Limoneira Company (NASDAQ:LMNR) Q1 2023 Earnings Call Transcript

Limoneira Company (NASDAQ:LMNR) Q1 2023 Earnings Call Transcript March 9, 2023

Operator: Greetings, and welcome to Limoneira’s First Quarter Fiscal Year 2023 Financial Results Conference Call. At this time, all participants are in listen-only mode, and the question-and-answer session will follow the formal presentation. . As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, John Mills with ICR. Thank you. You may begin.

John Mills: Good afternoon, everyone, and thank you for joining us for Limoneira’s first quarter fiscal year 2023 conference call. On the call today are Harold Edwards, President and Chief Executive Officer; and Mark Palamountain, Chief Financial Officer. By now, everyone should have access to the first quarter fiscal year 2023 earnings release, which went out today at approximately 4.00 PM Eastern Time. If you have not had a chance to view the release, it’s available on the Investor Relations portion of the company’s Web site at limoneira.com. This call is being webcast and a replay will be available on Limoneira’s Web site as well. Before we begin, we would like to remind everyone that prepared remarks contain forward-looking statements and management may make additional forward-looking statements in response to your questions.

Such statements involve a number of known and unknown risks and uncertainties, many of which are outside the company’s control and could cause its future results, performance or achievements to differ significantly from the results, performance or achievements expressed or implied by such forward-looking statements. Important factors that could cause or contribute to such differences include risk detailed in the company’s 10-Qs and 10-Ks filed with the SEC and those mentioned in the earnings release. Except as required by law, we undertake no obligation to update any forward-looking or other statements herein, whether as a result of new information, future events or otherwise. Please note that during today’s call, we will be discussing non-GAAP financial measures, including results on an adjusted basis.

We believe these adjusted financial measures can facilitate a more complete analysis and greater understanding of Limoneira’s ongoing results of operations, particularly when comparing underlying results from period to period. We provide as much detail as possible on any items that are discussed on an adjusted basis. Also, within the company’s earnings release and in today’s prepared remarks, we include adjusted EBITDA, adjusted net loss per diluted earnings per share, and diluted net loss per common share, which are non-GAAP financial measures. A reconciliation of adjusted EBITDA, adjusted net loss per diluted EPS and diluted net loss per common share to the most directly comparable GAAP financial measures are included in the company’s press release, which has been posted to its Web site.

And with that, it is my pleasure to turn the call over to the company’s President and CEO, Mr. Harold Edwards.

Harold Edwards: Thanks, John, and good afternoon, everyone. I am pleased with our performance in the first quarter. Despite the heavy rains in California pushing the initial first quarter avocado harvest and a portion of the lemon harvest into the second quarter, we generated over $37 million of revenue in our seasonally softer quarter. We had minimal damage to our crops from the rain and fully expect to recoup the delayed revenue in the second and third quarters, keeping our full year 2023 volume guidance intact. Additionally, we expect pricing for fresh lemon cartons to increase in the second half of the fiscal year. For new investors listening to our call today, I would like to quickly recap our strategic transition plan that is pivoting our business towards an asset-lighter model in order to streamline our operations and sell non-strategic assets, improve the consistency of our earnings, increase EBITDA and dividends per share, reduce debt, right-size the balance sheet and improve the return on invested capital.

This plan involve the identification of approximately $150 million of assets for sale, which because of greater value realized in initial monetization efforts, we believe are now worth approximately $180 million and a transition to a more efficient operating plan. We’ve made significant progress advancing our strategy to monetize certain non-strategic assets with nearly all of those identified assets sold, expanding our One World of Citrus initiative with the recruitment of close to 1 million additional cartons from new grower partners and executing on Harvest at Limoneira, all of which are transforming our balance sheet and positioning us to improve our top and bottom line results. Management will be meeting with our Board of Directors this month for our annual strategic planning session to implement a new strategic capital allocation plan, taking into account our very strong balance sheet.

