Limoneira Co (LMNR) 2016 Q4 法說會逐字稿

Good day and welcome to the Limoneira fourth-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 ICR. Please go ahead, sir.

Thank you. Good afternoon, everyone, and thank you for joining us for Limoneira's fourth-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 fourth quarter fiscal year earnings release, which went out today at approximately 4:00 PM Eastern time. If you had not had a chance to view the release, it's available on the Investor Relations portion of the Company's website, at limoneira.com. This call is being webcast and a replay will be available on Limoneira's website, as well.

Before we begin, we'd 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 risk and uncertainties, many which are outside the Company's control and could cause its future results, performance or achievements to differ significantly from the results, performance or achievements expressed or implied by such forward-looking statements. Important factors that could cause or contribute to such differences include risks detailed in the Company 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 matters, 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 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 10-K 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. Thanks for joining us. On today's call, I will begin with a brief overview of our financial results for the fourth quarter and full year of 2016, and provide an update on our progress across all of our business areas and how we are positioned as we enter 2017. Joe will review the financial results in more detail, and I will then discuss our FY17 outlook, and then open the call up for your questions.

I'm very pleased to announce that we exceeded our full-year earnings per share and EBITDA guidance for FY16, which was driven by a number of factors we'll discuss today, including our fourth quarter results. In the fourth quarter, revenue increased 37%, to $20 million, compared to the same period of FY15. Even though our fourth quarter is a seasonally slower quarter, our solid top line growth reflects higher lemon sales, due to higher volume and pricing for the fourth quarter of FY16 compared to the fourth quarter of last year. Our operating loss for the fourth quarter of FY16 improved to $900,000, compared to a $4.9 million loss in the fourth quarter of the previous fiscal year.

For the full year of FY16, revenue increased 11%, to $112 million, compared to FY15. Operating income for FY16 increased 100%, to approximately $9.2 million. Higher FY16 operating income reflects increased revenue for all agricultural crops, particularly lemons and avocados. Our EBITDA for FY16 increased 30%, to $20.1 million, compared to last year.

I'd now like to provide an update on our business segments. Starting with our agribusiness. Over the past few years, we've made a number of strategic investments that will drive our top and bottom line growth. With have expanded our customer base to over 170 customers and increased distribution by leveraging our domestic and international marketing and sales channels during the past few years, due to many factors, including our trade marketing strategy, consumer facing strategy, as well as increasing our packing capacity. Our new packing house in Santa Paula became operational this year, and this facility is expected to double the annual capacity of our lemon packing operations and reduce labor costs in FY17.

We've already began to see significant improvements in carton processing capacity. For example, during the last half of FY16, we processed an average of approximately 1,400 cartons per hour, compared to 900 cartons per hour for the same period in 2015. Long term, this facility will ensure 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 7,900 planted agricultural acres, of which approximately 1,500 are non-bearing lemons and are estimated to become full bearing over the next four years, with plans to plant an additional 500 acres of lemons 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 June, we announced that we are adding oranges and specialty citrus varieties to our one world of citrus model. We began our direct selling program for lemons six years ago, and have been very pleased with its success. We are excited to have our oranges and other citrus varieties marketed in Limoneira cartons. As our lemon business grows, our customers recognize the quality and consistency they receive with Limoneira lemons, and we are seeing increased demand from our customers for other citrus varieties.

In addition to Navel and Valencia oranges, Limoneira currently grows Cara Cara navels, Moro blood oranges, pomelos, and Star Ruby grapefruit. We are partnering with Cecelia Packing Corporation, a company that shares our values and commitment to quality, for packing Limoneira oranges and specialty citrus in Limoneira branded cartons.

In the fourth quarter of FY16, we had our first wine grape harvest at Windfall Farms to top wineries, including Bogle and Coppola wineries. We currently have planted 220 acres of vineyards at Windfall Farms and plan to plant an additional 100 acres in FY17.

Earlier this year, we announced the formation of Limoneira South Africa, which underscores our execution on our goal to become a leading global year-round citrus agribusiness. We are working with business partners in South Africa, Chile, Argentina and Mexico, and we manage the marketing and sales function from locally sourced citrus.

