Earnings Call Transcript - LMNR Q4 2020

Operator, Operator

Greetings and welcome to Limoneira's fourth quarter 2020 earnings 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. I would now like to turn the conference over to your host, John Mills.

John Mills, Host

Thank you. Good afternoon everyone and thank you for joining us for Limoneira's fourth quarter fiscal year 2020 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 fourth quarter fiscal year 2020 earnings release which went out today at approximately 4 p.m. Eastern Time. If you have not had a chance to view 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 the results, performance or achievements expressed or implied by such forward-looking statements. Important factors that could cause or contribute to such differences include risks 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 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, which is a non-GAAP financial measure. A reconciliation of adjusted EBITDA to the most directly comparable GAAP financial measures is included in the company's 10-K and press release which have been posted to our website. And with that, it's 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. During the fiscal 2020, we made important strides in many areas of our overall business despite the dramatic effect that the COVID-19 pandemic had on our foodservice business. We achieved record domestic lemon volume and our real estate development harvest at Limoneira exceeded our expectations. Domestic lemon volume was up due to our expanded focus on grocery retail as consumers continued to dine at home instead of foodservice venues. COVID-19 has affected our citrus businesses since March and this continued during our seasonally soft fiscal fourth quarter of 2020. Pricing improved in the beginning of the fourth quarter, however this was short-lived as reduced exports to Asia affected pricing in the back half of the quarter and continues to affect pricing in the first fiscal quarter of 2021. In addition, higher than normal winds in our coastal properties affected our lemon utilization during the fourth quarter. Even despite these challenges, we continue to be a leader in foodservice and exports and are well-positioned once dining out improves from COVID-19 vaccine distribution. I will now discuss each of our business divisions' performances for the fourth quarter, starting with our agribusiness. Agribusiness revenue was $28.6 million compared to $35.3 million in the fourth quarter of last fiscal year. Fresh lemon and orange revenues were down due to foodservice closures and lower export demand, which resulted in lower average per carton prices. We recognized $500,000 of avocado revenue in the fourth quarter of fiscal year 2020, compared to $2.3 million in the same period last fiscal year. The year-over-year decrease in avocado revenue was due to the receipt of crop insurance proceeds in the fourth quarter of 2019. Turning now to our real estate development segment. We have now closed 354 lots since inception, including 144 new lot closings in fiscal 2020 and Lennar, one of our primary builders, recently announced they expect additional lot closings of 76 residential units by the end of June 2021. Based on these stronger than expected homebuilding results throughout fiscal year 2020, we now have annual visibility on the expected $80 million of cash distributions from harvest at Limoneira during the next six years beginning in fiscal 2022. You will notice in our earnings release, we have provided a chart outlining our annually expected cash distributions during the next six years. The expected cash distributions do not include the potential upside from increased density in housing at harvest as well as the potential opportunity of a medical campus in our East Area 2 development. We expect to be in a position to provide greater transparency on those opportunities later this year. Our company now has over 15,000 acres of prime agricultural land, 550 acres of residential housing we are selling, many additional non-agricultural assets we expect to monetize in the future and over 28,000 acre-feet of water assets. We are also opportunistically repurchasing stock. We continue to be very good stewards of these assets and believe our company will continue to reward long-term shareholders for many years to come. As we look into 2021, we are very well-positioned to realize strong revenue from oranges and avocados and expect an improvement in lemon pricing once the COVID-19 vaccine allows restaurants and bars to reopen. We believe we will be even better positioned for long-term growth, thanks to our grocery and club expansion during this pandemic. We are encouraged by the domestic increase in fresh lemon volume in fiscal year 2020 and look forward to updating you on our agribusiness and real estate progress in the coming months. And with that, I will now turn the call over to Mark.

