Limoneira Co (LMNR) 2012 Q4 法說會逐字稿

Good day, and welcome to the Limoneira fourth-quarter fiscal 2012 conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. John Mills of ICR. Please go ahead sir.

Good afternoon, everyone, and welcome to Limoneira's fourth-quarter and year-end fiscal 2012 conference call. On the call today are Harold Edwards, President and Chief Executive Officer, and Joe Rumley, Chief Financial Officer.

By now, everyone should have access to the fourth-quarter fiscal 2012 earnings release which went out yesterday afternoon at approximately 4 p.m. Eastern time. If you've not had a chance to review the release, it's available on the Investor Relations portion of our website at Limoneira.com. This call is being webcast and a replay will be available on Limoneira's website as well at Limoneira.com.

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, that could cause its future results, performance or achievements to differ significantly from the results, performance, or achievements expressed or implied by such forward-looking statements. Important factors that could cause or contribute to such differences include 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 as a result of new information, future events or otherwise.

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

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

Thank you John. Good afternoon everyone and thank you for joining us. Because this is our first earnings conference call, and some of you may be new to our company, I'll begin today's call with a brief overview of our company and our growth opportunities, as well as some highlights of our fourth-quarter and full-year results. Then Joe will review the financial results for the quarter and full year in more detail. I will then review our fiscal year 2013 guidance and open the call for your questions.

To provide a brief overview of our Company, we are an asset-rich diversified operating income company founded in 1893 with approximately 8200 acres of profitable agribusiness lands, valuable real estate holdings and water rights primarily in southern California. Our three main businesses focus on agribusiness, real estate development, and rental operations.

As we begin fiscal year 2013, we believe we are in a strong position to begin unlocking the tremendous value we have in our real estate development opportunities and utilize that related cash flow to expand our leading agribusiness, capitalizing on the fresh citrus opportunities on a domestic and international basis, and to selectively expand our rental operations. Our agribusiness currently consists of approximately 5700 acres of lemons, avocados, oranges, and other specialty citrus. We are the largest vertically integrated supplier of lemons in the United States, the largest grower of avocados in the US, and our oranges and specialty citrus are sold both domestically as well as internationally.

In fiscal year 2012, we continued to execute on our agribusiness growth strategy of acquiring prime agricultural property throughout California. We acquired 355 acres of agricultural property and entered into the Sheldon Ranch leases for another 1000 acres.

We continue to benefit from our direct lemon marketing and sales strategy that we began in 2011. We now have over 100 different lemon customers, underscoring the success of our sales team, our strong brand, and our superior product. In 2012, we sold approximately 600,000 more fresh lemon cartons than the last fiscal year and we are looking forward to continued growth in 2013.

To bolster our direct lemon sales and marketing strategy, we launched a marketing campaign, Unleash the Power of Lemons, with the goal of building lemon sales and consumption through fun and easy consumption ideas. We have recently announced partnerships with experts in food, beauty, and lifestyle in major cities, including Los Angeles, New York, Chicago, and Tokyo, to promote the many innovative uses of lemons.

In addition to our agribusiness, we also own over 1500 acres of real estate dedicated to residential and commercial development. We believe this represents a great opportunity for us to unlock the hidden value these properties represent. We have invested over $90 million since 2004 on real estate developments and expect to monetize these projects in the future, potentially resulting in significant cash flows.

Before I turn the call over to Joe, I'd like to highlight a few of our financial accomplishments during the fourth quarter and full year fiscal 2012. For 2012, we increased overall revenue by 25% to $66 million, compared to last year, and in the fourth quarter our Agribusiness segment grew 39% to $13.6 million. Despite certain discrete costs during the year, we nearly doubled our net income for 2012 to approximately $3 million and generated $6.9 million of adjusted EBITDA during the year.

During the fourth quarter of 2012, we increased our common stock dividend rate by 20% as an indication of the confidence we have in our business going forward. With our strong product offerings and diverse business model, we believe we have laid the foundation for strong future growth.