We have successfully closed on the sale of four of the six identified assets over the past six months for a total of $130 million in proceeds. We ended the first quarter with the announced closing of our Northern Properties sale for approximately $99 million in net cash proceeds. The Northern Properties sale is the most transformative as the proceeds were used to significantly reduce our net debt position by 72% from year end 2022 to $28.9 million is expected to be accretive on a pro forma EBITDA and earnings basis will strengthen the balance sheet and enable us to pursue a range of strategic opportunities to maximize shareholder value. When we were looking for a buyer of our Northern Properties, it was imperative that we find one that allowed us to keep our lemon supply chain intact.

The property consists of 3,537 acres, made up of 2,700 planted acres, 231 acres of plantable ground and 606 acres of open space. As we laid out in the announced sale press release, as part of this transaction, Limoneira and Prudential Agricultural Investments entered into a farm management services agreement to provide farming services related to the property for an initial term of one year and entered into a grower packing and marketing agreement to provide packing, marketing and selling services for lemons harvested on the property for a minimum five-year period. This piece of the transaction fits squarely with our strategic plan to expand our One World of Citrus in an asset-lighter way, as we focus on leveraging our leading global packing, marketing and selling services using more grower partner fruit.

The economics of using grower partners is extremely attractive with Limoneira targeting $2.00 to $2.50 per carton of margin, with no additional capital outlay. It also reduces the impact of pricing volatility and rising farming costs on our business and will be additive to EBITDA and earnings per share on a pro forma basis. We have become very attractive to grow our partners and continue to develop best-in-class grower services to bolster our appeal through investments in our technology and supply chain. Our strategic approach to fresh utilization enables our sales and marketing team to successfully market fresh lemons throughout the year with one of the best fresh utilization rates in the market. In fiscal year 2022, we sold over 78% of lemons fresh at competitive prices compared to our largest competitor who was at approximately 50%.

This is obviously an important draw with grower partners. We are also working to better support our grower partners by reconfiguring our global lemon packing network. This includes reducing certain orange and lemon acreage globally, while still maintaining the packing and marketing of the lemons grown on these locations. In the first quarter of fiscal year 2023, roughly 66% of our U.S. pack fresh lemon source volume came from grower partners and our goal is to have that number closer to 75%. The structure of our Northern Properties deal with Prudential Agricultural Investments is a great example of the direction we are headed, growing the service part of our business as we focus on packing, marketing and selling. And in return, you will begin to see meaningful improvement to our returns on invested capital with better margins, cash flow and earnings that become a lot more stable and predictable over the next 12 to 18 months.

As far as our remaining assets, we have $50 million of the now $180 million in assets identified that we plan to monetize over the next 12 to 18 months. Even after the Northern Properties transaction, we continue to own approximately 11,800 acres with over 21,000 acre feet of owned water rights, usage rights and pumping rights. We are finding great monetization opportunities for our water assets by either fallowing acreage, leasing pumping rights or selling the water rights for significant appreciation over our investments. A near-term water monetization opportunity is the 1,300 acres of farmland we have in Yuma, Arizona that has associated Class 3 Colorado River water rights. The Department of the Interior has instructed that seven states that derive water from the Colorado River to reduce their intake by a third and the cuts will first come from Class 8 water rights all the way down.

These states will be forced to go to those with senior rights, like Class 3 water rights, and pay for their water. There is a proposed new fallowing program of which we plan to take advantage with 600 of our 1,300 acres, and we expect to receive $2,433 an acre to divert water from farming to urban use. A recent $80 million transaction in the City of Buckeye, Arizona provides a comparable water sales value of $13,500 per acre foot, which would equate to over $150 million for our Class 3 Colorado River water rights, of which Limoneira would be entitled 50%. There’s no guarantee we could achieve this value, but this is a great example of what is happening in our space for comparable water assets. In addition to these assets, we have our real estate development project Harvest at Limoneira.