Mark Palamountain, CFO

Thank you, Harold and good afternoon everybody. As a reminder to everyone listening, due to the seasonal nature of our business, revenue is driven by varying harvest periods from year-to-year and therefore it is best to view our business on an annual, not quarterly basis. Historically, our first and fourth quarters are the seasonally softer quarters while our second and third quarters are stronger. For the fourth quarter of fiscal year 2020, total net revenue was $29.8 million compared to total net revenue of $36.5 million in the fourth quarter of the previous fiscal year. Agribusiness revenue was $28.6 million compared to $35.3 million in the fourth quarter last year. Other operations revenue was relatively flat at $1.1 million. Agribusiness revenue for the fourth quarter of fiscal year 2020 includes $13.3 million in fresh lemon sales compared to $17 million of fresh lemon sales during the same period of fiscal year 2019. Pricing was lower than expected during the back half of the quarter due to COVID-19 pandemic-related foodservice closures reducing the demand for fresh lemons with reduced exports to Asia due to the pandemic. Approximately 787,000 cartons of fresh lemons were sold during the fourth quarter of fiscal year 2020 at an average price of $17 per carton compared to approximately 793,000 cartons sold at a $21.46 average price per carton during the fourth quarter of fiscal year 2019. The company recognized $500,000 of avocado revenue in the fourth quarter of fiscal year 2020, compared to $2.3 million in the same period last fiscal year. Approximately 500,000 pounds of avocados were sold during the fourth quarter of fiscal year 2020 at a $0.99 average price per pound, compared to no avocados sold during the prior year period. The year-over-year decline in avocado revenue was due to receipt of crop insurance proceeds in the fourth quarter of 2019. The company recognized $500,000 of orange revenue in the fourth quarter of fiscal year 2020, compared to $2.1 million in the same period of fiscal year 2019, attributable to lower brokered fruit sales. Specialty citrus and other crop revenue were $2 million in the fourth quarter of fiscal year 2020, compared to $2.1 million in the fourth quarter of fiscal year 2019. Total cost and expenses for the fourth quarter of fiscal year 2020 were $39.3 million compared to $40.1 million in the fourth quarter of last fiscal year. The fourth quarter of fiscal year 2020 experienced a decrease in agribusiness costs and selling, general and administrative expenses, partially offset by a decrease in gains from asset disposals. Costs associated with the company's agribusiness include packing costs, harvest costs, growing costs, costs related to fruit procured from third-party growers and depreciation and amortization expense. Operating loss for the fourth quarter of fiscal year 2020 was $9.5 million compared to an operating loss of $3.6 million in the fourth quarter of the previous fiscal year. Net loss applicable to common stock after preferred dividends for the fourth quarter of fiscal year 2020 was $7.6 million compared to a net loss of $3.2 million in the fourth quarter of fiscal year 2019. Net loss per diluted share for the fourth quarter of fiscal year 2020 was $0.43 compared to a net loss per diluted share of $0.18 for fiscal year 2019. Adjusted EBITDA was a loss of $6.6 million in the fourth quarter of fiscal year 2020, compared to a loss of $2.1 million in the same period of fiscal year 2019. A reconciliation of adjusted EBITDA to net income is provided at the end of our earnings release. For the fiscal year ended October 31, 2020, revenue was $164.6 million, compared to $171.4 million in the fiscal year ended October 31, 2019. Operating loss for the fiscal year 2020 was $19 million compared to an operating loss of $5.5 million for the fiscal year 2019. Net loss applicable to common stock, after preferred dividends, was $16.9 million for the fiscal year 2020, compared to a net loss of $6.4 million for the fiscal year 2019. Net loss per diluted share for the fiscal year 2020 was $0.96 compared to net loss per diluted share of $0.37 for the fiscal year 2019. Excluding the loss on stock in Calavo, non-cash equity in earnings of Limoneira Lewis Community Builders, LLC and loss on asset disposals for the fiscal year 2020, adjusted net loss applicable to common stock was $12.2 million compared to an adjusted net loss of $7.8 million for the fiscal year 2019. Adjusted net loss per diluted share was $0.69 compared to adjusted net loss per diluted share of $0.45 for the fiscal year 2019, based on approximately 17.6 million weighted average diluted common shares outstanding for both years. Adjusted EBITDA for the fiscal year 2020 was a loss of $6.7 million compared to income of $1.9 million for the fiscal year 2019. A reconciliation of adjusted EBITDA to net income is provided at the end of this release. Turning now to our balance sheet and liquidity. Long-term debt as of October 31, 2020 was $122.6 million, compared to $105.9 million at the end of fiscal year 2019. During the fiscal year 2020, the company received a $1.9 million income tax benefit from the CARES Act and applied for $6.7 million of federal and state income tax refunds. The company has received $800,000 of these refunds in October 2020 and $5 million in December 2020. On March 12, 2020, the Board approved a share repurchase program authorizing the ability to repurchase up to $10 million of its outstanding shares of common stock through March 2021. During the quarter ended October 31, 2020, we repurchased 208,877 shares for approximately $2.9 million and in fiscal year 2020 repurchased 250,977 shares for approximately $3.5 million. As of October 31, 2020, the remaining authorization under this program was approximately $6.5 million. Now, I would like to turn the call back to Harold to discuss our fiscal year 2021 outlook and longer-term growth pipeline.

