by entering the community of
Bakersfield, which we believe is an underserved commercial market with favorable
growth prospects.
In
Guam
and China we’re leveraging Matson’s presence to open opportunities. We are in
the final stages of evaluating a residential joint venture in Guam and believe
the opportunity exists for more investments in that high-potential market.
China
is clearly an exploratory initiative for us, but opportunities certainly seem
to
exist in logistics warehousing.
Let
me now
say a few words about our sugar operations. A major part of our effort to wean
us from the commodity side of the business has been to expand our production
of
what we call specialty sugar, which consists of non-refined, larger-grain,
brown
or white sugar crystals.
We
have
enjoyed good success in the sale of the brown crystals and hope to build upon
that success with the white crystals by supplying some of the country’s largest
packaged food and beverage manufacturers with what the industry considers to
be
a natural food ingredient. We will continue to invest in specialty sugar
production facilities at our Puunene mill on Maui, with the expectation of
one
day having over a quarter of our total sugar production channeled into specialty
sugars.
We
also
continue to evaluate the nearer-term opportunity of distilling our molasses
byproduct into ethanol, and the longer-term opportunity of converting sugar
cane
itself into ethanol or electricity. Perhaps not surprising given the increasing
production and demand for ethanol, the cost of building an ethanol facility
has
increased. The future pricing of ethanol remains less certain. What has not
changed, however, is the need to lessen Hawaii’s dependency on imported fuel. We
therefore will continue to fully evaluate all opportunities to transform our
plantation into a major energy producer.
In
summary, we expect good financial results for our real estate business in 2007
based on a mix of leasing income, development sales, and property sales.
Full-year earnings growth should be consistent with our long-term targets for
this business. Leasing performance will remain strong, although our current
high
occupancies will moderate year-over-year growth. Development projects that
were
pre-sold in prior periods will be harvested in 2007 and will be supplemented
by
projects currently under development.
Construction
activity will step up at our Kukui’ula project on Kauai. While Kukui’ula’s sales
are being impacted by a softening residential market, we have not lost any
confidence in its success over a 10-year development horizon. There simply
will
be no other project comparable in quality and lifestyle to Kukui’ula on
Kauai--or for that matter most of the rest of the state of Hawaii.
We
will
continue to seek, on a very disciplined basis, new investments outside of our
core land holdings. A softening residential market will eventually create good
buying opportunities for us.
Agribusiness
earnings will remain modest, especially as that business faces low sugar pricing
and remains in transition away from dependence on commodity sugar sales. Let
me
now turn it over to Chris, who will speak to A&B’s capital and financial
outlook.
Chris
Benjamin -Alexander
& Baldwin, Inc. -
SVP,
CFO and Treasurer
Thank
you,
Stan. Before I get into our 2007 capital and financial outlook, I would like
to
say a few words about 2006 and our expectations for the fourth quarter. As
you
know, we don’t provide point estimates; and the guidance given during our
third-quarter call remains generally valid, with one exception. The food
products segment is likely to have worse performance in the fourth quarter
than
previously anticipated due to challenging harvest conditions at our sugar
plantation and a significant drop in sugar pricing.
While
this
segment is relatively small for us, we do expect that instead of the nominal
profitability we forecast a few weeks ago, we will have a loss of somewhere
between 2 and $4 million at the operating profit level for the fourth quarter.
I
would point out, however, that through the third quarter the food products
segment has earned over $10 million year-to-date and of course will end up
the
year quite positive.
With
that,
let me turn to next year. This slide shows our preliminary 2007 capital budget
compared with our 2006 projected total spending. As you can see, the most
dramatic year-over-year change will be at Matson where, of course, we will
not
repeat the $150 million vessel purchase that we undertook this year. This
produces an overall capital budget for 2007 that is lower than 2006.
The
majority of the Matson capital in ‘07 relates to vessel and terminal related
investments aimed at improving operational efficiencies; while most of the
real
estate capital is for development activities, especially construction at our
Keola La'i condominium.
While
this
budget does include some growth capital for projects that are not yet
identified, specifically about $40 million of acquisition capital within our
real estate group, it does not reflect significant capital for the many
initiatives described today. If a number of these initiatives prove fruitful,
our capital budget could increase for 2007; and we do have the financial
capacity for that.
