Limoneira Co (LMNR) 2016 Q1 法說會逐字稿

Good day and welcome to the Limoneira first-quarter fiscal year 2016 conference call. Today's conference is being recorded. At this time I would like to turn the conference over to John Mills of ICR. Please go ahead.

Thank you. Good afternoon everyone and welcome to Limoneira's first-quarter fiscal year 2016 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 first-quarter fiscal year 2016 earnings release which went out today at approximately 4 PM Eastern time. If you have not had a chance to review the release it is available on the investor relations portion of the Company's website at limoniera.com.

This call is being webcast and a replay will be unavailable on Limoniera's website as well.

Before we begin, we would like to remind everyone that the 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.

Please note that during today's call we will discuss non-GAAP financial measures including results on an adjusted basis. We believe these adjusted financial measures can facilitate a more complete analysis and greater transparency into 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 added back.

Also within the Company's earnings release and in today's prepared remarks we include EBITDA which is a non-GAAP financial measure. A reconciliation of EBITDA to the most directly comparable GAAP financial measures is included in the Company's press release which has been posted on 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.

Thanks, John. Good afternoon, everyone, and thank you for joining us. On today's call I will begin with a brief overview of our financial results for the first quarter of 2016 and provide an update on our progress across all of our business areas. Joe will review the financial results in more detail and I will then discuss our upwardly revised 2016 outlook and open the call for your questions.

For those of you that have followed us for a number of years you know that our first-quarter results reflect the typical seasonality of our business. We generated revenue of $25 million compared to $28 million in the first quarter of last year. The decline in revenue was primarily due to lower lemon sales as a result of lower volume from our orchards in Yuma, Arizona.

As a reminder, the second and third quarters typically generate better results than our first and fourth quarters due to the timing of our crop harvest and as we look toward the remainder of this fiscal year, we believe that Limoneira is well-positioned to achieve a strong year for our agribusiness.

While the lemon volume out of the Arizona desert was less than last year, we believe that there is the potential for some of the shortfall in volume to be recovered during the remainder of the year. Average price per lemon carton has been higher than we previously anticipated and while it is still early and we are optimistic that we will benefit from stronger orange volume and pricing as well.

Our expanded and modernized packing house is now operational in beginning this month we expect to generate meaningful year-over-year cost savings that will positively impact our financial results. Based on our outlook for the remainder of the year, we are raising our 2016 earnings and EBITDA guidance which I will go over in more detail later on in today's call.

I would now like to provide an update on our business segments. First regarding our agribusiness, in fiscal year 2016 as well in future years, our agribusiness is well-positioned to benefit from investments that we have made over the past several years. As I mentioned, our packing house in Santa Paula is now operational. This facility is expected to double the annual capacity of our lemon packing operations, increase our efficiency and significantly reduce labor costs. We anticipate cost reduction of approximately $1 per carton packed beginning in March 2016 which is expected to lead to improved agribusiness operating margins.

In addition looking forward, the facility also ensures that we have ample capacity to integrate additional production from newly planted orchards as they become productive and from potential acquisitions as well as newly recruited third-party growers interested in our packing, marketing and sales services.

In the first quarter of fiscal year 2016, we completed the acquisition of 757 acres of lemon, orange and specialty citrus orchards in the San Joaquin Valley. This complements our acquisition of an additional 157 acres that we made in the fourth quarter of last year for a total of approximately 900 acres in the region. For the past several years, we have been leasing these properties from the Sheldon family. With the acquisition of the land, we anticipate realizing incremental operating results and cash flows resulting from the elimination of lease expense.

Last year we amended our agricultural lease agreement with Cadiz to include an additional 200 acres. We acquired a total of 200 acres of lemon trees and associated irrigation lines from Cadiz and one of its leasing tenants for approximately $1.2 million. Under the amended lease agreement, Limoneira has the right to plant up to 1480 acres of lemons over the next three years at the Cadiz Ranch operations in the Cadiz Valley in San Bernardino County.