Harold Edwards, CEO

Thank you, Mark. The recent increase in the COVID-19 pandemic affected our domestic and export pricing during the back half of the fourth quarter of fiscal year 2020 and we expect it to continue to create uncertainty on global pricing for the near term. Until this uncertainty dissipates, we are not going to provide guidance regarding our lemon volume right now. Offsetting some of this uncertainty, we do expect to generate strong orange and avocado revenue in fiscal year 2021, based on early market factors and initial crop indicators. We also have an additional 1,200 acres of non-bearing lemons estimated to become full bearing over the next four years, which will enable us to achieve strong organic growth for many years to come. The company expects 200 of the 1,200 acres to become full bearing in fiscal year 2021. Beyond these 1,200 acres, we intend to plant an additional 250 acres of lemons in the next two years that we believe will further build our long-term pipeline of productive acreage. We anticipate this additional acreage will increase domestic supply of lemons from our 2020 level by approximately 50% or about 900,000 to 1.3 million additional fresh cartons as the non-bearing and planned acreage becomes productive. We also expect to have a steady increase in third-party grower fruit. Also, due to more clarity in the development of harvest at Limoneira, we believe we will generate cash distributions from harvest as follows. Fiscal year 2021 is expected to be neutral. Fiscal 2022 is expected to generate $3 million of cash to Limoneira. Fiscal year 2023 is expected to generate $15 million. Fiscal year 2024 is expected to generate $27 million. Fiscal year 2025 is expected to generate $25 million. And 2026 is expected to generate $10 million. This will be about $80 million of cash back to Limoneira in the next six years. These expectations from harvest do not include the potential upside from increased density in the housing at harvest as well as the potential opportunity of a medical campus in our East Area 2 development. We expect to be in a position to provide greater transparency on these opportunities later this year. And with that, I would like to open the call up to your questions.

Operator, Operator

Our first question comes from Ben Bienvenu with Stephens.

Ben Bienvenu, Analyst

Hi Harold. Hi Mark. How are you all?

Harold Edwards, CEO

Hi Ben.

Mark Palamountain, CFO

Hi Ben.

Ben Bienvenu, Analyst

Thanks for the additional color around harvest. I wanted to ask, as it relates to the projected distribution that you gave and the comments that you made around the potential hospital development in East Area 2. Is the East Area 2 project solely a function of that potential hospital development? Or could you build out that real estate ownership parcel as well exclusive of the hospital opportunity? And if you did, would that impact the projected distribution that you have laid out here from East Area 1 for the net payout or distribution?

Harold Edwards, CEO

Certainly. So I will answer the last part of the question first. So this is all incremental above the comments we made about the distributions from harvest. So this is all on top of that. Essentially, the East Area 2 property is 38 acres and it has been zoned and was historically zoned and targeted to become complementary commercial property for the residential piece in harvest. With the changes that we are all observing in retail and big-box retail, the likelihood of seeing that property convert into a retail development has decreased significantly since we first began the project. The city of Santa Paula was looking forward to receiving tax benefits, sales tax benefits, from that retail. So they actually approached us on converting the focus into solving a problem that the community has, in that they have a community-based hospital which is today based on the hill in Downtown Santa Paula. For seismic reasons, it needs to be completely rebuilt by the year 2030. They were approached by the Ventura County Health Care Agency that currently operates our hospital about the potential of relocating the hospital and then developing a medical office that would house three of the existing clinics that the Health Care Agency runs in town to a new medical office building and then complement that with a skilled nursing facility and then eventually assisted living. There is a vision for that campus and there is a demand for that campus. Limoneira has made a nonbinding commitment to work very closely with the developer and the Health Care Agency in structuring a transaction where Limoneira would sell the ground to the developer who would then build the buildings and that would eventually become a hospital, a medical office building, skilled nursing, and assisted living. To go back to the first part of your question though, the East Area 2 development will also retain additional land that could be used for complementary commercial purposes. We also have the opportunity to tuck in some additional residential for sale or residential for rent housing on the property as well. As that development takes shape, we will be able to give much more granularity to the actual components of the East Area 2 project and will most likely include the hospital campus concept that I just laid out, but also complementary commercial and high-density multifamily housing. There is also some recent commentary from the county and the local press that we can show you just that really highlights their intent to make this project work. So it's a pretty opportunity.

Ben Bienvenu, Analyst

Okay. Great. So this is East Area 1. If you do begin to develop East Area 2 and the JV needs cash, maybe these numbers change. But that's all incremental relative to this, if I distill your comments down?

Harold Edwards, CEO

Yes, exactly. So the East Area 2 has nothing to do with the partnership in harvest. Today, it's 39 acres of commercially zoned property owned by the Limoneira Company that most likely the way we would transact that development would be to actually sell the land and monetize it upfront that would bring incremental benefits back to Limoneira.

Ben Bienvenu, Analyst

Okay. That's great color and this is a nice update. Thanks. On the pricing in 4Q and Harold, your commentary around export markets continuing to impact the first quarter, two questions. One, is the export market impact also hinged to the COVID recovery globally, more broadly? And then two, your realized price in the fourth quarter for lemons relative to the market price for, say, choice 115s? Was that a function of the winds impact that you mentioned? And will it not have any residual impact as we head into 2021?

Harold Edwards, CEO

Those are great questions. So the export markets will be tied directly to, I assume, the distribution of the vaccine and the reopening of foodservice venues, restaurants, and bars around the world. Towards the beginning of the first quarter, we saw export markets begin to reappear and for a period of time, we were doing almost pre-COVID levels of shipments to our Japanese and Korean partners, but towards the second part of the first quarter this year, we have seen those pull back again. Just like we are reading about around the world and around the United States, you are seeing situations of opening and then reclosing, opening and reclosing which gives us pause about sort of how to predict the rest of the year. That being said, though, the winds that were mentioned in our earlier remarks did have a negative impact on pricing. This season, as we start this new year, we have a much better distribution of grades throughout each of the growing districts, in District 3, District 1, and District 2 and a much higher percentage of first grade fruit. We expect that that will have a very positive impact on overall pricing in fiscal year 2021.

Ben Bienvenu, Analyst

Okay. Thank you very much. Best of luck guys.

Harold Edwards, CEO

Great. Thanks, Ben.

Operator, Operator

And our next question comes from Gerry Sweeney with ROTH Capital.

Gerry Sweeney, Analyst

Good morning guys. I am sorry, good afternoon. Thanks for taking my call.

Harold Edwards, CEO

Hi Gerry.

Gerry Sweeney, Analyst

I wanted to dig a little deeper just on supply and demand. Obviously, export and foodservice are headwinds. But I think the deeper question I wanted to get at would be, is there an oversupply of plantings or acreage today even if there's headwinds in the export and foodservice decline rectify themselves? In other words, even if we get past COVID, is there a chance of these record volumes continuing to still see some price compression?

Harold Edwards, CEO

So that's a great question, Gerry. Certainly, with the impact that we have today of COVID-related foodservice closures, it is oversupplied. Once we get COVID behind us and we can get back to the emerging market development and growth of those markets and consumption and demand growth, we believe that we are properly supplied. The part of that question that is somewhat complicated is because of the different growing regions and the timing of the production in those areas. There will be times when we are oversupplied and times when we are properly supplied on a global basis and times when we are even undersupplied. Looking at the seasonality of production, the age of the blocks in terms of productivity, and anticipating the acreage that's going to come out, producers tend to react if you go so this is the second year in a row of California lemon production, which has not been profitable for lemon producers in California. We are beginning to see some of that acreage pull out. We also know that Argentina is projected to have a 30% decrease in its total production of fresh lemons this coming year due to a drought that they have experienced there. There are factors out there on a global basis that give us reason to believe that once we get beyond COVID and return to pre-COVID demand levels, we will be properly supplied. But as you asked, it is a great question and we will have to continue to monitor that.

Gerry Sweeney, Analyst

Got it. And as you expand production globally, you have South American production, is there an ability to store some of the lemons and maybe even out some of your shipping and exporting activities maybe balance out some of that unevenness?

Harold Edwards, CEO

So the really great part about our Chilean investments is that almost all of that production can be consumed normally profitably within the Chilean market. It does not necessarily have to find an export home. Argentina is different. They don't have the consumption nor the demand to absorb that if we look at the total acreage that are planted right now, there are about two or three months that look like towards the back half of the summer that are oversupplied. We are constantly looking at global markets and the best opportunities from each of the production sources to identify the optimal way to move that fruit around to maximize its value.

Mark Palamountain, CFO

As an example, now we are actually exporting, starting here pretty soon into or importing into Chile where their summertime lemon starts to fall off, and they start seeing better prices and we are able to send some of our choice lemons down that way. So it works both ways.

Gerry Sweeney, Analyst

Got it. Thanks. That's it for me. I appreciate it and I appreciate the clarity at the harvest at Limoneira and the cash flows. So, thank you.

Harold Edwards, CEO

Great. Thank you Gerry.

Operator, Operator

And our next question is from Vincent Anderson with Stifel.

Vincent Anderson, Analyst

Yes. Thanks. Good afternoon guys.

Harold Edwards, CEO

Hi Vince.

Mark Palamountain, CFO

Hi Vince.

Vincent Anderson, Analyst

So, I appreciate you confirming the drought in Argentina. I heard there might be some cost issues down there as well. So one, have you escaped that? Or is that impacting your production as well? And then, you talked about Europe being an important exit valve, but has Argentina regained access to the European market yet?

Harold Edwards, CEO

So, the first part of your question about our production. The great news for us, for Argentina, is that our primary production is north of Tucuman, which is the province where the majority of lemons are produced. That is the area that's experiencing the significant drought. We are actually producing in the province of Jujuy, which is the furthest northernmost province in the country of Argentina. We have not been impacted by the drought, and our production actually looks to be up in this coming year. Regarding the European market, really Central and Eastern Europe is where we move most of our fruit today. We are able to move that fruit even though there are issues today, as you mentioned, in Western Europe.

Vincent Anderson, Analyst

Got it. Perfect. Thank you. And then if we were to kind of throw a worst-case scenario on foodservice demand this year. Maybe if you could talk about how you did in the fourth quarter in terms of adding more grocery sales? Obviously, a bigger export quarter is going to be tough to say. But if we see a slow recovery in foodservice, one, how could 2021 look versus 2020 on a fresh utilization rate just from the progress you made that? And how flexible can you be this year in terms of letting fruit size up a bit more to penetrate grocery better?

Harold Edwards, CEO

That's a great question. The thing that really hit us the hardest last year in 2020 was the oversupply of the second grade, the choice lemons, which predominantly find their way into foodservice. So a couple of things that are good news for us coming into 2021 are, first of all, last year, the percentage of first-grade fancy fruit fell to 20% where normally that would be around 40% to 50%. In 2021, we are back to normal and we are sort of in that 40% to 50% of first-grade fruit which means that if we can get the proper sizing on that fruit, it will be much easier for us to move into retail customers and at higher value. The other thing that happened to us last year as we came into March, April, May, and June, which is our District 2 coastal crop, was a situation where our juice partner had a market outlook that was predominantly foodservice. When that juice partner was unable to sell the majority, they closed that plant. We pivoted over to sell it to another plant that was supplied by our competitor, and we were shut out of that. This adversely affected our utilization. That has now been completely restored as our juice partner has been able to find outlets at retail that have been great. In the event that we don't get the foodservice business back as quickly as we would like this next year, our pivot over to retail, coupled with a partnership gives us confidence in a better total utilization in this next year.

Vincent Anderson, Analyst

That is perfect. Thank you. So, I guess kind of a quick housekeeping question. Those 200 acres you are bringing on this year, it looks like you might be netting them against some old acres you are pulling. And if so, is there a measurable net fresh carton impact that we should be modeling to? Or it would kind of just be negligible for the first year or so?

Harold Edwards, CEO

So there are a lot of moving pieces that are part of that answer to that question. The way to think about it, Vince, is District 3 is 30% lower in total tree crop for the industry and for us. District 1, where we are now up in the San Joaquin Valley, is 15% lower than it was a year ago for everybody and us. But the acreage that's coming online is up in District 1. So our total sales in District 1 should be about the same because of those 200 acres of fruit trees are now bearing. It is still too early to talk about the crop size. We assume it's going to be similar to last year, only with a higher percentage of fancy grade fruit. It will come down to size. If we can get that rain and get that extra size, that will be the difference-maker and really give us that volume confidence later in the year.

Vincent Anderson, Analyst

All right. Excellent. Thanks again guys. Good luck this year.

Harold Edwards, CEO

Thanks, Vince.

Operator, Operator

Our next question comes from Ben Klieve with National Securities Corporation.

