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.

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 second and third quarters are the seasonally stronger quarters, while our first and fourth quarters are softer. For the second quarter of fiscal year 2023, total net revenue was $48.1 million, compared to total net revenue of $46.8 million in the second quarter of the previous fiscal year. Agribusiness revenue was $46.7 million compared to $45.4 million in the second quarter last year. In April 2023, Limanera entered into a settlement agreement with Southern California Edison Company to formally resolve any and all claims related to the Thomas Fire in fiscal year 2018. Under the terms of the settlement agreement, the company was awarded a total settlement of $9 million. In May of 2023, Limanera received approximately $6.1 million net of legal and related costs, of which $3.8 million was considered lost revenue and recorded in agribusiness revenues, and $2.3 million was recorded in gain on legal settlement in the second quarter of fiscal year 2023. Other operations revenue was $1.4 million in both the second quarters of fiscal year 2023 and 2022. Agribusiness revenue for the second quarter of fiscal year 2023 includes $26.6 million in fresh lemon sales compared to $27.3 million during the same period of fiscal year 2022. Lemon revenues in the second quarter of fiscal year 2023 include settlement proceeds of $1.5 million allocated to lemons. Approximately 1,547,000 cartons of fresh lemons were sold during the second quarter of fiscal year 2023 at a $17.23 average price per carton, compared to approximately 1,552,000 cartons sold at a $17.57 average price per carton during the second quarter of fiscal year 2022. Lemon pricing for the first half of fiscal year 2023 has remained challenging, and while we are beginning to see a small recovery, we expect a slow rise in price in the second half of this year. Of the 1,547,000 and 1,552,000 cartons of US-packed fresh lemons sold during the second quarter of fiscal year 2023 and 2022, respectively, 49% and 51%, respectively, were procured from grower partners. Due to heavy rainfall that occurred during the first quarter of fiscal year 2023, the timing for the initial avocado harvest was delayed from the first quarter into the second quarter of fiscal year 2023. The company recognized $3.6 million of avocado revenue in the second quarter of fiscal year 2023 and expects to recoup the remaining delayed revenue in the third quarter. Avocado revenues in the second quarter of fiscal year 2023 included settlement proceeds of $2.4 million allocated to avocados. Approximately 900,000 pounds of avocados were sold in aggregate during the second quarter of fiscal year 2023 at a $1.30 average price per pound compared to approximately 1.9 million pounds sold at a $1.90 average price per pound during the second quarter of fiscal year 2022. We are currently dealing with an oversupplied avocado market exacerbated by a lot of fruit coming in from Mexico and Peru that is going to continue to pressure the price of avocados for fiscal year 2023. The company recognized $1.4 million of orange revenue in the second quarter of fiscal year 2023, compared to $2.6 million in the second quarter of fiscal year 2022. Approximately 88,000 cartons of oranges were sold during the second quarter of fiscal year 2023 at a $15.72 average price per carton, compared to approximately 328,000 cartons sold at a $7.98 average price per carton during the second quarter of fiscal year 2022. Specialty citrus and other revenue was $2.4 million in the second quarter of fiscal year 2023, compared to $1.4 million in the second quarter of fiscal year 2022. As a reminder, we sold almost all of our orange acreage and 100% of our specialty citrus acreage in the Northern Properties transaction. Total cost and expenses for the second quarter of fiscal year 2023 were $51.9 million, compared to $44.2 million in the second quarter of last year. The increase of $7.8 million was primarily due to the disposal of the Cadiz Ranch assets. As Harold spoke to earlier, Cadiz Ranch was an asset that was operating at a loss of approximately $1.5 million per year, and as part of the company's shift towards an asset-lighter business model, we decided it was in the company's best interest to cease farming operations and dispose of the related property, plant, and equipment. As such, we recorded a loss on disposal of assets of $9 million as of April 30, 2023. Operating loss for the second quarter of fiscal year 2023 was $3.9 million, compared to operating income of $2.6 million in the second quarter of the previous fiscal year. Net loss applicable to common stock after preferred dividends for the second quarter of fiscal year 2023 was $1.7 million, compared to net income applicable to common stock of $1.4 million in the second quarter of fiscal year 2022. Net loss per diluted share for the second quarter of fiscal year 2023 was 10 cents, compared to net income per diluted share of $0.08 for the same period of fiscal year 2022. Adjusted net income for diluted earnings per share for the second quarter of fiscal year 2023 was $3.9 million compared to $1.9 million in the same period of fiscal year 2022. Adjusted net income per diluted share was $0.21 compared to adjusted net income per diluted share of 11 cents for the second quarter of fiscal year 2022. A reconciliation of net loss or income attributable to Lehman Air Company to adjusted net income or loss for diluted earnings per share is provided at the end of our earnings release. Adjusted EBITDA was $6.2 million in the second quarter of fiscal year 2023, similar to the same period of fiscal year 2022. A reconciliation of net loss or income attributable to Limonera Company to adjusted EBITDA is also provided at the end of our earnings release. Turning now to our balance sheet and liquidity. At the beginning of the year, we sold our northern properties, which resulted in total net proceeds of $98.4 million. Those 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 of 2025. Long-term debt as of April 30, 2023 was $40.8 million compared to $104.1 million at the end of fiscal year 2022. Debt levels as of April 30, 2023, minus $9.8 million of cash on hand, resulted in a net debt position of $31.5 million at quarter end. As a reminder, we have $50 million of remaining non-strategic assets for monetization over the next 12 months and expect their sale, combined with improving EBITDA, will result in the opportunity to have no debt in a cash position on our balance sheet. Now, I'd like to turn the call back over to Harold to discuss our fiscal year 2023 outlook and longer-term growth pipeline.