We announced at the end of December that we increased our cash proceeds projection for this project by over 20% to $115 million and updated our timeline to include both the Harvest development and the Harvest Medical Pavilion across the highway. We received the first $8 million of proceeds in the fourth quarter of fiscal year 2022 and expect to generate the full $115 million over seven fiscal years. The project is currently approved to develop 1,500 residential units and we are in negotiations with the City of Santa Paula to expand that up to 2,000 units. We believe we will be able to announce the additional 500 units later this year. Finally, we look forward to transacting on $5 million of land sales at the Harvest Medical Pavilion in the fourth quarter of 2023.

So what is next for Limoneira now that we have a very strong balance sheet and a clear path to stronger EBITDA, cash flow and earnings? Over the next 12 to 18 months, you can expect to see our continued transition to an asset-light business model and focus on the best use of our assets to enhance shareholder value. Our Board and management team will continue to evaluate how to best leverage our expertise in packing, marketing and distributing citrus combined with our valuable portfolio of agricultural lands, real estate properties and water rights in order to enhance long-term shareholder value. As for longer term, in addition to capital allocation decisions, our upcoming strategic Board of Directors planning session will also review different areas where we can potentially reinvest that will produce more consistent and more reliable returns.

Potential areas of investment could be in our supply chain through investments in the forward distribution, forward warehousing and increased packing capacity and expanding our avocado production and potentially adding value to avocados beyond production as a complement to our One World of Citrus product offerings. And with that, I’ll now turn the call over to Mark.

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Mark Palamountain: Thank you, Harold, and good afternoon, everyone. As a reminder, it is best to view our business on an annual not quarterly basis due to the seasonal nature of our business. Historically, our first and fourth quarters are the seasonally softer quarters, while the second and third quarters are stronger. For the first quarter of fiscal year 2023, total net revenue was $37.9 million compared to total net revenue of $39.3 million in the first quarter of the previous fiscal year. Agribusiness revenue was $36.5 million compared to $38.1 million in the first quarter last year. Other operations revenue was $1.4 million compared to $1.2 million in the first quarter of fiscal year 2022. Agribusiness revenue for the first quarter of fiscal year 2023 includes $24.7 million in fresh lemon sales, similar to $24.7 million during the same period of fiscal year 2022.

Approximately 1,308,000 cartons of fresh lemons were sold during the first quarter of fiscal year 2023 at an $18.88 average price per carton compared to approximately 1,207,000 cartons sold at a $20.48 average price per carton during the first quarter of fiscal year 2022. Of the 1,308,000 and 1,207,000 cartons of U.S. packed fresh lemons sold during the first quarters of fiscal year 2023 and 2022, respectively, 66% and 57%, respectively, were procured from outside growers. As part of the company’s strategic plan, it is transitioning One World of Citrus to an asset-light model through the expansion of grower partners. Due to heavy rainfall that occurred during the first quarter of fiscal year 2023, the timing for the initial avocado harvest was pushed from the first quarter into the second quarter of fiscal year 2023.

The company recognized no avocado revenue in the first quarter of fiscal year 2023, but expects to recoup this delayed revenue in the second and third quarters. The company recognized $800,000 of avocado revenue in the first quarter of fiscal year 2022 on approximately 365,000 pounds at a $2.10 average price per pound. The company recognized $1.2 million of orange revenue in the first quarter of fiscal year 2023 compared to $900,000 in the first quarter of fiscal year 2022. Approximately 64,000 cartons of oranges were sold during the first quarter of fiscal year 2023 at an $18.00 average price per carton compared to approximately 53,000 cartons sold at a $16.47 average price per carton during the first quarter of fiscal year 2022. Specialty citrus and other crop revenues was $1.2 million in the first quarter of fiscal year 2023 compared to $900,000 in the first quarter of fiscal year 2022.