This
next
slide shows our consolidated debt levels and debt to debt-plus-equity ratio
over
the past several years. As you can see, our debt to capital has generally ranged
from the low 20s to roughly 30% over this time period.
As
we
indicated over a year ago, it is our intent to increase our leverage, primarily
through strategic investments, to the 35 to 40% range; and we have been making
progress. This is a range that we feel optimizes our use of leverage and
minimizes our cost of capital, but still leaves sufficient flexibility and
capacity to pursue strategic investments that in our business tend to be very
opportunistic.
One
other
comment that I would make with respect to our capital structure is simply a
reminder that in December we will take down the first of three tranches of
our
$125 million 10-year term financing through Prudential. This first tranche
of
$50 million carries a fixed interest rate of 5.53%.
Earlier
this year, the A&B Board of Directors approved an increase in our quarterly
dividend to $0.25. With the dividend increase and our recently concluded
accelerated share repurchase, we have returned 69% of our aggregate net income
back to shareholders over the past nearly 10 years. We also have Board
authorization to repurchase just over another 2 million shares of our common
stock.
While
the
timing of future share purchases, if any, has not been determined, it is
important that the Company has the ability to undertake repurchases as market
conditions, investment alternatives, and balance sheet considerations warrant.
We continue to view and evaluate share repurchases as an investment. While
we
will not use them simply to enhance EPS or combat dilution, we won’t hesitate to
continue buying our shares if we have the capacity and if we believe that they
are our best investment option.
Finally,
I
would like to turn to our outlook for 2007 earnings. This guidance is
preliminary and, as noted, is based on an assumption of relative market
stability at current levels. Of course, a dramatic change in the environment
could affect our outlook.
Jim
and
Stan already have provided some segment-specific commentary. But let me just
summarize by referencing the longer-term growth targets that we have established
for our two primary operations.
Matson’s
consolidated growth in 2007 is expected to be somewhat lower than its long-term
target of 8 to 10%. Properties’ performance should be consistent with its 13 to
15% long-term target, with virtually all of the growth coming from development
and sales, including property sales. As Stan has noted, food products will
likely show only nominal profitability.
Finally,
there are no significant changes anticipated in corporate expense in 2007,
but
we do anticipate that our effective tax rate will return to 38% next year,
up
from 37.5% this year.
So
with
that, I would like to open it up for questions. We have about 15 to 20 minutes
available for questions. Operator, I would like to ask you to solicit questions
from the callers.
QUESTIONS
AND ANSWERS
Operator
(OPERATOR
INSTRUCTIONS) Jason Kremer of Caris & Company. Jason has disconnected.
Jonathan Habermann of Goldman Sachs.
Jonathan
Habermann - Goldman
Sachs -
Analyst
Sloan
is
here with me as well. Allen, you mentioned the seven or so investments that
you’re considering. I am just curious if your sense of--I know they are not
included in the CapEx assumptions for next year. But can you give us a sense
of
the timing? And perhaps just how much. Perhaps a large investment, how large
it
could be and just a sense of the scale of these types of investments?
Allen
Doane -Alexander
& Baldwin, Inc. -
Chairman,
CEO
Yes,
there
have been descriptions of a number of these initiatives that have been woven
through the presentation today. I think that it’s at this stage a little bit
premature to give actual numbers. I would say that, for the most part, these
investments, if they do occur in 2007 will not in aggregate be all that large.
So I wouldn’t put a very big capital component, capital number, into capital
spending for these.
I
think
the most important message is that we have got quite a few prospects that we
are
in active evaluation on across our business lines. While we know a number of
them are not going to bear fruit for us, we think several of them well. So
it is
a way for us to add growth and good growth to the Company over the next few
years. But I wouldn’t put a large capital amount into the equation for it yet.
Jonathan
Habermann - Goldman
Sachs -Analyst
Okay.
I
guess a question for Stan. Looking at the real estate cycle and where we are
currently, can you just comment on --are prices coming down? Is it related
to
just liquidity having slowed at this point? What are you seeing? Because you
mentioned, obviously, being opportunistic looking ahead.
Stan
Kuriyama - A&B
Land Group -
President,
CEO
My
reference to opportunistic was really to opportunistic land sales, whether
they
be parcel sales, one - off parcel sales, or just really good offers that make
financial sense for us to sell.
