Earnings Call Transcript - LMNR Q2 2024

Operator, Operator

Greetings, and welcome to Limoneira's Second Quarter 2024 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. It is now my pleasure to introduce your host, John Mills with ICR. Thank you, sir. You may begin.

John Mills, Host

Thank you, Diego, and good afternoon, everyone, and thank you for joining us for Limoneira's second quarter fiscal year 2024 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 2024 earnings release, which went out today at approximately 4:00 p.m. 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 would like to remind everyone that prepared remarks contain forward-looking statements, and management may make additional forward-looking statements in response to your questions. Such statements involve a number of known and unknown risks and uncertainties, many of which are outside the company's control and could cause its future results, performance, or achievements to differ significantly from results, performance, or achievements expressed or implied by such forward-looking statements. Important factors that could cause or contribute to such differences include risk factors in the company's Form 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. 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 Limoneira's ongoing results of operations, particularly when comparing underlying results from period to period. We have provided as much detail as possible on any items that are discussed on an adjusted basis. Also, within the company's earnings release and in today's prepared remarks, we include adjusted EBITDA and adjusted diluted EPS, which are non-GAAP financial measures. A reconciliation of adjusted EBITDA and adjusted diluted earnings per share to the most directly comparable GAAP financial measures is 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.

Harold Edwards, CEO

Thanks, John, and good afternoon, everyone. I'm very pleased that our overall business generated adjusted EBITDA of $16.6 million for the second quarter, which represents more than double that of the prior year period, highlighting the continued momentum in our Harvest at Limoneira real estate development joint venture project with The Lewis Group. These overall results were achieved even as we decided to move the majority of harvesting our avocados to the third quarter for higher pricing and better volume. We continue to follow through with our previously discussed transition by expanding our avocado plantings by 1,000 acres over the next three years to 2,000 acres with 223 acres planted in fiscal year 2024. We expect this expansion of our avocado production will dramatically increase our longer-term EBITDA to $45 million to $55 million by fiscal year 2030 compared to the prior target of $30 million. Keep in mind, this does not include our expected increase in cash flow from the Harvest at Limoneira project, which I will discuss. We recently achieved two significant milestones for our company. First, in April of 2024, the joint venture closed on lot sales representing 554 residential units, thus completing the sellout of Phase 2 of the development. A total of 1,261 residential units have closed from the project's inception. Second, a few weeks ago, the Santa Paula City Council approved the joint venture's proposal to increase the total number of residential units for the project from 1,500 to 2,050 units. The 550 unit increase will provide 250 additional single-family for-sale home sites within Phase 3 of Harvest. A separate joint venture with Lewis plans to construct 300 multifamily rental homes on a mixed-use portion of the project. This is a 37% increase in residential units, unlocking further value creation opportunities. Based on these events and the continued increase in the land value associated with this project, we have increased our cash flow projections by 46% and now expect to receive $180 million in total future proceeds spread out over the next seven fiscal years, with approximately $18 million expected in fiscal year 2024. Now I'd like to provide a quick update on our decision to evaluate strategic alternatives for the overall business. Over the past 18 months, we have developed a strategic roadmap intended to enhance near and long-term shareholder value. Today, we consider ourselves to be in a strong financial position having recently reduced our net debt position, right-sized the balance sheet through our ongoing strategic shift towards an asset-lighter business model, and increased our cash flow projections from Harvest at Limoneira. As part of our exploration of strategic alternatives to maximize value and given the strong interest we are receiving, we decided it is in the best interest of our stockholders to move away from pursuing a packinghouse in Chile and instead add value by focusing on expanding our avocado production over the next three years. Long-term debt as of April 30, 2024, was $59.5 million compared to $40.6 million at the end of fiscal year 2023. Debt levels as of April 30, 2024, less $1.4 million of cash on hand, resulted in a net debt position of $58.7 million at quarter-end. However, it's important to note that our 50-50 joint venture with Lewis held $102.1 million of cash and cash equivalents as of April 30, 2024, of which our share is 50%. Furthermore, with the closure of the additional 554 residential home sites in April, the joint venture is expected to distribute $30 million in June of 2024, with Limoneira entitled to $15 million of the proceeds. This additional liquidity source for our joint venture provides further financial flexibility beyond the quarter-end net debt figure. Even after the recent non-strategic asset sales this past 1.5 years, we continue to manage approximately 10,500 acres of land with 21,000 acre-feet of owned water usage and pumping rights. In fiscal year 2024, on the operational side of our business, you will continue to see our transition to an asset-lighter business model and focus on the best use of our assets to enhance shareholder value. We have dramatically decreased interest expense, removed our pension obligation, are receiving quarterly payments from Yuma Mesa Irrigation and Drainage District for our following program, and we believe lemon and avocado pricing will be better this year compared to fiscal year 2023, positioning us well for strong improvements in fiscal year 2024. In addition to our operational improvements, 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 turn the call over to Mark.

