Earnings Call Transcript - ALCO Q1 2021

Operator, Operator

Greetings, and welcome to Alico's First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. As a reminder, today's conference is being recorded. On the call today are John Kiernan, President and Chief Executive Officer; and Rich Rallo, Chief Financial Officer. Earlier today, the Company issued a press release announcing its results for the first quarter ended December 31, 2020. If you have not had a chance to review the release, it is available on Investor Relations portion of the Company's website at www.alicoinc.com. This call is being webcast, and a replay will be available on Alico's website as well. Before we begin, the Company would like to remind everyone that the prepared remarks today contain forward-looking statements. Such statements are subject to risks, uncertainties and other factors that may cause actual results to differ materially from those expressed or implied in these statements. Important factors that could cause or contribute to such differences include risk details in the Company's quarterly reports on Form 10-Q, annual reports on Form 10-K, current reports on Form 8-K and any amendments thereto filed with the SEC and those mentioned in the earnings release. The Company undertakes no obligation to subsequently update or revise the forward-looking statements made on today's call, except as required by the law. During this call, the Company will also discuss non-GAAP financial measures including EBITDA and adjusted EBITDA. For more details on these measures, please refer to the Company's press release issued earlier today. With that, I would like to turn the call over to the Company's President and CEO, Mr. John Kiernan. Please proceed, sir.

John Kiernan, President and CEO

Thank you, Latonya, and thank you all for being with us for Alico's First Quarter 2021 Earnings Call this morning. As we start our fiscal year 2021, we are pleased to see higher market prices for citrus fruit per pound solid and that the downward trends in citrus pricing observed in the industry last year have eased. Prices for early and mid-season fruit are exceeding $2 per pound solid, whereas last year our prices were in the low $1 range. This price increase is driven by a higher consumption of not-from-concentrate orange juice by retail consumers and tighter citrus supplies from Florida, Brazil, and Mexico. These elements have resulted in reduced inventory levels among citrus juice processors. The demand for not-from-concentrate orange juice by retail consumers remains robust, and since March 2020, we have experienced double-digit growth in consumption. Recent Nielsen data indicates that this double-digit year-over-year growth in not-from-concentrate orange juice consumption is still holding strong. We believe these factors will support higher Valencia market pricing for the upcoming season, which is set to begin harvesting in the next few weeks. Regarding the 2021 harvest, which began in December 2020, we, along with the entire Florida citrus industry, have observed a decline in the production of processed boxes for the early and mid-season crop compared to last year. At the beginning of January, the USDA released its citrus crop forecast for the 2020/21 harvest season, projecting a decrease of about 19.8% in the Florida orange crop this year versus the previous year, significantly impacting the early and mid-season crop, which is estimated to decline by roughly 32.6%. We are implementing a comprehensive growth management program supported by years of operational expertise and efficiencies, which we trust will result in our percentage decline in the early and mid-season crop being considerably lower than the USDA's projection. Moving to our business highlights for the quarter, our new long-term agreement to provide citrus grove management services, including harvest and hauling for around 7,000 acres owned by Barron Collier Companies, is progressing well. We entered this agreement because we believe our approach to citrus grove management aligns with that of Barron Collier Companies. We have integrated our grove management programs, which has led to some operational economies of scale. This area of business is a natural extension for us that allows us to leverage our operational expertise and represents a growth opportunity that we plan to pursue in the upcoming fiscal year by targeting grove operators that fit our criteria and where we can deliver economic value. We continue looking for strategic land sale opportunities for our ranch and recently announced that the state of Florida has entered into an option agreement to purchase about 5,804 acres of Alico Ranch for approximately $14.6 million. If the state chooses to exercise this option, we expect to finalize the deal at the beginning of the third quarter of fiscal year 2021. Additionally, we have sold some smaller ranch parcels at competitive prices during the first quarter ended December 31, 2020. We will continue assessing real estate opportunities and expect further sales related to Alico Ranch soon. On October 30, 2020, we acquired a well-maintained citrus grove of 3,280 gross acres in Hendry County, which included significant new plantings completed in recent years. Although the grove has only been in our care for a limited time, we have already started additional plantings to enhance the density of this citrus grove, leading to improved production per acre. This initiative is part of our ongoing investment in our organic growth strategy, complementing the more than 1.3 million new trees we have planted over the last four years that are expected to positively influence our production results in the near future. We are optimistic about the rebound in citrus pricing after a challenging year and believe we are well-positioned to take advantage of this pricing improvement while continuing to deliver long-term value to our shareholders. Now, I will turn the call over to Rich to discuss our detailed financial results.