We recently announced another exciting development for our agribusiness operations. We began using solar energy at our Porterville Ranch, which is part of our Northern California operations, to generate electricity to power our deep water well pumps on that property. This will complement our First Solar facility at our headquarters in Santa Paula that provides energy for our packing operations, as well as our solar facility at Ducor Ranch, which powers our deepwater well pumps on that property.

We are proud of our efforts to be a leader in using clean energy. It's the right thing to do for the communities in which we operate and there 's the additional benefit of cost savings for our operations. Furthermore, it reinforces our commitment to our sustainable business practices that help set Limoneira apart as a sustainable agricultural supplier, a differentiation that our customers value greatly. We are continually evaluating additional solar conversion projects that make sense for our Company.

Turning now to our real estate development segment, as many of you know, in November of 2015, we formed Limoneira Lewis Community Builders LLC, a development partnership between Limoneira and The Lewis Group of Companies for the development of the Harvest at Limoneira. The total cash that Limoneira expects to receive over the life of the project will depend on several factors, including 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, which includes Lewis' initial $20 million payment for its 50% interest in the joint venture.

During the full year of FY16, we contributed approximately $2.3 million to the joint venture, matching Lewis' contribution to fund ongoing development activities. Current project plans indicate that grading should begin during the spring of 2017, Phase I site improvements to begin during the summer of 2017, and initial lots sales are anticipated to begin in the fourth quarter of calendar 2017.

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.

Interest from potential tenants is very encouraging. The residential and commercial components of the project should create a highly desirable community in a prime Southern California location. We plan to use the expected future proceeds from the project to reinvest in our agribusiness operations and further solidify Limoneira's position as one of the leading global citrus providers.

Lastly, turning to the rental operation segment of our business. Last year, we began renting 65 additional agricultural workforce housing units, which generated $663,000 higher rental revenues in FY16 compared to 2015. Our farm worker housing units are also important, as they help us maintain a consistent supply of labor for our agribusiness operations.

In summary, we are pleased with our full year performance and our healthy cash flow generation. As we enter FY17, we are well positioned to continue to expand our agribusiness and make progress on our goal of becoming a leading global citrus provider. And with that, I'd like to 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 fourth quarter and full year of FY16 ended October 31.

Fourth quarter revenue was $19.5 million, which was 37% increase compared to fourth quarter of 2015. Agribusiness revenue was $18.2 million, compared to $12.9 million in the fourth quarter of last year, primarily due to stronger lemon sales. Rental operations revenue was $1.3 million in the fourth quarter of FY16, which is similar to the same period last year. Real estate development revenue was not significant in the fourth quarter of FY16 or FY15.

Agribusiness revenue for the fourth quarter of FY16 includes $16.4 million in lemon sales, compared to $11.6 million of lemon sales during the same period of FY15, primarily reflecting increased lemon prices and volume. Approximately 521,000 cartons of fresh lemons were sold during the fourth quarter of FY16 at a $25.91 average price per carton, compared to 388,000 cartons sold at $25.00 average price per carton during the fourth quarter of FY15.

As anticipated, we recognize minimal avocado revenue in the fourth quarter of FY16, similar to last year. We generated $600,000 of orange revenue in the fourth quarter of FY16, which was similar to the same period of FY15. Specialty citrus and other crop revenues were $1.2 million in the fourth quarter of FY16, compared to $700,000 in the fourth quarter of FY15. 2016 specialty citrus and other crop revenues includes our first wine grape harvest from Windfall Farms of approximately 200 tons for $300,000.

Costs and expenses for the fourth quarter of FY16 were $20.4 million, compared to $19.1 million in the fourth quarter of last year. The fourth quarter of FY16 increase in operating expenses primarily reflects higher agribusiness costs, mainly resulting from increased fresh lemon sales volume.

Our operating loss for the fourth quarter of FY16 improved to $900,000, compared to a $4.9 million loss in the fourth quarter of last year. Net loss applicable to common stock after preferred dividends for the fourth quarter of FY16 was $100,000, which includes a $1 million gain associated with a conservation easement with the Nature Conservancy. We retain the title to the property and the easement allows us to continue the agricultural activities on the property.

