Limoneira Co (LMNR) 2018 Q1 法說會逐字稿

Good day, and welcome to the Limoneira First Quarter 2018 Earnings Call. Today's conference is being recorded. And at this time, I'd like to turn the conference over to Mr. John Mills of ICR. Please go ahead, sir.

Great. Thank you. Good afternoon, everyone, and thank you for joining us for Limoneira's First Quarter Fiscal Year 2018 Conference Call. On the call today are Harold Edwards, President and Chief Executive Officer; and Mark Palamountain, Chief Financial Officer.

By now, everyone should have access to the first quarter fiscal year 2018 earnings release, which went out today at approximately 4 p.m. 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 at limoneira.com. This call is being webcast, and a replay will be available on the Limoneira 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 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'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'll 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 of 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-Q and press release, which has been posted to our 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. 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 2018 and provide an update on our progress across all of our business areas. Mark will review the financial results in more detail, then I will discuss our outlook for fiscal year 2018. After that, we will open up the call and take your questions.

We are pleased with the great start to 2018. In the first quarter, revenue increased 12% to $31.6 million, primarily due to higher volumes and pricing of our citrus portfolio. Our operating loss for the first quarter improved to $1.7 million compared to a $3.2 million loss in the prior year period. Our EBITDA was positive $200,000 in the first quarter of fiscal year 2018 compared to a loss of $1.3 million in the same period of fiscal year 2017. Our ability to generate positive EBITDA is a great accomplishment in what is traditionally our slowest seasonal quarter from an income perspective. This was the result of higher citrus revenues and improving the seasonal balancing of our business as we continue to execute against our ONE WORLD OF CITRUS initiative, which is steadily growing our global footprint.

Shifting to our business segments, we'll start with agribusiness. Over the past few years, we have made significant investments that are driving our top and bottom line growth. We have expanded our customer base to over 200 customers and increased distribution by leveraging our domestic and international marketing and sales channels. We have focused on our trade marketing and consumer-facing strategies as well as increasing our packing capacity. In addition, we have eliminated seasonality for our customers by sourcing citrus from different global locations, giving us 365 days of fresh lemons. Collectively, this is the basis of our ONE WORLD OF CITRUS initiative.

Our new packing house in Santa Paula has doubled our annual capacity and greatly increased the operating efficiency of our lemon packing operations. Since commissioning the new packing facility in March of 2016, we have realized a material increase in our packing productivity. For example, for full year fiscal 2017, we packed 300,000 additional fresh lemon cartons versus the same prior year period for $400,000 less cost. In 2018, we expect to generate greater efficiencies as this new facility will allow us to efficiently manage the planned growth in our fresh lemon volume from our own acreage as it becomes productive as well as additional third party grower lemons, which we are actively recruiting. The new packing facility has the capacity to double 2017's lemon volume. And as we increase volume, efficiencies will continue to improve.

We currently have over 8,200 planted agricultural acres, of which 1,600 acres are currently nonbearing lemons and are estimated to become full bearing over the next 4 years. Beyond these 1,600 acres, Limoneira currently intends to plant an additional 500 acres of lemons in the next 2 years that will further build our long-term pipeline of productive acreage. 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 additional fresh cartons as the nonbearing and planned acreage becomes productive. In addition, we expect to have a steady increase in third party grower fruit as well.

Globally, we are now growing our own fruit in the United States and Chile and managing the marketing and sales function for locally sourced citrus from business partners in South Africa, Chile, Argentina and Mexico. As our lemon business grows, our customers recognize the quality and consistency they receive with Limoneira lemons as well as high levels of service that are fundamental part of our culture. These efforts combine to make us an important and consistent source of year-round fresh citrus suppliers to our growing roster of global customers.

From our operational standpoint, we believe vertical integration of international production and marketing combine to maximize our revenue and margin opportunities while smoothing out the seasonality of our business over the long term.

