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Limoneira (NASDAQ:LMNR)

F1Q2014 Earnings Conference Call

March 10, 2014, 04:30 PM ET

Executives

John Mills - ICR

Harold Edwards - President and Chief Executive Officer

Joseph Rumley - Chief Financial Officer

Analysts

Jon Feeney - Janney

Steven Martin - Slater

Operator

Good day and welcome to the Limoneira first quarter fiscal year 2014 conference call. Today's call is being recorded. And at this time, I would like to turn the conference over to John Mills of ICR. Please go ahead, sir.

John Mills

Good afternoon, everyone, and welcome to Limoneira's first quarter fiscal year 2014 conference call. On the call today are Harold Edwards, President and Chief Executive Officer; and Joe Rumley, Chief Financial Officer.

By now everyone should have access to the first quarter fiscal 2014 earnings release, which went out today at approximately 4:00 PM Eastern Time. If you've not had a chance to review the release, it's available on the Investor Relations portion of the company's website at limoneira.com. This call is being webcast and a replay will be available on Limoneira's website as well.

Before we begin we'd like to remind everyone that the 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 that could cause its future results, performance or achievements to differ significantly from the results, performance or achievements expressed or implied by such forward-looking statements.

Important factors that could cause or contribute to such differences include risk detailed in the company's 10-Qs and 10-Ks filed with the SEC and those mentioned in the earnings release. Except as required by law we undertake no obligation to update any forward-looking or other statements herein whether as a result of new information, future events, or otherwise.

Also, within the company's earnings release and in today's prepared remarks we include EBITDA which is a non-GAAP financial measure. A reconciliation of EBITDA to the most directly comparable GAAP financial measures is included in the company's press release which has been posted on our website.

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

Harold Edwards

Thanks, John. Good afternoon, everyone, and thank you for joining us. On today's call, I'll begin with a brief overview of some financial highlights for the quarter and provide an update on our progress across all of our different business areas. Joe will review the financial results for the first quarter in more detail, and I'll then discuss our 2014 outlook and open the call up for your questions.

We are pleased to report a solid start to fiscal year 2014. Our financial results, which reflect the anticipated seasonality of the first quarter, show strong improvements in both revenue and operating income as compared to last year, primarily driven by higher lemon sales.

We generated sales of $25.9 million, which is 49% increase compared to the first quarter of last year. Our operating results improved $1.9 million versus the prior-year period. This improvement was driven by a number of factors, including our acquisition last year of Associated Citrus Packers in Yuma, Arizona, which mitigated a portion of the seasonality of our business and contributed approximately $2 million to operating income in the first quarter.

This underscores our ability to successfully integrate acquired orchards into our operations, and gives us confidence as we continue evaluate additional opportunities to strategically expand our agribusiness acres going forward. Based on our year-to-date results and positive outlook for the remainder of the year, we are reiterating our previously issued guidance, which I'll review later during today's call. We are excited about the momentum for Limoneira and continue to make progress on all aspects of our business.

First, regarding our agribusiness. We expect to benefit from the additional 2,300 agricultural acres that we acquired or leased last fiscal year [Technical Difficulty] expansion of our lemon packing facilities. The project is expected to increase the efficiency of our packing facilities and once completed, our annual lemon capacity is estimated to be approximately twice of what it is today. We anticipate the facility will be completed in fiscal year 2015.

Over the past couple of years, our sales team has done a tremendous job of steadily increasing our base of direct lemon customers. This combined with our expanding acreage and increased packing capacity should enable us to generate increasing sales and operating income from lemon sales for many years to come.

I would like to take a moment to address the weather conditions in our key market. As many of you are aware, California has been experiencing one of the most severe droughts on record. Rainfall, snow levels and water content or snowpack are significantly below historical averages. These conditions have resulted in reduced water levels in streams, rivers, lakes, aquifers and reservoirs. The Governor of California declared drought state of emergency in February of 2014.

Limoneira is extremely fortunate and that the drought has not had a material impact on our operations. Water for our farming operations, located in Ventura County, California, is secured from the existing water resources associated with our land, which includes approximately 8,600 acre feet of adjudicated water rights in the Santa Paula Basin and the unadjudicated Fillmore Basin.