These results compare to net income applicable to common stock of $500,000 in the fourth quarter of FY15. Fourth quarter of FY15 net income includes $5 million gain associated with the sale of 140,000 shares of Calavo Growers Inc common stock and a $900,000 gain on the sale of the Company's Wilson Ranch.

Net loss per diluted share for the fourth quarter of FY16 was $0.01, compared to a net income per diluted share of $0.04 for the same period of last year, with both periods based on approximately 14.1 million weighted average diluted common shares outstanding. EBITDA was $2 million in the fourth quarter of FY16, compared to $2.4 million in the same period of FY15.

Turning to our full year results, as Harold mentioned, we exceeded our EBITDA and earnings per share guidance for the full year. Revenue increased 11%, to $112 million, compared to FY15. Operating income increased 100% for FY16, to $9.2 million.

Higher FY16 operating income reflects increased revenue for all of our agricultural crops, particularly lemons and avocados, offset primarily by higher third-party grower expense to greater lemon procurement costs, and higher packing costs related to increased lemon sales volumes. In addition, selling, general and administrative expenses for FY16 were less than FY15 by approximately $500,000, primarily related to legal and consulting costs being less, which were associated with the Limoneira/Lewis joint venture of last year.

Net income applicable to common stock after preferred dividends was $7.4 million for FY16, compared to $6.4 million for FY15. FY16 results include a $3.4 million gain associated with the sale of 60,000 shares of Calavo Growers common stock and the aforementioned $1 million sale easement, or sale of the easement, as well as $1.2 million of transaction costs incurred in the first quarter in connection with the Limoneira/Lewis joint venture. FY15 results include the aforementioned $5 million gain associated with the sale of Calavo Growers common stock and a $900,000 gain associated with the sale of the Wilson Ranch.

Earnings per diluted share for FY16 and FY15 were $0.52 and $0.46, respectively, both shares being based on approximately 14.1 million weighted average diluted common shares outstanding. EBITDA for FY16 increased 30%, to $20.1 million, compared EBITDA of $15.4 million in FY15.

Lastly, our long-term debt as of October 31, 2016 decreased to $87.2 million, compared to $89.1 million at the end of FY15. Now I'd like to turn the call back to Harold to discuss our FY17 outlook.

Thanks, Joe. We expect our agribusiness to continue its long-term growth trend in FY17 and as we enter the year with a much more efficient packing house that we believe will increase our operating margins. We expect to sell between 3.1 million and 3.5 million cartons of fresh lemons at an average price of approximately $23 per carton, and we expect to sell approximately 8.5 million to 9 million pounds of avocados at approximately $0.80 per pound.

We believe operating income for FY17 will increase approximately 25%, to a range of $11.4 million to $11.9 million, compared to operating income of $9.2 million for FY16. FY17 EBITDA is expected to be in the range of $18.3 million to $18.8 million. We expect FY17 earnings per diluted share to be in the range of $0.38 to $0.42 a share. Excluding the combined gain of approximately $4.4 million associated with the sale of Calavo Growers stock and the conservation easement and the $1.2 million of transaction costs incurred in the first quarter of 2016 in connection with the Limoneira/Lewis joint venture, FY16 EBITDA and earnings per diluted share were $16.9 million and $0.39 per share, respectively. Our estimates do not include potential equity income from the Harvest at Limoneira project.

We expect to begin development grading on the project in spring of calendar year 2017, and lot sales are estimated to begin at the end of calendar 2017. The total cash that Limoneira is expected to receive over the life of the project will depend on several factors, including 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, which includes the initial $20 million payment from Lewis. We are well positioned to capitalize on opportunities we have been cultivating over the past few years and we continue to look for additional opportunities that lie ahead.

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

Thank you.

(Operator Instructions)

Tony Brenner, ROTH Capital Partners.

Thank you. A couple questions: One, it's been raining here in California for 1.5 weeks or 2. And I wonder if, as a result, any of your fields are flooded, or even if they are, if that makes any difference at all at this time of the year?

Hi, Tony. It really doesn't affect us that much, based on the amount of inventory that we have in storage right now. As you may know, we've transitioned out of the desert crop and up to the northern California crop. And we've been dealing with good, solid inventory. So our supply chain won't really be affected by it.