Turning now to our real estate development segment. The partnership between Limoneira and the Lewis Group of Companies for the development of Harvest at Limoneira is progressing well. 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 over the estimated 7- to 10-year life of the project, which includes $20 million we received from Lewis when the joint venture was formed, and we expect cash flow from this project to begin during the latter part of calendar 2018. The first phase of the project broke ground to commence mass grading on November 8, 2017. Project plans include approximately 632 residential units in Phase 1. In December of 2017, we recorded Final Tract Map 5854 for the development Harvest at Limoneira. The recordation of Final Tract 5854 map subdivides the 3 main parcels of land into legal lots for the parks, schools, recreations -- recreational areas, commercial areas, open space and the backbone streets. Phase 1 site improvements have begun, and we are currently negotiating with national and regional homebuilders in the lot-bidding process. Bids are due back to us by the end of March, and we remain confident that we will be in a position to close initial lot sales by the end of calendar 2018.

In addition to the residential aspect of the project, we're also planning the development of approximately 40 acres of commercial property adjacent to the residential development that is not included in the partnership plans and financial projections and represent additional cash flow opportunities. Initial interest from potential commercial tenants is very encouraging. In addition to these 40 acres, we recently exercised an option to purchase an additional 7-acre parcel adjacent to our East Area 2 for approximately $3 million. This property is located along the south side of California Highway 126, directly across from Harvest at Limoneira, and is suited for commercial and/or industrial development.

Since the end of fiscal 2017, we've closed on 2 of our Santa Maria properties. The commercial portion of our Sevilla property closed on November -- in November for $1.5 million, which after closing costs resulted in a gain of approximately $10,000. Additionally, our Centennial property closed in December for $3.25 million, which after closing costs resulted in a deferred gain of approximately $200,000.

In summary, we are pleased with the great start to 2018. As I mentioned earlier, our ability to generate positive EBITDA in what is traditionally our slowest seasonal quarter from an income perspective is a nice start to the year. We have made many strategic investments in all aspects of our business during the past few years and believe we are now in a very strong position to continue building out our global supply of fresh citrus, both organically and through acquisitions. We operate in a very fragmented industry, and based on our strong platform, global presence and leading brands, we are very well positioned to capitalize on the long-term consolidation trend that is occurring in many of our markets.

And with that, I will now turn the call over to Mark.

Thank you, Harold, and good afternoon, everyone. I will discuss some of the details of our financial results for the first quarter ended January 31, 2018.

For the first quarter of fiscal year 2018, net revenue increased 12% to $31.6 million compared to net revenue of $28.1 million in the first quarter of the previous fiscal year. Agribusiness revenue was $30.3 million compared to $26.8 million in the first quarter last year, primarily the result of higher prices and volume of fresh lemons sold as well as an increase in the volume and price of oranges and other specialty citrus compared with the same period in fiscal year 2017. Rental operations revenue was $1.3 million in the first quarter of fiscal years 2018 and 2017.

Agribusiness revenue for the first quarter of fiscal year 2018 includes $27.8 million in lemon sales compared to $26 million of lemon sales during the same period of fiscal year 2017, with the increase primarily the result of higher prices and volume of fresh lemons sold versus the prior year period. Approximately 912,000 cartons of fresh lemons were sold during the first quarter of fiscal year 2018 at a $26.32 average price per carton compared to approximately 909,000 cartons sold at a $23.10 average price per carton during the first quarter of fiscal year 2017.

As anticipated, due to the seasonality of the avocado crop, we recognized no avocado revenue in the first quarter of fiscal year 2018 and 2017.

We did have solid growth of orange revenue in the first quarter of fiscal year 2018 to $1.3 million as compared to $500,000 in the first quarter of fiscal year 2017. Specialty citrus and other crop revenues in the first quarter of fiscal year 2018 experienced similar growth and were $900,000 higher than the first quarter of fiscal year 2017, primarily due to increased specialty citrus volumes. This lift is the result of our strategic alliance with Suntreat.