In
terms
of the residential market, yes, if you look at statistics to date, what you
see
clearly a big drop in sales volume; a drop in some of the other related
statistics -- days on market, the number of listings. But sales prices really
are still up year-over-year, but flat for 2006.
So
really
the question is, going forward what will happen to sales prices? There you
will
probably get different opinions from everyone you ask. I will tell you my
personal opinion is at some point a decline in sales volume is going to have
to
have an impact on sales prices. We haven’t seen it yet. Other people, like other
economists, are still predicting flat sales prices for the next few years.
Jonathan
Habermann - Goldman
Sachs -
Analyst
Then
just
one last question, I guess for Allen, maybe, in terms of China on the Logistics
side. How imminent would that investment be? Is that something that you’re just
considering at this point?
Allen
Doane -
Alexander & Baldwin, Inc. -
Chairman,
CEO
I
am going
to ask Jim to also comment on this, but what we are doing in China, in the
various China initiatives of both Logistics and real estate, are not quite
long
shots, but they are probably on the farther end of early exploration.
I
believe
that if we do something in real estate in China, it is going to be relatively
small, as a pilot project. I think the Logistics possibilities are more
interesting in the immediate timeframe. Jim, if you could just give a couple
of
comments on how you see it.
Jim
Andrasick - Matson
Navigation Company, Inc. -
President,
CEO
Certainly.
I think China is a vast and complicated country from a transportation
perspective. There have been a number of foreign entities that have been doing
business there for years, so we’re going in with our eyes wide open. The kinds
of situations that we are in the really formative stage of analyzing right
now
and talking to potential partners do involve collaborative efforts, for the
most
part. It would be unrealistic to think that Matson would be able to jump into
this market in any kind of material way without a partner in hand.
So
it is
formative. We do move with caution in this market to minimize risk. If anything
happens in 2007, I think it will be on the small side in terms of investment
dollars.
Jonathan
Habermann - Goldman
Sachs -
Analyst
Allen,
a
question in terms of Pasha and Horizon, in terms of the competition you’re
seeing on the shipping side. Can you just comment there? I know you have target
the $80 million of CapEx. Can you comment how much of that is just maintenance
versus defensive?
Allen
Doane -
Alexander & Baldwin, Inc. -
Chairman,
CEO
Jim,
why
don’t you talk about the competition first; and I will chime in at the end.
Jim
Andrasick - Matson
Navigation Company, Inc. -
President,
CEO
Well,
the
competitive set in 2007, certainly we baked that into our outlook that we just
described. It involves Horizon Lines, our main competitor in Hawaii and Guam
for
containerized freight. They have announced plans that have begun to be executed
to introduce five foreign-built ships into the U.S. coast at Guam and onward
to
Asia, a string which would displace the ships currently in that service back
to
Hawaii, Puerto Rico, and potentially Alaska. Just taking from memory their
public releases in this regard, the net effect on the Hawaii service will be
an
increase in capacity for Horizon Lines. How that capacity is utilized remains
to
be seen.
So
we
intend as we always have to focus all our efforts on our customers, providing
superior service, both here in Hawaii and in Guam. I will just leave it at
that.
As
far as
automobile carriage, Pasha continues to operate as a privately held partnership,
that I think you know. So its results are not available to us. But we see,
given
the state of contract carriage with the major auto manufacturers, and all those
contracts are multiyear agreements, that there won’t be much of a change in the
competitive outlook in 2007 versus 2006.
Then
if I
may go on to the capital question, capital spending certainly is greatly
reduced; and I would say that the biggest single project in that 80 or so
million is the conversion of one of our C-9 vessels to "rocon;" that is, a
roll-on, roll-off as well as a container-carrying vessel. Right now, it is
a
100% container ship.
That
work
will commence very shortly, and that ship will be available for service in
its
new form mid-year 2007. That will give us certainly another leg up in our
productivity, the way we handle automobiles.
The
rest
of the capital budget is really what I would call maintenance, but with one
exception. We continue to reinvest in information technology at Matson. We
think
that is the key to our future. Many of our legacy systems are approaching the
end of their useful life. We feel that it is the right thing to do. I would
just
say that a fairly good chunk of that $80 million is devoted to the update of
those systems.