If it keeps raining for an extended period, that could become a factor. But so far, the rains have been a blessing for the state of California and for all of us. So we're very pleased with the amount of rain so far.

So you've got avocado on the trees at the moment. Will this induce an earlier harvest, if that keeps up?

It can. It doesn't always. It's funny how a tree reacts and behaves when natural rainfall occurs. Typically your question -- it's a great question because it can, and usually does, lead to quicker sizing of the fruit. We'll just keep our eyes on the size of the fruit, the maturity of the fruit, and then just keep that compared to where the market values are for the markets that we serve, and alter our harvest strategy accordingly, if we believe we need to.

Right now, it looks like our harvest is going to trend more towards probably third quarter, a lot like we experienced last year. There were some early size picks that took place, just to get weaker fruit off the tree, but it looks like the crop year should play out very similar to last year.

Okay. The later, the better, I presume, because of the competition from imports?

That's right.

Okay. Last question: Early in your comments, you indicated that you expected lot sales to begin during the fourth quarter; and at the end of your comments, you assumed no contribution in FY17. So what should we model?

I think we're trying to be conservative, Tony. And so we're trying to not create an expectation for lot sales in 2017, although we believe we will have our first lot sales in 2017. But to model it, I'd push it into the next fiscal year. Joe, do you agree with that?

Yes, I think conservatism being the key. But the other thing that's happening is we may see some deposits on lots in our fiscal year, which wouldn't, in themselves, generate any earnings. They're just deposits. And so we may not see actual sales of the lots until first quarter of our FY17.

So based on just timing, based on this thing starting up, based on still a lot of moving parts and factors, and just the ability to forecast, I think once we get it rolling a little better, we'll be able to give more information. But right now, I think for 2017, it's likely not to see any earnings impact, even though we might see some cash come in towards the later part of the year.

Pretty good. Thank you.

Thank you, Tony.

Chris Krueger, Lake Street Capital Markets.

Hi. Good afternoon.

How are you doing?

Good. Can you talk about lemon pricing and how that fluctuated throughout the year, and just talk a bit about the outlook, how reliable is your estimate for the full FY17? Or could that be conservative?

At this point, through two months, internally, it appears to be conservative, but we've got a long way to go through the rest of the year. The thing that makes the algorithm somewhat complicated, Chris, is there's three different grades and eight different sizes of lemons. And so for the sizes with the most demand at the highest grade, that's typically where we get our highest transactional sales. However, as you move down towards the off sizes and the off grades, the value of those sales decreases considerably.

It's that whole blend between how much volume will we actually take to market, which is factored into our assumption of giving guidance to 3.1 million to 3.5 million cartons next year. But at $23, it would mean that we would sell a considerable more of what we call standard, which is the third grade of the quality of fruit. And the standard market today is somewhere between $10 and $15 a carton. So if we have much more of those sales, it would logically then bring the weighted average of the total sales price down.

So it's too early for us, with our visibility today. Right now we're experiencing about a $25 average market across the sizes and the grades we're selling, but it's too early to say that that's sustainable through the rest of the year. So I think we tried to be conservative in our forecast at $23, given what our experience was in 2016.

Okay. Then moving on to avocados, is that simply the two-year cycle in California, where you have your on year and your off year, and this would be heading into the lower volume year?

Yes, this is the off year. And so we're very pleased with the volume that we have in the off year. And to Tony's question earlier, with the amount of rain that we seem to be getting early in the year, we have a great shot of taking the same number of pieces but making the weight of them more by having them size to a greater size and selling more size.

The wild card in the avocado deal for us really is going to be how much import comes from Mexico and when, and what influence that will have on pricing. But pricing today remains very, very strong and well above the $0.80 guidance that we've given. But again, we've tried to be conservative as we've tried to model this.

Okay. Then on to the real estate project, as you start clearing trees and grading and all that, are there any further legal issues or permitting or anything like that, that you have to get through?

Nothing that presents a barrier that we're concerned about today. I think the biggest challenge throughout the most recent part of the entitlement process has just been dealing with the bureaucracies at the different levels. So we had federal agencies we were dealing with. We've had state agencies we've dealt with. We've had county agencies that we've dealt with.