Mark Palamountain, CFO

Thank you, Harold, and good afternoon, everyone. Before I begin, I would remind you it is best to view our business on an annual, not quarterly basis due to the seasonal nature of our business. Historically, our first and fourth quarters are the seasonally softer quarters, while our second and third quarters are stronger. For the second quarter of fiscal year 2024, total net revenue decreased 7% to $44.6 million compared to total net revenue of $48.1 million in the second quarter of the previous fiscal year. Agribusiness revenue was $43.3 million compared to $46.7 million in the second quarter of last year. Other operations revenue was $1.3 million in the second quarter of fiscal year 2024 compared to $1.4 million in the second quarter last year. Results in the second quarter of fiscal year 2024 were impacted by increased rainfall in California that delayed the picking of lemons and caused fresh utilization in the second quarter to fall to around 70%. Agribusiness revenue for the second quarter of fiscal year 2024 includes $25.8 million in fresh pack lemon sales compared to $26.6 million during the same period of fiscal year 2023. Approximately 1,446,000 cartons of US packed fresh lemons were sold during the second quarter of fiscal year 2024 at a $17.85 average price per carton compared to 1,547,000 cartons sold at a $17.23 average price per carton during the second quarter of fiscal year 2023. Brokered lemons and other lemon sales were $3.8 million and $2.5 million in the second quarter of fiscal year 2024 and 2023, respectively, representing 52% growth year-over-year. The company recognized $2.3 million of avocado revenue in the second quarter of fiscal year 2024 compared to $3.6 million during the same period of fiscal year 2023. Avocado revenues in the second quarter of fiscal year 2023 included legal settlement proceeds of $2.4 million allocated to avocados. Approximately 1,595,000 pounds of avocados were sold in aggregate during the second quarter of fiscal year 2024 at a $1.47 average price per pound compared to approximately 941,000 pounds sold at a $1.30 average price per pound during the second quarter of fiscal year 2023. The company strategically postponed a significant proportion of its avocado harvest from the second quarter into the third quarter of fiscal year 2024 in order to capture more favorable anticipated pricing. The company recognized $1.2 million of orange revenue in the second quarter of fiscal year 2024 compared to $1.4 million in the second quarter of fiscal year 2023. Approximately 66,000 cartons of oranges were sold during the second quarter of fiscal year 2024 at a $17.58 average price per carton compared to approximately 88,000 cartons sold at a $15.72 average price per carton during the second quarter of fiscal year 2023. As a reminder, the company opportunistically has buy-sell arrangements for orders with our retail and foodservice customers to complement our lemon sales. Specialty citrus and other crop revenue was $800,000 in the second quarter of fiscal year 2024 compared to $1 million in the second quarter of fiscal year 2023. During the second quarter of fiscal year 2024 and 2023, approximately 29,000 and 41,000 40-pound carton equivalents were sold at an average price per carton of $29.24 and $24.78 respectively. Farm Management revenues were $2 million in the second quarter of fiscal year 2024 compared to $1.4 million in the same period of fiscal year 2023. Total costs and expenses for the second quarter of fiscal year 2024 were $49.3 million compared to $59.1 million in the second quarter of last year. The decrease of $2.7 million was primarily related to the 2023 Cadiz Ranch asset disposal, partially offset by increases in agribusiness costs and expenses and selling, general and administrative expenses. Operating loss for the second quarter of fiscal year 2024 was $4.7 million compared to an operating loss of $3.9 million in the second quarter of the previous fiscal year. Net income applicable to common stock after preferred dividends for the second quarter of fiscal year 2024 was $6.4 million compared to a net loss applicable to common stock of $1.7 million in the second quarter of fiscal year 2023. Net income per diluted share for the second quarter of fiscal year 2024 was $0.35 compared to a net loss per diluted share of $0.10 for the same period of fiscal year 2023. Adjusted net income per diluted EPS for the second quarter of fiscal year 2024 was $8.1 million compared to $3.9 million in the same period of fiscal year 2023. Adjusted net income per diluted share for the second quarter of fiscal year 2024 was $0.44 compared to adjusted net income per diluted share of $0.21 for the second quarter of fiscal year 2023. A reconciliation of net income or loss attributable to Limoneira Company to adjusted net income or loss for diluted EPS is provided at the end of our earnings release. Adjusted EBITDA more than doubled in the second quarter of fiscal year 2024 compared to the prior year period and was $16.6 million compared to $6.2 million. The $10.4 million improvement highlights the continued momentum of our Harvest real estate development project. A reconciliation of net income or loss attributable to Limoneira Company to adjusted EBITDA is also provided at the end of our earnings release. Turning now to our balance sheet and liquidity. In the first quarter of last year, we sold our Northern Properties, which resulted in total net proceeds of $98.4 million. The proceeds were used to pay down all our domestic debt, except the AgWest Farm Credit, $40 million non-revolving line of credit, which has a fixed interest rate of 3.57% until July 1, 2025. Long-term debt as of April 30, 2024, was $59.5 million compared to $40.6 million at the end of fiscal year 2023. The increase was primarily driven by working capital needs, which typically peak in the second quarter. Debt levels as of April 30, 2024, minus $1.4 million of cash on hand resulted in a net debt position of $58.7 million at quarter-end. As Harold mentioned, it is important to note that our 50-50 joint venture with Lewis held $102.1 million of cash and equivalents as of April 30, 2024, of which our share is 50%. Furthermore, with the closure of the additional 554 residential homesites in April, the joint venture distributed $30 million on June 5, 2024, and Limoneira received $15 million in cash proceeds. This additional liquidity source from our joint venture partnership provides further financial flexibility beyond the quarter-end net debt figure. Now, I'd like to turn the call back over to Harold to discuss our fiscal year 2024 outlook and long-term growth pipeline.

Harold Edwards, CEO

Thanks, Mark. We are very pleased with the strategic direction of our company. We continue to expect fresh lemon volumes to be in the range of 5 million to 5.5 million cartons for fiscal year 2024. We are increasing our avocado volume estimates and now expect them to be in the range of 9 million pounds to 10 million pounds for fiscal year 2024 compared to previous guidance of 7 million pounds to 8 million pounds. Longer term, we are raising our outlook for EBITDA accretion of $45 million to $55 million by fiscal year 2030, up from its previous target of $30 million. This increase is underpinned by plans to significantly expand avocado production by planting 1,000 acres of avocados over the next three years to capitalize on robust consumer demand trends. During this transition, the company expects fiscal year 2025 and fiscal year 2026 operational results to be similar to fiscal year 2024. Keep in mind, this does not take into account expected additional earnings from Harvest at Limoneira. Turning to our real estate, due to additional entitled lots and the increased value of the overall projects, we now expect to receive total future proceeds of $180 million, a 46% increase from previous expectations from Harvest at Limoneira, Limoneira Lewis Community Builders 2, and East Area 2, spread out over the next seven fiscal years. And with that, I'd like to turn it back to the operator.

Operator, Operator

Our first question comes from Raj Sharma with B. Riley Securities. Please state your question.

Raj Sharma, Analyst

Hi, thank you for taking my questions. I have a couple of them. I wanted to clarify on Harvest. Was Phase 1 completed? Phase 2 is completed, and now you have an additional 550 units. Phase 1 was 707 units and Phase 2 was 554 units, is that correct? I’m trying to reconcile the 1,261 units completed so far with the original 1,500 units. If you could clarify that, I have a couple more questions.

Mark Palamountain, CFO

Yeah. So the 1,261 is completion of Phase 1 and Phase 2, as you indicated. The total number of single-family units that will be sold is 1,750. And then the additional 300 to get us to 2,050 will be for rent multifamily apartments there, if that answers the question.

Raj Sharma, Analyst

Thank you for your comments regarding the strategic review. Although you haven't shared the final results yet, could you explain how this connects to the decision to remove the Chilean packinghouse from the market and the extension of the avocado operation by three years? Can you provide some insight on whether this is aimed at making your ongoing operations more robust and asset-light, possibly aiding in enhancing shareholder value following the strategic review?

Harold Edwards, CEO

Yes. So, thank you for that question, Raj. So the strategic pivot there is, as we look forward at the potential value creation of expanding our avocado production domestically, we believe that more than offsets what we were anticipating in potentially generating by investing more capital into Chile to build the packing house and then to increase our supply chain by the maturing lemon trees that we're working with, not only of our own orchards in Chile but also with our grower partners there. And so we felt strategically, it would be a much better opportunity for us to lock in better value creation for our shareholders by increasing the avocado production here but also then transitioning our ideas of how we're going to add value to the 5 million cartons that eventually we will have access to in Chile by continuing to focus on marketing and selling them, but not necessarily packing them, which was going to take an additional requirement for capital investment. So we think that it's a lot less capital investment to expand our avocado production, but we also think the value creation of that will be significantly greater than our views on what our forecast were for the packinghouse at Chile. So when you put it all together, that was the rationale of why we made that pivot.

Raj Sharma, Analyst

Got it. That's very helpful. And then just last question from me. Could you help clarify the economics of the 1,000 acres of avocados over three years? How soon could you see this? And I see that your estimate of EBITDA has gone up from $30 million to $45 million. So is that the additional $15 million to $20 million all coming from the avocados? And at current prices, how would those economics work?

Mark Palamountain, CFO

We currently have about 1,200 acres of avocados planted, with over 800 acres fully bearing. We generally expect to yield between 10,000 and 15,000 pounds per acre based on the age of the trees. For the additional 1,000 acres we are planting, we anticipate producing between 25 million and 30 million pounds of avocados annually. The price of avocados has fluctuated between $1 and $2 per pound recently. We expect near-term growth to remain flat since we began planting around 18 months ago. Over the next 2 to 2.5 years, as the trees reach their first commercialization after four years, we should see an increase in EBITDA. We project that by 2030, EBITDA could grow from an estimated $15 million to $20 million to between $40 million and $55 million, depending on avocado prices, which we expect to be in the range of $1.20 to $1.70. From 2026 and 2027 through to 2030, we foresee incremental growth of $5 million to $7 million each year as the new trees begin to produce.

Raj Sharma, Analyst

Got it. And then just lastly. So obviously, you are expecting the next three years, you don't expect any sort of demand supply to suffer in avocados, you expect the demand-supply dynamics to stay as robust as they probably look to you right now? I mean, any impact from Mexico that could…

Harold Edwards, CEO

No, that's a great question, Raj. So we are very bullish on California avocados because if you look at the seasonality of the avocados that we produce here today and into the future, we believe we have a sustainable market niche in the North American market where Mexico is between crops and that creates a little window of opportunity from May to July that will allow us to essentially be alone with California. We'll be competing against Peruvian fruit at that point. But the market today, and we believe sustainably into the future, is seeking more California fruit during this time period because the logistics are closer to the market. It's a fresher product and it's perceived as a very high-quality product, which consumers demand and want and prefer. And so we believe this little niche is not only sustainable, but one of the other dynamics that's driving this decision is as you've seen drought conditions and water challenges in San Diego County, Orange County, moving up into Los Angeles County, you've seen a lot of that California production of avocados come out and a lot more production coming up into Ventura County, where the climate is ideal and there's still sustainable sources of water that exist in this area that we believe gives us a unique opportunity to capitalize on a significant growth in the amount of California avocados that are produced and then marketed and sold domestically here in the United States.

Raj Sharma, Analyst

Great, great. Excellent. Thank you for taking my questions. I'll take this offline.

Harold Edwards, CEO

Thank you, Raj.

Operator, Operator

Our next question comes from Ben Klieve with Lake Street Capital Markets. Please state your question.

Ben Klieve, Analyst

All right. Thanks for taking my question. First, congratulations on the really sudden news out of the harvest initiative. I know that took a while to be able to announce and yeah, just congratulations again on getting out over the finish line thus far. My questions, though, are related to the agribusiness operations. First of all, on the avocado side. I'm wondering if you can elaborate on kind of what is different in your avocado expansion plans over the next few years than maybe you had thought over the last couple of quarters? Because it seems like this is kind of the direction you were going, and I'm wondering if I'm wrong. Is there something that's materially changed here in your avocado expectations that you're announcing today?