As we look ahead, we believe the following aspects of our business provide us with distinct growth and greatly improved cash flow opportunities. First, the important focus of farm fresh to family table, or traceability and quality, provide us long-term growth opportunities within our diverse agricultural product offerings, both domestically and internationally. We are able to leverage our status as a low-cost producer and one of the largest direct marketers of lemons in the United States. We are able to capitalize on significant growth opportunities in the avocado industry. We generate steady cash flow from our rental properties. We are positioned to potentially generate significant cash flows from the sale of our extensive Southern California real estate holdings that are uniquely situated for residential and commercial real estate development. We expect to utilize proceeds from the sale of Southern California real estate to purchase a deep pipeline of lower cost per acre agricultural land with similar productivity and cash flow. We are able to leverage our sustainability focused investments in solar energy, water management, and environmental stewardship.

Finally, there are very high barriers to entry in the Southern California agribusiness industry due to a number of factors, including high land prices and a rigorous regulatory environment. We believe our uniquely positioned holdings and leading positions in the fruit and citrus industry provide us a significant competitive advantage.

As we enter fiscal 2013, we think we are in great position to build off of a strong fiscal 2012 and deliver solid financial results. Industry growth is extremely encouraging and we are positioned to capitalize on a number of growth opportunities around the world.

And with that, I would like to turn the call over to Joe to discuss our fourth-quarter and full-year financial results.

Thank you Harold. Good afternoon everyone.

For the fourth quarter ended October 31, 2012, we reported net revenue of $14.8 million compared to revenue of $10.9 million in the fourth quarter of the previous year. Agribusiness revenue increased 39% to $13.6 million compared to 19 -- or excuse me, $9.8 million in the fourth quarter last year. Rental operations revenue was $1.1 million in the fourth quarter of 2012 compared to $1 million in fourth quarter of last year. Real estate development revenue was $90,000 compared to $41,000 in the fourth quarter of 2011.

Our fourth-quarter 2012 Agribusiness revenue includes $8.5 million of lemon sales compared to $7.8 million of lemon sales during the same period of '11, reflecting a larger number of cartons of fresh lemons sold as well as a higher average price per carton. We also experienced higher sales of lemon byproducts compared to the same period last year.

Avocado revenue was $3.3 million in the fourth quarter of fiscal 2012 compared to $0.9 million in the fourth quarter of last year. The increase in avocado sales reflects higher volume of fruits sold, offset by lower average price per pound. We generated $1.8 million of orange specialty citrus and other crop revenues in the fourth quarter of 2012 compared to $1.1 million in the same period of 2011.

Regarding costs and expenses, for the fourth quarter of fiscal year 2012, we incurred $14.3 million of costs and expenses compared to $10 million in the fourth quarter of last fiscal year. The year-over-year increase in operating expenses reflects increased agribusiness costs associated with higher sales for this segment as well as higher selling, general, and administrative expenses due primarily to increased employee incentive and selling expenses as a result of improved operation in 2012 versus 2011.

Operating income for the fourth quarter of 2012 was $458,000 compared to $843,000 in the fourth quarter of last year. Fourth-quarter 2012 operating income was lower than the prior year primarily due to a $125,000 operating loss on the Sheldon Ranch leases and increased selling, general, and administrative expenses associated with employee performance incentives and as a result of improved operations and other costs related to the growth of the business.

The Sheldon Ranch leases are comprised of six operating leases for approximately 1000 acres of lemon, orange, citrus and other crop orchards. Under the terms of that lease agreements and due to growing and harvest timing, Limoneira did not share in the citrus crop revenue on the Sheldon property in fiscal 2012 but incurred certain farming costs and lease expense associated with the property, resulting in a loss from operations of $125,000 in the fourth quarter of 2012 and $735,000 for all of 2012. We expect Sheldon Ranch operations will be profitable in 2013.

Adjusted EBITDA, defined as net income excluding interest, income taxes, depreciation and amortization and non-cash impairment charges on real estate development, in the fourth quarter of fiscal year 2012 was $1.1 million compared to $1.5 million in the same period of fiscal year 2011. Fourth-quarter 2012 adjusted EBITDA is lower than the prior year due to Sheldon Ranch leases and increases in certain costs, as I mentioned.

