Limoneira Co

Greetings and welcome to the Lehman Yara first quarter fiscal year 2021 financial results. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during a conference, please press star zero on your telephone keypad. 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.

Good afternoon, everyone, and thank you for joining us for Lehman Air's first quarter fiscal year 2021 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 2021 earnings release, which went out today at approximately 4 p.m. 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 website at limanera.com. This call is being webcast and a replay will be available on Limanera's website 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 details in the company's 10 Qs and 10 Ks filed with the SEC and those mentioned in the earnings relief. Except as required by law, we undertake no obligation to update any forward-looking or other statements herein, whether 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 Lehman Air's ongoing results of operations, particularly when comparing underlying results from period to period. We have provided 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, which is a non-GAAP financial measure. A reconciliation of adjusted EBITDA to the most directly comparable GAAP financial measures is included in the company's 10-Q and press release, which have been posted to its website. And with that, it is my pleasure to turn the call over to the company's president and CEO, Mr. Harold Edwards.

Thanks, John, and good afternoon, everyone. I'm pleased with our start to fiscal year 2021 as we achieved record first quarter lemon volume, solid specialty citrus revenues, and our improved cost structure contributed to improvement in cash flow compared to last year. As a reminder, since our first quarter ends January 31st, the pandemic did not have a material effect on our fiscal first quarter last year. So this year over year improvement was due to our ability to dramatically expand our focus on grocery retail and the reason we believe we are very well positioned to achieve a meaningful increase in domestic food service and exports once dining out improves from COVID-19 vaccine distribution. In addition, Even though it is early in the season, we expect strong results from avocado and oranges in fiscal year 2021. During the first quarter, higher and more frequent than normal winds affected our lemon industry growers in District 2. This temporarily reduced the quality of the industry's crop coming out of this district, but it also is expected to drive increased pricing for top graded lemons during the springtime. I'll now discuss each of our business divisions performance for the first quarter, starting with agribusiness. Agribusiness revenue was $37.1 million compared to $40.5 million in the first quarter of fiscal year 2020. Fresh lemon revenue was $25 million compared to $27 million during the same period of fiscal year 2020. Even though we achieved record lemon volume in the quarter, overall pricing was $18.91 average price per carton compared to $21.12 average price per carton. U.S. pricing was approximately $20 and our pricing in South America approximately $10, which is expected to rise as we enter their export season. Orange revenue was lower in the first quarter as higher prices of oranges were partially offset by the timing of harvest. The orange season has had a slower start than anticipated. However, it is our expectation for fiscal year 2021 to have better profitability on fewer cartons and acres dedicated to oranges. Specialty citrus and other crop revenue was similar to prior fiscal year period of $1.8 million. Turning now to our real estate development segment. Our real estate development project, Harvest at Limonera, continues to perform very well, and we have now closed 398 lots since inception, including 44 new lot closings in the first quarter of fiscal year 2021. As each quarter closes, we gain confidence in the timing of the expected $80 million of cash distributions from Harvest at Limonera over the next six years, beginning in fiscal year 2022. The expected cash distributions do not include the potential upside from increased density in housing at Harvest at Lima Nera, as well as the potential opportunity of a medical campus in our East Area 2 development. We expect to be in a position to provide greater transparency on these opportunities in the upcoming quarters. Our company now has over 15,000 acres of prime agricultural land, 550 acres of residential housing we are selling, many additional non-agricultural assets we expect to monetize in the future, and over 28,000 acre feet of water rights, pumping rights, and usage rights. We continue to be very good stewards of these assets and believe our company will continue to reward long-term shareholders for many years to come. As we enter our stronger second and third quarter growing seasons, we are very confident we will achieve improved year-over-year results due to our expanded footprint in retail as well as the potential for food service to begin coming back online as everyone continues to receive their vaccines, allowing restaurants and bars to reopen. We're encouraged by the record fresh lemon volume during our first quarter and the continued improvement in our cost structure. We expect positive cash flow towards the end of fiscal year 2022 from harvest at Limonera and look forward to updating you on our agribusiness and retail real estate progress in the coming months. And with that, I'll now turn the call over to Mark.

