Limoneira Co (LMNR) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Limoneira second-quarter FY16 conference call.

Today's conference is being recorded.

At this time, I would like to turn the conference over to John Mills of ICS. Please go ahead, sir.

Good afternoon, everyone, and thank you for joining us for Limoneira's second-quarter FY16 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 second-quarter FY16 earnings release, which went out today at approximately 4:00 pm Eastern time. If you have not had a chance to view the release, it's available on the investor relations portion of the Company's website on Limoneira.com. This call is being webcast, and a replay will be available on Limoneira's website as well.

Before we begin, we'd 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 risk details in the Company's 10-Qs and 10-Ks filed with the SEC and those mentioned in the earnings release. Except as required by law, we undertake no obligation to update any forward-looking or other statements herein, whether a result of new information, future events, or otherwise.

Please note that during today's call, we will be discussing non-GAAP financial measures, including results on an adjusted basis. We believe these adjusted financial measures can facilitate a more complete analysis and greater understanding about Limoneira's ongoing results of operations, particularly when comparing underlying results from period to period. We have provided as much detail as possible on any items that are discussed on an adjusted basis.

Also within the Company's earning 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 10-Q and press release, which has been posted to its website.

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

Thanks, John, and 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 second 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 FY16 outlook, and then open the call for your questions.

In the second quarter, we generated revenue of $27.4 million, which reflects higher prices in volume of fresh lemons sold offset by the timing of our avocado harvest and sales, which began later this year than last year. We reported EBITDA of $3.4 million, compared to $5 million in the prior-year period, and we reported earnings per diluted share of $0.08 in the second quarter of FY16 compared to $0.17 in the prior-year period. The quarter-over-quarter decline was impacted by the later start to our avocado harvest.

I'd now like to provide an update on our business segments. First, regarding our agribusiness, we believe our agribusiness is well positioned to benefit from the investments and strategic decisions we have made in the past several years. Our new packing house in Santa Paula became operational in March. This facility is expected to double the annual capacity of our lemon packing operations and significantly reduce labor costs.

The startup and transition to the new packing facility and realization of its cost efficiencies is taking longer than we originally anticipated. We expect to begin seeing the improved agribusiness operating margins as we work through the operating transition. The new facility also ensures that we have ample capacity for increased production expected in the coming years from our current non-bearing orchards, as they become productive, as well as newly recruited third-party growers interested in our packing, marketing, and sales services.

We currently have approximately 7,500 planted agricultural acres, of which approximately 1,500 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 by approximately 30%, or about 900,000, to 1.3 million fresh cartons as the non-bearing and planned acreage becomes productive.

In April, we made further progress on one of our long-term goals of becoming one of the leading global citrus agribusinesses when we announced the formation of Limoneira South Africa. Working with our business partners in South Africa, we plan to manage the packing and sales function from locally sourced lemons. We believe this represents another promising opportunity for supplying our global customers year-round.

Lastly on our agribusiness, I would like to make some comments regarding the ongoing California drought. Recent precipitation has brought relief to California's drought conditions, although the last few years have been among the most severe droughts on record.

We believe we have access to adequate supplies of water for our agricultural operations, as well as our real estate development and rental operation segments of our business, and currently do not anticipate that the California drought will have a material impact on our operating results. However, if the current drought conditions persist or worsen, or if regulatory responses to such conditions limit our access to water, our business could be negatively impacted by these conditions.

Staying with the topic of water, the Ventura City Council passed an ordinance at its June 6, 2016 meeting which imposes a one-time fee of $26,457 for every acre foot of new water a development needs. We think this is a potential indicator for the value of approximately 10,000 acre-feet of Santa Paula basin water rights that we own in Ventura County.

Turning now to our real estate development segment, in November of 2015, we formed 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 One project, which we have now renamed Harvest at Limoneira.

We contributed our East Area One 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. The net cash flow 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 7 to 10 year life of the project.

We expect to begin development grading on the project in early calendar year 2017, and lot sales are estimated to begin at the end of calendar year 2017. The total cash that Limoneira will receive over the life of the project will depend on the median home price and the related lot sales price, but with its highly desirable location near the Pacific Ocean, we believe that Limoneira should receive between $100 million and $130 million from the project.

During the second quarter of FY16, we contributed $450,000 to the joint venture and an additional $450,000 in May 2016, matching Lewis's contribution to fund ongoing development activities. In addition to the residential aspect of the project, we are also planning the development of approximately 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. We plan to use the expected future proceeds from the project to reinvest into our agribusiness operations to further increase Limoneira's position as one of the leading global citrus providers.

As a final point on our real estate development segment, we recently were recognized by the American Planning Association California chapter, Central Coast section with the 2016 Comprehensive Plan Award of Excellence for the Company's Harvest at Limoneira project; Limoneira's plan will now move on for consideration at the APA California Chapter State Awards this October in Pasadena.

Lastly, turning to the rental operation segment of our business, last fiscal year, we began renting 65 additional agricultural workforce housing units, which contributed to increased second-quarter rental operations revenue. On an annual basis, we expect that the new units will produce approximately $900,000 of additional rental revenue. We also anticipate that the farm worker housing units will help us maintain a consistent supply of labor for our agribusiness operations.

In summary, we are excited about the position of our business and the progress we continue to make. We remain focused on our goals of establishing and global agribusiness presence and working toward supplying our customers the leading citrus on a year-round basis.

And with that, I will 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 second quarter ended April 30, 2016. In the second quarter of FY16, revenue was $27.4 million compared to $28.3 million in the second quarter of 2015.

Agribusiness revenue decreased 4% to $25.9 million, primarily due to the timing of our avocado harvest, which began later in FY16 versus last year. Rental operations revenue was $1.4 million in the second quarter of 2016 compared to $1.3 million in the second quarter of last year, reflecting rental revenue from 65 additional agricultural workforce housing units, which we began renting last fiscal year, as Harold mentioned earlier. Real estate development revenue was $8,000 compared to $18,000 in the same period last year.

Second-quarter 2016 agribusiness revenue includes $20.8 million in lemon sales, compared to $18.8 million in lemon sales during the same period of FY15. Approximately 780,000 cartons of fresh lemons were sold during the second quarter of FY16 at an average price of $22.44 per carton, compared to 711,000 cartons sold at $21.94 average price per carton during the second quarter of FY15.

Second-quarter avocado revenue was $1.2 million compared to $4.1 million in the prior-year period. The decrease in avocado revenue was a result of decreased prices and volume of avocados sold, impacted by less favorable market conditions, primarily driven by increased volume of Mexican avocados imported in the US market. The lower sales volume also reflects our decision to accelerate our harvest plan in FY15, which we did not do this year.

We recognized $2.6 million of orange revenue in the second quarter of FY16 and FY15. Specialty citrus and other crop revenues were $1.3 million in the second quarter of 2016 compared to $1.4 million in the second quarter of FY15. Second-quarter 2016 results for oranges and specialty citrus reflect lower prices, partially offset by higher volume, compared to the same period in FY15.

Turning to costs and expenses, for the second quarter of FY16, we incurred $25.2 million of cost and expenses compared to $24.1 million in the second quarter of last year. The 2016 second-quarter increase in operating expenses was primarily attributable to increases in our agricultural costs partially offset by lower selling, general, and administrative costs.

Second-quarter FY16 real estate development expenses were $200,000, which is the same as the second-quarter of 2015. Agribusiness cost and increases 6% in the second quarter of 2016 compared to the second quarter of last year, primarily related to increases in packing, harvest, and third-party grower costs, mainly due to higher lemon sales and harvest volume, partially offset by lower growing costs. Packing costs also include certain labor costs associated with starting up and learning the operating requirements of our new packing house.

Operating income for the second quarter of FY16 was $2.2 million, compared to operating income of $4.1 million in the second quarter of last year. EBITDA was $3.4 million in the second quarter of 2016, compared to $5 million in the same period of FY15.

Net income applicable to common stock after preferred dividends for the second-quarter of 2016 was $1.1 million compared to net income applicable to common stock of $2.4 million in the second quarter of 2015. Net income per diluted share for the second quarter of FY16 was $0.08 compared to $0.17 for the same period in 2015, based on approximately 14.2 million, and 14.1 million weighted average diluted common shares outstanding respectively.

Regarding our year-to-date results, for the first six months of FY16, revenue was $52.4 million compared to $56.3 million in the same period of last year. EBITDA for the first six months of FY16 was a loss of $1.3 million compared to earnings of $3.8 million in the same period last year. Net loss applicable to common stock was approximately $3 million for the first six months of 2016 compared to net income of $800,000 for the same period last year.

Net loss per diluted share for the first six months of 2016 was $0.21 compared to earnings per diluted share of $0.06 in the same period of the prior year. The decrease in operating results for the six months ended April 30, 2016 compared to the same period last year is impacted by $2.9 million lower avocado sales, because we began our avocado harvest later this year than compared to last year. In addition, the six months ended 2016 results include $1.2 million of transaction costs incurred upon entering the previously announced joint venture with the Lewis Group.

Regarding our cash flow and balance sheet for the first six months of FY16, net cash and operating activities is $5.9 million, compared to $1.5 million in the prior year. Net cash used in investing activities was $7.5 million in the first six months of 2016 compared to $16.4 million in the prior year. Net cash provided by financing activities was $13.4 million in the first six months of 2016 compared to $17.9 million in the same period last year. As of April 30, 2016, long-term debt was $102.5 million compared to $89.1 million at the end of FY15.

Now, I would like to turn the call back to Harold to discuss our updated FY16 outlook.

Thanks, Joe.

We are reconfirming our guidance for FY16. For the fiscal year ending October 31, 2016, we continue to expect to sell between 2.7 million and 3 million cartons of fresh lemons at an average price of $23 per carton, and we expect to sell approximately 8.5 million to 9.5 million pounds of avocados at approximately $0.80 per pound.

We are reiterating our guidance range for operating income, EBITDA, and earnings per diluted share for FY16. We estimate our operating income for FY16 will be approximately $8.6 million to $9.1 million. FY16 EBITDA is expected to be in the range of $14.6 million to $15.1 million. We expect FY16 earnings per diluted share to be in the range of $0.28 to $0.33. Excluding transaction costs incurred in connection with the Limoneira Lewis joint venture, FY16 earnings per diluted share are estimated to be in the $0.33 to $0.38 range.

We plan to substantially complete our avocado harvest in the third quarter and typical of the seasonality of our business, we estimate that the third quarter will be the most profitable quarter of the year. Our FY16 estimated operating results reflect an anticipated increase in operating income primarily related to cost savings from our new lemon packing facilities, increased revenues from additional farm worker housing units, and the elimination of lease expense resulting from the acquisition of the previously Sheldon Ranches, offset by transaction costs of $1.2 million incurred on the close of the Limoneira Lewis joint venture and an expected increase in depreciation and expense resulting from the new packing facilities, the acquired Sheldon Ranch property, and the additional farm worker housing units. In addition, interest expense is expected to increase in FY16, related to the new packing house and the additional farm worker housing units being placed into service because of related interest costs were capitalized during the construction period.

As we conclude, I want to leave you with a few highlights of our upcoming opportunities. During the next four years, we are expecting an additional 1,500 acres that are currently non-bearing to become full bearing, increasing our annual lemon supply approximately 30%, or from 900,000 to 1.3 million fresh cartons, which our new packing house is expecting to efficiently manage contributing to our top line beginning in 2017.

We are also excited to be working with the Lewis Organization on the Harvest at Limoneira project. We expect to begin development grading on the project in early calendar year 2017, and lot sales are estimated to begin at the end of calendar year 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. We remain focused on capitalizing on opportunities we have been cultivating over the past few years, and continue to look for additional opportunities that lie ahead.

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

(Operator Instructions)

Your first question will come from Tony Brenner with ROTH Capital Partners.

Thank you very much. Harold, could you talk a little about what opportunities you've got beyond the efficiencies of the packing houses that comes fully onstream to reduce costs and expenses for the balance of the year? I noticed G&A or SG&A is down sequentially in the second quarter. Is that sustainable or is there more there or is there an opportunity on agriculture costs as well to obtain some reduction?

A couple of things there, Tony, thanks for the question. We, at the beginning of this year, pulled the management team together and challenged ourselves to pull costs out of the business to the extent that we would be able to do that. So, we did a couple of things.

One, we received some pretty good cooperation from mother nature throughout our California and Arizona operations as it related to adequate rainfall to reduce our irrigation cycles, fairly significantly. So, the amount of irrigation cost associated with our operations in 2016 versus 2015 are significantly lower than last year.

We also have challenged ourselves internally with our SG&A costs to pull costs out of the business, and in essence, tighten the belt a bit around the organization, the operation. We have cut back on some of our sales and marketing activities to the extent that we felt we could without impacting the overall business. We actually raised the bar as it relates to our management incentive program, so that we actually were, in an effort to gain greater profitability out of the year, working to a much higher target to trigger bonus payments throughout the management structure.

So, the bottom line, to answer your question, is we challenged ourselves to pull approximately $1 million of cost out of the business, out of the SG&A part of our business 2016 this year versus last year. And we believe that the cuts that we have made to date are sustainable and that we're on track to achieve that $1 million in cost reduction for the year.

Okay. So, for the quarter, yes, that's about $1 million run rate or pretty close to it.

Yes, we believe it is sustainable.

Okay. Would you repeat the particulars of the Ventura County water fee and the impact that you think that might have on Limoneira.

Sure, the particulars, Tony, are the Ventura city Council met last week and, the city of Ventura lies approximately three miles to our west, with the border of Ventura about three miles to our west. And they met and improved an ordinance that says that any new development that is conceived residential or commercial that needs to come to the city council and planning commission of Ventura County -- sorry, the city of Ventura, needs to come with either its own source of new water or in the absence of that water, for the amount of water that its required to bring to the project, pay a one-time fee for that water of $26,457 an acre foot.

Okay, so that means other developments will potentially be buying water from Limoneira for that amount?

It's more of a benchmark figure. Whether they buy it from Limoneira, whether they buy it from the city of Ventura's own internal source of water, whether the city of Ventura is forced to go out and acquire new water shares or new access, new water in the Santa Paula basin, that is an amount of money that we can now reference as a value per acre foot.

Okay, the number of acre-feet that Limoneira has in the Santa Paula basin was?

Approximately 10,000.

Okay. Thank you very much.

Thank you, Tony.

From Feltl we will hear from Brent Rystrom.

Thank you. Harold, could you give us a sense, when you think about your lemon groves, where the EBITDA per acre is right now for a mature fully producing lemon grove?

Sure, Brent, it's all over the map by district. So remember, we grow in three very different areas. We grow in the desert, in Yuma, Arizona in the fall season, and then that shifts up in the winter up into the San Joaquin Valley. And then in the summer months, it falls down to the coast here in Ventura County. And so, the EBITDA reality in each of those places is different based on where the market is at that time. But, in total, we are looking at approximately

$4,000 to $6,000.

Yes, right now it is about $6000 an acre EBITDA net.

And Joe, you mentioned that $4,000 to $6,000. So would the $4,000 be something more typical in those other districts and it's the $6,000 is in the coast?

Yes, and as Harold said, depending on the ranch, depending on its production, depending on how its age and every year is a little different, so there is that range in there. But, with the prices that we have been seeing over the last few years at this $23, $24 price range, those are the relative acreage per return on an EBITDA cash-on-cash basis.

Another component to that, Brent, is the yields that come off that areas that are very different. So we expect to get about 600 fresh cartons with normal fresh utilization per acre out of our Yuma production. That goes all the way up to 1,000 cartons per acre up in the San Joaquin Valley, and then here on the coast, we expect to get somewhere around 800 cartons per acre. So all of that factors in to the question that you just asked.

And to that point, too, as you would have seen in our first quarter, [D3] Arizona was a little bit lower this year in production; it has been the last couple years, which will directly translate into a lower per-acre return. So, that's the other thing, too, is you don't always get the same thing every year.

Yes, that makes sense, that is helpful. Thinking of the guidance this year for 2.7 million to 3 million cartons of lemons, how are those sourced? What is the proportion that's coming from your properties and then how much is from others?

So, this year about 60% of everything that we sell will be internally grown and 40% will be outside grown. And, that's -- that's about right. Remember, Brent, that we started off in our fall season at the beginning of our fiscal year out of our district three desert crop 300,000 cartons below our internal plans and below the guidance.

The significant thing that happened in the second quarter that we can comment on is that we fought back significantly and over-produced and over performed with our lemons in the second quarter in the San Joaquin Valley. And now as we come forward and we are beginning our summer harvest here in district two, we are very, very optimistic by what we see hanging on the tree.

So we believe we will be able to more than fight back on that 300,000 carton deficit we faced in the first quarter and will more than make up for that. But the other very exciting part of that is that at very, very high FOB sales prices right now, which the entire industry is enjoying.

Through the second quarter, it was 49%, 41%; 49% us -- 49% was the outside growers.

So it's 50%, 50%?

To your point, as the year goes on, it typically is in that 60%, 40% range.

Because we own more of district two, yes.

All right, just so I can clarify that, the 60%, 40% split projection, is that on the $2.7 million as a base or is it on the $2 million?

No, no, it is on the $2.7 million to $3 million forecast.

Yes, it's on the whole year of production.

So, if you do $2.7 million or you do $3 million, you expect still to do 60% either way and your production would just reflect what the industry has available.

Yes.

Alright. Can you refresh, we have talked over the last couple years about the packing house adding at least $1 per carton of [top seeds]. Can you give us an update, even though it's starting off, I know, with some higher startup costs, what are you seeing right now in the packing house once you get past these costs as far as what these savings per carton might be?

I will break it down into three areas. We are living it right now. It's very, very exciting, but it is really putting a lot of pressure on the organization, it's good pressure. And I would really characterize the transition we are making as really a -- I would characterize it as a cultural change for our overall business, just given the level of modernity and just how incredible this new technology of this packing house is.

But the first thing that we wrestled with and have made huge strides overcoming has been getting the machine to actually perform at the level that we basically signed up for when we made the investment into the packing house. And the metric we use to follow our progress is in cartons per hour that we are able to pack using that new packing house.

For a matter of reference, the old packing house in March, or actually, let's use the month prior, so February, achieved a 750-carton-per-hour average pack throughput rate in the month of February. We are now averaging approximately 1,500 cartons an hour, so, in essence, we have doubled the throughput in the same amount of time from February to today.

Theoretically, the machine can operate at something around 2,200 cartons an hour, and we are seeing that kind of performance for small intervals. But unless you were able to string together hours and hours and hours of consecutive operation at those levels, that is really the game. So we have, in essence, doubled the throughput as the first hurdle we had to clear.

Then the next part of the hurdle was to do that without adding hours of overtime and double-time, as we tried to meet the sales orders for a given week. And we have been able to cut the amount of overtime and double-time that we have thrown at this effort down by 75% in the last month. So we are really making progress there.

The final piece to the puzzle is on overall headcount and actual labor cost, and right now when we have issues of running the plant, as we are learning to run the plant, we are actually doing it with more bodies than necessary as we go through the production. We think we have the opportunity to pull a significant amount of bodies off of the line and reduce the total headcount from where we are today by as many as 50 people over the course, and these are temporary laborers and temporary employees, as we go through it, as we gain competence and skills to do that.

We believe that transition will take probably the next, I don't know, three to six months as we acclimate and we get the confidence to be able to do that. But when we do that, we are still very focused on the idea that our year-on-year savings will be significantly greater than the dollar than we signed up for this year per carton.

Thank you. From an acreage perspective, can you guys give us an update? I know you had mentioned I think you said you have 7,500 acres now planted. Was that 7,500 acres of total crops?

Total crop, yes.

Was the 7,500, is that a producing number so there is another 1,500 beyond that or is the 1,500 part of the 7,500?

It's 7,500 less 1,500. 1,500 non-bearing, so 6,000 acres is bearing and 7,500 is owned, so 1,500 is non-bearing.

And is the breakdown roughly -- I know lemons are close to 4,000 acres of the 6,000. Is that correct?

Yes.

Okay. How else does it break down, Joe? Can you give us a sense of oranges, avocados, specialty?

Oranges are around 1,000, specialty is around 500, I'm going from memory.

Yes, so I have got the deck in front of me. So 4,200 acres of lemons, 1,100 acres of avocados, 1,400 acres of oranges and 900 acres of specialties.

Okay. And then, I believe you have about 1,000 acres you rent to others, is that still correct?

700.

It's 500 to 600.

600, Brent.

600 rented, okay. And then, I know it's a long ways off yet, but can you give us a sense of how you think from a flow perspective, how lot sales will start and just a time flow thing? And then does it start off with some strips where you are selling off a bunch of lots? Where they be piece meal, where you are selling a lot or two?

And then how should we think about cash flows those first couple of years? Because I seem to recall when you first start developing lots, more cash will go to the Lewis Companies, then as you get further in, the cash will build to you.

I will make a couple comments and Joe can jump. So Joe is spending a lot of time pro forma-ing this with the Lewis Group. But the first phase that will be developed will be at this point, it is estimated to be 640 lots. It will be lumpy, but we believe that the absorption would be over the next three years.

More than that I think, because it's not going to start until the end of 2017.

Sorry, 2017 to 2020 would be the first -- over those three years, the 640 lots would be developed and it will be something like this where, is the assumption 300 units per -- for the second year is 300 units?

I think yes, directionally there's -- as I think about the different years, I think there is a 250-unit year, there's a 300-unit year. So based on the projections, it's going to be significant in any given of those three years to add up to that 600 units. But it will be with multiple builders and so on.

Yes, and so the average lot take down, I ask this question to Lewis just in the last executive community meeting, but they think the average takedown from any one builder might be 50 lots. And, so maybe if you're thinking about it from a modeling perspective, Brent, we might want to think in terms of because the first lots will really sell in the back part or the end of 2017, there will be a modest amount of lot sales and cash flow and earnings in 2017.

2018 will be a big year because you'll have the full push of the 300 units. And then the following year with the balance of 2019, will be when the balance sell, but there will also probably be new costs associated with that. So the cash flow will be limited in 2017, it will be pretty big -- it will be big in 2018, and it will start to be limited in 2019 as we begin to go forward with the next push of development.

And as a reminder, Brent, I think as we have talked before on this, this is an equity investment to Limoneira. So the performance and earnings cash flow and any of that, from an income statement standpoint, will be reflected as one line, equity earnings on our income statement. So there won't be the revenues and costs flowing through our financials we don't expect.

The entity itself is an LLC, it's standalone entity will have the revenues and costs and then you would expect an allocation of costs and so forth. And bear in mind that there is some new revenue recognition rules coming down the pipes.

So we have intentionally stayed a little bit vague, if you will, on the earnings right now as we start to figure out how some of those costs and some of this accounting will affect. But from a cash-flow standpoint, what Harold just said would be the general range to think about. In other words, the cash flow and the earnings won't necessarily match.

All right. And so thinking about that, just following that one more step, Joe, if 2017 is a -- first lot sales start in 2017. I would assume that would be possibly some earnings but probably not any cash flow.

No, 2017, and again, we are now projecting that 2017, in theory, could have some deposits. The general way we understand this works is they [won't] just show up at the end of 2017 necessarily and by lots. Typically get out in front of that, get the arrangements, get the contracts, get things going and commitments, et cetera.

So we would expect some cash flow that may or may not accrue back to Limoneira. But certainly at the entity level, there will start to be some cash flow in the form of deposits and then lot sales, more cash flow, and then we start to go from there.

So then carrying that a step further, so then in 2018, what you're saying is you may actually have fairly substantial earnings, because the acceleration of the lots, your cash flows from it could be even more substantial. Then as you cycle into your second big year, your earnings could also be big, your cash flows will start to come down a bit as you start to ramp for the next phase of development?

Yes, I think that's generally the way to think about it. In fact, to that point, before we get to the end of 2017, as we noted so far this year, we have contributed $900,000 to the joint venture' Lewis has contributed that and more. Just from how to get matched up to have as equal equity interests in that sense. And then as we said earlier in other releases, between now and [when] deposits and lot sales, et cetera, and when the joint venture gets to a financial place that it makes sense to start getting some loans at that level, the expectation, the partners will fund a significant part of that -- of those development costs.

So I think we said, and still we don't there is any reason to think otherwise, somewhere in the $10 million to $15 million range in total each between now and call it even into 2017 or 2018 as it starts to turn the corner.

So, Joe, that $900,000 is the first effort of that $10 million, to $15 million? Is that a way to think about it?

That's right. We think it might be $2 million to $3 million this year is a rough estimate subject to change as we see how the speed of the development starts to roll out.

And then when thinking about this, I don't know if you can even answer this, the first 604 lots, are these going to be typical of how the 1,500 total lots look? Will there be a mix of different types of lots? Will these be more entry-level? Will these have any particular variation that you would like to highlight for us relative to the overall life of the project?

Yes, we actually had this discussion in our last executive session, executive committee meeting. And, we believe that at any given time -- so this is going to be what's called an aspirational master plan in which there is going to be multiple, multi-segment types of product being built simultaneously. And we believe that the types of lots that will be sold will be representative with various different values and very different price ranges too different builders concurrently.

And we believe at this point, that there could be as many as five different builders, building on five different product types who have just taken down and purchased a certain number of lots to meet whatever their part of that first phase is going to be. So, we think the bottom line to answer to your question is we think it's going to be very representative, from a product-mix standpoint, to the overall absorption of the 1,500 units.

But we also think this is very early that assuming the pro forma and the economy, et cetera, cooperate, and as the development starts to look that much better, that first piece, the first house -- as you start to get a real neighborhood in and the amenities and all the nice things of the master plan. So in the later years, the thinking is that while it will still be a mix of different segments and home types, that it will be somewhat higher mix, the values would appreciate. That is the thinking today.

Like I say, subject to cooperation from the economy and the market and everything else, but that is what we would expect.

So basically, if you build a nice community, you would expect as it fills out to realize a better return because you're going to have a limited ability to absorb beyond a certain point and as you get closer to the end price, you can work higher.

Perfectly said.

Thanks, guys.

Thank you, Brent.

Next we will go to Eric Larson with Buckingham Research Group.

Good afternoon, everyone.

Hi, Eric.

First question is more of an accounting question for Joe. Joe, can you just give us what kind of a FY16 interest expense you would expect? And then what a fully loaded full-year interest expense number would be?

Hang on one second. Rather than going from memory, I think we can do a little better than that. So we think interest expense should be somewhere in the $1.6 million to -- plus, minus, maybe a little more range for 2016 for the year.

Okay, and that would be, you're not putting on -- right now you're not decommissioning other things, so that would be a full run-rate number again for 2017 assuming you don't pay any debt, though.

Right, no, so that is a good question. The interest expense or interest costs for us because of the still relatively intensive capital investments we always have, our planting grapes up in Windfall, we have got this 1,500 acres working on. So anytime we have development properties, even the East Area One project we are still under accounting rules permitted to continue to capitalize some interest.

So there is interest cost and then there's interest expense. The $1.6 million or so for the year would be subject to that accounting, and so 2017 will be different as certain properties start to become, some of these orchards start to become producing, like the Windfall grapes. We have 100 acres will become live next year, and that kind of thing.

So I'm going to go from memory; I think it is around $3 million of total interest cost for any given year, 2016, and of which $1.6 million would be expensed. The other $1.4 million or so is capitalized, something like that. It might be off a little on that, but directionally, it is something like that.

Okay good, thanks. That helps clarify that web of interest-expense dilemma.

The next question is for Harold. Harold, obviously, we are seeing producer returns come down fairly sharply in the avocado business. You have got increasing production in Mexico, et cetera. Strategically, does it make sense at some point, to -- it probably doesn't make sense to expand avocado acreage. But is it possible to actually convert some avocado acreage to lemons? I think you said that avocados were 1,000 acres earlier.

Avocados I think are 1,200 acres now.

About 1,200 acres, yes.

And I think at our peak, we were about 1,500 acres, Eric. But, since the last time we have debriefed, and since the last real communication we had, something amazing has happened. So, Mexico, which -- so the US market is going to consume, at this estimation, about 2.4 billion pounds of avocados; 80% of the supply is going to come from Mexico. The California crop this year is estimated to be somewhere around 350 million to 400 million pounds, and Limoneira, which is the biggest grower in California still, our guidance is somewhere around 9 million pounds.

So where we -- so in the first part of the harvest, which we have already experienced, Mexico was exporting and the US was importing about 52 million pounds of Mexican avocados each week. Until about six weeks ago, when Mexico finished their old crop and then pushed pause while they waited for the off-blooming avocados to begin and then their new crop to start, which we estimate to begin sometime around probably the middle of July.

And, what unexpectedly happened is literally overnight, Mexico went from exporting 52 million pounds a week to 20 million pounds a week. When Mexico was exporting 52 million pounds a week, the average price for a size 48 piece of fruit, which is about an eight-ounce piece of fruit, was going for about $0.50. When Mexico reduced their amount of exports, it artificially shorted the market, and we saw the value of those 48's go from $0.50 to right know about $1.20 per pound.

So overnight, the market improved to the point where California had a window in which it was able to jump in at significantly greater producer prices than we thought we'd see this year. So, when we caught wind of this and we saw the opportunity, we put our foot down on the gas and we really started to accelerate our harvest. And consequently, we will get to our full approximately 9 million or slightly greater pounds of avocados. And we feel very confident that we will get this $0.80 that we forecast.

So, to that case, we used to harvest over the course of what amounted to about nine months a year. The way that is working now, that has been truncated to somewhere around three to four months. But if you can get your entire crop off in that time period, you can still enjoy some pretty good prices.

One of the things I will say, Eric, that we are experiencing in the avocados is we are seeing smaller sizing than we thought. I think that is a function of just the overall drought over the last few years. We haven't seen the size of the avocados getting to where we want it to, but we have been very pleased with the number of pieces, so we are going to get the total weight. The smaller fruit has a slightly lower value, but we think the avocado forecast is intact.

And now, to get to the final part of your question, we have some avocados still remaining on the flatland here in Ventura County where we could convert it very easily to lemons; in fact, that is the plan on some of it. But, for the majority of our avocados, they are planted up on the hillsides where today, there really isn't a great substitute or an alternative.

You could introduce the idea of wine grapes down here, but we are electing to do it because there are certain pests that are naturally living in citrus that carry diseases that are very damaging to wine grapes. And so citrus and wine grapes haven't lived very well together over time. So we really like our mix, and while we'll see the amount of avocado acreage come down slightly, we still think it's the best way to utilize our health hillside acreage Ventura County.

Okay, okay. And all that hillside acreage, I assume, has water to it; you are able to irrigate?

Yes, well, so I mentioned the rainfall earlier. So this year was a great year; we received approximately 10 inches of rain down here in this part of Southern California. Well levels are actually up, so our access to water has been excellent.

And the other part to the way the rain cycle worked this year is even though it wasn't the massive amount of rain that was predicted for El Nino, that actually hit up more closely to Northern California in the form of great, great snow in the Sierra Nevada, which really helps our Northern California operations. Here in Southern California, though, the way that the storms were stretched out, it really helped us avoid irrigation cycles, and there is just something about a natural rainfall that physiologically does something to a tree versus having to irrigate it. It leaches the soil, it gets the salts off the root system, and the trees generally get great -- more healthy and consequently, more productive. So, it actually, in a strange way, was a really, really good year from a rainfall perspective for us this year.

Okay. Interesting. And now -- and thank you for that explanation. It's now clear why you put the brakes on for your production for avocados in Q2 and now have the gas pedal down in Q3.

Do you think this is the new norm then? Is this window going to be relatively consistent with Mexico going forward? Or is it unique to Mexico this year, too? How does that play out going forward on a consistent basis?

No, that is the great question, and I think the reality is, is that Mexico, Mexico is the 10,000 pound gorilla. And so, we really need to be aware of the Mexican crop and how the very disciplined Mexican industry is going to behave.

They have been good partners because they are very communicative and they work very closely with our handlers. Calavo is one of the biggest importers of Mexican fruit into the US. So that relationship has been incredibly helpful.

In terms of our ability to predict what is coming and when it is coming from Mexico, which then allows us to see where our windows might be, and so the bottom line, to answer your question, is that it is going to differ year to year based on the size and the structure and the type of crop that is coming out of Mexico. So, California will continue to have to be increasingly nimble in terms of our ability to get in and get out when the window is open. But I do believe that every year, there will be a good window.

And with our logistical advantage being close and more proximate to the US market, there's actually a really interesting niche that has developed where consumers actually seek out California avocados. And because of that, we are able to command a premium price in some places. And that little niche opportunity is what is going to keep us in a good place with our avocado production.

Okay, great. And then the final question and I will pass it on, your lemon pricing continues to creep up gradually. It is really nice to see a $23 outlook per carton for lemons.

Talk a little bit more about the driving factors there. I think you talked a little bit the last time that you were thinking that your fruit was going to be -- your sizing was going to be a positive mix this year as well, larger fruit. Can you give us just a quick snapshot of what is going on, similar to what you just did with avocados for lemons?

Sure, two exciting things going on. But as it relates to this year versus last year for us, so remember in lemons, there is three different grades of fruit. There's the fancy, which is the really good stuff; the choice, which is the more food-service-oriented, middle-of-the-road quality, and then standards. And the standards are if you can get it into a fresh box instead of selling it to the juice plant or sending it to the juice plant, you get a good return.

We're -- because of the way that their rain fell this year, because of our cultural practice with good aggressive pruning, but also very aggressive pest-control work, we are seeing a much greater percentage of fancy fruit this year. So from a product-mix standpoint, we are really enjoying the benefits of higher FOBs, because we're selling more valuable, fancy fruit than we did last year, so that is very, very exciting.

And I think the other thing to mention, which is probably the most exciting thing from an industry standpoint, is we continue to benefit from what we predict that being about a 10% to 12% increase in the size of not only the US but the global markets for fresh lemons right now. So it has put us in this really unique position of being in a demand exceeds supply position as we going to the sub North American summer months, when demand is at its highest anyways because of consumption trends, as lemons are used as a garnish in a drink and all that iced tea you're drinking back in Minneapolis and the lemonade that you're drinking back there, you're using a lot more lemons at much higher pricing this year than the year before. And all of those things together make us very, very bullish on not only this year but looking forward at the price and the value of lemons.

Okay. So, obviously, to summarize that whole thing, the higher value you are seeing per carton is really a function this year of a much better, higher-quality lemon mix.

That is part of it and also just the overall market year on year is tighter and it is driven because of increases in demand.

Got it. Okay. Thank you, everyone, I will pass it on.

Thanks, Eric.

From Lake Street Capital Markets, we will hear from Chris Krueger.

Hi, good afternoon, guys.

Hey, Chris.

Most of my questions have been answered, but can you just go over the South African partnership briefly and what it means to you?

I think the main thing that it does is we have been -- have been and will continue to look at different international markets and regions that are politically stable, good growing ground and circumstances and environment. So as we have been checking that out, you know that a couple years ago we made an investment down in Chile. We've looked around at other opportunities and we have studied South Africa to understand it's one of the largest growers of citrus and lemons, in particular, literally in the world.

So there is an excellent opportunity. It happens to be pretty far away, but it is very stable, good market, actually opens up all different opportunity into Europe, et cetera.

So, this is a first cautious step to start to dip our toe in the water, partner with some people we know down there to get to know the land better, the markets better, the growers better. And so the idea is to, as we said, to partner with some people and work with the growers there, the local market, to participate in sales that would get into potentially the East Coast of the US, and more importantly, Russia and Europe and so forth.

And as we play that out over time, it is down the road a bit, but we would certainly like to see a scenario where we could actually make more significant investments to start to own property down there. That is the long-term strategy that we have stated before overall as we grow our business.

All right, great. Thanks.

At this time, there are no other questions. I would like to turn the conference over to management for any additional or concluding remarks.

Thank you for your questions and interest in Limoneira. We look forward to updating you again in September on the third-quarter call. Thank you again and have a great day.

That does conclude today's presentation. We do thank everyone for your participation.