Ben Klieve, Analyst

All right. Thanks for taking my questions. First one here. And Harold, you kind of alluded to this in your prior answer, but I am wondering if you could elaborate a bit more on how you are looking at managing inventory in the coming months and quarters in the event that the foodservice industry really does pick up? I mean, to what extent are you going to leave fruit on the trees for a bit longer, leave fruit that's already been processed for a little bit longer with the hope of getting better pricing as foodservice opens up? Or is that really not something that you are going to mess around with too much?

Harold Edwards, CEO

That's a great question, Ben. The sales team have done a really good job getting in front of what we see from each of our growing districts and setting up contracts with retail customers that are allowing us to sort of anticipate demand and sales. The good news is, because we are behind the rainfall and the fruit is growing more slowly, we are naturally inventorying a lot of this fruit just on the tree and letting mother nature do her thing without incurring additional costs of storage. Our strategy is just to keep monitoring on a day-to-day basis in weekly and monthly the sizing of the fruit and let mother nature determine the optimal time for us to harvest. The combination of all those factors have a huge influence on our fresh utilization. In 2020, we saw fresh utilization drop to 60%. We anticipate that in 2021 we will improve that rate through better management strategies, partnerships, and customer focus.

Ben Klieve, Analyst

Got it. Very interesting. Well, it's tricky to navigate, but best of luck as you do so. My other question here is regarding water rights. I am hoping you can just kind of provide a general update on how you are looking at water rights over the next year and in particular in the context of, like you said, a dry year so far in California and an even drier year in the Colorado River Basin. The current weather impact, how you are thinking about those at all? And any updates from a big picture would be appreciated.

Harold Edwards, CEO

Happy to talk about water. Water has become a futures market and is now beginning to be actively publicly traded. As you implied, scarcity means more value with water and water rights. Our primary focus right now is using the majority of our water assets to support our agricultural operations. We do have surplus water in certain areas and are working to find ways to monetize that water, specifically our Class 3 Colorado River water rights. We have a partnership with a private equity group focused on monetizing these assets. Nothing to report on specific transactions yet, but we are exploring those opportunities. For 2021, we probably won't experience much in terms of significant financial returns from water rights.

Ben Klieve, Analyst

Got it. Perfect. Well, I appreciate the color on both of those. I think that does it for me. That's a lot coming up here in coming quarters and I will jump back in queue.

Harold Edwards, CEO

Thank you, Ben.

Mark Palamountain, CFO

Thank you.

Operator, Operator

And our next question comes from Mark Smith with Lake Street Capital Markets.

Mark Smith, Analyst

Hi guys. First question for me is, just any other insight into changing consumer trends within grocery retail? And additionally, you already talked about some of the new partners that you added during the quarter and anybody else to maybe discuss or kind of your long-term prospects with some of these new partners?

Harold Edwards, CEO

We mentioned earlier that we were forced to pivot over to retail during COVID. Pre-COVID we were 70% sales to foodservice customers and 30% to retail. This has now translated to approximately 50/50. We have made some great progress with new retail customers, and we are seeing much stronger demand at retail than we saw pre-COVID. We suspect that as restaurants and foodservice gradually begins to recover, we will see continued high levels of retail demand as well. Our sales team has contracted with exciting new retail accounts, and we believe that the total demand and consumption will be up once we get past the pandemic.

Mark Palamountain, CFO

And as a part of our focus, we are still chasing after quick-service restaurants and fresh lemonade sales as well. We are very focused on that segment. If we can pick up one or two more such customers, it would help with our lower grade fruit.

Mark Smith, Analyst

Okay. The only other question for me is just really looking at the profitability. Can you just talk about labor pressure as you look at this new year? Anything else that you are seeing that may be impacting costs? And then really just how we improve the profitability here, especially if we stay in an environment with low commodity prices?

Harold Edwards, CEO

The biggest impact on our profitability has been our fresh utilization percentage. If we can produce a normal percentage of first-grade fruit and find good demand for all grades, including the second and third grades, we can improve our utilization rate back to 70%, which historically drives our profitability. We faced demand destruction due to the pandemic and oversupply issues that have negatively affected pricing. If we can pivot effectively to retail, we can achieve that target and restore profitability based on current costs.

Mark Smith, Analyst

Okay. Great. Thank you.

Operator, Operator

Ladies and gentlemen, we have reached the end of the question-and-answer session. I would like to turn the call back over to Mr. Harold Edwards for closing remarks. Thank you.

Harold Edwards, CEO

Thank you and thank you for your questions and your interest in Limoneira. Have a great day.

Operator, Operator

This concludes tonight's webinar. You may disconnect your lines at this time. Thank you for your participation. Have a good evening.