Allen
Doane -
Alexander & Baldwin, Inc. -
Chairman,
CEO
Just
a
takeaway about that $80 million; about two-thirds of it is normal course
replacement; about a third of it is what Jim described with the vessel; and
a
few other items related to expansion.
Jonathan
Habermann - Goldman
Sachs -
Analyst
Great.
One
last thing. Just any update on Kauai Kukui'ula, in terms of the sales?
Allen
Doane - Alexander
& Baldwin, Inc. - Chairman, CEO
Stan?
Stan
Kuriyama - A&B
Land Group -
President,
CEO
As
you
know from the last call, we are in the process now of issuing sales contracts
to
buyers; having them review them, execute them, have them go binding, and close.
So there is a mix of better than 10 sale contracts issued and sales that have
close.
Based
on
the last numbers I saw, I would say the mix probably consists of about 75 to
80
letters of intent. I believe we have closed eight sales to date. Speaking to
the
sales staff very recently, they expect to issue contracts, perhaps 80 contracts
this year, with of course a much smaller percentage of those contracts actually
closing by year-end.
Jonathan
Habermann - Goldman
Sachs - Analyst
Okay,
thank you.
Operator
Jason
Kremer of Caris & Company.
Jason
Kremer - Caris
& Company-Analyst
Sorry
I
got dropped off earlier. I just had a quick question. What percentage of your
Matson business is dedicated to construction materials, or is for the
transportation of construction materials?
Jim
Andrasick - Matson
Navigation Company, Inc. -
President,
CEO
We
really
have not revealed that information for competitive reasons. I would add, the
other part of our outlook for ‘07 in terms of competition, is there are barges
that run from the West Coast to Hawaii that carry primarily construction
materials. But I would say we have not revealed the percentage; but certainly,
it is less, far less than a quarter of our business.
Jason
Kremer - Caris
& Company -
Analyst
Okay.
Also, do you guys have a revenue guidance that you could give, excluding fuel
surcharges as they are coming down, that would be more comparable?
Jim
Andrasick - Matson
Navigation Company, Inc. -
President,
CEO
With
respect to Matson?
Jason
Kremer - Caris
& Company-Analyst
Yes,
sorry.
Jim
Andrasick - Matson
Navigation Company, Inc. -
President,
CEO
We
haven’t
provided revenue guidance. I think that embedded in our expectation for 2007
is
a cost and a price variance that is relatively balanced. So if we get a spike
in
cost, that could alter the situation. But otherwise, at least from a planning
standpoint, we are trying to offset, one way or the other, the increases and
decreases that price and the surcharge would cause.
Jason
Kremer - Caris
& Company -
Analyst
Okay,
great. I will jump back in the queue.
Allen
Doane -Alexander
& Baldwin, Inc. -
Chairman,
CEO
Chris
wanted to make a comment.
Chris
Benjamin -Alexander
& Baldwin, Inc. -
SVP,
CFO and Treasurer
We
typically focus our guidance --as lucid as it is-- on operating profit for
the
units. I think there are a couple things that you could look at.
One
is, I
think we have stated that we anticipate margins probably staying in the 10
to
12% range on a full-year basis. The other thing is we have published general
rate increase information on Matson; and of course we have talked about how
we
will have the benefit of a more complete year of the China service. So I think
you can use some of those pieces to approximate revenue.
Jason,
don’t drop off. If you have got another question, we will take it, because I
believe there is no one else in the queue. So go ahead and ask the question
and
then-- if you have another one.
Jason
Kremer - Caris
& Company-Analyst
Okay,
I
guess, just going back to Kukui’ula, I think I’m a little confused there still.
Are you guys going to be getting binding contracts or no binding contracts?
Stan
Kuriyama - A&B
Land Group -
President,
CEO
No,
as we
have stated before.
Jason
Kremer - Caris
& Company-Analyst
It
is just
going to go to sales?
Stan
Kuriyama - A&B
Land Group -
President,
CEO
Yes.
Allen
Doane -
Alexander & Baldwin, Inc. -
Chairman,
CEO
One
of the
reasons that we go to binding contracts on a lot of projects is that there
is a
significant gap between the time we start selling the product and when it is
available. So, for example, the condominium project, we need to begin
construction and we need to have confidence that we have got the sales. So
we
will go to a binding contract status.