Rich Rallo, Chief Financial Officer

Thank you, John, and good morning, everyone. As this is our second earnings call, I would again like to remind everyone of the seasonality of our business. The majority of our citrus crop is harvested in the second and third quarters of the fiscal year, and the majority of our profit and cash flows are typically recognized in the second and third quarters as well. As such, the quarterly results for the first quarter are not indicative of our full year results. For the quarter ended December 31, 2020, total operating revenue was $13.7 million compared to $11 million in the same period of the previous fiscal year. Citrus revenue was $12.9 million and $10.2 million, respectively, for the quarters ended December 31, 2020 and 2019. The increase in revenue for the quarter ended December 31, 2020, compared to the same period in the prior year was primarily due to us generating greater revenue from our third-party grove management services. As John discussed earlier in the call, we entered into an agreement last year with an affiliated group of third parties to provide citrus grove caretaking and harvest and haul management services for approximately 7,000 acres owned by these third parties. Under the terms of this agreement, we are reimbursed by third parties for our costs incurred related to providing these services, and we also receive a management fee based on acres covered under this agreement. We record both revenues and expenses when we provide these grove caretaking management services. For the first quarter ended December 31, 2020, we recorded approximately $2.9 million of operating revenue, including the management fee. During the quarter ended December 31, 2020, we saw a significant increase in the market price per pound solids for our early and mid-season fruit. The increase in the price per pound solids is due to increased consumption of not-from-concentrate orange juice, along with tighter supplies, which has, in turn, led to reduced inventory levels and increased prices. As reported by the latest Nielsen data, not-from-concentrate orange juice consumption increased 14% for the 12-week period ended December 26, 2020, as compared to the similar 12-week period in the prior year. We expect, based on this consumption trend, that the market pricing for the upcoming harvest season of the Valencia fruit will also increase significantly over the prior year. For the quarter ended December 31, 2020, fewer boxes were harvested and pound solids per box were lower compared to the same period in the prior year. While we harvested a greater percentage of our early and mid-season crop through December 31, 2020, measured as a percentage of our estimated full year early and mid-season crop as compared to the same period in the prior year, we, along with the Florida industry, in general, are recording a smaller number of boxes harvested due to a greater rate of fruit drop occurring during the current harvest season as compared to the previous year. In addition, the internal quality of the fruit was not as strong as in the previous year, resulting in lower pound solids per box. The USDA citrus crop forecast for the 2020/'21 harvest season indicates that the Florida orange crop will decrease to 54 million boxes, down from approximately 67.3 million boxes in the prior year. The USDA anticipates the majority of this decrease will relate to the early and mid-season boxes as their forecast is a decrease of 9.7 million boxes or a 32.6% decline. We, through our comprehensive grove management program mentioned by John earlier, anticipate our decline in the early and mid-season crop will be in the 20% to 25% range. The increase in operating expenses for the quarter ended December 31, 2020, as compared to the same period in the prior year, primarily relates to the third-party grove management services. As previously stated, we have an agreement to provide these services to an affiliated group of third parties and recorded approximately $2.6 million of operating expenses in the quarter ended December 31, 2020. Additionally, the increase in operating expenses is attributable to the Company harvesting a greater percentage of boxes in relation to the estimated total boxes to be harvested for the full season, in the quarter ended December 31, 2020, as compared to the same period in the prior year, leading to a larger percentage of costs being allocated to cost of sales in the current period. We also received less proceeds under the Florida Citrus Recovery Block Grant program, which are recorded as a reduction of operating expenses during the quarter ended December 31, 2020, when compared to the quarter ended December 31, 2019. Partially offsetting this increase was a decrease in harvest and haul expenses resulting from a decrease in the early and mid-season boxes harvested. Income from operations for the land management and other operations segment for the quarter ended December 31, 2020, improved by approximately $300,000 compared to the quarter ended December 31, 2019. This improvement was primarily due to our decision to no longer pursue our Dispersed Water Storage Project. As such, no water conservation expenses were incurred in the current quarter, and we do not anticipate any future expenses to be incurred relating to this project. General and administrative expenses for the quarter ended December 31, 2020, totaled approximately $2.5 million compared to approximately $2.8 million for the quarter ended December 31, 2019. The decrease is in large part due to a reduction in payroll expenses of approximately $200,000 relating to one of the senior managers leaving the Company in December 2019, and a reduction in pension expense related to our deferred retirement benefit plan of approximately $100,000 as a result of the Company terminating this plan and paying out each of the planned participants in August 2020. Other income, net of other expenses, for the quarter ended December 31, 2020, was approximately $2.2 million compared to other expense, net of other income, of approximately $1.6 million for the quarter ended December 31, 2019. The shift to other income net from other expense net is primarily due to us recording gains on the sale of real estate, property and equipment and assets held for sale of approximately $3.4 million relating to the sale of approximately 700 acres from the Alico Ranch to several third parties in the quarter ended December 31, 2020. For the quarter ended December 31, 2019, we only recorded a nominal gain on the sale of real estate, property and equipment and assets held for sale. Additionally, a reduction of approximately $400,000 in interest expense was realized, primarily because of the reduction of our long-term debt resulting from mandatory principal payments. During the quarter ended December 31, 2020, we received approximately $4.1 million of additional proceeds under the Florida Citrus Recovery Block Grant Program relating to Hurricane Irma. To date, we have received approximately $24.2 million under this program. For the fiscal quarter ended December 31, 2020, we reported net income attributable to Alico common shareholders of approximately $3.8 million compared to net income attributable to Alico common stockholders of approximately $800,000 for the fiscal quarter ended December 31, 2019. The Company is affirming its fiscal year 2021 guidance at this time. Our balance sheet remains strong, and we expect, as we move forward into the peak of our season, we will provide stronger cash flow in fiscal 2021. Our working capital at September 30, 2020, was $39.8 million, representing a 3.21:1 ratio. In addition, we have experienced a steady improvement in our debt-to-equity ratio. Our debt-to-equity ratio at December 31, 2020, 2019 and 2018 were 0.7:1, 0.78:1 and 0.82:1, respectively. I would like to now pass you back to John to discuss our fiscal year 2021 outlook.

