Cadiz Inc (CDZIP) 2001 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Cadiz fourth quarter results conference call.

During the presentation, all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. At that time if you have a question, please press the one followed by the four on your telephone. As a reminder, this conference is being recorded, Thursday, March 21, 2002. I would now like to turn the conference over to Mr. Keith Brackpool, Chairman, and Chief Executive Officer with Cadiz, inc. Please go ahead, sir.

Thank you, Operator. Good morning everybody.

Before I begin, let me read the following Safe Harbor statement. "The following discussion will contain trend analysis and other forward looking statements within the meaning of section 27A of the Securities Act of 1933 as amended and section 21E of the Securities Exchange Act of 1934 as amended. Actual results could differ materially from those projected in the forward-looking statements through out this call. Factors that could actual results or events to differ materially from those reflected in the companies forward looking statements, are detailed in the companies most recent form 10-K, 10-Q, and other SEC filings."

Good morning. Welcome to the fourth quarter call. Follow our normal procedure, the are Stanley Speer, Cadiz Chief Financial Officer, to read you the summary of financials, and Tim Shaheen will talk about the agricultural operations. I will then give you an update on where we are on the water resources side and then open up to any of your questions. So without further ado, I pass it over to Stan.

Thanks, Keith.

Revenues to the quarter were 16 million. Loss was 3.6 million, and net loss applicable to common stock was 9.3 million or 26 cents per share. The 2001 fourth quarter net loss did include 2.4 million of depreciation, amortization and non-cash interest charges. By comparison in the fourth quarter of 2000, revenues were 17.5 million, operating loss was 2.0 million, and net loss applicable to common stock was 7.0 million or 20 cents per share.

The 2000 fourth quarter net loss amount included 2.2 million of depreciation, amortization, and non-cash interest charges. The decrease in revenues and operating profits for the quarter is primarily attributed to less favorable market conditions for our farming operation which cause downward pressure on fob prices for table grapes and plums that continued from the third quarter and Tim Shaheen will talk a little further about that.

Additionally we had a two delay in the harvest in South Africa, which caused a portion of our revenues related to the licensing to our proprietary table grapes there to be pushed into the first quarter of 2002.

Earnings before income taxes, interest expense, depreciation, amortization and other special charges contributed from Sun World were 7.0 million for the year ended December 31, 2001, compared to 12.5 million for the year ended December 31, 2000. Other special charges include the non-reoccurring compensation expense of $5.5 million that we recorded in the first quarter of 2001. The cost of removal of under performing crops, but not the operating losses of those under performing crops. Additionally, the other special charges include our inter company management fee that we pay to Cadiz and operating charges related to Cadiz Ranch which total 3.0 in 2001 and 2.7 in 2000 on a combined basis.

continues to re-deploy capital within its business and we removed 700 acres of marginal commodity wine grapes, citrus, and stone fruit in the fourth quarter of 2001 that resulted in a charge of 0.5 million. These crops contributed 1.1 million of losses that are included in Sun World operating losses in 2001. It will not recur on a go forward basis, and are not included as an add back to the $7.0 million EBIT number I just talked about, EBITDA number I just talked about.

Revenues and our litigation settlement with Waste Management for the year ended December 31, 2001, were 100.3 million, operating loss was 6.1 million, and net loss applicable to common stock was 26.8 million or 75 cents per share. The 2001 net loss amount included 11.7 of depreciation, amortization, and non-cash interest charges. By comparison in 2000, revenues were 107.7 million; operating loss was 3.1 million and net loss applicable to common to stock was 22.5 million, or 64 cents per share. The 2000 net loss amount included 10.9 million of depreciation, amortization, and non-cash interest charges.

From a balance sheet perspective, our working capital excluding current portion of long-term debt was 3.8 million compared to 13.3 million last year. Total assets at December 31 were 198.3 million compared to 203.6 million in 2000. Our Sun World seasonal revolver was at zero for both years. Total long-term debt was approximately 146.4 million, of which 121.7 million was at Sun World. Year to date capital expenditures were 6.1 million compared to 6.7 million in 2000.

Additionally as noted in the 8-K that we filed earlier this month, Cadiz has amended the terms of its senior term and revolving credit facilities to extend the maturity dates to January 31, 2003 and to increase the revolving credit facility capacity to $25 million from $15 million. In conjunction with this amendment, the lender has the option to convert 10 million of the total 35 million in debt into Cadiz common stock at a fixed conversion price of $8.