On
this
project, however, we’re actually going straight to sales very early in the
process. So there is no reason to go to a binding contract as the intermediate
step. Stan, I don’t know if you want to add anything else? No? Okay.
Jason
Kremer - Caris
& Company -
Analyst
Okay,
well, thanks a lot.
Allen
Doane -
Alexander & Baldwin, Inc. -
Chairman,
CEO
Then
we do
have a few folks in the room that I believe would like to ask a question. Tom?
Tom, do you want to introduce yourself?
Tom
Hazlehurst -
Fremont Group - Analyst
Sure,
it’s
Tom Hazlehurst from Fremont Group. Just a couple of quick questions. First
of
all, in the CapEx guidance that you gave for real estate, $220 million in 2007,
you said most of that is real estate development. Can you kind of just quantify
that as roughly what it is? Development versus income?
Stan
Kuriyama - A&B
Land Group -
President,
CEO
Maintenance
capital for these portfolios is a small fraction of that; maybe 5% of that.
The
rest would be construction. The largest single project in there would be the
completion of construction of our high-rise Keola La'i project.
Tom
Hazlehurst -
Fremont Group - Analyst
Okay.
Then, another question. I think that I read recently that your main competitor
for Matson elected to take tonnage tax versus corporate tax, and it is providing
a tax advantage. I actually don’t know the details of it at all, but just
curious if you guys have looked into it. How does it actually work?
Allen
Doane -
Alexander & Baldwin, Inc. -
Chairman,
CEO
Chris
has
been waiting for this.
Chris
Benjamin -
Alexander & Baldwin, Inc. -
SVP,
CFO and Treasurer
I
thought
Jim might jump in. The short answer there is it is certainly something that
we
have looked at. Although all of our vessels, as Jim indicated earlier, all
of
our vessels operate in at least partial domestic freight. The way that the
legislation is drafted currently states that if a vessel spends more than 30
days in domestic service during a calendar year or a 12-month period, then
it is
not eligible for tonnage tax.
So
even
though our ships spend probably close to 80% --the China ships spend close
to
80% outside of the U.S. and the Hawaii market, that is enough time in the
domestic market to make them ineligible.
Jim
Andrasick - Matson
Navigation Company, Inc. -
President,
CEO
I
think I
would like to add the comment that we think we have a very strong position
and
have been trying to change the law to remove that 30-day limitation. Because
the
whole premise and the whole purpose of that Act was to promote U.S. jobs, create
U.S. jobs, and generate more commerce as part of U.S. flag operators.
And
we are
one of them. We have opened up new markets for U.S. owned, U.S. flag, U.S.
crewed vessels in Asia. So we believe that certainly going to be pursuing that
in Washington, the re-application of it and in particular the 30 days
limitation. So we will be seeking eligibility.
Brendan
Maiorana - Wachovia
Securities - Analyst
Hi,
it’s
Brendan Maiorana of Wachovia. My question, first question, is for Stan. A large
part of the value proposition of the Company is monetizing the legacy land
holdings. If I look at slide 30 and compare that, [look at] your Hawaii
investment and compare that to slide 26, which is your development queue, it
seems that -- at least in my estimation -- that there is probably a larger
portion of development projects that are using legacy land holdings now.
Do
you
think that is--has there been a concerted effort to push some of the legacy
land
through the entitlement process? Or is it just the development pipeline is
more
a function of the lumpiness of the process?
Stan
Kuriyama - A&B
Land Group -
President,
CEO
I
think,
actually, both statements are true. We have -- we always are making concerted
effort to entitle lands. We know how important that is for value creation.
It is
really the building block that we start with. So we at all times have a
concerted effort. It is very difficult. It is a very lengthy process, however.
So
when we
get an entitlement through, then you have that project that is ready to be
developed along a number of years. But the major, in terms of new acquisitions,
the major acquisitions that contributed to the pipeline already and will
continue to do so for a number of years is the Wailea acquisition. But that
one
because it was already entitled.
Brendan
Maiorana - Wachovia
Securities -
Analyst
Just
so
I’m clear, isn’t [that] a major shift in--over the past five years, in trying to
push those land holdings through the entitlement process?