John Kiernan, President and CEO

Thanks, Rich. Alico is the leading high-quality, low-cost producer of citrus in Florida, and one of the largest citrus growers in the United States. We will continue to focus on controlling and managing costs and unlocking additional value for our shareholders to ensure that the legacy of Alico thrives for decades to come. After carefully considering the impact of lower production but higher prices this season, we are affirming our previously announced guidance for the fiscal year 2021. Our confidence is the result of a combination of our insight into the factors supporting increased market prices as well as our track record for continued stringent management of our operating and general and administrative expenses. We continue to project net income of $7.5 million to $10 million, adjusted net income of $4.5 million to $6.9 million, EBITDA between $29 million and $33 million and adjusted EBITDA between $25 million and $28.8 million. And with that, we will now open the line up to questions from industry analysts. Latonya?

Operator, Operator

Our first question comes from Gerry Sweeney with ROTH Capital.

Gerry Sweeney, Analyst

I want to start out by discussing the harvest. You mentioned the early and mids, as well as the size of the harvest. I believe you harvested more acres in this first quarter compared to both last quarter and the first quarter of last year. If we combine the early and mids production from last year and adjust it based on the range you provided, would that give us a reasonable estimate for potential production in the early and mids this year?

John Kiernan, President and CEO

Rich?

Rich Rallo, Chief Financial Officer

Yes. I would say that the early and mid would be a fair assessment.

Gerry Sweeney, Analyst

Got it. Pricing looks very good. As we move forward into Valencia, which we expect to see some in the second quarter and then more in the third quarter, I'm curious about how the early and mid varieties had a substantial increase in pricing. How should we view pricing for Valencia, and how does it compare to the early and mids? I'm sure there are some nuances, so I would like to know how this might play out or what we should keep an eye on.

Rich Rallo, Chief Financial Officer

Yes. So Gerry, as we've seen and mentioned, the consumption of not-from-concentrate orange juice continues to be strong. So while we don't have specifics, we anticipate that this trend for the Valencia, with respect to market pricing, will be similar, if not a little bit stronger than what we've seen in the early, mid size. So I think, as we look forward, there's nothing here that says that trend would be anything different.

Gerry Sweeney, Analyst

Got it.

John Kiernan, President and CEO

Again, the harvest season hasn't started yet, but every indication is that the Valencia prices will be higher than what the market prices for early and mids were this season, which would be a substantial increase over last year.

Gerry Sweeney, Analyst

Yes. And then what gives you confidence that, obviously, early and mids were lower, more fruit drop, et cetera. When you look at your acreage, it sounds like you have some confidence that as well as the Florida state, the Valencia should be less impacted or not have as nearly as much decline in the harvest. Can you go through what provides that confidence? Or the difference why early and mid felt more declined versus potentially on the Valencia side?

John Kiernan, President and CEO

I'll take that, Rich. The facts to support that claim are that we are monitoring and working on all of our groves every day, so they are under constant inspection. We noticed that the drop actually started to slow down in our early and mid-season, and we hope that this trend will continue as we approach the Valencia season. With these lower drop levels, we feel very confident as we forecast our financial results for this current season.

Gerry Sweeney, Analyst

Got it. I have one more question before I jump back in line. Grove management, how is the progress on potential new customers? Are you in discussions with other groves? Can you provide any qualitative or quantitative insights on that?

John Kiernan, President and CEO

Sure. It's all going to be qualitative. We don't have any quantitative we can at this point. We've discussed previously that we're very selective on the grove management services we would provide to potential customers. They have to meet a pretty stringent set of criteria. So it's less than a dozen potential targets, and we've been in discussions with several of them. I don't have anything to report at this time on either the likelihood that we'll close in this current fiscal year. But when we do, it will be at profitable levels. But there are active discussions that we are having.

Operator, Operator

At this time, there are no more questions in the queue. I would like to turn the call back over to Mr. John Kiernan for closing comments.

John Kiernan, President and CEO

I just want to thank everyone for joining our call today and for your support of Alico. In addition, I want to send a special thank you to our dedicated employees and the rest of our management team for their continued efforts to make Alico the best it can be. Our annual meeting will be held on Thursday, February 25 in Tampa. And we're strongly encouraging shareholders this year to mail in their proxy vote. We look forward to hosting another earnings call for our second quarter results in May. We hope everybody stays safe. Thank you.

Operator, Operator

Thank you, ladies and gentlemen. This concludes today's conference. You may disconnect your lines at this time, and thank you for your participation.