While we continue to focus on minimizing the dilution to our shareholders, we believe that this financing was prudent to provide additional funds to allow us to continue to make capital investments necessary for Cadiz program, our water development opportunities in the Middle East and development of our proprietary products at Sun World. And with that, I will turn it over to Tim.

As we talked about in the third quarter, and as Stan briefly mentioned, we continue to be adversely effected in our farming operations as a result of overlapping growing seasons and an industry wide over supply of table grapes and stone fruit. These conditions continued through the remaining table grape and stone fruit harvest which were completed in the fourth quarter. This as frame of reference resulted in the average price per unit sold in the quarter before cooling of $8.44 versus $10.08 in the same prior year quarter.

From our perspective, while income in agricultural operations for the quarter, and really, the last two years have been disappointing, we've continued to use this down cycle in the industry to reposition the business in a number of ways. We talked about these a little bit again in the last quarter and I will recap them.

We continue to re-deploy capital within the business by shifting our production mix of permanent vines and trees to proprietary products that provide us with significantly improved fruit and grape flavor at times of the year when it is otherwise unavailable. In this regard, we've now removed 2,000 acres of marginal production during the last two years and continue to invest in approximately 1500 acres of developing crops.

The combinations of the removals and the redevelopment, have moved this mix up from approximately one-third proprietary three years ago to almost-and-a-half proprietary today. We've also continued to expand our licensing business into all key fruit producing areas with third-party license production now over 7,000 acres, which is again up more than 50 percent over the last two years. As we move into 2002, we are very encouraged that this two-year down cycle is now turned positive and we feel this way for a number of reasons.

We are seeing the amount marginal acreage that's been removed, not just by ourselves, but by others across the industry. We are seeing a change in the current pricing environment across the entire sector. And we are also seeing, from a timing standpoint this summer, normal production windows for all our key growing areas. So when you couple those changes with the underlying changes that we have made in our business -- I'll recap those as well.

Our continued international growth, our pending merger with , the continued expansion of our licensing business. We've got a commercial ramp up of two very significant proprietary products this year with 30 to 50-percent increases expected in both our black diamond plums as well as our midnight beauty grapes. We also completed a three year organic transitional process on our table grapes that you have to go through to get these certified to be sold as organic.

So approximately 10 percent of our table grape production will be organic this year. And we also continue great success with new proprietary products that we have in the pipeline. So we feel we are extremely well positioned to take advantage of the upturn in market conditions and we are bullish on a very positive 2002. With at I will pass it to Keith.

Thank you Tim and Stan. Well, on the waterside, I think that most material issue that we like you are all still waiting for, is the issuance of the final record of decisions from the Federal Government. We had all expected this to come a couple of months ago. It is an extraordinary, excruciating process to go through. We start with the -- the good news is that we are told we have this out now within the next number of weeks. So truly do believe it's there and obviously the proof of that will be when you, when you see it.

Just one point to bring up as to one of the main reasons for the delay. Any project that was in front of the Department of the Interior between September, October, and November and had comment periods in those times which ours did -- an individual sued the Federal Government on another project, saying that due to the anthrax scare his comment letter had not arrived and not been reviewed. So the Department of Interior reopened the comment period for any project -- there are about 40 projects that was in front of them at that stage -- they reopened that in January.

As you would expect, the zero additional comments were received, but it did delay the process to go through that. So we are now expecting that decision to be issued shortly and will put out a release and let you know as soon as that is out.

At this stage, we have always said that it would two prong process to get to towards completion. We have the record of decision and Metropolitan has to have its environmental workshop and then its contractual approval meetings. But this stage, Metropolitan has tentatively set that workshop for April. So like us, it is expecting issuance of this document imminently and the contractual meetings to follow -- to follow at the following board meetings. So we really are, I truly believe right there, but obviously the proof of this will be when you see this in the next, in the coming weeks.

The Colorado River plan, the 4.4 plan that we've talked about extensively over the last several years. California is under an obligation to complete as many of these things as they can by the end of 2002. Frankly this one is, I would say, the most likely to be completed by that stage. So there is real pressure on all of these local water agencies to get these transactions complete. So we are as frustrated at the delays by the Federal Government as anybody but it is what is and we continue to work through the process and really do believe that the result is well worth waiting for.

One of the things that we talked about on the last call was the new urban water management bill that was passed and signed into law by the state of California earlier this year, requiring developers to seek and demonstrate and adequate, reliable supply of water. This really has had the effect, in the first few months of the year that we expected. Every major developer is now engaged in trying figure out what he has to do on the waterside.

And so we've really got a spirit of energy into the sector now. And it's not just public agencies telling everyone that it all be all right on the night. They will plan for it at some stage. These developers are really find out wither or not it's going to hurt their development. So I think that is a very much a positive step.