And we've been working the entire time with the city government as well, and just making sure that all of those agencies are satisfied. And believe it or not, sometimes they might have incongruent objectives. So that's been the issue in the past. But at this point, I think we feel very confident and good that we're going to begin grading in March and see those first lots put up and for sale by the end of calendar 2017. It's really looking good.

So as we've been talking about this project for the last 10 years, I think the amount of impediments that we see in front of us are probably the least we've seen from a political standpoint or an entitlement standpoint. It's now just going in directly into the market forces, which I think we feel very fortunate today, have significant tailwinds behind us right now. How long they will sustain is really the question we're asking. But we feel very, very good as we go into the first phase of this development.

All right. Very good. That's all I got. Thanks.

Thanks, Chris.

Brent Rystrom, Feltl.

Could you give me a sense of how you're going to measure the financial productivity of the packing house? I'm assuming the cost per carton comes down. And at what volume do you start to realize those efficiencies, from a financial perspective?

I'll take a stab, Brent, and then welcome Joe's ideas. So what we really focused on was really the throughput and the efficiency of the facility. And so it began by putting data collection points throughout the packing house that allows us to truly monitor the cartons per hour that we actually pack. And so right now, we've essentially doubled our throughput on a cartons per hour. So that was the first thing.

The next thing is, what's our labor experience going to be in this process? And that's the part that we talked about the last time we discussed the packing house that took some time, as we transitioned through permanent labor and now temporary labor, as we've begun to reduce the headcount in the actual shift-to-shift operation.

So we have very, very specific throughput targets. We have very specific goals for manpower. And then the biggest thing that trips us up is what we call reworking the fruit, where we actually put it into a box, it goes into the cooler, and then for whatever reason, it needs to be repacked -- wrong carton size, customer rejects an order, whatever. And that takes its toll on the packing cost, too.

So we try to monitor the amount of repacking in the operation and keep that at a minimum. And I think that, I've been directly involved with the whole process and I've been very, very pleased with how we've started the year and what we're seeing so far. Joe, any other comments?

Yes, I would say that we've certainly, as Harold said, got off to a little bit of a slower start than we want. But if you actually look at last year versus this year, it actually went up a bit but finished off the year at a lower per-carton cost. So we finished the year at $7.22 versus $7.31. Not a huge improvement, but certainly noteworthy and going the right direction.

And early in 2017, for the first two months, while the numbers certainly for December are pretty preliminary, we're continuing to see nice improvement and that cost per carton come down, as I think we've hopefully turning the corner now and getting the costs managed, and taking advantage of the efficiencies that the new packing house can give us. And all that is, of course, reflected in our FY17 guidance. So we're looking to start to see some of that cost come down. But we'll see it, and we'll all see it for sure in our first quarter, and that will be a good measurement to how we're starting to see that packing cost efficiency translate.

And then, Joe, just to clarify that, was that $7.22 per carton?

Yes.

Versus $7.31. What's your long-term goal? In your reasonable expectation, what do you think --?

We've always, I think, talked to you for a while now, in that $0.50 to $1 range. So that still remains the target.

But not only that, the packing house itself, as we've been thinking about it more strategically, not only is there a cost opportunity, a savings opportunity, but because of the additional volume, because of our ability now to take care of customers in different ways, we're actually also seeing some revenue opportunities on packing different configurations and so forth. So I think, net-net, we're going to see more than just a cost savings, but also a top-line benefit, as well, from the new house.

All right. How many grape acres did the $300,000 represent? How many acres were harvested?

About 100 -- of the grapes, yes. So we planted about 100 in FY14 and about 100 in FY15. And as we said, about another 100 coming in, in FY17.

So the FY14 planting, it wasn't a full size harvest, if you will, but it was commercially viable and was actually probably ahead of the game, so we're very pleased with it. But that was off of the 100. So this year, 2017, we expect that all 200, 220 will be having harvest, that we'll see some improvement there.

And in the past, we've talked about a possibility of $5,000, $6,000, $7,000 an acre of proceeds from wine grape harvest. Does that still seem reasonable?

That seems reasonable. And again, trying to err on the side of conservative, but that was, on the Cabernet Sauvignon wine grapes that we harvested, they were in their second leaf and we got 3 tons to the acre, which is very, very high for a new planting. And all of it went into contracts that had annual contracts in place at $1,600 a ton. So very, very good start to the yields. But I think our assumptions of $6,000 to $7,000 are still pretty good.