Total cost and expenses for the first quarter of fiscal year 2018 were $33.3 million compared to $31.3 million in the first quarter of last fiscal year. The first quarter of fiscal year 2018 increase in operating expenses was primarily attributable to increases in our agribusiness costs and expenses.

Operating loss for the first quarter of fiscal year 2018 improved to $1.7 million compared to a loss of $3.2 million in the first quarter of the previous fiscal year, with agribusiness revenue growth being the primary driver of the improvement.

Reported net income applicable to common stock after preferred dividends for the first quarter of fiscal year 2018 was $8.5 million compared to a net loss of $2.2 million in the first fiscal quarter of -- fiscal year 2017. Reported net income per diluted share for the first quarter of fiscal year 2018 was $0.58.

The company recognized a noncash $10 million or $0.67 per diluted share onetime tax benefit associated with the decrease in its deferred tax liability during the first fiscal quarter of 2018 due to tax reform. Excluding this noncash tax benefit, adjusted diluted loss per share for the fiscal -- first fiscal quarter of 2018 was $0.09, which compares favorably to a net loss per diluted share of $0.16 for the same period of fiscal year 2017.

EBITDA was $200,000 in the first quarter of fiscal year 2018 compared to a loss of $1.3 million in the same period of fiscal year 2017. As Harold commented, we are pleased to have generated positive EBITDA during the period.

Lastly, our long-term debt at January 31, 2018, was $112.4 million compared to $102.1 million at the end of fiscal 2017.

Now I would like to turn the call back to Harold to discuss our fiscal year 2018 outlook.

Thanks, Mark. We expect our agribusiness to continue to benefit from the more efficient infrastructure we have in place as we are able to build revenues through expansion of our in-house citrus orchards as well as growth in third party volumes that we pack and market. We feel great about the long-term growth trajectory we are on and look forward to continuing to deliver value for our shareholders.

With that, let's discuss our second quarter and full fiscal year 2018 outlook. We are updating our fiscal year 2018 guidance to include the expected benefits from the recent Tax Cut and Jobs Act that was signed into law. This act had the effect of lowering the company's corporate tax rate from 38.4% to 28.2%, which results in an earnings per share benefit of $0.10 per share for the full fiscal year of 2018. Based on this, we are raising our fiscal 2018 adjusted earnings per diluted share guidance by $0.10 a share to a new range of $0.65 to $0.75 per share. Importantly, this guidance excludes the onetime noncash deferred tax benefit of $0.67 per diluted share that the company recognized in the first fiscal quarter of 2018.

We also wanted to provide some additional quarterly seasonality guidance to our business for the remainder of 2018. We expect our second quarter this year to be stronger compared to last year due to the timing of our citrus and avocado crops. Third quarter and fourth quarter will be slightly lower than last year due to the timing of crops as well. The underlying full year fundamental business drivers for our core agribusiness remain unchanged and are summarized as follows: we continue to expect to sell between 3.1 million cartons and 3.3 million cartons of fresh lemons at an average price of approximately $24.50 per carton, and we continue to expect to sell approximately 6 million pounds to 6.5 million pounds of avocados at approximately $1.30 per pound. We believe operating income for fiscal year 2018 will increase approximately 41% at the midpoint of our guided range of $15.7 million to $17.8 million, which compares to operating income of $11.9 million for fiscal year 2017.

Fiscal year 2018 EBITDA is expected to be in the range of $23 million to $25 million, which compares to 2017 adjusted EBITDA of $19 million. Note that our estimates do not include potential equity income from the Harvest at Limoneira project. The first phase of the project broke ground to commence mass grading on November 8, 2017. We have begun Phase 1 site improvements and are currently engaged with potential homebuilders in the lot-bidding process, which puts the project on track to close initial lot sales in the first quarter of fiscal year 2019. 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 we already received from Lewis upon consummation of the joint venture.

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

(Operator Instructions) And we'll go first to Gerry Sweeney with Roth Capital.