In addition, we wrote off a $150,000 note receivable related to a business we discontinued in 2006. A reconciliation of adjusted EBITDA to GAAP net income is provided in the earnings release.

Primarily as a result of larger amount of capitalized interest on real estate development projects during the fourth quarter of 2012, interest expense was $114,000 compared to $298,000 in the same period of 2011. Non-cash fair value adjustments in our interest rate swap resulted in income of $212,000 in the fourth quarter of 2012 compared to $109,000 of expense in the same period of last year.

Net income applicable to common stock after preferred dividends for the fourth quarter of 2012 was $76,000, or $0.01 per share. Excluding $125,000 operating loss on the Sheldon Ranch leases and the $150,000 note receivable loss that I mentioned, net income would've been $351,000, or about $0.03 a share. This compares to net income applicable to common stock in the fourth quarter of 2011 of $489,000, or $0.04 per share.

Turning to our full-year results for fiscal 2012 ended October 31, 2012, revenue was $65.8 million compared to $52.5 million last year. Lemon sales increased 41% to $44.2 million in 2012 compared to $31.2 million in 2011 as a result of increased volume and higher average prices. Fresh lemon cartons sold increased 33% to $2.4 million -- 2.4 million cartons in 2012 compared to 1.8 million in fiscal year 2011. Avocado sales increased 27% to $9.5 million in 2012 compared to $7.5 million 2011 as a result of higher production partially offset by lower prices. We sold 12 million pounds of avocados in 2012 compared to 4.3 million pounds in 2011. The California avocado crop typically experiences alternate years of relatively higher and lower productivity due to plant physiology.

Operating income for 2012 is $4.6 million compared to $1 million last year. Net income applicable to common stock after preferred dividends for 2012 was $2.9 million, or $0.26 per share, compared to $1.3 million or $0.12 per share in the same period last year. Excluding $735,000 of operating loss associated with the Sheldon Ranch leases that I previously discussed and $265,000 in notes receivable losses comprised of the $150,000 related to discontinued business I mentioned, as well as a $115,000 loan to an Internet television company to assist it in promoting Santa Paula and surrounding areas, fiscal year 2012 net income applicable to common stock would have been $3.9 million or $0.35 per share.

Turning to our balance sheet, net borrowings on long-term debt were $6.8 million in 2012, which was used to finance acquisitions of agriculture properties, real estate development activities, and ongoing capital requirements.

Now, I would like to turn the call back to Harold to discuss our fiscal year 2013 guidance.

Thanks Joe. Beginning this year, we will be providing certain annual metrics to enhance the transparency of the controllable aspects of our business. We believe we are positioned for another very strong year in fiscal year 2013.

We enter 2013 with approximately 800 additional revenue-generating agricultural acres, representing a 12% increase compared to the beginning of 2012. We expect that revenue and operating profit as well as EBITDA and net income will grow in 2013, primarily driven by our Agribusiness segment related to increased lemon and avocado volume and improved operating results from the Sheldon Ranch lease.

For the fiscal year ending October 31, 2013, we expect to sell between 3 million to 3.2 million cartons of lemons, representing approximately a 25% increase over 2012. In addition, we expect to sell between 17 million and 19 million pounds of avocados, representing approximately a 50% increase compared to 2012. We believe that lemon and avocado prices will be less than 2013 compared to 2012 due to higher industry production.

We also expect progress in our Real Estate Development segment. We anticipate receiving annexation approval for our East Area 1 project in Santa Paula. East Area 1 is a 520-acre property that is approved for 1500 dwelling units as well as 250,000 square feet of commercial and 150,000 square feet of light industrial development. We anticipate completing development phasing plans and track mapping for East Area 1 by early 2014 with the first construction phase to begin in 2014.

We expect to submit the application for annexation of East Area 2 in the first six months of 2013. This project is planned for up to 250,000 square feet of commercial property.

The Williamson Act expired for our Windfall Farms property on December 31, 2012, which allows for the project to be subdivided into up to 76 10-acre parcels. Development plans are currently underway for this property.