On another positive note, an announcement that we made last week, which received a fair amount of coverage, nationwide in the newspapers. We are extremely pleased to welcome former Secretary of Interior, former Governor of Arizona, Bruce to join us. Bruce is going to take up the position of chairman and chief executive of new subsidiary that's being formed to undertake water projects in the Middle East.

We're obviously very -- feel very good that someone of the caliber and reputation of Secretary has chosen this as his vehicle to join the private sector. We've now been working in the Middle East, as most of you know, for several years, primarily on the Egyptian project. Opportunities there are really first class. Bruce and I made just in January to eight different countries and the total capital being invested by those eight countries was a very, very significant percentage of what the United States is planning on spending in cap, on infrastructure on water.

By the time you add in the Gulf States as well -- in certain years the capital expenditures that are going on in water projects in the Middle East right now would exceed that of the United States. So there is real effort being put in there. The reception we have received over there with the announcement that Bruce is joining us is as good as you would hope for.

We will be bring in some local partners into that subsidiary. And we will be talking to you about that in the near future. And the purpose of this company is not to get itself into the consulting business, but there are many, many investment opportunities. We intend to accomplish those with both local and public, private financing. And the aim of this subsidiary will be to end up with significant carried interest in .

So some of them are already under progress and moving along. So I think that we've really here got very, very, very interesting triangle where you have the success of what we've been able to do out here with the largest public private partnership in, certainly in the state of California, probably nation wide on water transfer and storage project. We have somebody with the reputation and experience in the water industry in the United States, is Secretary which I would say the experience is unsurpassed. And then finally, we have the very, very, considerable strength of our local partners out there. So I think it gives us a very strong boost to be able to come out of the gate running on this project. So it gives everybody something to really look forward to.

Finally we are progressing on all documentation on the transaction. At this stage, I believe that the required regulatory approvals that we need, both domestically and probably more importantly from overseas, will slow the closing of this down by a number of weeks. But at this stage as we sit here today, as you saw from the press release, we're projecting both the Metropolitan transaction and the merger to close within the second quarter of this year. So with that, I open it to questions.

Thank you sir. Ladies and gentlemen, if you would like to register a question, please press the one, followed by the four on your telephone. You will hear three to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the one followed by the three. If you're using a speakerphone, please lift your hand set before interring your request.

One moment please for the first question. with Schwab Capital Markets, please go ahead.

Yes, good morning. A couple of questions, Keith. One on the California pricing situation, you said the new water management laws having the effect expected. Can you give us some current sense of what you see on pricing, particularly as it would related to your third party water that you're hoping to sell out of the project?

Yeah, let me give it to you this way. The biggest problem with any form of looking for comparative prices out here has been that there is not the water available for anybody to buy. So probably the best comparative I can give you is that the city of Carlsbad, in conjunction with the San Diego water authority, announce earlier this week that they really were going to pursue this new desalinization plant along the coast. They had signed a memorandum of understanding with the developer of that project to pay a fix price of $798 for the next five years, with inflation adjustments then to take place.

So I think that's probably the best comparative that I can give you is that there is no water available for sale in Southern California on a firm basis. And so we are looking at new sources all the time. So I think that when you see those sorts of numbers being paid, that's a very, very, positive development indeed. The fact that it's taken us this long to get through the process. It's taken everybody. There are no other projects that have come online. This is California, it takes a long time. But that's why prices are rising to the level they are.

And can you give us sense of what would then be your timing on -- you hoped to complete the Met deal in the second quarter -- then is the sale of third party water contingent on that completion as well?

Yeah, we have to complete the institutional arrangements with Metropolitan and then obviously the pipeline infrastructure itself has to be completed before water could delivered. But once we have completed the institutional arrangements with Metropolitan this year, we would then be in a position to enter into a long term agreement with people who wanted to buy that third party sales. Where the deliveries themselves wouldn't be able to start until the pipeline was completed.

Of course, but we could see agreements on that, theoretically in the second half of this year?

I think that you certainly start to see some indications of where we are going to go.

OK. On the Middle East -- can you give us a little color or specifics, in terms of what you say capital spending exceeding US levels -- what sort of a range, you know, since there are different ways of measuring it here, what sort of range in terms of billions of dollars that you are talking about? And any sort of specifics -- not on actual projects, but types of projects that you would be looking at? Whither they would be industrial water supply, water reuse desalination, you know, transfer -- what types of projects you think are going to be sort of your sweet spot, if you will? And also and what types of local partners?