We continue to believe total lemon sales volume will 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. For the third quarter of fiscal year 2023, we expect to experience continued pricing pressure but believe the industry-wide lower production will lead to slightly higher prices. Due to weather-related factors adversely reflecting our orchards and impacting our orchards, we now expect avocado volumes for fiscal year 2023 to be in the range of 3 million pounds to 4 million pounds compared to a previous range of 4 million pounds to 5 million pounds. Also, it's important to note that while fiscal year 2022 was a record year for avocado revenue, the California crop typically experiences alternating years of high and low production due to plant physiology. In addition, we continue to expect to receive $115 million from harvest at Limonera and the addition of the Lima Nera Community Builders II and East Area II spread 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 in January to include the medical campus in our East Area II development. The breakdown continues to be expected as followed. Fiscal year 2022 generated $8 million of cash to Lima Nera. 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've made great progress thus far executing against our plan with the sale of $130 million in the past nine months and expect to announce the sale of the remaining $50 million in the next 12 months. And with that, I'd like to open the call up to your questions. Operator?

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 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 keys. One moment please while we poll for questions. Thank you. Our first question comes from Ben Benito with Stevens. Please proceed with your question.

Hey, everybody. Thanks so much for taking my questions. Hey, Ben. Hey, Ben. I want to start just if you could just give us kind of a little bit of a view or your view on the limit markets as we move through the balance of this year and kind of what is the path back to more normalized earnings from this segment of your business. Obviously, you know, the fundamentals have been under pressure for a number of years. But I'm curious, you know, you have so many company-specific dynamics that are favorable going on for you. You know, if we think about Lemons eventually getting to be a more positive contributor to the P&L than negative, I'm curious about kind of how we get there and, you know, what you ultimately think that could contribute to the business.