Thank you, Harold, and good afternoon, everyone. As a reminder to everyone, there is a seasonal nature to our business with our revenue driven by varying harvest periods from year to year. Therefore, we advise that our business be viewed on an annual, not quarterly basis. Historically, our first and fourth quarters are the seasonally softer quarters, while our second and third quarters are stronger. For the first quarter of fiscal year 2021, total net revenue was $38.3 million compared to total net revenue of $41.7 million in the first quarter of the previous fiscal year. Agribusiness revenue was $37.1 million compared to $40.5 million in the first quarter last year. Other operations revenue was similar to the prior fiscal year at $1.1 million. Agribusiness revenue for the first quarter of fiscal year 2021 includes $25 million in fresh lemon sales compared to $27 million of fresh lemon sales during the same period of fiscal year 2020. Approximately 1,320,000 cartons of fresh lemons were sold during the first quarter of fiscal year 2021 at a $18.91 average price per carton compared to approximately 1.2 million 80,000 cartons at $21.12 average price per carton during the first quarter of fiscal year 2020. Pricing was lower in the quarter due to COVID-19 pandemic-related food service closures, reducing the demand for fresh lemons in the food service marketplace and creating an oversupply in the retail marketplace. We also had sales of fruit in South America in the first quarter, lowering the overall weighted average pricing. But if you were to look at just the US price of fresh lemons in the first quarter of fiscal year 2021, it was $20.05 average price per carton. The company recognized no avocado revenue in the first quarter of fiscal year 2021, compared to $200,000 in the same period last fiscal year. Approximately 125,000 pounds of avocados were sold during the first quarter of fiscal year 2020 at a $1.34 average price per pound. The company recognized $1.1 million of orange revenue in the first quarter of fiscal year 2021 compared to $2.3 million in the same period of fiscal year 2020, attributable to higher prices of oranges partially offset by the timing of the harvest. The orange season has had a slower start than anticipated. However, it is our expectation for fiscal year 2021 to have better profitability on fewer cartons with less acreage dedicated to oranges. Specialty citrus and other crop revenues was similar to the prior fiscal year at $1.8 million. We continue to improve our cost structure in the quarter with decreased total costs and expenses from $50.1 million in the first quarter of last fiscal year to $43.9 million in the first quarter of the fiscal year 2021. The decrease in operating expenses was primarily attributable to decreases in harvest, growing, and third-party grower costs, partially offset by increased packing costs. Costs associated with the company's agribusiness include packing costs, harvest costs, growing costs related to the fruit procured from third-party growers and depreciation and amortization expense. Operating loss for the first quarter of fiscal year 2021 was $5.6 million compared to operating loss of $8.5 million in the first quarter of the previous fiscal year. Net loss applicable to common stock after preferred dividends for the first quarter of fiscal year 2021 was $4.3 million compared to a net loss of $6.6 million in the first quarter of fiscal year 2020. Net loss per diluted share for the first quarter of fiscal year 2021 was 25 cents compared to a net loss per diluted share of 37 cents for fiscal year 2020. Adjusted net loss applicable to common stock for the first quarter of fiscal year 2021 was $4.4 million compared to adjusted net loss of $5.2 million in the same period of fiscal year 2020, which excludes the loss on stock in Colabo. Adjusted net loss per diluted share was 25 cents compared to adjusted net loss per diluted share of 30 cents for the first quarter of fiscal year 2020, based on approximately 17.4 and 17.6 million weighted average diluted common shares outstanding respectively. A reconciliation of adjusted net loss to net loss is provided at the end of our earnings release. Adjusted EBITDA was a loss of $3.1 million in the first quarter of fiscal year 2021 compared to a loss of $5 million in the same period of fiscal year 2020. A reconciliation of adjusted EBITDA to net loss is provided at the end of our earnings release. Turning now to our balance sheet and liquidity, long-term debt as of January 31, 2021 was $131.5 million compared to $122.6 million at the end of fiscal year 2020. On March 12, 2020, the Board of Directors approved a share repurchase program authorizing the company to repurchase up to $10 million of its outstanding shares of common stock through March 2021. During the fiscal year 2020, the company repurchased 250,977 shares for approximately $3.5 million. As of January 31, 2021, the remaining authorization under this program is approximately $6.5 million. In December 2020, we received $5 million of federal tax refunds related to the CARES Act, and we expect an additional $900,000 of California state refunds in fiscal 2021. Now, I would like to turn the call back to Harold to discuss our fiscal year 2021 outlook and longer-term growth pipeline. Thank you, Mark.