A lot of questions in one then. In one question. Let me do it this way. I think that when we do the roll out of the local partners here shortly, I think we will certainly go into, in that release, a lot more detail in terms of the questions you've asked.

But let me give a little overview of where we are. You have capital spending going on, certainly in the form of all of the things that you've talked about, desalinization, storage, reuse as well as now for the first time, transfers. A prime example would be the type of project that's currently going on in Jordan. Jordan is a chronically water short country. Shares a common border with Saudi Arabia.

There is an old, non-rechargeable aquifer at that border on the Saudi side they have used for years to grow some wheat and some barely. The Jordanian Government have put out a tender. They are building now a well field down at the site. Those wells go down as deep as 1500 feet. They are going to pump about 40,000 acre feet of water out a year and send it in 350 kilometers into Jordan. The entire cost of the project, up front is about $750 million.

So when you look at the sorts of money that are being paid for water like that -- the different options that are available. There are lots of those types of projects that are going on. So I think it will be using the skill set that's been developed here, the knowledge base that Secretary has. I'm really working with those governments. As far as the local partners, they will, when I say local partners, they will be Middle East, primarily private sector, and types. And as I say, I think that combination will really give us the boost. But we will make sure that when we put out the rollout of the partners, etc. that at the same time really get into some of the statistics on the capital spending side, because I think that would be good to show that to you.

OK. Thanks, I'll get back in line.

Our next question will come from with B.Riley and Company. Please go ahead.

Good morning, Keith. One, I don't know wither it was a slip, but you mentioned on the Met after the workshop, that contract discussion will occur in the next meetings? Or it is -- you thinking now two meetings, instead of one after the workshop?

I'm just being conservative. I mean it all depends on the day of the workshop is to how many days they have before the next meeting. But it will be the one or the one after that. So that was the only reason I said it like that.

OK. And this probably more for Tim, but Tim could you go into -- first of all did you give units on the SPs -- and then after that say exactly what changes you are seeing in the current pricing environment?

Well the units for the quarter for us, I think were 1.2 million. As far as changes -- we are almost through our first I guess, so can speak with some confidence on that -- we've definitely seen -- I mean, I think when you go through a two year period like we went through -- a down cycle has a way of exposing, I guess, warts quicker. And I think what we've gone through with -- the good thing about what we've done is that we've continued to re-invest and re-deploy and re-invent. And I think all of those things that we've done are going to shine this year. The prices for citrus are lot higher -- if you bought head of lettuce in a supermarket it's a lot higher.

I mean, what's been going on, is been across the vegetable and across much wider than the portion of the business were in. This has forced a lot people out of business. It's force lot acreage to come out. So the trend that we are seeing -- I think the retail consolidation is a big part of it because now we are seeing more retailers get more pro active about growing the top line instead of, you know, beating another quarter out of the bottom line. So we are seeing, we are seeing a lot of positive signs at this stage.

OK. And then on the license revenues, I think that's running at about, what about five million a year.

It's about five million a year. And as Stan mentioned, we had a year-on-year comparison, some of those slipped into the first quarter of 2002 as well.

Right. And so right now you have 7,000 acres in third party growers. Now you've talked in the past about a number of other growers waiting to start planting due to this quarantine process. Could you just go into what that entails?

Sure, it depends on the county, but it's a combination. I think -- similar to us. I mean when they plant the acre they are going to have ramped up in production, you know, over a two, three, four-year period. So, in some countries we are still getting new products through quarantine. But in others we do actually have the plantings going on and we still see those on an up curve.

So in South Africa for example, you know, going through a cycle right now, I mean we would expect to see another five hundred to 1,000 acres from that particular area going into new varieties and those will ramp up over the next few years. I think the 7,000 acres themselves, I think it's realistic to look at those going up in these 10 to 15 percent each year over the next few years of new production going in and licensing growth, you know would increase as a result of that.

OK. Great. Thanks a lot, Tim. And Keith, when does water start to flow in Egypt?

Brackpool October the 6th, this year. I say that with a certain degree. It's Egypt's big military celebration day and that's the day it's planned. And I think there will be another military celebration by somebody if it doesn't fly.

OK. Great. And just one final -- two final questions excuse me. What is the equity capital structure for the new subsidiary that's one.? And then two -- what are the approximate total number of vested warrants and the average strike prices?

We release the details of the capitalization of the subsidiary when we release the partner situation after we finish that negotiation. It's well in the planning stages right now, but until we are signed up, I would rather not do that right now.

OK.

And Stan is going to -- why don't we take the next question and we'll answer that in a second.

Thanks a lot.

Ladies and gentlemen, as a reminder, to register for a question, please press the one followed by the four on your telephone. Once again, if you do have question, please press the one, followed by the four at this time. Our next question will come from with Safeco Asset Management. Please go ahead.

Thanks, good morning. Keith, could you kind of itemize -- what are the dollar values of what you are going to have to invest in these new projects in the Middle East that Mr. is working on? And -- because I'm trying to understand -- what's the rate at which you are going to be committing capital there and where is that capital going to come from?

As I said earlier on in the call, it's our intention to really be packaging and putting these together and end up with a carried interest in these. As we sit here today, it's not the intention to use, equity capital of Cadiz to be investing in those. We will have co-investment opportunities and we will be able to bring in private matching funds if we want, but there will be no obligation to invest in the projects.

So you are going to strictly use your expertise and let some else put up the capital this time around?

That's a simplified way of saying it, but yes we will be packaging the transactions, working on the transactions, we will be putting an amount of capital into the subsidiary to start with to fund it and do everything else. That will not be in market capitalization in terms of the company, a significant dollar amount. We will do that out working capital. And as projects come along, we will make our decision as to wither we want to co-invest along with the local partners or wither the company will keep its carried interest in the project.

How fast -- optimistically do you think these projects could reach a state of starting to produce revenue.

Well, you know these -- there's good and bad wherever you go in the world and one of the good things about the Middle East is that ironically things to tend to happen on that side of the sector extremely quickly. To put it in perspective, Egypt started planning the project and the Canal in 1996. It was in -- end of 1996 beginning of 1997 that we commenced the EIL process for our project. One of those projects is now complete and the other one will be complete this October the 6th. And they deliver a little over 12 million acre feet of water. So I think as you can see without the four or five-year regulatory hurdles that we have to go through here, the projects are ironically much, much quicker to come to fruition.

OK. We are still looking at a few years...

... talk about a new project that hasn't been planned you might be right. But I think you could very much expect to see us involved in some of the projects that are currently underway.

OK. They have a head start already.

Correct.

OK. Thank you.

Mike here, to answer to your question is at December 31 there is about 1.2 million warrants with a weighted average exercise price of 40.

Gentlemen, our next question will come Debra Coy. Please go ahead with your follow-up question.

Yeah, a follow-up for Tim. You gave some details on what you are seeing in terms of improved pricing environment. Can you be any more specific on what you are seeing thus far for your crops in the first quarter thus far?

In, well -- as you, I think, you recall the majority of our production is in the summer months, fruit season.

Right. Of course.

So it's a smaller amount of production that we have going on in the first quarter. What we are seeing at this stage is, you know, on citrus products, you know probably, you know, a 30 to 40-percent increase over the average for the last few years. But we are also seeing, you know, which is very important at this stage, we are also seeing the movement of those crops -- an orderly finish of those crops, an orderly finish of southern hemisphere.

So a lot of things -- where people are now speculating on the opening prices of fruit here and starting to forward price. And I would say in all cases -- I don't want to go to far out on this limb-- the dynamics are extremely good for this to continue right into the summer, but the critical months for us will be June, July, and August.

Is that why you said you're seeing more normal production windows for this summer because of how you are seeing the southern season?

Southern is the first part of it. So you kind of have an estimate of much production there is and consumption patterns and how that's winding down, so you see that. But we also -- with cultural practices for the summer production, we now have some fairly good estimates of, you know, when we would expect, for example a crop to start. Which you may recall last year it was about two weeks behind normal.

At this stage, we see it right on tract for a normal start. And then also the cultural practices being applied in the San Joaquin Valley would also at this stage peg their timing back to normal. So there are a lot of things, you know, that can still alter that, but the dynamics of where they are at right now is extremely encouraging. And when you couple that with, you know, what's happening in the market place right now, you know, things are lined up very well.

OK. And the risk factor to that would be primarily weather?

Yeah, I mean, it becomes less so now, because you think that things that would effect on region would effect another. And so they move together, you still have the gaps between regions. That will effect it and the amount of production that has been taken out. So, I mean we feel pretty good at this stage.

OK. Thank you.

Ladies and gentlemen, once again to register for a question, please press the one followed by the four at this time. Gentlemen, I 'm showing no additional questions, please continue with your presentation or any closing remarks.

Good, well thank you. As usual we are here in the office today, if anybody has any has follow up questions. And we look forward to talking to you again in the very near future to give you some solid up dates on the things we talked about today. Thank you once again for your support of the company. Thank you. Good morning.

Ladies and gentlemen, that does conclude our conference call for today. We thank you for your participation and ask that you please disconnect your lines.