Well, and the $300,000 is [$3,000] on an early harvest. So, yes, I think that would be reasonable to think in that direction.

It will all come down to the yields, Brent, and I think they're going to be there.

From the conservation easement, I may have missed this, but did you say which property that was on?

It's on Orchard Farm, which is, if you've been in our headquarters and you go south towards the river, it's the river bottom land of Orchard Farm.

So it won't have any impact on our operations.

How --?

It was 235 acres.

235, okay.

And it was essentially to keep it in habitat. Most of it's not being farmed today.

All right. So this is basically considered part of the riparian area there, when there is water?

Correct. Exactly. The easement was put in place with The Nature Conservancy, and it was to balance the amount of cultivated agricultural acres with habitat that now remains intact for us.

My final question, you gave us some great granularity on the residential development at Harvest Limoneira. Have you thoughts that you're willing to share on the timing and the possible structure of the development of the 40 acres that's the more commercial part of the property?

Yes, the reason we're less granular there is that today we're not able to be granular, mostly because the initial infrastructure for the first 640 lots, which is the first phase of the residential piece, needs to go in, in order to service the commercial piece. So now that that's going in, I think you'll see much more granularity towards the middle to back half of 2017. Because now we can really go start to talk to potential tenants and see if we can put some deals together attracting them into that space.

Do you expect that you will retain ownership of that land, and lease that land out for others to build, basically on pads? Do you think you'll actually build buildings and lease them? Or do you think you'll just outright sell the land or some combination of all of that?

That's exactly what's being discussed right now. And it will really just come down to the quality of the deals we can put together. So I hesitate to give you specific clarity in an answer, because it will probably go the other way. But I think the nice part about our business model is that we have the ability to go both directions. And we would look forward to adding more rental income properties to our portfolio, especially ones that are local with solid tenants.

Thanks, guys.

Thank you.

Eric Larson, Buckingham Research Group.

Good afternoon, everyone. Thanks for taking my question. I just want to drill down a little bit more on Brent's question. In your guidance for lemon cartons for the year, it's 3.1 million to 3.5 million. How much of that is owned fruit versus third-party? Are you putting much third-party fruit into that volume number?

Joe, you want to field it?

If you look at FY17, it's a range. So based on the range, the Limoneira fruit should be -- let's use the 3.5 million -- around 2 million, and the third-party fruit around 1.5 million. So that takes you to the 3.5 million, plus or minus that, to get within that range.

Okay.

2 million, and 1.5 million are third-party. And this year was 1.7 million Limoneira and 1.2 million third-party, just for reference.

There you go. That's what I was trying to get at. So with your new packing plant, isn't there potential upside on the third-party? Obviously, you don't make nearly the margin with that, but obviously you could pick up a margin and then reduce that overhead cost per carton pretty nicely with your facility. Is that potential upside in the next several years going forward?

Eric, it really is. And you put your finger on the essence of what the opportunity is. So, besides the 1,500 planted but non-bearing lemon acres that we have in the ground, which should add 900,000 to 1.3 million new cartons over the next three years, we also have the ability to go out and attract lower margin but still very profitable and valuable outside growers to leave our competitors and come utilize our services.

We're targeting margins per carton on that fruit of $1, and I think we're going to be able to achieve it. We challenged the team in 2016 to recruit another 500,000 cartons from the outside growers. It appears, on paper, that we've done that. We'll see if it comes to fruition. But that fruit from the third-party grower is incorporated in the guidance that we gave on the 3.1 million to 3.4 million cartons that we've given guidance to for FY17.

Okay. And then I think Joe gave specifically the cost per case this year for your packing plant. But when I look forward, I believe I saw that your packing plant, optimally it wouldn't be your nameplate capacity, but -- it's a tongue twister -- your optimal running volumes would be somewhere between, I think you said some time ago, 1,800 to 1,900 cases per hour. You're at 1,400. If you get to that 1,800 to 1,900 cases, what does that do to your cost per case?