Just a question on the top line. Obviously, some of the fourth quarter was pushed into the first quarter. Do you know how much that got pushed around? Maybe like on an apples-to-apples basis, what Q1 could be?

Not exactly, Gerry, because at any given time, we're always sort of estimating this year's crop and then next year's crop. But on an order of magnitude, I might say that of the, call it, 12% increase year-on-year, maybe 3% to 4% of that might have been attributable to last year's crop pushing into this quarter, and the remainder, just purely a bigger crop for this year than last year's.

Okay. And then, obviously, I mean, the pricing was $26 and change. I mean, pretty good. What were the dynamics behind that? And obviously, there's -- on a go-forward basis, there's a lot of puts and takes, but curious if there's...

Two factors. One, just stronger markets than a year ago at this time, but also a higher concentration of more fancy fruit and better product mix sales, which aggregated to result in higher FOBs year-on-year.

How is the market looking today versus a couple of months ago in terms of the -- do you -- still getting that stronger market dynamics?

Yes, so the markets are still very strong. The issue that we will face for the remainder of our fiscal year 2018 relates to quality issues that were the result of very, very strong winds that accompanied that terrible Thomas Fire that we all heard about and Limoneira experienced firsthand. And so what -- how that manifests self in our forecast, Gerry, is that creates more second-grade fruit or -- so the 3 grades of lemons are: fancy, choice and standards, and it pushes more of the grade towards choice and standards, which has a negative impact on our average FOB. So we've seen our average FOB decline, but it really has less to do with market dynamics and more with less higher-quality fruit.

Got it. And then could you also -- I missed something on the -- or in your prepared remarks, you talked about 8,200 acres, 1,600 are nonfruit-bearing. But then you said you're going to plant, I think, 500 more within -- was that within the next 2 years? Was that what you said there?

Yes, correct. And that's actually expansion acreage, which we're coming out of row crop leases and actually converting those into actual Limoneira lemon plantings.

Got it. And then on that front, how much -- what's the -- you have acreage, sort of, coming into production at different, sort of, intervals over the next several years. Could you run through that real quick just for my memory?

So -- and the way we have it scheduled out, it's 900,000 into 1.3 million cartons over the next 4 years, and it's actually fairly evenly spread. In our models, we're basically using 0.25 million cartons of new additional Limoneira lemons per year over the next 4 years.

4 years, got it. And then finally, how's the recruiting of the third parties going? Any -- well, I'll just leave it like that. So...

Yes, so we have a stated goal for fiscal year 2018 to recruit a net growth amount of 500,000 new cartons. And what's different about that goal versus last year's goal was, before, there was still the same goal of 500,000 cartons, but it wasn't the net goal. So on any given day, we're gaining growers and we're losing growers. So when you added it all up at the end of year, last year, our net result was about 300,000 new cartons. So this year, we've challenged ourselves to have 500,000 cartons of net growth. And through the first quarter, we're way ahead of our schedule and are somewhere on order of magnitude of 300,000 cartons of new fruit recruited. And that's for 2019, Gerry.

(Operator Instructions) We'll go next to Eric Larson with Buckingham Research Group.

Just a follow-up on some of Gerry's questions. But the -- your orange revenue, your other citrus revenue, Harold, for the last few quarters, and particularly this quarter again, was really strong. Could you talk a bit more, fundamentally, what's going on in that business? And is this a sustainable -- I'm not saying the percentage change is sustainable going forward, but the absolute level, going forward, is this sustainable? And how should we take a look at that other citrus revenue?

Yes, that's a great question, Eric. And appreciate the question, so we can peel the onion and explain the situation a little bit better. It's sort of a good news, bad news story. And the bad news in the story was that last year's orange performance was substandard. And it was substandard for a number of reasons, but predominantly driven by ill-timed weather. You'll remember we had large rain events last year. And even though we desperately needed the rain, and so that was good news, the bad news was it kept us from getting a lot of our crop into the packing house and then into the export market. So we were almost completely shut out of our export markets last year, where we, in essence, buttered our bread with our oranges. This year, with our new alliance with Suntreat and more cooperation from mother nature with weather, we're much more on track with our orange shipment. So the second part of your question was, is this sustainable? And we feel this is sustainable. So it was really more of a function of last year being bad and this year being -- returning to normalcy, which is great news from an ongoing sustainability of the orange and other citrus performance but also then highlights how substandard last year's performance was.