Stan
Kuriyama - A&B
Land Group -
President,
CEO
It
was a
bit at the high level, just trying to push it through entitlement.
Brendan
Maiorana - Wachovia
Securities -
Analyst
Then
a
second question would be for Chris. You talked about a desire to increase
leverage. One mechanism to do that is by increasing debt. The other would be
to
reduce your equity base. Can you just talk about your appetite for share
repurchases at this point?
Chris
Benjamin -
Alexander & Baldwin, Inc. -
SVP,
CFO and Treasurer
Yes,
as we
said our priority is always strategic investment. As you have seen today, we
not
only have a fairly sizable capital program baked into the plan, but we also
have
a number of initiatives that could drive additional capital investment. So
that
is always our priority.
But
as I
said, if we have got excess capacity and feel that the stock is a good
investment, and we demonstrated earlier in the year that we did feel that,
then
we will do it again. I cannot put a dollar figure on it; but you know the size
of the authorization we have. We’re certainly willing to use that under the
right conditions.
Allen
Doane -
Alexander & Baldwin, Inc. -
Chairman,
CEO
I
think
that is really the key, is that there is a very structured and, we hope,
thoughtful way that we look at spending your dollars for purposes of growing
the
Company and investing in the Company. One of the ways that we do it is looking
at share repurchases.
We
have
done this several times over the last number of years, and we have an
authorization in place that we can do it again.
I
think we
have time for one more question. Jonathan?
Jonathan
Chappell -
JPMorgan - Analyst
Jon
Chappell from JPMorgan, for Jim. The rate increase that Matson announced on
Friday afternoon, how structured is that? Is that once every six months, once
every three months, that you put an internal handling charge? How do you expect
the customer acceptance to be, given a little bit slower expectation for the
economy and maybe consumer and business optimism?
Jim
Andrasick - Matson
Navigation Company, Inc. -
President,
CEO
It
has
been Matson’s long-standing practice to announce general rate increases every 12
months, so that we give our customers the benefit of planning at least 14 months
ahead in this area. We consistently have gotten feedback that that is a good
thing. That is what they want.
I
guess I
should back up and say we have three tiers of pricing. First is a general rate
increase; second a terminal handling charge; and the third being a fuel
surcharge. So what I’m really addressing here on a 12-month-out basis is the GRI
and the terminal handling charge. Those are costs that are inherent in running
our business. We can predict them fairly well. A lot of them are contractual
in
nature for both longshore as well as other types of expenses.
I
would
say that the rates we announced were--so far I have not seen any overwhelmingly
negative feedback. I think there is a general understanding as to levels of
inflation that we face, particularly with our ILWU West Coast and Hawaii
contracts, which were six-year deals. We are right now entering the fifth year
of those contracts. Some of them were back-end loaded with respect to benefits.
So
I think
it is fair. We are very cautious the way we approach these rate actions.
Clearly, A&B as a Company has a lot at stake in Hawaii, and we are not going
to do anything to unduly burden the Hawaii economy. The rate increases, we
believe, are fair. (inaudible)
Terminal
handling charges are what they are. It is getting increasingly more expensive
just to lift containers on and off vessels in both the West Coast market as
well
as Hawaii. And fuel, who knows where that is going? We have taken to adjust
our
fuel surcharges as necessary as opposed to our previous practice of doing it
quarterly.
Jonathan
Chappell - JPMorgan
- Analyst
(indiscernible)
fuels outright, then, right?
Jim
Andrasick - Matson
Navigation Company, Inc. - President, CEO
Yes,
the
last two actions have been downward movements in the surcharge.
Jonathan
Chappell - JPMorgan
- Analyst
Okay,
thanks, Jim.
Allen
Doane -
Alexander & Baldwin, Inc. -
Chairman,
CEO
Okay,
I
think our time to conclude our webcast is now. We have been on the air for
just
slightly over an hour. We want to thank everyone for participating today. Chris,
do you have any final comments on people calling you or any further follow-up?
Chris
Benjamin -
Alexander & Baldwin, Inc. -
SVP,
CFO and Treasurer
People
are
welcome to call me.
Allen
Doane -
Alexander & Baldwin, Inc. -
Chairman,
CEO
Okay.
Thanks a lot, everyone.
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