We use a combination of ground water provided by wells and water from various local water districts in Tulare County, California, which is in the agriculturally productive San Joaquin Valley. Our associated farming operations in Yuma, Arizona, sources water from the Colorado River to the Yuma Mesa Irrigation and Drainage ditch, where we have access to approximately 11,700 acre feet of Class 3 Colorado River water rights.

For the first quarter of fiscal year 2014, irrigation cost for our agricultural operations were just 100,000 greater than the first quarter of last year, resulting from pumping more water from wells and basins due to less rainfall. We expect this trend to continue, as we pump more water than historical averages, as demand from limited water supplies increases the cost for such supplies and federal state and local water delivery infrastructure cost increased to access these limited water supplies.

In challenging conditions such as these, it is beneficial that we have significant water rights across our agribusiness operations. We believe we have access to adequate supplies of water for our agricultural operations as well as our real estate development and rental operation segments of our business. And unless drought conditions persist or worsen, we currently do not anticipate that California drought will have a material impact on our operating results.

Turning to the rental segment of our business. We remain on track with the development of 71 additional agricultural workforce housing units in Santa Paula, California, that will be available for rent to local agricultural workers and Limoneira employees towards the end of fiscal year 2014.

We anticipate this will add another $850,000 to $900,000 to our annual rental business. Our rental business is a steady and predictable revenue stream that provides us with a dependable source of annual cash flow as well as the unique ability to offer housing to agricultural workers and to our employees.

Now, turning to our real estate development business. We continue to make progress on breaking ground on East Area 1. As a reminder, East Area 1 and 2 consist of 550 acres of master plan community of residential units, commercial and light industrial properties, comprising up to 1,500 residential units, 560,000 square feet of commercial space and 150,000 square feet of light industrial space. We estimate that the residential component represents approximately 25% of all single-family homes, town homes and condominiums that are currently planned or approved in Ventura County over the next 10 years.

We are committed to entering into a deal with a reputable builder or builders that will optimize the success, cash flow and profitability of the project and ultimately maximize shareholder value. We continue to engage in discussions with leading homebuilders and remain focused on our goal to break down on the project and begin selling homes during fiscal year 2015. In the meantime, we are currently processing tract maps with the city of Santa Paula and are pleased with the progress-to-date we have made on the rock remediation for East Area 1, which we began earlier this calendar year.

Our expanding agribusiness combined with the progress we are making with our real estate development efforts make this a very exciting time for Limoneira. We remain focused on our previously stated goals of continuing to capitalize on opportunities to monetize our rich portfolio of assets and strategically investing in our agribusiness. We continue to see a healthy pipeline of potential agribusiness acquisition opportunities.

With that, I'd like to turn the call over to Joe, to discuss our first quarter financial results.

Joseph Rumley

Thank you, Harold. Good afternoon, everyone. For the first quarter ended January 31, 2014, revenue was $25.9 million compared to revenue of $17.4 million in the first quarter of the previous year. Agribusiness revenue was $24.7 million compared to $16.3 million in the first quarter last year, primarily reflecting higher lemon revenue.

Rental operations revenue was $1.1 million in the first quarter of fiscal year 2014 compared to $1 million in the first quarter of last year. Real estate development revenue was $44,000 compared to $48,000 in the first quarter of last year.

Our first quarter 2014 agribusiness revenue includes $20.9 million in lemon sales compared to $14 million in lemon sales during the same period of fiscal year 2013, which reflects a higher average price per carton due to more favorable market conditions, partially offset by a lower number of cartons of fresh lemon sold. As anticipated due to the typical seasonality of the avocado crop, we did not record significant avocado sales in the first quarter.

We recognized $1.9 million of orange revenue in the first quarter of 2014 compared to $1.4 million of orange revenue in the same period of last year. This increase reflects a higher average price per field box, partially offset by a lower number of field boxes sold. Specialty, citrus and other crop revenues were $1.9 million in the first quarter of fiscal '14 compared to $0.9 million in the first quarter of fiscal year 2013, resulting from higher prices and sales volume.

Turning to cost and expenses for the first quarter of fiscal year 2014, we incurred $28.1 million of cost and expenses as compared to $22.7 million in the first quarter of last year. The year-over-year increase in operating expenses primarily reflects increased agribusiness cost associated with our growing agribusiness, including the acquisition of Associated Citrus Packers and Lemons 400.