Harold Edwards, CEO

Thanks for the question, Ben. We've gained greater confidence in the unique position of California avocados, particularly regarding their harvest season from about May to July. We believe that the combination of production from Mexico, mainly Michoacan and Jalisco, along with California's output, creates an ideal year-round supply for the North American market, making it the most efficient and reliable source available. As previously mentioned, California’s production fills the gap when Mexican crops are transitioning between seasons, and it competes with Peruvian produce. This situation presents a compelling and sustainable demand profile that we anticipate will continue to grow. Consequently, we are confident in converting some of our older lemon blocks, which have been less profitable, into avocado cultivation. Demand for avocados remains strong, supported by favorable trends. To provide some context, Mexico produces around 4 billion pounds of avocados annually, while California's output is between 200 million and 300 million pounds. While we may be smaller in volume, our seasonality positions us uniquely to meet demand sustainably. This switch from lemons, which have seen oversupply in recent years, to avocados, which are significantly more profitable per acre on our farms in Ventura County, represents a great opportunity for maximizing land value.

Ben Klieve, Analyst

Got it. Thanks, Harold. You alluded to one of my other questions on lemon pricing. It continues to seem like quite oversupply is driving this. Can you kind of talk about the lemon pricing outlook? I mean the $17.85. I think it was in the quarter? Was that kind of in line with your expectations at this time three months ago? Or did that disappoint? And kind of what's your expectations now here in the second half of this fiscal year?

Harold Edwards, CEO

The market is considerably stronger now, and pricing has improved compared to a year ago. The challenges we experienced in the second quarter, which we are currently reporting on, were largely due to the product mix of the lemons available for sale, with a higher percentage of lower-quality fruit that commands lower prices. This situation was largely influenced by the significant rainfall we had in the fall and winter, which, while beneficial for replenishing our aquifers, negatively impacted the quality of our produce in the second quarter. If we had had a higher percentage of premium fruit, which is more typical, pricing would have likely been even higher. However, we believe that conditions are improving in the lemon market. Given that this is year five or six of challenging pricing and increased costs, we expect to see more lemons being produced, which should positively affect the overall pricing environment for the lemons we continue to grow and sell in the future.

Mark Palamountain, CFO

Yeah. And I'll just add on to that. The current pricing right now is about $19.50. Again, that's even probably a little bit low that the pricing environment is a tale of two stories out there. There's not a lot of smaller sizes out there, so the 165s and the 200s. I think I heard a quote today in the high $30 range. That's obviously supply-demand dynamics, but we're feeling optimistic. We're $1 higher than last year, and it's just going to be a slower march up in it, but still in a profitable one at this point.

Ben Klieve, Analyst

Got it. That's helpful from both of you. Thank you. Mark, one for you, and then I'll get back in line. You talked about the kind of expectations in fiscal '25 and '26 as you're ramping your avocado acreage. Totally understandable. I'm wondering, though, if you can help us understand a bit about kind of the CapEx that needs to go into this initiative and then the associated OpEx with managing this level of acreage before it becomes productive over the next couple of years?

Mark Palamountain, CFO

If we consider everything, the cost to plant and manage an avocado tree for the first four years is around $15,000 per acre. These expenses will impact our inventory and balance sheet, and we won't see them reflected immediately. Over the next few years, we expect to incur significant costs until these trees start producing commercially. We'll also be replacing older lemon trees, which may result in a slight decrease in our volume initially, but we'll compensate for that by increasing volume from external partner growers and agency business. By the time we reach year four, about a third of our current plantings, which are 1.5 years old, will begin to generate revenue, allowing us to recoup costs. We anticipate our lemon business will remain stable from our standpoint. Additionally, we plan to plant new lemon trees and renew existing ones. The total capital expenditure for this five-year project is estimated to be around $15 million, with approximately $4 million or $5 million already spent, leaving us with about $10 million to invest over the next three years.

Ben Klieve, Analyst

Okay, great. Very good. Well, I appreciate all the color. Thanks for taking my questions. We'll get back in queue.

Harold Edwards, CEO

Thanks, Ben. Thank you.

Operator, Operator

Thank you. And at this point, there are no further questions at this time. I'll hand the floor back to Harold Edwards for closing comments.

Harold Edwards, CEO

We'd like to thank you for your questions and your interest in Limoneira, and we'd like to wish you all a great day. Thank you very much.

Operator, Operator

Thank you. And with that, we conclude today's conference. All parties may disconnect. Have a good day.