No, thank you for that question, Ben. That's a great question, and that is sort of the question we've been focused on answering as we've begun our pivots. But the financial team at Lima Nera put together a really valuable and helpful analysis that really showed the impact on our P&L of different economic influences and in different places where we were producing. And so the first thing that we did to set out to improve was to eliminate the areas where we were really having our challenges. And the first area just in this very low price, high cost environment is in the desert in Yuma, Arizona. And so because of the following program and the opportunities to actually reduce our actual production but increase our revenues and our value there by taking advantage of these valuable following programs with the Bureau of Reclamation. We believe that we've solved the profitability problem out of Yuma. And with our increased focus on production there but our significant cost reduction in Yuma, we think that you'll see, even in this low-pricing environment, much better lemon results coming out of that area. The results that were coming from our lemons in the San Joaquin Valley, we've pivoted to 100% service provider to be a packer, marketer, and seller of those lemons, where before, when this low-cost and low-pricing and high-cost, low-pricing environment we were really struggling with the profitability of that production. Finally, the production that we actually have in Ventura County, just because it's very close to our packing house, the logistical cost of moving those lemons is significantly better than the other areas where we're producing. So as a result, even in this low pricing environment, we see a great opportunity to generate value out of those lemons. So I think the first and the simple answer to your question is the first thing we needed to do was to solve our problems in the unprofitable area. The final real problem that we had was in Cadiz, and as we've just announced, we have stopped our farming operations in Cadiz and eliminated that part of our supply chain. It really only amounted to about 250,000 cartons of actual supply, which will offset with... with production from grower partners at the same time in those areas. But the elimination of those problems in those areas and then the focus in on our streamlining and our operations in Ventura County and in Santa Paula should see a really dramatic swing in the profit contributions from the lemon business. And that's assuming that we stay in this very low-priced environment that's caused by oversupply. We're starting to see some production in not only in the three production districts in California and Arizona come out, but you're also seeing supply reductions in other parts of the world that will take time for that to manifest itself in the balance between demand and supply. But you're going to see significant improvements because of the tactical changes to the way we're running our business. and that puts us into good position to wait for a higher price, which we are confident will come, we're just not sure how long that's gonna take to get there.

Okay, that's great, very helpful. Maybe shifting gears to the avocado side of the business, obviously volumes coming into the US are up considerably, prices are down. You noted kind of the volume dynamics that you're experiencing. With prices under pressure, What is your sense of parsing out how much of that is supply versus demand? And has demand been impaired at all by what has been a weaker consumer backdrop?

Certainly the big driver is supply. Mexico, as you know, has a huge crop, much larger year on year this year than last year. And remember, last year's sort of weird pricing dynamic was driven by a disruption in the supply chain that was but it took a while for the supply chains to catch back up to the demand. One of the things that we noticed, Ben, and I've seen this before in my career, but when you have these disruptions in supply chain and you see these really high prices, it tends to turn demand off for a period of time because the pricing gets so high. And so while it's glorious as a producer during that time period because you're achieving higher prices and much higher profitability, it's unsustainable because you get to sort of that place in elasticity in the marketplace where consumers get turned off because of the high pricing. Now that we're back to normal pricing and you see much more value at the supermarket for your avocados, that demand takes a while to catch back up because people were turned off before by the high-pricing environment. So we've seen this before. We've seen the demand lag. I think we're going through that lag period right now. I'm fully confident it will catch back up, but right now we actually have seen demand fall off year on year. It was really just driven by the really high-pricing environment in the marketplace.

Okay. And then last question for me, if I could, on the – potential monetization of water rights. You talked about the fouling programs that you'll participate in. I'm curious, one, what is the appetite in the market for actual outright purchases or some sort of strategic arrangement in which you financially monetize your water rights? And what is your desire to engage with that sort of appetite?

So I'll give you sort of a vague answer because we'll assess all the opportunities as they sort of are presented. So the dynamic on the river is interesting. The following program that we put in place that we just agreed to will drive about $1.4 million of additional revenue towards us for not farming 613 acres. And that's a three-year deal that will end by 2026. And you may have followed what the federal government has come out and said, but they said that the current agreement is a three-year agreement, but then the seven states that draw water off the Colorado River need to have their new agreements for the next 25 years put in place by 2026. So behind the scenes, there's lots of horse trading and negotiation and decisions that are being made of who are buyers and who are sellers of water. But the goal for the federal government is to cut a third of the consumptive use off the river. We believe that there's the potential that the next round of following will be a 25-year deal for all of the acreage at significantly higher values. The values that we have in this deal right now are $400 an acre foot. We're hearing whispers of $800 to $1,000 an acre foot to not take the water for all of the production, which would mean we'd have to go out and supplement that part of our supply chain from somewhere else. But the following program could be extremely lucrative for us. Now, knowing that that's sort of happening, as you know, we're also partners with a water-focused hedge fund in New York that's looking at all of this and trying to figure out what their best play on it is. And one of their best plays may be to actually acquire the acreage outright at a value. And so we're engaged in those discussions, and we're not sure which way it's going to go. But we're evaluating both, and whatever our decision is, we're determined to make sure it's the best decision for our shareholders.