Total costs and expenses for the first quarter of fiscal year 2023 were $12 million compared to $48.8 million in the first quarter of last year. The decrease of $36.8 million was primarily the result of the gain recognized from the sale of the Northern Properties in January 2023. During the first quarter of fiscal year 2023, the company made funding contributions of $2.6 million to fully fund and settle the company’s retirement plan and recorded settlement charges of $2.7 million. There are no remaining benefit obligations or plan assets. In addition, a patronage dividend of $1.4 million will be recorded in the second quarter of fiscal year ’23 compared to a patronage dividend of $1.6 million recorded in the first quarter of fiscal year 2022.

Operating income for the first quarter of fiscal year 2023 was $25.9 million compared to an operating loss of $9.6 million in the first quarter of the previous fiscal year. Net income applicable to common stock after preferred dividends for the first quarter of fiscal year 2023 was $15.5 million compared to a net loss applicable to common stock of $6.6 million in the first quarter of fiscal year 2022. Net income per diluted share for the first quarter of fiscal year 2023 was $0.84 compared to a net loss per diluted share of $0.38 for the same period of fiscal year 2022. Adjusted net loss for diluted EPS for the first quarter of fiscal year 2023 was $9.3 million compared to a loss of $5.7 million in the same period of fiscal year 2022. Adjusted net loss per diluted share was $0.53 compared to an adjusted net loss per diluted share of $0.33 for the first quarter of fiscal year 2022.

A reconciliation of net income or loss attributable to Limoneira Company to adjusted net loss for diluted EPS is provided at the end of our earnings release. Adjusted EBITDA was a loss of $7.9 million in the first quarter of fiscal year 2023 compared to a loss of $5.6 million in the same period of fiscal year 2022. A reconciliation of net income to loss attributable to Limoneira Company to adjusted EBITDA is also provided at the end of our earnings release. Turning now to our balance sheet and liquidity. On January 31, 2023, we sold our Northern Properties which resulted in total net proceeds of $98.8 million. The proceeds were used to pay down all of our domestic debt, except the AgWest Farm Credit $40 million non-revolving line of credit, which is fixed at 3.57% until July 1, 2025.

Long-term debt as of January 31, 2023 was $40.9 million compared to $104.1 million at the end of fiscal year 2022. Debt levels as of January 31, 2023 minus $12.5 million of cash on hand resulted in a net debt position of less than $29 million at quarter end. Also, we have $50 million of remaining non-strategic assets for monetization and expect their sale combined with improving EBITDA will result in the opportunity to have no debt and a cash position on our balance sheet. Now, I’d like to turn the call back to Harold to discuss our fiscal year 2023 outlook and longer term growth pipeline.

Harold Edwards: Crop reports for lemons continue to suggest industry-wide production is expected to be down 10% to 15% in fiscal year 2023 from Mother Nature. However, due to the planned expansion of our grower partner fruit, we are expecting to increase volume and increase our market share in fiscal year 2023. We continue to expect total lemons sales volume to be in the range of 5 million cartons to 5.4 million cartons for fiscal year 2023. This is up from 4.9 million cartons in fiscal year 2022 and 4.4 million cartons in fiscal year 2021. For the second quarter of fiscal year 2023, we expect to experience continued pricing pressure but believe the industry-wide lower production will lead to higher prices beginning in the second half of fiscal year 2023.

Also, during the second quarter of fiscal year 2023, we received a patronage dividend from our primary lender AgWest, formerly Farm Credit West, of $1.4 million. We continue to expect avocado volumes for fiscal year 2023 to be in the range of 4 million pounds to 5 million pounds. It’s important to note that while fiscal year 2022 was a record year for avocado revenue, the California crop typically experiences alternate years of high and low production due to plant physiology. This, along with adverse weather conditions, is contributing to the year-over-year decline. We experienced unusually high temperatures in early September and a wind event in November that knocked fruit off of our trees and will have a negative impact on our 2023 avocado crop.