We currently have 360 acres of lemon trees growing on the property leased from Cadiz with 60 acres currently productive. We currently have approximately 7500 planted agricultural acres of which approximately 1500 acres are non-bearing and are estimated to become full bearing over the next four years with plans to plant an additional 500 acres in the next two years. We anticipate this additional acreage will increase our annual lemon supply from our current level of approximately 30% or about 900,000 to 1.3 million fresh cartons as the non-bearing and planned acreage becomes productive which our new packing house is expected to efficiently manage.

Our long-term goal is to be one of the leading global citrus agribusinesses and one of our key areas of focus is continuing to invest in our agribusiness by adding productive citrus acreage to our land portfolio. We see potential acquisition candidates in both our core California and adjacent markets as well as internationally and we have the financial flexibility to capitalize on acquisition and investment opportunities.

Lastly on our agribusiness, I would like to make some comments regarding the ongoing California drought. While we experienced meaningful rains in December in January and recently in March, February was dry and warm throughout much of California. While we hope that rain will come later in March and April which is not atypical in El Nino years, we continue to take steps such as drilling new wells and upgrading existing wells and irrigation systems to proactively strengthen our position.

As we have discussed before and have included in our previous filings, we believe we have access to adequate water supplies to support our operations although we have incurred certain additional irrigation and crop treatment costs and have had to be more strategic in our water usage. In addition, we have seen some effects in fruit sizing as a result of the drought. However, our operations have not been significantly affected. If the drought continues or worsens or if the state of California or other governmental agencies implement regulatory restrictions or costs, our business would or could be impacted.

Turning now to our real estate development segment. In November of 2015, we formed the Limoneira Lewis Community Builders LLC which is a development partnership between Limoneira and the Lewis Group of Companies for the development of the Santa Paula Gateway East Area 1 project which we have renamed Harvest at Limoneira.

We contributed our East Area 1 property to the LLC and received $20 million from Lewis for a 50% interest in the joint venture. We expect to receive 25% to 80% of the net cash flow of the project based on cash flow milestones provided in the operating agreement which is estimated to aggregate approximately 70% of total net cash flows to Limoneira including the initial $20 million payment and the balance of net cash flows to the Lewis Group over the estimated seven to 10 year life of the project. We anticipate that the joint venture will begin receiving security deposits from homebuilders for lot sales by mid-2017 and the sale of lots is expected to begin in the fourth quarter of 2017. The total cash that Limoneira will receive over the life of the project will depend on the median home price but with its highly desirable location near the Pacific Ocean, we believe that Limoneira should receive between $100 million and $130 million.

Beyond the residential aspect of the project, we are also planning the development of an additional 40 acres of commercial properties adjacent to the residential development that is not included in the partnership plans and financial projections which represent additional cash flow opportunities. We have been extremely encouraged by the strong interest from potential tenants including big-box retail, drug stores, banks, outpatient medical facilities and educational centers. The residential and commercial components of the project will create a highly desirable community in a prime Southern California location.

As we began to receive the expected cash flows associated with the project, we plan to use the proceeds to reinvest into our agribusiness operations to further establish Limoneira's position as a leading global citrus provider.

Lastly turning to the rental operation segment of our business, we completed the development of 65 additional agricultural workforce housing units in Santa Paula, California which were fully occupied in August of 2015. On an annual basis we expect that this will contribute approximately $900,000 of additional rental revenue. We also anticipate that the additional farm worker housing units will help us maintain a consistent supply of labor for our agribusiness operations for many years to come.

In summary, we are excited about the position of our business. We are beginning to benefit from the investments that we have made over the past several years and we expect to benefit even more in coming years. We remain focused on identifying and capitalizing on opportunities to grow our total productive acreage through strategic acquisitions.

With that, I will now turn the call over to Joe.

Thank you, Harold. Good afternoon, everyone. I will discuss some of the details of our financial results for the first-quarter ended January 31, 2016.

In the first quarter of fiscal 2016, revenue was $25 million compared with $28 million the first quarter of 2015. Agribusiness revenue decreased 12% to $23.6 million primarily due to lower lemon sales. Revenue operations revenue was $1.4 million in the first quarter of 2015 compared to $1.1 million in the first quarter of last year reflecting the benefit of the additional rental units for our agricultural workforce as Harold mentioned earlier.