The COVID-19 pandemic continues to affect our food service business on a global basis. The company believes it is prudent to not provide lemon guidance at this time until the COVID-19 vaccine is widely distributed and we begin to see consistent openings of the food service market. The higher and more frequent wins during the first quarter will reduce industry volume for the second quarter, but will also drive higher temporary pricing for top-grade lemons. Offsetting some of this uncertainty, we do expect to generate strong orange and avocado revenue in fiscal 2021 based on positive market factors and positive initial crop indicators. We also expect improving results compared to last year during the second, third, and fourth quarters of fiscal 2021 due to slowly increasing demand from food service and export markets, as well as improving cost control measures. We also have an additional 1,200 acres of non-bearing lemons estimated to become full bearing over the next four years, which will enable us to achieve strong organic growth for many years to come. The company expects 200 of the 1,200 acres to become full bearing in fiscal year 2021. Beyond these 1,200 acres, we intend to plant an additional 250 acres of lemons in the next two years that we believe will further build our long-term pipeline of productive acreage. We anticipate this additional acreage will increase domestic supply of lemons from our 2020 level by approximately 50% or about 900,000 to 1.3 million additional fresh cartons as the non-bearing and planned acreage becomes productive. We also expect to have a steady increase in third-party grower fruit. Also, due to continued steady improvement in the development of harvest at Limonera, we believe we will generate cash distributions from harvest as follows. Fiscal 2021 is expected to be neutral. Fiscal 2022 is expected to generate $3 million of cash to Limonera. Fiscal year 2023 is expected to generate $15 million. Fiscal year 2024 is expected to generate $27 million. Fiscal year 2025 is expected to generate $25 million, and fiscal year 2026 is expected to generate $10 million. This will be $80 million of cash back to Lima Nera in the next six years. These expectations from harvest do not include the potential upside from increased density of housing at harvest, as well as the potential opportunity of a medical campus in our East Area 2 development. We expect to be in a position to provide greater transparency on these opportunities later this year. And with that, I'd like to open the call up to your questions. Operator?

Thank you. Ladies and gentlemen, at this time, we will be conducting a question and answer session. If you'd like to ask a question, you may press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of Ben Bienvenu with Stevens Inc. Please proceed with your question.

Hey, good afternoon, guys.

Hi, Ben. Hey, Ben.

I want to ask you, you mentioned this in your guidance, and you touched on it last quarter as well, just how your positioning in the grocery channel has improved in the midst of COVID. And I want to understand a little bit better how sticky that positioning is as we, uh, you know, hopefully return to normal here over the next year or two. Um, and what, if any difference in profitability there is in, in that channel versus your traditional food service channel, if there was a, um, you know, cartons oscillating from food service to grocery, any color you could, you could offer there would be helpful.

Sure, as it relates to pricing and margins in the retail channel versus in the food service channel, there's roughly parity between the two, so no great differential. So either channel can be equally profitable. We believe that the pivot over to the retail for us will be relatively sticky Part of the challenge that we had when food service markets began to close was we were an unknown commodity or a newly certified vendor for some of these retailers. So it took us a while to become known but also then proven and ultimately our value proposition needed to be proven to some of these retailers. So we needed to use price in some instances, to actually get in the door with some of these retailers. As we became proven and our supply chains were proven and our quality was proven, that price differential between us and our competition diminished. And we're really pleased to say that as we just finished our first quarter and now are in our second quarter, We have great stickiness with our retail customers, and we're pretty much selling at parity with the competition. So that's all very positive for us. The one thing I can tell you, Ben, is the premium that we receive typically by selling to our export customers can be as much as $5 to $7 a carton into that channel, which is one of the reasons we tend to choose to take our fancy fruit into the export markets whenever we can. But in terms of the differential between food service and retail channels domestically, they pretty much sell at parity.

Okay, that's helpful. My second question is related to costs in the business and just cost inflation more broadly, thinking specifically about, you know, labor tightness, freight inflation. Does that traditionally manifest itself in higher lemon prices in the industry? And how are you all positioned relative to some of the key cost inflation drivers in the industry more broadly as we think about fiscal 21?

Yeah, so I'll take that, Ben. So generally, I think we were very pleased with our cost controls relative to the internals of the company. We did have some packing costs increase that were attributable to our minimum wage increases in California and some minor COVID costs, PPE, et cetera. But overall, I think, you know, some of the costs that we've seen start to rise a little bit, a little bit in the paper side, into the carton boxes. You know, we were fortunate from the fertilizer side that oil prices and all that have been at a low level, and we're starting to see that obviously get to 52-week highs. So we anticipate seeing some inflation there. You know, from the lemon absorption of those costs, I think historically we've seen that kind of go parry-pursue. You know, when we were starting this adventure back in 2010 as a public company in You know, the prices were $14, $15, and, you know, there's moderate growth in the demand, but we also saw price increases with those cost increases sort of be able to carry the industry.

Okay. That's very helpful. Good luck, and I'll get back in the queue. Thanks. Thanks, Ben. Thank you, Ben.

Our next question comes from the line of Vincent Anderson with Stiefel. Please proceed with your question.

Yeah, thanks. Good afternoon, guys. So, hey, yeah, so I mean, I guess in addition to a little bit of weather in District 2, South America has been having some fun over the last few months. You know, maybe can you just break down, you know, in South America, how much it has impacted lemon production overall, and then specifically yourself, and then if you had any detail at this stage in terms of what the D2 impact is, if it's just sizing or if there's scarring issues.

Yeah, so I'll start with the latter part of that, which is the impact of the winds on our California production. And it's really right here on the California coast. So the last few years, we've seen unusually high levels of east winds. And as you know from your visit, in looking inside a lemon tree, lemon trees have thorns and When the wind blows, the fruit sometimes rubs up against those thorns, and it'll scar the fruit and downgrade the quality from a perfect-looking, fancy-grade piece of fruit to a choice-grade of fruit. And so in District 2, what normally would be forecast at 40% of the total tree crop being harvested at fancy grade for the limonera production and that of our affiliated growers, We're estimating that now closer to 25% fancy grade. And then the choice grade upwards of 40 to 45%, where that's typically a little lower than that. So the challenge will be that there'll be really two, which is the overall tree crop size is 20% down in total as an industry. The percentage of first-grade fruit will be down because of the winds. And then the choice-grade fruit will be up in terms of the percentage of being up. And the choice-grade is typically the fruit that finds its way into the food service market. So I guess the potential challenge or risk that we're all looking at out there is that if the food service markets or channels are slow and restaurants and bars are slow to reopen – the choice grade fruit could build up and become overcrowded, which will put negative pricing pressure on us to sell that fruit. So that's sort of the overview domestically, and we'll just have to keep reporting on it as we go into the second and third quarters. But as it relates to the production in Chile and Argentina, I guess the good news is in Argentina, our production is way up north in the northern part of Argentina. The middle part of Argentina is going through a pretty severe drought right now, and production is significantly off as a result of that drought. We believe ultimately that'll help us because there'll be a much better balance between the supplies of Argentine fruit and then its ability to find the markets. And then we also are experiencing drought conditions in parts of Chile. Our production is actually in pretty good shape. So we believe that the production that you'll see coming out of our operations in both Chile and Argentina should be quite favorable. And we have a normally excellent percentage of fancy grade fruit that should find its way into the U.S. market in order to take advantage of the decreased coastal fruit that you'll have here, the fancy grade fruits. So we believe this is all sort of part of our one world of citrus model, and we believe that we'll see the benefits of our southern hemisphere production in 2021, unlike we've seen in years past, and it should really be a significant value producer for the company.

Excellent. Um, and then this one may be a little bit more of a stretch, but you know, you've had a couple of tough marketing years to try and ramp up your third party recruiting. You know, as you think about, you know, your ability and really the necessity to keep your pack house filled, you know, has the thought process changed at all to where maybe you need a little bit more call it juice exposure to help retain growers and down years, even if it sacrifices fresh utilization on the margin. Or is the sales pitch really still the same in recruiting third party?

Yeah, the sales pitch is still the same. Certainly, we took some hits as a result of the challenges that we've had over the last two years. And in 2021, admittedly, our grower returns for part of the year were not at the top of the market, and we did have some grower attrition. The good news about that is that that actually is coming right into a time of the year where there's general oversupply, and that's in the spring and the summer. So even though it'll be negative in terms of running less units across our line, and by the way, the total tree crop in all districts is down anywhere from 15% to 30% in each of the districts. So overall, I think the total tree crop across California and Arizona is down 20%. So that should help, but also not having to handle the buildup of fruit that we'd accumulated in District 2 in the spring and the summer should actually become a much better profit formula for our company because our fresh utilization should be better. With that being said, though, the goal is to fill our packing houses up with volume and to sell all of the volume that we do handle So as bad as it might have been over the last two years, if we're able to maintain higher levels of fresh utilization, our grower returns should be more competitive, which they will be, and we'll make it our business to make them more competitive, which will greatly enhance our ability to attract and recruit and retain outside growers. So we fully expect that in years to come, we'll be able to continue to recruit outside growers and stay right on our plan of filling our packing houses up and ultimately being able to sell all of their lemons as markets and market demand return to pre-pandemic levels.

And Vince, I'll just add there that as we saw some of that grower attrition this year, even though seeing we have that industry crop down 20% as a total, our overall internal crop will be up given the fact of those new acres that are coming on and some different techniques that we've been using. So we anticipate that to more than offset any of that grower loss.

All right, great to hear. Thank you. I'll turn it over. Thanks, Vance.

Our next question comes from the line of Mark Smith with Lake Street Capital Markets. Please proceed with your question.

Hi, guys. First one for me is just, you know, are you guys seeing any change yet in food service that's really impacting your business yet?

So it's just starting. We're just starting to see it. It literally is changing on a day-to-day basis as we're seeing increased orders in different pockets of the country that are opening up. And some areas are growing faster and increasing faster than others. So, so we're, we're cautiously optimistic, but certainly everything we've been reading and seeing on, on the news suggests that, uh, in certain parts of the country, they're opening up very rapidly and people are going out and eating and enjoying restaurants and bars. And that's exactly the area that the areas where we're seeing the lift in demand.

Perfect. And then as we look back at the storms that rolled through the South, primarily Texas, any real damage in crops that you can point to or any changes in fruit pricing that impacts you guys?

Not that really that affects us on the fresh side. Texas got clobbered with really cold weather and snow, as you know, and then part of the Mexican production got hit as well. I guess what we would expect to see, if there is any impact on our business, is would be slightly less production coming out of Mexico, which typically begins in August. And we'd see that benefit in our fourth quarter. So we do believe there'll be slightly fewer lemons from Mexico coming into the US market. But as it relates to Texas, that really impacted more the grapefruit and some orange production, which had less of an impact on our total business. OK.

And then any update on export market, on what you guys are seeing there, any impact that ports are having, or any updates you can give us there would be great.

Yeah, you just touched on it with that question, which is a very insightful question. As you know, containerized shipping lanes have been significantly compromised in terms of their service levels due to challenges that the pandemic have caused with longshoremen and the ability for vessels to birth, load, unload, and basically enjoy port services. And so there's huge backups around the ports around the world, and we're caught up in a lot of that. A great example of how that's impacting our business is our Japanese market, which still is coming out of pandemic-related demand issues. So they're probably at about, I'm going to make it up, but maybe 60% or 70% of pre-pandemic demand levels. We're seeing rapidly escalating pricing opportunities in Japan, but it's driven more by our inability to service the market with reliable container ship services because of the challenges at the ports. What we're finding in our Korean shipments, we've been very fortunate to be able to deliver pretty consistently in the Korean market. And demand in Korea now is at pre-pandemic levels. Different sort of scenarios in different countries in the Asian markets. But all in all, we're seeing improvement in each of those markets today. And we're just hopeful that as the vaccine finds its way around the world and as different markets open up, that the port situation will improve and we'll begin to see more reliable shipping opportunities again, which should really help the supply chains, not only for us, but for everybody as those markets improve not only due to the pandemic and the improvement in the spread of the vaccine, but also in the improvement of their port openings and people going back to work and opening the ports.

Okay, great. Maybe one more from me, and I'm not sure if Mark wants to take it, but as we look at SG&A expense, any insights you can give us on cost-cutting, effectiveness of some of the cuts that you guys have made, maybe an outlook through the remainder of the year as we look at SG&A?

Yeah, no problem. So I'll take that. So in general, costs have been lower. Simply, there's a lot of COVID costs that aren't in the business, travel expenses, those kinds of things. And we've really taken a look at the whole organization and really where the efficiencies and inefficiencies are. If we look last year to this year, year over year, we're about $500,000 less in the first quarter of SG&A. So we feel like that's a positive trend for us. But typically, you know, I think, you know, we run anywhere from about $1.3 million to $1.5 million in any month. And so that will probably hold true from where we go forward. And that does include a pickup in travel expenses for us as we'll see, you know, the sales groups and us hosting more conventions and whatnot. Okay, great.

Thank you, guys. Thank you.

There are no other questions in the queue. I'd like to hand the call back over to Mr. Edwards for closing remarks.

Thank you for your questions and interest in Lima Nera. Have a great day.

Ladies and gentlemen, this does include today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.