Operating loss for the first quarter of 2014 was $2.2 million compared to $5.3 million loss in the first quarter of last year. Associated Citrus Packers earned approximately $2 million of operating income in the first quarter of fiscal year 2014. EBITDA was a loss of $1.1 million in the first quarter of fiscal year 2014 compared to a loss of $4.4 million in the same period of last year.

In the first quarter of fiscal year 2014, all interest incurred was capitalized on non-bearing orchards, real estate development projects and significant construction in progress. In the first quarter of fiscal year '13, interest expense was $0.1 million.

Non-cash interest income as a result of fair value adjustments on our interest rate swap was zero in the first quarter of fiscal year '14 compared to $0.2 million in the same period of last year. The interest rate swap that generated the income in the prior periods expired in the third quarter of fiscal year 2013.

Net loss applicable to common stock, after preferred dividends, for the first quarter of fiscal year 2014 was $1.3 million compared to $3.2 million in the first quarter of the prior year.

Loss per diluted share for the first quarter of fiscal year 2014 was $0.09 on approximately 14 million weighted average diluted common shares outstanding compared to a per diluted share loss of $0.28 on approximately 11.2 million weighted average diluted common shares outstanding in the same period last year. The year-over-year increase in shares outstanding is due to the February 2013 public offering of common stock and the stock issued in acquisition of Associated.

Turning to our balance sheet. We ended the first quarter with working capital of $2.6 million. Long-term debt as of January 31, 2014, was $71.3 million compared to $61.6 million at October 31, 2013, our yearend. The increase in long-term debt was primarily due to typical seasonality of our business and expenditures on strategic initiatives such as the expansion of our lemon packing facilities and construction of additional farm worker housing units.

Now, I'd like to turn the call back to Harold to discuss our fiscal year 2014 guidance.

Harold Edwards

Thanks Joe. Based on our first quarter results and outlook for the reminder of the year, we are reiterating our previously issued guidance. For the second quarters of fiscal year 2014, we expect to realize incremental revenue and earnings resulting from the acquisitions of Lemons 400. For the fiscal year ending October 31, 2014, we expect to sell between 3 million and 3.3 million cartons of fresh lemons and expect to sell approximately 6 million to 7 million pounds of avocados.

The California avocado crop typically experiences alternate bearing years of high and low production due to plant physiology. Fiscal year 2013 was a high avocado production year and fiscal year 2014 is expected to be a lower avocado production year. Lemon and avocado prices are expected to be higher in fiscal year 2014 than fiscal year 2013 due to lower industry production.

We expect to earn approximately $7 million in operating income in fiscal year 2014, representing approximately a 30% increase over fiscal year 2013 operating income of $5.3 million. The expected increase in operating income is primarily due to the additional lemon revenues to be generated by the acquisitions of Associated and Lemons 400, partially offset by lower expected avocado revenues.

Fiscal year 2014 pre-tax earnings are anticipated to be similar to fiscal year 2013, as $1.3 million of earnings from asset sales and $700,000 in interest rate swap income realized in fiscal year 2013 are not expected to recur in fiscal year '14. We began fiscal year 2014 with approximately 2,300 additional agricultural acres, representing a 30% increase compared to the beginning of fiscal year 2013.

And with that, I'd like to now open the call up for your questions, operator?

Question-and-Answer Session

Operator

(Operator Instructions) And at this time, we'll take a question from Jon Feeney with Janney.

Jon Feeney - Janney

I really just had one question, you added 2,300 acres, in terms of how do you balance, do you think -- I think it was a long-term plan about getting the capital and potential returns you have invested back from East Area 1 and your total potential acquisition plans? And maybe things at East Area 1 are taking a little longer, have you slowed those acquisitions plan down or how many acres would you like to acquire in the next 12 or 18 months to facilitate your long-term plans to maintain lemon production and realizing value from development project?

Harold Edwards

The opportunity to acquire these citrus farms is something that we're spending quite a bit of time, turning over rocks, if you will, and cultivating or nurturing some of these deals. These are typically characterized by, in many cases, generational family farms that might be lacking succession. And as such, they take a long time, our experience suggest that they take a long time to not only nurture, but then to structure a relationship or ultimately a transaction.