Real estate development revenue was $12,000 compared to $10,000 in the same period last year. First-quarter 2016 agribusiness revenue includes $21.9 million in lemon sales compared to $24.7 million of lemon sales during the same period of fiscal year 2015. Approximately 753,000 cartons of fresh lemons were sold during the first quarter of fiscal year 2016 at an average price of $23.46 compared to approximately 869,000 cartons sold at $23.40 average price per carton during the first quarter of fiscal year 2015.

The decrease in volume in the first quarter of fiscal year 2016 was primarily due to lower production from our orchards in Yuma, Arizona.

Avocado revenue was not significant in the first quarters of fiscal years 2016 and 2015. We recognized $1 million of orange revenue in the first quarter of 2015 compared to $1.5 million of orange revenue in the same period last year. Specialty citrus and other crop revenues were $659,000 in the first quarter of 2016 compared to $723,000 in the first quarter of 2015.

Turning to cost and expenses for the first quarter of fiscal year 2016, we incurred $31.3 million of cost and expenses compared to $30.5 million in the first quarter of last year. The first quarter of fiscal year 2016 increase in operating expenses primarily reflects higher real estate development costs partially offset by lower agribusiness costs.

First quarter of fiscal year 2016 real estate development expenses include $1.2 million of transaction costs paid upon entering the previously announced joint venture with the Lewis Group of Companies. Agribusiness costs and expenses were $300,000 lower for the first quarter of fiscal year 2016 compared to the first quarter of last year primarily related to lower volumes of lemons, oranges and specialty citrus harvested and sold.

Operating loss for the first quarter of fiscal year 2016 was $6.3 million compared to an operating loss of $2.5 million in the first quarter of the previous fiscal year. EBITDA was a loss of $4.7 million in the first quarter of 2016 compared to a loss of $1.2 million in the same period of fiscal year 2015. Operating loss in EBITDA includes $1.2 million in transaction costs that I described earlier which was incurred in connection with the Limoneira Lewis joint venture.

Net loss applicable to common stock after preferred dividends for the first quarter of fiscal year 2016 was $4.1 million compared to a net loss applicable to common stock of $1.6 million in the first quarter of 2015. Net loss per diluted share for the first quarter of fiscal year 2016 was $0.29 compared to $0.11 for the same period of fiscal year 2015 with both periods based on approximately 14.1 million weighted average diluted common shares outstanding.

The previously described joint venture transaction cost of $1.2 million increased net loss per share by approximately $0.05 in the first quarter of fiscal year 2016.

Regarding our cash flow and balance sheet during the first quarter of fiscal year 2016, net cash used in operating activity was $5.4 million compared to $5.8 million in the first period last year.

Net cash used in investing activities was $3 million in the first quarter of fiscal year 2016 compared to $7.1 million in the prior year period. Net cash provided by financing activities was $8.3 million in the first quarter of fiscal year 2016 compared to $12.9 million in the same period last year. As of January 31, 2016, long-term debt was $97.2 million compared to $89.1 million at the end of fiscal year 2015.

During the first quarter and February of fiscal year 2016, we entered into fixed-rate long-term credit arrangements totaling $27 million. The loan proceeds were used to pay down our revolving line of credit which provides additional availability for real estate development, agribusiness investments and other corporate purposes.

Now I would like to turn the call back to Harold to discuss our updated fiscal year 2016 outlook.

Thanks, Joe. Based on expected higher lemon prices and increased orange returns, we are raising our fiscal year 2016 guidance range. For the fiscal year ending October 31, 2016, we expect to sell between 2.7 million and 3 million cartons of fresh lemons. We now expect an average price of $23 per carton increased from $22.50 previously expected. We continue to expect to sell approximately 8.5 million to 9.5 million pounds of avocados at approximately $0.80 per pound.

We are raising our guidance range for operating income, EBITDA and earnings per share. We now estimate operating income for fiscal year 2016 to be approximately $8.6 million to $9.1 million compared to our previous range of $7.8 million to $8.3 million. Compared to fiscal 2015, our 2016 estimated operating results reflect an anticipated increase in operating income primarily related to cost savings from the new lemon packing facilities, additional revenues from additional farm worker housing units, and the elimination of lease expense resulting from the acquisition of the previously leased Sheldon Ranches.