And Ben, just if I might add, one other thing that's out there is some of these cities are being proactive, especially out in the desert. As we saw, the city of Buckeye pay about $13,000, $13,500 an acre foot, which is a big number based against our water rights out there. And so as this three-year period sort of dries up and people are looking towards the future, I think you'll see much more industrial types and cities come and approach us for water as well.

Okay. Very good. Thanks so much.

Thank you. Our next question comes from Raj Sharma with B. Riley Securities. Please proceed with your question.

Yeah, thank you for taking my question. A few of my questions have already been answered. Can we focus a little bit on the Acid Light outlook? That's the only part that sort of has not been spelled out. You've in the past talked about a five-year plan and where you want to take this production or the amount of the number of lemon cartons too. Is there any sort of level we should expect by you know, this year? And can you talk about that next year? And where the third party cartons are going to come from? Could you talk about that, please?

Yeah, sure. We'd be happy to, Raj. And it's a great question. Thank you for that. So a lot of the answers to that question were driven in the past by how much packing capacity we had available to us. And so theoretically, the Santa Paula facility today has a capacity of of 7 million cartons annually. And as you know, we're also still utilizing some storage and washing capabilities in our Oxnard facility. But as we evaluate sort of where the lemons are going to come from by district, so District 3, which is the desert, we actually believe that a part of that supply chain is going to be reduced because of the water pressure from the Colorado River. And then we look at what's going on with supplies in the San Joaquin Valley. We think that those supplies are actually going to increase because of the large opportunity that we see with outside growers and the expansion of lemon production in that area. So having us pursue additional lemon packing capabilities and optionality in the valley is something that we're looking at very closely right now because we think that's an area of growth. Finally, as we think about the coast, and that's the lemon that's the spring, early summer lemon, we have that capacity of 7 million cartons there. But I think to be fair about all of it, we have sort of an internal target of 15 million cartons that we want to try to get to in the next, call it three to five years, and all the while sort of trying to manage that growth Somewhere from a volume perspective, around 20% per annum.

Volume growth to 20% per annum, including the third party in packing and shipping?

Mostly with the third party because we do have some younger acreage that is still coming online, but the lion's share of that growth will come from third party grower partner fruit.

Got it. And now, is that to be expected to flow through evenly across the next five years?

By year? I think it's fair to say that, yeah. So, if you're thinking about it from a modeling perspective, that's how I'd do it, by year. It won't be exactly that, but it should be close to that. The other dynamic is we – so, That's expansion, but you're also seeing contraction because of water in District 3. So that's part of the calculus here that we're trying to factor in to balance the overall growth. But I think if we thought about it in terms of 20% volume growth per year, that's probably as good a number as we can get. And that's what we're trying to accomplish.

Thank you. And then just a couple more questions on the water rights, Yuma. Do I understand that correctly? Could your $1.4 million a year could actually triple to quadruple simply because you'd have a, you know, if they come back with a 25-year requirement, pricing would double and also the number of acres you would follow would also double? That's right.

Yeah, so here's the rough math on that, Raj. So we have 613 acres that we fallowed, and the three-year program that we've just entered allows us to get 5.6 acre feet per acre that's fallowed times $400 an acre foot. And of our 1,300 acres, they've allowed us to fallow half of it. So what we believe the next opportunity is going to be is something directionally like all of the acreage, so at which point it would be 1,300 acres times 5.6 acre feet per acre times whatever value that they actually offer. And that's what we've heard whispers of $800 to $1,000 an acre foot.

Right. So the actual money could quadruple.

It could, yes. And that's why we want to make sure that we – We stick around in the event that that opportunity presents itself.

I got it. Thank you. And then lastly, the Cadiz, could you explain the Cadiz, the increase in the costs of $9 million? Is the entire operating, is the loss in the numbers in the operating costs? Can you clarify that, please? And is that non-cash?

Yeah, so it's all non-cash. So we've had $9 million invested in 640 acres, one section there. Half of the acreage was the pink lemon, which we were trying, you know, we experimented out there, which didn't go well. And so we decided as the last two, really three years, we were losing anywhere from a million to a million and a half dollars on the operating side while still having development costs. So in essence, last year, the million and a half of operating loss also had about $1.3 million of development costs because some of those trees were not placed in service yet. And so it was really a no-brainer on the $9 million and $3 million of cash out. And so that's why we think we're going to see a dramatic shift in our fourth and first quarters relative to that asset in there. Does that answer your question?

Your $1.3 million development and $1.5 million operating loss, that gets reversed, obviously. That gets taken out, you know, $49 million non-cash loss. Correct, yeah.

Yeah, and the other part of the timing was, you know, to offset a tax payment coming up here in June relative to our gains, and it just made a lot of sense, and as we were seeing the year go forward, that this asset, it's really in the middle of nowhere if you've been out at Cadiz in the San Bernardino Desert. And so the transportation was a killer in that. We were losing about $10 a carton. So I think at the end of the day, it should be very well received, and it's going to make a huge difference for us.

Great, great. Thank you. I'll take my questions offline. Thanks a lot. Thanks, Raj.

Thank you. question comes from Ben Cleave with Lake Street Capital Markets.

All right, thanks for taking my questions. Harold, I promised you that I would badger you about the appeal agreement, and that's a promise that I intend to keep here. A couple questions here, and you didn't really refer to this in your prepared remarks, but the relationship between the two of you in the press release, there was some element of exclusivity that was noted. Can you talk about exactly what the relationship is between the two of you and the degree to which there is exclusivity, either from the perspective of Lehman era or appeal?

I'd be happy to Ben. Great question. Um, so, uh, we've been good friends with, uh, the appeal team since their, their formation and have followed their progress, um, with great interest, uh, since they, they first started and, um, they've, They've had many, many successes, but they've had some challenges along the way in their business models as they've worked with various fruits and vegetables and the application. The one thing that we absolutely have been sold on is the science and the efficacy of the science. The challenges that we think they ran into in some of their other relationships with other commodities were because of the ways that they've structured their relationship with suppliers. In this particular case, Appeal's founder and CEO, James Rogers, came to us and offered us the opportunity to be basically their one-stop shop lemon partner. And the way that we envision this to take place is Lima Nero will go out and establish relationships for Appeal-coated lemons with the major retail and food service customers initially in the United States, but eventually globally. And the idea is that, obviously, Limonera, we will not be able to handle the complete supply chain to all customers, nor will the customers tolerate probably having a single source of supply. So what we'll do is we'll work very closely with our customers on the amount of the supply that we can provide as Limonera And then with the partnership or collaboration of customers, have them determine which strategic partners they'd like for alternative sources of supply. And then we as Lima Nero will work on a licensing arrangement to go set up that additional part of the supplies to the customers with other suppliers. And so we'll be able to maintain the exclusive relationship with the customers for the full relationship But that doesn't necessarily mean it will be 100% of the supply. Because just to dream a little bit, if you've got a customer like Walmart, for instance, to say, okay, we will only buy lemons if they're coated with a peel, that is such a massive account. We need to go out and be very careful and analytically strategic on which supplier partners we choose to work with to supply that one account. So that will transcend itself across all retail and food service customers. And we're just going to go one customer at a time and try to provide solutions for them that work best for them.

Very helpful. Very helpful. Thank you, Harold. So that then stimulates a couple of follow-up questions. So first follow-up is, you know, in the process, the journey of appeal, I think, has been pretty well documented for some time. And so, you know, what you just described, you know, strikes me as exactly what we've heard from other sources. So, you know, given the science that they have, given the shelf life benefits that you described, but also given the challenges that they've had historically, can you talk about how your retail customers are taking to this news. Are you seeing these customers eager to engage with you on this, or is this something that is going to take a little bit of time to really hit the income statement?

I think it's going to take a little bit of time. You know, it's new, and so there's a logistical component that needs to be sort of contemplated and worked out as to where and how it gets applied and how the distribution takes place. But the other thing that's really interesting, Ben, is there's a lot of different places where applications can benefit customers and in the supply chain. It's not as simple as let's just put this coating on and watch how much better it looks on the shelf. That'll certainly be part of it. But what it'll do is it'll allow us to begin to work closely with customers on experimenting with things like shipping and ambient temperatures and things and different channels of supply that don't have perfected refrigeration. One thing that's interesting about a lemon is that over 40% of that lemon's life post-harvest, from the time it leaves the tree to the time it's actually consumed by a consumer, is spent in an ambient temperature environment. So if we have a coating that actually sort of reduces or eliminates ripening in that ambient temperature, it's just going to be a much better experience for our customers and then ultimately for the end-user consumers. But, you know, the original question, the answer to that is it's one customer at a time, and I think we'll prefer to kind of communicate our successes as we actually achieve them rather than over-hyping it on the front end and, you know, over-promising and under-delivering.

Got it. Got it. No, that makes sense. Very good. Can you address my other one? Very interesting. Look forward to hearing about those successes here as they come. That does it for me. Thanks for taking my question. I'll take it back in line.

Thanks, Ben.

Thank you.

Thank you. Our next question comes from Jerry Sweeney with Ross Capital. Please proceed with your question.

Good afternoon, Harold, Mark. Thanks for taking my call. Hey, Jerry. Hey, Jerry. A couple, I'm going to start maybe at the top. Obviously, you're divesting a bunch of underperforming assets. Then you have the Yuma, and you're just tightening everything down. I think you've talked about maybe even at some point, I'll call it Luminaire 2.0, reinvesting some of the money for growth. Obviously, some of this is marketing, packing, et cetera. When will we get a better glimpse into where sort of Lehman Air 2.0 is going to go in timing?

Great question, Jerry. And so we've been working really diligently with the board. We met in April and had a strategic planning session to go over different ideas and things that we're going to do to create value for our shareholders going forward. We got tasked, Carol and I, to come back in July to put a roadmap together with different ideas relative to this asset ladder model. So I think in September, in our call there, we'll be able to articulate more relative to that. But in the meantime, we're being really diligent and trying to create cash. And we're not in a huge hurry to go out and spend what we just put back. I think getting ourselves a cash position and net zero debt is our first objective. And as we see these earnings you know, sort of improve from all these, you know, fixing the holes in the ship, if you will. I think, you know, you'll see us to come out with ideas to deploy that capital creatively and efficiently.

And Jerry, if I could just pile on and say that, you know, our success, our initial success in serving grower partners and filling capacities, existing packing capacities, by providing packing marketing and selling services to grow our partners has been an exceeds expectation for us in terms of not only how successful it's been, but how profitable that's been. So we want to continue to fan those flames and grow in that asset lighter way. But the other area that we're really honing in and focusing in on now is the idea of creating a new division for the company in farm management services and we were given the gift of the opportunity to work very closely with Prudential in providing those farm management services as a result of the transaction that we completed recently with them. But as you'll note, we're very focused on trying to deliver best-in-class service so that we can continue to hold on to that contract, but then also begin to think about expanding that part of our company which could drive incrementally significant amounts of new value for the company in a very asset light way without having to deploy a lot of capital to grow. So those two areas will certainly be areas that we communicate more closely as we move forward. And as Mark said, we're just trying to be really stingy with the capital that we have now so that we don't, you know, put it all back out there after we just brought it all back in.

Totally understandable. And I mean, The message here is you guys are working on a plan. It's going to develop over the next month or two, and we'll start getting some details later this year, right?

Perfect. That's it. Yeah, perfect.

Yeah. Talking about lemons, you know, previously we always talked about China, Asia being a great area for higher-priced lemons. What's going on in that area? Has that changed? Is there an opportunity there? Obviously, China was on lockdown three, four, five months ago, but maybe opening up. But just curious if the market has permanently changed in that region.

I think what we have to say is thank goodness for China, because if China wasn't there, the oversupplied situation would be even worse. So So really our biggest enemy right now in Southeast Asia has been foreign exchange. And just because of the strength of the dollar and then the pricing that that sort of creates as we export fruit from the United States into Japan, into Korea, into Hong Kong, into China, the strength of the dollar and those weaker currencies have made the cost of those and the price of those lemons in those countries much, much higher. And what that's done is that opens the door for our customer base to begin exploring alternative sources of supply that's cheaper. And so what we're seeing is we're seeing fruit from Egypt and fruit from Turkey and fruit from South Africa begin to find their ways into these markets, which is creating much more of a competitive situation, which is further challenging to the situation for us. So whereas before pre-pandemic, we had this great balance of good, reasonable exchange rates and high levels of demand, you sort of saw it as a significant premium to U.S. pricing when we shipped into those export markets in Japan and Korea, and to a certain extent, Hong Kong and China, that's now changed. So there's kind of global parity in pricing that's happening in a much more challenging landscape of competition because you've got these other suppliers from these other countries that were duking it out every day in those marketplaces. So that's kind of the dynamic that's going on. They're great markets. It's just they're not trading at the premiums that they were pre-pandemic today for us.

Got it. And then water rights, I know this is a horse that's been beaten, but, you know, what the hell. You know, water rights are a little bit esoteric, and I think you even alluded to it. There's multiple classes, right? Class one is maybe eight or even higher, and there's different seniorities amongst those, right? How does that process work? If you're class three, which is presumably more senior than four through eight, does the program select students and value those water rights and classes at different levels. Because obviously the less senior, if there's a drought, you have less access to water. So you want to have sort of a portfolio approach to water rights when you're doing some of these programs at the state level or even at the city level like Buckeye, et cetera. But curious as to how that works. And, you know, I know that's getting into the weeds, but it's maybe at a high level.

No, it's a great question, and I'll try to answer it in a simple way. So at the turn of the century, 1900, 1905, there was an accord that was put together with the seven states on who got what off the river that was put in place. And that's been what they called the treaty on the river that established these class levels, one through eight, one being senior and eight being junior. the most junior. And that's been the law and the rule of the river since that was put in place. That treaty and that accord is set to expire in 2026. So it's at the end of its life. And so that's why there are deals that are being put together right now for the next three years. But now what's going on is the federal government is posturing that in using the Bureau of Reclamation as its negotiating arm to put pressure on the seven states that pull water off the Colorado River to reduce the total consumptive use off the river by a third. And so the way it's starting initially is the junior water right holders are the first ones that are going to get cut. And then the senior water right holders are the owners of the water who have the right to either keep it and use it or keep it and sell it or just sell it outright. And so that's the opportunity that we're being provided. And so you've got different levels of demand and willingness to sell it or not sell it. You have farmers in the Imperial Valley that have a senior water right that don't want to sell it but want to have it so they can continue to farm with it. you've got a lot of the permanent crop producers in like Yuma, Arizona, the lemon growers, us, who see a much better value proposition, at least today, to actually fallow and sell those water rights to the urban users in Phoenix and Scottsdale all the way to Las Vegas as a better opportunity for us as asset owners than preserving that water to continue to grow lemons. So that's kind of the dynamic, if that makes sense. And it was always esoteric and opaque, and you were never really sure what you had until right now you're starting to see actual offers of willing buyers and willing sellers as the dynamic that's now sort of taking place on the river. And we believe that at the end of the day, you'll see a third of the consumptive use cut off the river. And you'll see all the housing from the Central Arizona project having bought the water, and that'll all be funded by the federal government. And you noticed probably in some of the press releases how much money the feds have thrown at this, as well as the individual states who will fight to fund some of this for the preservation of those water rights.

Got it. I appreciate it. I'll talk to you guys in a little bit offline. Thanks.

Thanks, Jerry.

Thank you. I would like to turn the floor back over to Harold Edwards for closing comments.

Thank you very much, and thank you all for your questions and your interest in Lima Nera. Have a great day.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.