So I would say, we continue to be very active in the cultivation of our acquisition pipeline. We continue to work with a number of potentially interested sellers. And then, at the same time, we're constantly trying to take into consideration the profile of the acreage. And by that I mean, where the acres are and as such the seasonality of the crops that are produced in these given areas.

So while we go through the normal course of due diligence and sort of assurances to our internal management team and ultimately to our board that all deployment of capital will come across in an accretive way. We are also then trying to blend that acreage and the production into a 365-day supply chain in a way that make sense for our customers.

And so that's why the acquisition of Associated Citrus was so valuable, because it brought lemons into our year round supply chain, where before we really never had any. And the same holds true with Lemons 400, it complemented our growing opportunity to bring more winter lemons into our supply chain as well.

So in terms of your question is how many of these deals would we like to do? Well, we'd like to do as many as we could possibly do to facilitate our march towards ultimately achieving our goal of increasing our annual supply up to 10 million cartons. So as I reported earlier, we're about 3.3 million cartons, so we've got a long ways to go and we will continue to turn over rocks and cultivate that acquisition pipeline.

Jon Feeney - Janney

And just one other, while I have you, while there's been some rain, thank God, recently, that puts a lot of attention on the drought and there has been a lot of attention historically I think that you've brought to your water assets. And I guess I wanted you to comment if you could about, the impacts of the drought in the marketplace, if any on lemon prices and some of the other fruits that you sell? But also longer-term, has anything changed about the potential asset value there, interested parties, et cetera, due to the attention that came from the drought on the value of owning water rights?

Harold Edwards

Two great question there. To address the first question about any of the supply related impacts of the drought affecting pricing. If you recall earlier in the year, we sustained and actually the entire industry sustained significant cold temperatures and frost and even freezes throughout California. And as such, we reported earlier is that the impact of the freeze on our lemon crop as an industry affected the total crop by about 10% and for the oranges by about 25% of total production was damaged by those freezes.

So it really has been the freeze impact, the impact of the cold weather that has had the material impact on pricing in the marketplace. In terms of actual supplies, we'll probably see about a 10% reduction in industry lemon supply this year and maybe 25% reduction of orange suppliers. But today we're seeing a material improvement or increase in the prices we're receiving for the products somewhere in the magnitude of 25% to 30%, where we thought we would be at this time in the year. So that's been very helpful for us.

Operator

At this time we'll take a question from Steven Martin with Slater.

Steven Martin - Slater

Could you talk about, there has been some concern about the housing market in certain areas of the country. Can you talk about the pricing of land in Ventura County and Santa Paula in this interim period, while we've been waiting?

Harold Edwards

Sure. Well, I can't say that Santa Paula and Ventura County is completely immune to the ups and down cycles of the overall real estate market in general. But what I can tell you is that, as a result of the rigorous regulatory environment and just how long it takes to process tract maps and to gain entitlements of otherwise used land, the economics are somewhat skewed in that.

Fundamentally, Ventura County exist in a demand exceeds supply condition for housing, both multifamily rental and multifamily for-sale and single-family for-sale housing as well. And so as such, since we've gained the entitlement, we continue to benefit from that sort of disparity between demand and supply that we're seeing, rapid appreciation in home prices.

Now, as of recent, we've seen those slow a little bit. But I would say that just like we've been reading all across the country, the pricing has been somewhat volatile, where one month you'll see it slow and then the next month it will spike way up. So I think it's really too early to identifying any significant trends of price appreciation slowing down on a permanent basis or even seeing demand for housing slowing on a material basis.

So as such, we remain really bullish on our position and we think what we're experiencing is a much more normal appetite for new housing starts around the state. And as those housing starts in Ventura County and specifically in our project East Area 1 begin to be realized, we're very optimistic and bullish on the potential to see that inventory absorb.

Operator

Seeing no further questions in the queue, I'll turn things back over to Harold Edwards for any additional or closing remarks.

Harold Edwards

Great. Thank you very much. And thank you for your questions and interest in Limoneira. We'll be presenting at the ROTH Investor Conference tomorrow and over the next several months we'll be attending select investor events, and we hope to see many of you there. Thank you, again. And have a great day.

Operator

And again, this does conclude today's conference call. Thank you all for your participation. You may now disconnect.

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