Yes, okay. That makes perfect sense. So if you look at -- this is -- again, I think it goes back to partially one of Gerry's questions. Your lemon pricing for the quarter, you had -- you actually had decent amount of volume of 900,000 cartons -- a little over 900,000 cartons in the quarter, and you started off with a much, much higher average price per carton. So in your -- I don't believe you actually changed your -- I mean, this is -- maybe you're just being conservative. Given the good strong start in pricing, you did not change your guidance on average lemon price for the year. Is there something that you -- the next several quarters, you might give a little of that back because of something going on in the marketplace? Or how should we look at that?

Yes, we don't know anything, Eric, so your analysis is spot on. It's -- we're just -- we're attempting to be conservative with it, only because, as mentioned, we had very heavy winds earlier in the year that tends to downgrade the quality of the fruit, which means that from a product mix standpoint, there'll probably be more choice and standard fruit going into the market than fancy and choice fruit. And so just in an attempt to be conservative and not have to guide down later, we kept our guidance unchanged even though we built up a good lead in the first quarter.

Okay. Yes, it really related to kind of the guidance question. So I was just -- I felt it was maybe more let's be prudent and conservative rather than set expectations too high. So I think that's good. Also, can you give us a quick update? The -- with the question in -- at the end of Q4 with the wildfires, we're worried about the quality of the fruit and maybe even the amount of the fruit from avocados, those high, high winds. Any update on what that might do for this year as well?

The good news about the timing of the fire and our communication of the fire is that we hadn't provided any guidance of what we felt the crop for -- the avocado crop for 2018 was going to be. So that when we came out with our first guidance, it was after the impacts of the heavy, heavy winds and the fire. The actual result was damaging in that we believed initially we had somewhere between 9 million to 10 million pounds hanging on the trees. And after the winds and the fire, we downgraded that to 6 million pounds. So we felt like we lost about 1/3 of the fruit in the event -- in the wind events. And that was pretty consistent across all growers down in this part of California. So -- but we do believe that we still have 6 million to 6.5 million pounds. And the big issue in our minds is really going to be how we can manage the harvest of this fruit to get that volume and also to connect with that $1.30 a pound price that we've guided to. The markets are close to that right now. We still have yet to pick our first avocado. However, if there's risk to that plan, it's more on the pricing side, I believe. So we're timing our view of the market against the very large amount of Mexican and Peruvian fruit shipments that will make their way into the United States, and really trying to find our windows of supply when we can hit that pricing opportunity in the U.S. markets.

Okay, sounds good. And then one question for Mark. Your effective tax rate this fiscal year, given that you crossover both calendar years, will be 28%, I believe you said. If you did, on a apples-to-apples full year to full year benefit, what is -- what would be your -- what would be a tax rate, let's say, for fiscal -- if you were to just look at fiscal '19, and we're not trying to -- I'm not asking for guidance per say, but would it be 23%, 24%, 25%? What would that tax rate number be for '19 if you had a full year of it?

Right now, we're looking at about 25%, based on everything we know today for fiscal '19. So about a 3 -- 2 to 3 point delta from our effective rate this year.

And by the looks of it, the majority of that tax benefit isn't only GAAP tax benefit but there's also cash taxes too. So you get almost all of that as increased cash in the bank as well, is that a fair assumption?

Yes, that's a perfect assumption.

(Operator Instructions) And with no further questions in queue, I'd like to turn the call back to Harold Edwards for closing remarks.

Thank you for your questions and interest in Limoneira. We look forward to updating you again in June on our second quarter call. Thank you, again, and have a great day.

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