Limoneira Co

Greetings and welcome to Lee Muñera's second quarter fiscal year 2023 financial results conference call. At this time, all participants are in a listen-only mode. A 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.

Great, thank you. Good afternoon, everyone, and thank you for joining us for Lehman Air's second 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 second quarter fiscal year 2023 earnings release, which went out today at approximately 4 p.m. Eastern time. If you've not had a chance to review the release, it is available in 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'd 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 detail in the company's 10Qs and 10Ks 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 a result of new information, future events, or otherwise. And 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 Limonera's ongoing results of operations, particularly when comparing underlying results from period to period. We've 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 and adjusted diluted earnings per share, which are non-GAAP financial measures. A reconciliation of adjusted EBITDA and adjusted diluted EPS to the most directly comparable GAAP financial measures are included in the company's press release, which has 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 performance in the second quarter and first half of fiscal year 2023. A few of our lemon ranches were impacted by the highly publicized heavy rains in California, delaying a portion of the lemon harvest into the third quarter, as well as softer pricing for lemons and avocados as markets continue to work through surplus inventory. Even with the recent rains, we continue to expect to achieve our full fiscal year 2023 lemon volume guidance. We also are experiencing strong interest from national builders for the second phase of our residential development project, Harvest at Lima Nera. We generated over $48 million of revenue in the second quarter and adjusted net income for diluted earnings per share in the second quarter of fiscal year 2023 was $3.9 million or 21 cents per diluted share, approximately doubling compared to last year. Our net debt position was reduced to $32 million at the end of the second fiscal quarter from $105 million at the end of fiscal year 2022 due to the continued implementation of our asset lighter business model. Our strategic asset lighter transition plan that we expect to be completed in the next 12 months is pivoting our business towards a model that will 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 our return on invested capital. The benefits of this will begin to be fully realized in fiscal year 2024. This plan now involves approximately $180 million of assets for sale, and we have already closed on four of the six identified assets over the past nine months for a total of $130 million in proceeds. We have $50 million of remaining assets identified that we plan to monetize over the next 12 months. We continue to make 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 Limonera, all of which are transforming our balance sheet and positioning us to improve our top and bottom line results in fiscal year 2024. Since the beginning of fiscal 2023, we've achieved the following transactions to enhance our asset lighter business model. On January 31, 2023, we sold our northern properties, which resulted in total net proceeds of $98.4 million. The proceeds were used to pay down much of the company's domestic debt. As part of this transaction, Limanera 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 Limonera targeting $2 to $2.50 per carton of margin with no additional capital outlay. It 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. Even after the non-strategic asset sales, we continue to farm approximately 11,100 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 following 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 III Colorado River water rights. The Department of the Interior has instructed the seven states that derive water from the Colorado River to reduce their intake by a third, and the cuts will first come from Class VIII water rights all the way down. These states will be forced to go to those with senior water rights, like Class III water rights, and pay for their water. There is a proposed new following program of which we plan to take advantage with approximately 600 of our 1,300 acres, and we expect to receive $2,240 an acre to divert water from farming to urban use. In April of 2023, we entered into a settlement agreement with Southern California Edison Company and Edison International to formally resolve any and all claims related to the Thomas fire in fiscal year 2018. Under the terms of the settlement agreement, we were awarded a total settlement of $9 million. In May of 2023, we received $6.1 million net of legal and other related costs. Mark will provide more detail on this shortly. Also, in April of 2023, we determined that citrus farming operations were economically unviable on 670 acres of leased agricultural land at the Cadiz Ranch. As a result, we ceased farming operations, disposed of the related property, plant, and equipment, and recorded a non-cash loss on disposal of assets of $9 million as of April 30, 2023. This move is one of the many ways we expect our margins to improve dramatically in fiscal year 2024 by eliminating unprofitable operations. In May of 2023, we entered into an exclusive licensing relationship with Appeal Sciences. Their leading technology will protect our lemons across the supply chain with Appeal's coating technology. This non-GMO, edible, plant-based coating maintains moisture for longer and reduces oxidation, preventing spoilage throughout the supply chain. For lemons, this means they stay juicy, juicy and retain their bright yellow color for longer. As Appeal's first fully integrated lemon supplier in the United States, we will significantly expand availability of Appeal-protected lemons domestically and internationally through Limonera-affiliated packing facilities and through licensing management. In product trials conducted by Limonera, Appeal-protected lemons demonstrated a significant difference in quality compared to other coatings. Appeal-protected lemons exhibited reduced water loss, shrivel, and color change or bronzing, including when tested in ambient conditions. This validates that Appeal's technology allows citrus to retain its quality for longer, regardless of how they are stored or merchandised, which improves our strategic position for market opportunities with retail and food service customers, demanding a more sustainable approach to providing the highest quality, freshest produce. Because of all the improvements and refocusing of our business to an asset lighter model that includes the expansion of third-party fruit, we've become very attractive to grower 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. 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 six months of fiscal year 2023, roughly 57% of our U.S. packed fresh lemon source volume came from grower partners, And our goal is to have that number closer to 75% on an annual basis. In addition, we have our real estate development project Harvest at Lima Nera. 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 22 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. Interest in the second phase of this development has resulted in recent discussions with national home builders that participated in the successful first phase of this project. We expect to have more information on this in the coming months. So what is next for Limonera now that we have a very strong balance sheet and clear path to stronger EBITDA, cash flow, and earnings? Over the next 12 months, you can expect to see our continued transition to an asset lighter 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 farm management, 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. And with that, I'll now turn the call over to Mark.