There's a linear math formula, algebraic, that you could do to answer that question. But it would immediately fall onto the sales. Can the sales guys sell it? That's the issue. So assuming they could sell it, and assuming certain grades and sizes that the market wanted at prices that we wanted to sell it to them for, go out on a limb, but I think there's $1.50 of opportunity of margin that we could capture if we got that kind of throughput and efficiency.

Got it. Okay. That helps frame it, because I know there's a lot of mix issues, and like you've said, different grades, et cetera. So I'm just looking for a ballpark number, and that was terrific. Thank you, Harold.

Then the final question I have, obviously I'm focusing a lot on your citrus. We're hearing that there's going to be more fruit coming in -- more lemon citrus coming in from Argentina this year, et cetera. Can you give us a little bit more color on what's happening with your South African arrangement, maybe with what's going on in South America, more of your international sales piece of it as well?

I'd be delighted to, Eric. It's just been very, very exciting for all of us to experience the amount of demand that we're experiencing all over the world. But essentially, as you have burgeoning middle classes, you have burgeoning economies, and you have restaurants and food service investments, and you have retail behaviors in those markets, it creates opportunities for us to sell our lemons. And when you put that into combination then with us now being able to stuff a 40-foot container rather than having a dedicated vessel that goes out to these markets, it gives us a lot of opportunity to sell a lot more fruit than we've ever sold into the export markets. But by doing that, take the pressure off the potential oversupply from production that's here, but also that potential oversupply from fruit that are now coming from new sources of supply, like Argentina.

So ultimately, when we read about and you hear about these new sources of citrus and of lemons that could make their way into now open markets like the United States, like just recently happened, it may be slightly disruptive at periods of time as we figure out who's going to be in what market and with what grades and how that's going to work. But long term, ultimately it's going to be a significant benefit, because as long as we're able to put that lemon in a Limoneira box and then let the customer decide, based on the freshness, the quality, and ultimately the price of that lemon that's coming from those other places, it means we never have to lose touch with the customers. That's our great long-term opportunity.

So I think that's really where we're headed, and I think 2017 is showing a lot of promise to absorb all this fruit. You've read a lot of the potential unhappy growers in California that maybe don't like the Argentine fruit coming to the US market. I think what we're going to find is it's less expensive to land a 40-foot container from Buenos Aires to New York City than it is to roll a truck from Santa Paula to New York City, of lemons.

So that's really what's going to dictate and drive who gets the business, probably, is who's willing to go into the markets with the freshest product at the best prices. And I don't necessarily see a massive competitive deterioration of value that we can create. I think it's just going to be another source of supply that ultimately will complement our global supply chains.

The two follow-up questions to that is, how much volume does Argentina represent right now? Where do you think it could be? And then, is Argentina competitive with the top-end grades? Where you get your real value, the proper grade, et cetera, are they competitive at the top end or is it more inferior fruit? How would you characterize it?

Okay. So their timing is, why it's scary for some California growers is their timing is really March to, say, July. So it's exactly what our coastal California lemons are. That's why there's been the concern.

The industry was planted in Argentina mostly to go after the juice and the oils and the industrial side of lemon production. So when we talk about their production, we talk in terms of 25% to 30% fresh utilization versus what we try to get in California, which is more like 70% to 90% fresh utilization, just for comparison. So they have a harder time putting up that -- to your great question -- they have a harder time putting up that super fancy lemon that we're able to put up.

Where they're going to really be disruptive or it's going to be some bumpy roads maybe is they're going to take their top quality and really get it in there into what we call our fancy grade, which is the number two grade. And that's where I think they can have a stronger impact. It'll be very interesting to see how it plays out. But taking a step back and looking at it, I think it ultimately could be complementary.

Your other question about how much volume is it? I think initially it will be about 1 million cartons from about March to, say, July. It could be as much as 3 million cartons. However, right now we're consuming in the United States, somewhere between 32 million to 35 million cartons a year. So just in relative perspective, it's at the most, 10% of consumption over the year.

Okay. Thanks. I appreciate the flavor and framing what the impact this year. Thanks, guys.

You bet.

I would now like to turn the call over to Harold Edwards for any closing remarks.

Thank you for all your questions and interest in Limoneira. Thank you again and have a great day.

Ladies and gentlemen, this does conclude today's conference. Thank you for your participation. You may now disconnect.