Longer term, we are beginning to unlock value of our extensive real estate holdings by converting agricultural land into three desirable California coastal counties, Ventura, Santa Barbara and San Luis Obispo, into residential and commercial real estate. We expect to begin monetizing these projects, resulting in significant cash flows which we plan to invest in productive agriculture and selected rental operations and over time to increase our dividends.

In closing, we believe we are very well-positioned to achieve strong growth in 2013 and look forward to reporting to you throughout the year on our progress. And with that, I'd like to now open up the call for your questions.

(Operator Instructions). Tony Brenner, Roth Capital Partners.

Thank you. Harold, what sort of price decline for lemons and avocados are you anticipating for fiscal 2013?

So that sort of involves a little bit of a crystal ball, but our budgets and our best guess at this point call for a moderate price decline in lemons just simply because of the abundant supply that's coming out of the Southern Hemisphere as well as all producing parts of California. But our operating budgets call for an average price per carton of approximately $15 a carton. I think that compares to approximately $17 a carton in fiscal year 2012.

Avocados are the tricky one. We anticipate a fairly significant price decline driven primarily by the abundant production in Mexico that will find its way into the US market. And our budgets are calling for approximately $0.55 to $0.57 of return back to us.

Okay. If I can just follow that up, given that price decline versus your projected significant revenue increase and the fact that Sheldon will be profitable versus a drag in fiscal 2012, as I recall, a larger proportion of lemons coming from outside growers, how does all that play into agriculture gross margins in 2013?

So, I think that lemons will be flat from an operating profit standpoint. I think avocados will be up significantly, assuming that any future weather event doesn't stand in our way. I think the benefits of increasing the acreage, our overall acreage, from the Sheldon lease will bode very well for increasing our orange operating profits. So in total, our cultural operating profits will be up significantly.

Thank you.

Joe Munda, Sidoti & Co.

Good afternoon guys. Thanks for taking my question. Can you hear me okay? Harold, as a follow-up, a recent Wall Street Journal article came out talking about the colder weather you guys are experiencing in California. I don't know if you saw that article, but can you give us a little bit of color on the weather you guys are experiencing there and how it's affecting the growing?

Be happy to. Yes, we saw the article, and certain parts of California did get hit very, very hard. Our properties sustained cold temperatures, but for the most part our properties in the San Joaquin Valley and in Ventura County made it through the cold events very well. One of our properties we believe sustained approximately a 10% reduction in volume due to the cold weather. But all in all, I think we made our way through the cold event very well.

Okay.

That 10% is kind of limited to particular types of crops rather than an across-the-board 10%. So it really depends on where you are but like Harold said, we came across, broadly speaking, pretty well.

Okay. Harold, also, I mean you spoke about monetizing assets, and going into the real estate itself, but I think, unless I missed it, could you provide us some color on what's going on with your water rights and the process there? I know you brought somebody on the board to help monetize that asset.

Sure, I'd be happy to. So I think Mark Twain was the one that said that water was for fighting over and whiskey was for drinking. And so there's an awful lot of time being spent fighting over water in California right now. And the regulatory environment is getting more and more difficult. So, as sort of a way to set the stage for future monetization of our water, we are being very, very methodical and careful to safeguard our water assets to make sure that we have plenty of water for present but also future crop changes. That being said, we do believe that we have, in certain areas, water in excess of our current water needs, and so we are in the process of trying to establish agricultural water leases where we actually lease the wet water versus actually selling the water right, and beginning some of the first discussions with potentially trying to execute the same thing with surrounding municipalities that are challenged by water scarcity. That gets very political and is very challenging. But we're working on it every day, and I think that you will hear us make some announcements in the future, but until we are able to make those announcements, we are keeping it pretty close to the vest.

I'm just curious. How would that work? Would a pipeline run literally from your property back to the municipality?

That's one way it could happen. We actually do have the infrastructure that would allow that to take place. Old pipelines that were built in the 1920s. But the other way it happens is we just agree not to pump from one well and then allow the surrounding cities to pump from their well, and thus get the allocation that we have in the adjudicated basins.