2016 EBITDA is now expected to be in the range of $14.6 million to $15.1 million compared to the previous range of $13.6 million to $14.1 million. We now estimate fiscal year 2016 earnings per diluted share to be in the range of $0.28 to $0.33 per share compared to the previous range of $0.25 to $0.29 per share.

Excluding transaction costs incurred in connection with the Limoneira Lewis joint venture, fiscal year 2016 earnings per diluted share are expected to be in the range of $0.33 to $0.38 per share compared to previous estimates of $0.30 to $0.34 per share.

Before we open the call for your questions, I would like to reiterate two important aspects of our business that are expected to begin contributing to our business less than two years from now. We currently have approximately 7500 planted agricultural acres of which approximately 1500 are non-bearing and are estimated to become full bearing over the next four years with some of the acreage beginning to contribute to our topline in 2017.

We anticipate this additional acreage will increase our annual lemon supply from our current level by approximately 30% or about 900,000 to 1.3 million fresh cartons as the non-bearing and planned acreage becomes productive which our new packing house is expected to efficiently manage. We also are now about 12 to 18 months away from when we expect that our real estate development joint venture will begin receiving security deposits from homebuilders for lot sales and the sale of lots is anticipated to begin in the fourth quarter of 2017.

The total cash that Limoneira will receive over the life of the project will depend on the median home price but with its highly desirable location near the Pacific Ocean we believe that Limoneira should receive between $100 million and $130 million.

With that, I would like to now open the call up for your questions. Operator?

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

Thank you. Good afternoon. I have two questions. First of all, Harold, you discussed El Nino and particularly with respect to rainfall which there wasn't at least on the Pacific, there wasn't much in Southern California. But what there was was unusually warm weather in January and February and I am wondering what effect that might have had on your plantings particularly with respect to possible early maturation of some of your fruit?

We actually had a pretty interesting rainfall event in January and as we looked back at our actual performance in January, we actually were only able to get into harvest for half of the month. So the rainfall in January actually did have quite a bit of impact in our ability to harvest. However, to your point, February was unseasonably warm and I guess the best way to say this is the trees became confused or are confused and they started behaving like it was springtime. There is really very little risk in terms of what that impact is on the quality of the fruit or the timing of the fruit. The biggest issue that happens to us is if it is accompanied right after by a freeze.

Fortunately we haven't experienced cold weather subsequent to the unseasonably warm temperatures so really from a maturation of fruit standpoint, we should be fine. The recent March rains which we are enjoying some rain that looks like there is going to be another storm that we anticipate coming through this weekend and there is actually the forecast for an additional storm the weekend after that, we received two inches of rain last weekend and the benefits that we will receive by that rain accompanied by warmer temperatures should be considerable sizing of both the avocados and the lemons which should contribute to much more marketable, desirable fruit.

So it really couldn't have been better for us thus far as aside from the harvest disruption in January, we are still looking good.

Did you place any of that optimistic outlook with respect to increased sizes and the effective prices, is that incorporated in your revised outlook or are there potentially further revisions there?

No, it is two things, Tony. It is what we see hanging in the trees right now. So we finished up in the desert in Yuma and then the forecast that we built our budgets around in the San Joaquin Valley are coming in very close to right on our volume estimates. We've been enjoying higher average FOB sales prices than we had anticipated so we have taken our pricing for the year up in our forecasts but also we see more fruit count which we anticipate to be of good quality and size as a result of the rain pattern for our coastal fruit which is just starting now and will carry us through the end of probably August.

My second question is regarding the packing house. What kind of start-up costs were incurred in the first quarter and might be in the beginning of the second quarter as that was brought to fully operational?

Yes, so I think that at this point when we built our budgets -- so recall that last year we were dealing with the construction issues which was very disruptive in running our old packing house while we were constructing our new packing house and so that disruption was in the form of things like guys having to take forklifts from one area to another whereas in the old packing house, it would have just come straight out of storage. And there were some duplication of expenses which then carried on through the first quarter of this fiscal year.

We actually factored all of that into our guidance and our forecast of being able to save $1 a carton. So on the guidance that we have given of the 3 million -- or sorry the 2.7 million to 3 million cartons of fruit that we are running we believe that we are still on track to save $1 a carton so that should bring our packing cost in aggregate down by $3 million which we factored into our budget. Those are the start-up costs that we have in essence incurred. And through the first quarter, our packing cost per carton were essentially at par with last year just because we were still dealing with the duplicative packing arrangement while we waited to commission our new packing line which is just coming online right now.

Got it. Thank you very much.

Chris Krueger, Lake Street Capital Markets.

Good afternoon, guys. First on the agribusiness, you have a heavy focus on the lemon industry and your avocado groves as well. Is there any focus on getting deeper into the other citrus areas like the specialty citrus and oranges and things like that in the next couple of years?

Definitely. I think you will see our biggest moves forward in the orange space. With the acquisition of the Sheldon properties in combination with our prior acreage, it brings our total volume to pretty close to about 1 million cartons of oranges a year. And our oranges are comprised of multiple varieties that target specific market windows that give us our best shot at having as long a season as possible but also with a heavy emphasis of that production being at forecasted market windows there is less supply so we have a better chance of achieving price.

We also continue to be very optimistic about our specialty citrus and our varieties in those areas. You will see us continue to invest in and focus on those certain areas. But I think the area to maybe comment on of the specialty citrus that gives us probably the most amount of promise that we see coming shortly is the variegated pink lemon which we believe has market opportunities that we believe could rival the Meyer lemons and really capture a really neat niche segment in the market which we believe could give us some really robust pricing potential and good returns for the acre production potential.

And moving over to the real estate, I know you had a timeframe of when you expect some deposits to start coming in but what should we look for in the meantime as far as where the project is at as far as breaking ground or building the streets out and sewers and all that or where are we at with that?

So you will see that there is going to be a lot more sort of public communication about the process that is actually just beginning right now but essentially we are working diligently in the back room right now to get all of the requisite box checked to get the grading permits. Things seem to be on plan and schedule to be still accomplished at the beginning of our grading process in the early part of the summer of 2016 so just in a few months. With the initial grading that will take place that will then allow us to lay the foundation for the initial infrastructure that will start with the water system so essentially two things will happen. We will begin working on the at grade crossing of Hallock Drive that will go up and over into the project as well as laying the foundation with grading for the first phase of residential development called the Haun Creek neighborhood which at this point is envisioned to encompass or include about 541 dwelling units but will also lay the infrastructure of the entire water system including over three million gallons of new water storage that will be installed at the top of the project allowing gravity flow of the water to come down and provide water pressure as well as a sewer lift station that we will begin to put in and the beginnings of pulling the permits for the bridge that will go across Santa Paula Creek.

We believe that the combination of all of those first things which by the way will allow us to then sell our first finish loss to homebuilders which we begin to be accomplished in the fourth quarter of 2017, that will also allow us to begin to play these specific plans for our first commercial developments not only in the harvest or East Area One on the north side of the 126 but also will provide the infrastructure that will allow us to begin to have meaningful conversations with retailers across the 126 in what we used to refer to as the East Area 2 area as well.

On that note on the commercial efforts, can you give us an idea of just how big that is? Can it be a home retailer, a big box mass merchandise, hardware, how many partners -- how many will actually probably end up being there?

So I think at last count there is 12 pads and two of them are super pads that would accommodate a large, two large big-box retailers and the rest will be smaller pads that will be things like pharmacies, banks, QSR restaurants and service providers.

All right, that is all I have got. Thanks.

Brent Rystrom, Feltl.

Hello, guys. Just a couple of quick questions. Can you walk us through real quickly what the bank line capacity now looks like with the new fixed term loan allowing you to pay some down? How much of the total available, how much have you used?

We have right now available about $23 million so we have used about, we have $125 million or so capacity so it is roughly $100 million used or a little less. That is with Farm Credit, that is with Rabo, that is with Wells, that is all in and giving us about $23 million or so still available to be borrowed.

Okay. Can you guys give us a quick breakdown? You had mentioned the 1500 acres coming online the next four years and then 500 more acres being planted. Do you have a breakdown of crops? Are those all lemon or are they lemon and orange? How do they break down?

So if the total is 2000 acres which it is, it is 1700 acres of lemons and it is 300 acres of wine grapes.

And the 300 acres, is that (inaudible) a little bit or was 300 the number? I seem to recall 200?

Yes, 200 but there is also an anticipated 100 acres of new plantings that we are considering at Windfall next year.

Okay. And as I recall the grapes primarily, cabs is what you guys planted?

Correct, yes. And it is a little too early to announce the names but we have had some very positive interaction with high quality wineries on establishing long-term wine grape contracts. And so one thing to anticipate probably by the end of 2016 will be the announcement of some of the first contracts that we execute for the 2017 wine grape harvest which we anticipate from the initial first 100 acres that was planted at Windfall.

And just so I understand it, you are saying you will be partnering with people to use those grapes or will you be partnering with people to sell those grapes into the bulk grape market or will you be selling bulk wine?

No, we will be selling the grapes, Brent. So the way that works is the wineries come out and they establish a pay price per ton and it has to meet certain quality specifications and to the extent that we are able to execute the production into those specifications, we get paid that committed pay price for the duration of the contract. And so then when we extrapolate what we believe our growing costs are for those grapes and our anticipated yields which -- because this will be the first crop and we are probably let's just say 60% of the way towards being full bearing, those yields will continue to increase annually but we should have our first meaningful yields of wine grapes in 2017 and the pay price gives us great reason to be optimistic about our abilities to execute significant returns per acre on those wine grapes.

And do you still intend to sell that property or has it shifted now to maybe a more permanent property given from what I have learned about wine grape acreage it is actually quite a bit more profitable if done right than your lemons are. What is your thought as far as that asset being either permanent or still at some point for sale?

The wildcard in Windfall is the water situation in the Paso Robles area and we remain very fortunate in that we have significant water supplies through underground water aquifers that are not only abundant but just before the well drilling moratorium was put in place, we drilled three new wells that have shown very significant yields of water. And so that gives us great opportunity then to expand that vineyard to as much as what we believe will be ultimately 500 acres.

So to answer your question, we believe that once the 500 acres of wine grapes are put in place, our ability to parcel-ize up to 76 ten acre smaller parcels still exist, but we believe we will selectively break out parcels and sell potentially some of those as vineyard estates but until that happens, you will probably see a conversion of this being treated as a real estate development asset and it will convert into being a full-blown vineyard for the future.

And probably more of a question for Joe on this. But Joe or Harold, of your real estate development classification on the balance sheet, how much of that is this property?

It is about $25 million.

Great. And then my last couple of questions, have you guys walked through kind of what the cost of your packing house is per carton so as we get a sense of pricing per carton going from 23 to 25 or down to 21, how should we think about the cost per carton pack?

Well, we have been averaging I think in the Q we talk about in the 750 or so range and we have been talking about $1 or so reduction when the new packing house is in place and fully transitioned in. So take us from roughly 750 or so that we have been seeing for the last couple of years to 650 on that basis. We think there is an opportunity for better but that is where we think at this point.

We are trying not to count the chickens before they hatch. But we think there is significant upside above the $1 because the $1 that we committed to and communicated factored in start-up costs, the cost and time that we knew were going to challenge us in this fiscal year but assuming that we are able to get the majority of the flow of fruit which is just about to start for us into the new packing house with good success, it gives us a great opportunity to get the full run next year which should allow us to save even more significantly.

Okay. Again quick question follow-on to that and then one more after that, sorry. So for thinking about then that cost per carton, is that based on the 2.7 million to 3 million cartons and then beyond that, what capacity could you grow that to?

Okay, so it is based -- so right now the volume that we are running through is let's just say for math sake is 3 million cartons so our guidance is 2.7 million to 3 million cartons with the expected growth and the anticipated yields from what we have in the ground today that will show up over the course of the next three to four years, that will go from 3 million cartons to 4 million cartons. The theoretical capacity of the packing house is 8 million cartons which gives us 4 million cartons of ability to make accretive acquisitions of productive lemon property but also it allows us to recruit outside lemon growers. And so if we can execute our plans of running this as efficiently as we believe we are going to be able to and we are able to recruit outside growers with a packing charge that we believe is competitive in the industry, we hope to be able to generate a new profit center for our Company with these outside growers that theoretically we could bring 4 million cartons into us with the ability to create incremental margin of somewhere between $1 to $1.50 a carton once we get the packing house running at full capability and capacity.

One other thing too, Brent, to your question is probably the biggest -- one of the biggest variables to running it would be people like a lot of businesses like a lot of facilities. So since this new facility is a lot more automated than the variable costs, we still should be able to get a cost per carton at an even lower rate as we continue to increase the volume through there.

Thank you. And the follow on on that, Joe, I am hearing that it has been a little difficult to secure labor recently from some of the other operators more up in the Valley than down where you guys are. I am just curious any thoughts on that?

Yes, probably of all of the issues we are wrestling with right now, labor is the biggest issue and it is more in our outside contracted harvest labor. One of the competitive advantages that we have is because we operate year-round and we operate all over California and Arizona, we have a pretty steady labor force that we are able to call on and by being able to provide year-round work for these folks, we are able to do a pretty good job with it.

Where it is really showing up right now is more in the issue of the cost for that labor and with the scarcity even though we are able to get it, so that is great because we are able to get our harvest complete and with the quality of the harvest that we need, those costs continue to escalate and so managing those costs and the quality of the labor continues to be a challenge.

So far we have been able to manage it but as we look forward we think that is going to get tighter and tighter and with some of the rhetoric at the national level and the presidential level, it could be an issue for the company if relations with our neighbors to the south are compromised.

Thanks. I've got one final question. Remind me -- so right now, NOAA went out today or yesterday and said that the odds of a La Nina transitioning from El Nino into a strong La Nina are going higher. And what is the typical impact both to you domestically of La Nina and then if I recall, it can be pretty devastating to the South American producers. So I'm just curious if you can give a brief overview if La Nina were to happen, how would it impact you and how would it impact the industry globally?

With current communication, the Internet and our ability to access information a lot more quickly and a lot more readily, we are just bombarded by information so really anecdotally we have to go back in our experience of wet drys and wet wet periods into dry periods. And so we have experience in that. And what I would say is the irony of El Nino is that last year was an El Nino also and we have a high pressure ridge develop over Southern California, we really didn't get a lot of rain last year. This year it started setting up the exact same way but it actually broke down and so finally we are starting to get some of those sort of historic El Nino sort of influences of the pineapple express and moisture rivers which are atmospheric moisture rivers I think they are calling them now which bring a lot more rain and snowfall.

Northern California has had significant rain and snow pack. That is going to be biggest impact for us is the snow pack up north. So far in Southern California, I think we are good. But to answer your question, if we go into prolonged periods of dry periods, it is really going to boil down to our ability to access our deep water aquifers and to manage through the dry periods based on our wells and our access to that underground water.

Thank you.

(Operator Instructions). Eric Larson, Buckingham Research Group.

Good afternoon, everyone. I have got a really bad connection. I hope you can hear me. A couple of questions on lemon pricing. You continue to put a fair amount of your volume in the hands of domestic exporters as well as direct international sales. Does that have an impact of tightening the US lemon market or is it a matter that (inaudible) whole the production cycle to fewer lemons?

I think it is a combination of tightness that came out of the desert but the exciting part for us, Eric, is we also think it is think it is being fundamentally driven by global demand. We continue to see global demand. Eric, are you there?

I lost you right there. You went dead. Are you guys still there?

Okay, yes, we are here. Can you hear us?

I can hear you breaking in and out. I don't know what has happened with my line here.

Unfortunately we lost Eric and we have not had anybody else queue up for questions. So at this time, I will go ahead and turn the call back over to Mr. Harold Edwards, CEO, for closing remarks.

Thank you very much and thank you everybody for your questions and interest in Limoneira. We will be presenting at the ROTH conference next week. We will also be attending additional select investor events over the next few months and hope to see many of you there. Thank you again and have a great day.

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