In addition, we continue to expect to receive $115 million compared to the previous estimate of $95 million from Harvest at Limoneira and the addition of the Limoneira Lewis Community Builders II and East Area II spread out over seven fiscal years, with proceeds of $8 million already received in the fourth quarter of fiscal year 2022. Our cash flow projections were updated last quarter to include the medical campus in our East Area II development and a portion of the cash flow projections were pushed out approximately 18 months due to the higher interest rate environment, which reduced the current number of new home starts. The breakdown is expected to be as follows. Fiscal year 2022 generated $8 million of cash to Limoneira. Fiscal year 2023 is expected to generate $5 million.

Fiscal year 2024 is expected to generate $8 million. Fiscal year 2025 is expected to generate $17 million. Fiscal year 2026 is expected to generate $25 million. Fiscal year 2027 is expected to generate $30 million and fiscal year 2028 is expected to generate $22 million. And lastly, as previously stated, we have identified $180 million of non-strategic assets for sale. We have made great progress thus far executing against our plan with the sale of $130 million in the past six months, and expect to announce the sale of the remaining $50 million in the next 12 to 18 months. And with that, I’d now like to open the call up to your questions. Operator?

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Q&A Session

Operator: Certainly. We will now begin the question-and-answer session. . The first question comes from Eric Larson from Seaport Research Partners. Please go ahead.

Eric Larson: Hi, guys. How are you doing today?

Harold Edwards: Hi, Eric.

Mark Palamountain: Hi, Eric.

Eric Larson: So my first question, and I think I’d know the answer to this. So on your big asset sales, the water rights are going with those I’m assuming. Is that true or is it not? And is there any way to sort of split or try to figure out what the valuables water rights would have been as part of the sale price?

Harold Edwards: So part of the compelling price that we received for the Northern Properties, Eric, was due to the access of reliable water and water rights. So the water assets did go with the land assets in those sales. There were a number of different water rights associated with those properties with various and varying ranges of value based on the reliability and the sustainability of each of those sources. But prior to the divestiture of the Northern Properties, we had about 28,000 acre feet of water rights. And that number now is down to 21,000 acre feet. So about 7,000 acre feet of water went with those properties.

Mark Palamountain: And Eric, just further detail. So far and above the best water rights that we have left, which are here the adjudicated Santa Paula basin and Yuma, which equate to over 90% of the prior water value. So still in great shape with water and moving forward there.

Eric Larson: Okay. Thank you. That’s good clarification. So next question is just the lemon business. Obviously, it was soft again this quarter. You’re under $19 per carton. I think you need to be around $20 to kind of even breakeven and make some money. Give us a little more flavor, Harold, about really when does the supply situation really start to tighten up? What is kind of gradual improving price into the rest of the year, but it seems to be continuing getting delayed and I’m just curious as to how you look at the cadence of how that pricing outlook is going to be?

Harold Edwards: So that’s a great question. So we keep dealing with the reality of an oversupplied lemon market exacerbated by a lot of young plantings throughout California and Arizona domestically, but also a lot of fruit ready to be imported from the southern hemisphere. And so Mark actually — Mark and his team completed a really fascinating and interesting analysis about the economics of each of the growing districts in California and Arizona. And the profitability of each of the districts as it related to a weighted average sort of here is what the costs of all of them together are and then here’s what the price achieved in each of those timeframes of the year when each of those lemons go to market. And what we found was really interesting.

So the year starts for us in the desert. And what we found there was that the cost structure was high really driven because it’s a tough place to grow lemons, which compromises the yields. And the lower yields equates to higher cost per carton, because you’re not generating the amount of fruit that you do in other places, and the cost of transportation to get it all the way from Arizona to our packing house in Santa Paula. So you put that together and that really was a really negative part of the margin that we were achieving. So what’s going on in Arizona now is almost — 50% of what’s going on Arizona is more of a water story where we followed 600 of the 1,300 acres, which takes half of the cost of farming out of that equation. And it’s now being replaced by a water coupon that we received for the fallowing program.