Okay. And then I just have one final question. In your prepared remarks, you spoke about high land prices as a barrier to entry in California. I mean what are you seeing right now as a price per acre on agricultural land?

So, it's the old real estate adage -- location, location, location. So certain properties, we're seeing land values upwards of $100,000 an acre that strawberry producers are purchasing, lemon producers are purchasing, avocado producers are purchasing. That's a very difficult sort of return on capital proposition given that the average operating profit per acre in any of those is anywhere from $3000 to $5000 a year. That being said, though, if you looked over the profile of all of our assets, we run the gamut based on where these properties are, and their fair market values. But probably a safe range would be somewhere from $40,000 an acre up to $100,000 an acre.

All right, thanks guys.

(Operator Instructions). Brent Rystrom, Feltl.

Good afternoon guys. A couple of quick questions. Can you give us kind of an explanation of -- or a description of the 800 acres being added, what is the mix of those 800 acres? Say lemons, avocados, other citrus and other?

Joe, do you want to tackle that?

Yes. Most of that really has to do with the Sheldon leases that we've described as being in the beginning year of the lease. There was -- we didn't receive any of the revenue off of those leases for the citrus crop. So about 600 to 700 acres of that really refers to the Sheldon leases coming on and being available to us to generate the revenues off of them that we didn't have last year. So, it's a portion of Sheldon (multiple speakers) that's all citrus, predominantly citrus.

Yes. And then the rest of that then was land that was available to you last year because it wasn't citrus? Is that --?

We've put in some new acreage, but the other big piece of that would be about 60 acres of one of the acquisitions that we made this year will generate revenue for us in 2013 and did not just based on timing of the acquisition in 2012. So it's basically the new acquisition as well as 600 or 700 acres of Sheldon. And most of Sheldon, in fact most of all that, is mostly orange, orange crops and some specialty.

And from a curiosity perspective, do you plan to be active buying land in 2013, agricultural land?

We are always looking for good opportunities to make acquisitions, continuing what we did in 2012. So we are out searching for opportunities that make sense for us.

Sort of drawing from the private equity model, we make it part of our business to keep a robust pipeline of acquisition possibilities or potentials. And typically these are sort of generational family farms, so they don't come up all the time. But we are out actively in the market and spreading the word around that we are searching for opportunities, and I think we have a robust pipeline for 2013. Whether we can execute any of the deals we will just have to see.

Out of curiosity, I was looking at some stuff over the weekend that probably that's some of the fastest selling land in up north of you up there by [Talarius] basically anybody specializing in nut trees. I'm just curious. Has there been, in areas where you're looking on citrus, has there been a conversion prospect of people trying to buy land and convert that to nuts as opposed to what you folks are trying to do?

We have been pretty fortunate in that most of the citrus property has hung in there and remains as citrus. But a little bit to your point, we are seeing -- we have seen some sort of midseason navel varieties pulled out in favor of pistachio plantings.

Out of curiosity, Harold, do the properties (inaudible) do they have different freeze risk? I know there's a different harvest season that gets you into little more defined pricing season for lemons in the summer. Is there a freeze risk that's different because it's the later crop?

Yes, and the topography is different. I think I've tried to explain our methodology or our thought -- our thinking around our property acquisitions as it relates to freeze sort of in the following way. We call it sort of the bear in the woods strategy where we really don't have to outrun the bear; we really try to outrun our buddies. And we try to do that by acquiring properties that are in warmer parts of the Valley. And that's actually one of the strengths of our colleague, Alex Teague's sort of forte is he is very good at identifying some of the best quality production land.

Then final question, what was average selling price of avocados in 2012?

I think we averaged, Joe, $0.78 in 2012?

I think it was about $0.78, yes.

Thank you guys.

$0.78, $0.79.

And that concludes our question-and-answer session. I'd like to turn it back to Mr. Edwards for any closing remarks.

Thank you for your questions and interest in Limoneira. We are at a very exciting time for our business and are excited to share our story and growth with the investment community. Over the next several months, we will be attending select investor events, including the ICR Consumer Conference this week. Thank you again and have a great day.

Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation.