Limoneira Co (LMNR) 2020 Q4 法說會逐字稿

Greetings, and welcome to the Limoneira Fourth Quarter 2020 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, John Mills.

Thank you. Good afternoon, everyone, and thank you for joining us for Limoneira's Fourth Quarter Fiscal Year 2020 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 fourth quarter fiscal year 2020 earnings release, which went out today at approximately 4:00 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 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 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 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 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 adjusted EBITDA, which is a non-GAAP financial measure. A reconciliation of adjusted EBITDA to those most directly comparable GAAP financial measures is included in the company's 10-K and press release, which we have -- which have 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.

During fiscal 2020, we made important strides in many areas of our overall business despite the dramatic effect that COVID-19 pandemic had on our food service business. We achieved record domestic lemon volume and our real estate development harvest at Limoneira exceeded our expectations. Domestic lemon volume was up due to our expanded focus on grocery retail as consumers continue to dine at home instead of foodservice venues. COVID-19 has affected our citrus businesses since March, and this continued during our seasonally soft fiscal fourth quarter of 2020.

Pricing improved in the beginning of the fourth quarter. However, this was short-lived as reduced exports to Asia affected pricing in the back half of the quarter and continues to affect pricing in the first fiscal quarter of 2021. In addition, higher than normal wins in our coastal properties affected our lemon utilization during the fourth quarter. Even despite these challenges, we continue to be a leader in food service and exports and are well positioned once dining out improves from COVID-19 vaccine distribution.

I'll now discuss each of our businesses -- each of our business division's performance for the fourth quarter, starting with our agribusiness. Agribusiness revenue was $28.6 million compared to $35.3 million in the fourth quarter of last fiscal year. Fresh lemon and orange revenues were down due to food service closures and lower export demand, which resulted in lower average per carton prices. We recognized a $500,000 of avocado revenue in the fourth quarter of fiscal year 2020 compared to $2.3 million in the same period last fiscal year. The year-over-year decrease in avocado revenue was due to the receipt of crop insurance proceeds in the fourth quarter of 2019.

Turning now to our Real Estate Development segment. We have now closed 354 lots since inception, including 144 new lot closings in fiscal 2020. And Lennar, one of our primary builders, recently announced they expect additional lot closings of 76 residential units by the end of June 2021. Based on these stronger-than-expected homebuilding results throughout fiscal year 2020, we now have annual visibility on the expected $80 million of cash distributions from Harvest at Limoneira during the next 6 years beginning in fiscal year 2022. You will notice in our earnings release, we have provided a chart outlining our annually expected cash distributions during the next 6 years. The expected cash distributions do not include the potential upside from increased density in housing at Harvest, as well as the potential opportunity of a medical campus in our East Area 2 development. We expect to be in a position to provide greater transparency on those opportunities later this year.

Our company now has over 15,000 acres of prime agricultural land, 550 acres of residential housing we are selling, many additional non-agricultural assets we expect to monetize in the future and over 28,000 acre feet of water assets. We are also opportunistically repurchasing stock. We continue to be very good stewards of these assets and believe our company will continue to reward long-term shareholders for many years to come.

As we look into 2021, we are very well positioned to realize strong revenue from oranges and avocados and expect an improvement in lemon pricing once the COVID-19 vaccine allows restaurants and bars to reopen. We believe we will be even better positioned for long-term growth, thanks to our grocery and club expansion during this pandemic. We are encouraged by the domestic increase in fresh lemon volume in fiscal year 2020 and look forward to updating you on our agribusiness and real estate progress in the coming months.

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

Thank you, Harold, and good afternoon, everybody.

As a reminder to everyone listening, due to the seasonal nature of our business, revenue is driven by varying harvest periods from year-to-year, and therefore, it is best to view our business on an annual, not quarterly basis.

Historically, our first and fourth quarters are the seasonally softer quarters, while our second and third quarters are stronger. For the fourth quarter of fiscal year 2020, total net revenue was $29.8 million compared to total net revenue of $36.5 million in the fourth quarter of the previous fiscal year. Agribusiness revenue was $28.6 million compared to $35.3 million in the fourth quarter last year. Other operations revenue was relatively flat at $1.1 million.

Agribusiness revenue for the fourth quarter of fiscal year 2020 includes $13.3 million in fresh lemon sales compared to $17 million of fresh lemon sales during the same period of fiscal year 2019. Pricing was lower than expected during the back half of the quarter due to COVID-19 pandemic related food service closures, reducing the demand for fresh lemons with reduced exports to Asia due to the pandemic. Approximately 787,000 cartons of fresh lemons were sold during the fourth quarter of fiscal year 2020 at a $17 average price per carton compared to approximately 793,000 cartons sold at a $21.46 average price per carton during the fourth quarter of fiscal year 2019.

The company recognized $500,000 of avocado revenue in the fourth quarter of fiscal year 2020 compared to $2.3 million in the same period last fiscal year. Approximately 500,000 pounds of avocados were sold during the fourth quarter of fiscal year 2020 at a $0.99 average price per pound compared to no avocados sold during the prior year period. The year-over-year decline in avocado revenue was due to receipt of crop insurance proceeds in the fourth quarter of 2019.

The company recognized $500,000 of orange revenue in the fourth quarter of fiscal year 2020 compared to $2.1 million in the same period of fiscal year 2019, attributable to lower brokered fruit sales. Specialty citrus and other crop revenue were $2 million in the fourth quarter of fiscal year 2020 compared to $2.1 million in the fourth quarter of fiscal year 2019.

Total cost and expenses for the fourth quarter of fiscal year 2020 was $39.3 million compared to $40.1 million in the fourth quarter of last fiscal year. The fourth quarter of fiscal year 2020 experienced a decrease in agribusiness costs in selling, general and administrative expenses, partially offset by a decrease in gains from asset disposals.

Costs associated with the company's agribusiness include packing cost, harvest cost, growing cost, costs related to fruit procured from third-party growers and depreciation and amortization expense.

Operating loss for the fourth quarter of fiscal year 2020 was $9.5 million compared to operating loss of $3.6 million in the fourth quarter of the previous fiscal year. Net loss applicable to common stock after preferred dividends for the fourth quarter of fiscal year 2020 was $7.6 million compared to a net loss of $3.2 million in the fourth quarter of fiscal year 2019. Net loss per diluted share for the fourth quarter of fiscal year 2020 was $0.43 compared to a net loss per diluted share of $0.18 for fiscal year 2019.

Adjusted EBITDA was a loss of $6.6 million in the fourth quarter of fiscal year 2020 compared to a loss of $2.1 million in the same period of fiscal year 2019. A reconciliation of adjusted EBITDA to net income is provided at the end of our earnings release.

For the fiscal year ended October 31, 2020, revenue was $164.6 million compared to $171.4 million in the fiscal year ended October 31, 2019. Operating loss for the fiscal year 2020 was $19 million compared to an operating loss of $5.5 million for the fiscal year 2019. Net loss applicable to common stock after preferred dividends was $16.9 million for the fiscal year 2020 compared to net loss of $6.4 million for the fiscal year 2019. Net loss per diluted share for the fiscal year 2020 was $0.96 compared to net loss per diluted share of $0.37 for the fiscal year 2019.

Excluding the loss on stock in Calavo, noncash equity and earnings of Limoneira Lewis Community Builders, LLC, and loss on asset disposals for the fiscal year 2020, adjusted net loss applicable to common stock was $12.2 million compared to adjusted net loss of $7.8 million for the fiscal year 2019. Adjusted net loss per diluted share was $0.69 compared to adjusted net loss per diluted share of $0.45 for the fiscal year 2019, based on approximately 17.6 million weighted average diluted common shares outstanding for both years.

Adjusted EBITDA for the fiscal year 2020 was a loss of $6.7 million compared to income of $1.9 million for the fiscal year 2019. A reconciliation of adjusted EBITDA to net income is provided at the end of this release.

Turning now to our balance sheet and liquidity. Long-term debt as of October 31, 2020, was $122.6 million compared to $105.9 million at the end of fiscal year 2019. During the fiscal year 2020, company received a $1.9 million income tax benefit from the CARES Act and applied for $6.7 million of federal and state income tax refunds. The company has received $800,000 of these refunds in October of 2020 and $5 million in December of 2020.

On March 12, 2020, the Board approved a share repurchase programming, authorizing the ability to repurchase up to $10 million of its outstanding shares of common stock through March of 2021. During the quarter ended October 31, 2020, we repurchased 208,877 shares for approximately $2.9 million and, in fiscal year 2020, repurchased 250,977 shares for approximately $3.5 million. As of October 31, 2020, the remaining authorization under this program is approximately $6.5 million.

Now I'd like to turn the call back to Harold to discuss our fiscal year 2021 outlook and longer-term growth pipeline.

Thank you, Mark.

The recent increase in the COVID-19 pandemic affected our domestic and export pricing during the back half of the fourth quarter of fiscal year 2020, and we expect it to continue to create uncertainty on global pricing for the near term. Until this uncertainty dissipates, we are not going to provide guidance regarding our lemon volume right now.

Offsetting some of this uncertainty, we do expect to generate strong orange and avocado revenue in fiscal year 2021 based on early market factors and initial crop indicators. We also have an additional 1,200 acres of nonbearing lemons estimated to become full bearing over the next 4 years, which will enable us to achieve strong organic growth for the many years to come. The company expects 200 of the 1,200 acres to become full bearing in fiscal year 2021. Beyond these 1,200 acres, we intend to plant an additional 250 acres of lemons in the next 2 years that we believe will further build our long-term pipeline of productive acreage.

We anticipate this additional acreage will increase domestic supply of lemons from our 2020 level by approximately 50% or about 900,000 to 1.3 million additional fresh cartons as the nonbearing and planned acreage becomes productive. We also expect to have a steady increase in third-party grower fruit.

Also, due to more clarity in the development of Harvest at Limoneira, we believe we will generate cash distributions from Harvest as follows: fiscal year 2021 is expected to be neutral; fiscal 2022 is expected to generate $3 million of cash to Limoneira; fiscal year 2023 is expected to generate $15 million; fiscal year 2024 is expected to generate $27 million; fiscal year 2025 is expected to generate $25 million; and 2026 is expected to generate $10 million. This will be about $80 million of cash back to Limoneira in the next 6 years. These expectations from Harvest do not include the potential upside from increased density in the housing at Harvest as well as the potential opportunity of a medical campus in our East Area 2 development. We expect to be in a position to provide greater transparency on these opportunities later this year.

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

(Operator Instructions) Our first question comes from Ben Bienvenu with Stephens.

Thanks for the additional color around Harvest. I wanted to ask, as it relates to the projected distributions that you gave and the comments that you made around the potential hospital development in East Area 2, is the East Area 2 project solely a function of that potential hospital development? Or could you build out that real estate ownership parcel as well, exclusive of the hospital opportunity?

And if you did, would that impact the projected distributions that you've laid out here from East Area 1 or the net payout or distribution?

Certainly. So I'll answer the last part of the question first. So this is all incremental above the comments we made about the distributions from Harvest. So this is all on top of that.

So essentially, the East Area 2 property is 38 acres, and it has been zoned and was historically zoned and targeted to become complementary commercial property for the residential piece in Harvest. And with the changes that we're all observing in retail and big-box retail, the likelihood of seeing that property convert into a retail development has decreased significantly since we first began the project.

The city of Santa Paula was looking forward to receiving tax benefits -- sales tax benefits from that retail. So they actually approached us on converting the focus into solving a problem that the community has in that they have a community-based hospital, which is today, based up on the hill in Downtown Santa Paula. And for seismic reasons, it needs to be completely rebuilt by the year 2030.

They have -- they were approached by the Ventura County Health Care Agency about -- that currently operates our hospital, about the potential of relocating the hospital and then developing medical office that would house 3 of the existing clinics that the health care agency runs in town to a new medical office building. And then complement that with a skilled nursing facility and then eventually assisted living.

And so there's a vision for that campus and there's a demand for that campus. And so Limoneira has made a nonbinding commitment to work very closely with the developer and the health care agency in structuring a transaction where Limoneira would sell the ground to the developer, who would then build the buildings and that would eventually become a hospital, a medical office building, skilled nursing and assisted living.

To go back to the first part of your question, though, it's -- the East Area 2 development will also retain additional land that could be used for complementary commercial purposes, and we also have the opportunity to tuck-in some additional residential for sale or residential for rent housing on the property as well. So as that development takes shape, we'll be able to give much more granularity to the actual components of the East Area 2 project and will most likely include the hospital campus concept that I just laid out, but also complementary commercial and high-density multifamily housing.

And Ben, there's also some recent commentary from the county and the local press that we can show you just to -- really highlights their intent to make this project work. So it's a pretty exciting opportunity.

Okay. Okay. Great. So this is East Area 1. If you do begin to develop East Area 2 and the JV needs cash, maybe these numbers change, but that's all incremental relative to this. Is that if I distill your comments down?

Yes, exactly. So the East Area 2, most likely -- East Area 2 has nothing to do with the partnership in Harvest. And so it's -- today, it's 39 acres of commercially zoned property owned by the Limoneira company that most likely the way we would transact that development would be to actually sell the land and monetize it upfront that would bring incremental benefits back to Limoneira.

Okay. That's great color. And this is a nice update. On the pricing in 4Q, and Harold your commentary around export markets continuing to impact the first quarter, two questions. One is the export market impact also -- is that hinged to the COVID recovery globally more broadly?

And then two, the -- your realized price in the fourth quarter for lemons relative to kind of the market price for, say, Choice 115s, is -- was that a function of the wins impact that you mentioned? And will that have any residual impact as we head into 2021?

Those are great questions. So the export markets will be just tied directly to the -- I assume the distribution of the vaccine and the reopening of food service venues, restaurants and bars around the world. And towards the beginning of the first quarter, we saw export markets begin to reappear. And for a period of time, we were doing almost pre-COVID levels of shipments to our Japanese and to our Korean partners. But towards the second half -- second part of the first quarter this year, we've seen those pull back again.

So just like we're reading about around the world and around the United States, you're seeing situations of opening and then reclosing, opening and reclosing, which gives us sort of moment to pause about sort of how to predict the rest of the year.

With that being said, though, the wins that were mentioned in our earlier remarks did have a negative impact on pricing. This season, as we start this new year, we have a much better distribution of grades throughout each of the growing districts, in District 3, District 1 and District 2 and a much higher percentage of first grade fruit. So we expect that, that will have a very positive impact on overall pricing in fiscal year 2021.

And our next question comes from Gerry Sweeney with ROTH Capital.

I wanted to dig a little deeper just on supply and demand, obviously, export and food service or headwinds. But I think the deeper question I wanted to get at would be is there an oversupply of planting for acreage today, even if those headwinds in the export and food service decline -- or rectify themselves?

In other words, even if we get past COVID, is there a chance of these record volumes continuing and still seeing some price compression?

So that's a great question, Gerry. And certainly, with the impact that we have today of COVID-related food service closures, it's -- it is oversupplied. Once we get COVID behind us, and we can get back to the emerging market development and growth of those markets and consumption and demand growth, we believe that we're properly supplied. The part of that question that is somewhat complicated is because of the different growing regions and the timing of the production in those areas, there will be times when we are oversupplied and times when we are properly supplied on a global basis and times when we're even undersupplied.

So really looking at the seasonality of the production, the age of the blocks and the productivity and then looking forward at the plantings that are out there, the nonbearing acreage that's coming online, but then anticipating the acreage that's going to come out, producers have a tendency to -- if you go -- so this is the second year in a row, of California lemon production that has not been profitable for lemon producers in California. So we're beginning to see that some of that acreage pull out.

We also know that Argentina has a -- it's projected to have a 30% decrease in its total production of fresh lemons this coming year due to a drought that they've experienced there. So there are factors out there on a global basis that give us reason to believe that once we get beyond COVID and once we get back to pre-COVID demand levels, and we return to global consumption and demand growth, that we're properly supplied.

But it's a great question. And when we look at the total acreage that are planted right now, there's about 2 or 3 months that look like towards the back half of the summer that are oversupplied. And we'll just have to continue to monitor that as the economy recovers and as restaurants and bars reopen around the world.

Got it. And as you expand production globally, you have your South American production, is there an ability to store some of the lemons and maybe even out some of your shipping and exporting activities to maybe balance out some of that unevenness?

So the really great part about our Chilean investments is that almost all of that production can be consumed normally profitably within the Chilean market. So it does not necessarily have to find an export home.

Argentina is different. They don't have the consumption for and -- or nor the demand to absorb that. But to go back to the Argentina production, a lot of that acreage and a lot of that production targets the European markets. And that gives us a great purge valve in the situation when the United States is oversupplied or there's just -- there's too much fruit in the market. So we're constantly looking at global markets and the best opportunities from each of the production sources to find out what the optimal way to move that fruit around is to maximize its value.

And Gerry, as an example now, we're actually exporting -- starting pretty soon into -- or importing into Chile, where their summertime lemon starts to fall off. They start seeing better prices, and we're able to send some of our choices and lemons down that way. So kind of -- it works both ways.

Got it. That's it for me. I appreciate it, and I appreciate the clarity of the Harvest at Limoneira and the cash flows.

And our next question is from Vincent Anderson with Stifel.

So I appreciate you confirming the drought in Argentina. I heard there might be some pros issues done there as well. So one, are you -- have you escaped that? Or is that impacting your production as well?

And then you talked about Europe being an important exit valve, but has Argentina regained access to the European market yet?

So the first part of your question about our production. So the great news for us for Argentina is that our primary production is north of Tucuman. And Tucuman is the province where the majority of lemons are produced that is the area that's experiencing the significant drought. And so that area is up to 30% off. But we're actually producing in the province of Huhui, which is the furthest northern most province in the country of Argentina, and we have not been impacted by the drought. And our production actually looks to be up in this coming year. So we believe that's a very good thing.

And when we talk about the European market, really Central and Eastern Europe is where we move most of our fruit today. So we're able to move that fruit even though there are issues today, as you mentioned, in Western Europe.

That's perfect. And then if we were to kind of throw a worst-case scenario on foodservice demand this year. Maybe if you could talk about how you did in the fourth quarter in terms of adding more grocery sales, obviously, a bigger export quarter, so it would be tough to say. But if we see a slow recovery in foodservice, one, how could 2021 look versus 2020 on a fresh utilization rate just from the progress you've made there? And how flexible can you be this year in terms of letting fruit size up a bit more to penetrate grocery better?

No, that's a great question. And so the thing that really hit us the hardest last year in 2020 was the oversupply of the second grade, the choice lemons, which predominantly find -- mostly find its way into food service.

So what -- a couple of things that are good news for us coming into 2021 are, first of all, last year because of the heavy wins that we mentioned, the percentage of first grade fancy fruit fell to 20%, where normally that would be around 40% to 50%. In 2021, we're back to normal, and we are sort of in that 40% to 50% of first grade fruit. Which means that if we can get the proper sizing on that fruit, it will be much easier for us to move into retail customers and at higher value. So that's a great thing for us this year.

The other thing that happened to us last year, as we came into March, April, May and June, which is our district 2 coastal crop, we have a -- we had a situation where our juice partner -- so if we can't sell it fresh, we sell -- that we sell the balance of that production to -- for juice and products. Our juice partner had a market outlet that was predominantly food service. And so when that juice partner was unable to sell the majority of what we were taking them, they closed that plant. We pivoted over to sell it to another plant that was supplied by our competitor. And we were shut out of that.

And so the reality for us on the utilization was very negative because we lost that juice outlet for a period of time. That has now been completely restored as our juice partner has been able to find outlets at retail that have been great.

So in the event that we don't get the food service business back as quickly as we'd like this next year, our pivot over to retail, our partnership with a juicer that has retail outlets for the juice, bodes much better for our total utilization in this next year.

And we've made great progress with specific retail customers. Costco being the biggest success for us, picking up a big part of the national business for Costco, but also HEV in Texas and Wakefern on the East Coast. The one risk factor that we'll point to though is that California is well below throughout the state, its normal levels of rainfall. And the rainfall is what we depend on to get proper sizing of our fruit throughout each of our growing areas. And if we don't get the rain and we don't get the size, it will be difficult for us to move the crop in an orderly way because there's only so much market for that smaller pieces of fruit.

So our strategy is to actually stretch our seasons out to give the trees a greater chance for growing, the normal -- normal sizes that we sell and the grades that we want to sell to the market. And while that may add a little bit more cost, it will give us a much better opportunity to have the sizes that the market and the customers want.

That is is perfect. I guess one kind of quick housekeeping question. Those 200 acres you're bringing on this year, it looks like you might be netting them against some old acres you're pulling. And if so, is there a measurable net fresh carton impact that we should be modeling to or it's going to kind of just be negligible the first year or after?

So -- so there's a lot of moving pieces that are part of that -- the answer to that question. But the way to think about it, Vince, is District 3, is 30% lower in total tree crop for the industry and for us. District 1, where we are now up in the San Joaquin Valley, is 15% lower than it was a year ago for everybody and us. But the acreage that's coming online is up in District 1. So our total sales in District 1 should be about the same because of that -- because of those 200 acres of fruit that are now -- the trees that are now bearing.

And then as we come down to District 2 on the coast, it's still a little too early to talk about the crop size. We still don't see enough of it to know. So our assumption is that it's going to be similar to last year, and only with a higher percentage of fancy grade fruit because we are able to see that coming online now. So just -- it will come down to the size. And if we can get that rain and get that exercised, that will be the difference maker and really given us volume confidence later in the year.

And our next question is from Ben Klieve with National Securities Corporation.

First one here. Harold, you kind of alluded to this in your prior answer. But I'm wondering if you could elaborate a bit more on how you're looking at managing inventory in coming months and quarters in the event that the food service industry really does pick up. I mean to what extent are you going to kind of -- reap fruit on the trees for a bit longer, reap fruit that's already been processed for a little bit longer with the hope of getting better pricing as food service opens up. Or is that really not something that you're going to mess around with too much?

No, that's a great question, Ben. And that is sort of the nature of our business. So the sales team have done a really good job getting in front of what we see from each of our growing districts and what we know we have and what we think we have, and setting up contracts with retail customers that are allowing us to sort of anticipate demand and anticipate sales.

And I guess the good news is because we are behind in rainfall and the fruit is growing more slowly, we're inventorying a lot of this fruit just on the tree, naturally letting Mother Nature do her thing and not having to pull it off a tree and then put it into storage, which creates more risk. Because if you put it in storage, you lose a customer or unable to sell it, then you have to -- you have to dump it or send it to the juice plant at much lower values.

So our strategy is just to keep monitoring on a day-to-day basis, in weekly and monthly, the sizing of the fruit, and then let Mother Nature determine when the optimal time for us to harvest it and really do as good a job as we think we can, keeping it out of our cold storage. Because once you put all the cost into that fruit and you put it into storage, if you aren't able to sell it, it's the double negative of getting much lower value because it goes to the juice plant, but also, you've got all the cost in that fruit.

Whereas if we knew later on in the season that we weren't going to be able to find a home for that fruit, we won't put the cost in it, but we'll actually just send it straight to the juice plant.

And the combination of all those things have a huge factor in what we call our fresh utilization. Our net results of fresh utilization in 2020 were 60%. And it was really just because in the summer months, which is really -- like the March, April, May, so spring and summer when COVID impacted us so negatively, and then we had that juice plant challenge, we suffered much lower utilization than we would have anticipated.

So as we look forward on a go-forward basis into 2021, we know that we're going to be challenged at some level with the closure of foodservice. So we're pivoting to retail and working as diligently as we can to find export market opportunities for a lot of that fruit. While meanwhile, focusing in on the type of quick-serve restaurants that are still doing pretty good business with their drive-throughs and their takeout and really attacking that part of the market.

And the combination of all of those things should improve our fresh utilization and should overall improve our pricing, we're being careful with guidance just because we're just unsure the magnitude of the demand and the demand reduction because of food service and export, and also how quickly or slowly we'll see the return of foodservice business.

Got it. Got it. Very interesting. Well, it's tricky to navigate, but best luck as you do so. My other question here is regarding water rights. I'm hoping you can just kind of provide a general update on how you're looking at water rights over the next year. And in particular, in the context of like you said a dry year so far in California, an even drier year in the Colorado River Basin. Does the current weather impact, how you're thinking about those at all? And any updates from a big picture would be appreciated.

No, happy to talk about water. I think the thing that's happened since the last time we spoke is that water became -- a futures market has been developed in the capital markets for water, and water is now beginning to be actively publicly traded, which is interesting.

So as your question sort of implied, as there's scarcity, there also becomes more value with water and water rights. And so as it relates to all of our assets and our deployment of water, our primary focus right now is using the majority of our water assets to basically monetize our agricultural production and to support our agricultural operations.

With that being said, though, as you go around the portfolio of investments that we have and the land and water that we have access to, we do have surplus water in certain areas. And one area of value where we're working very hard to find ways to monetize that water is our Class III Colorado River water rights. We have a partnership with a private equity group that has a water focused on monetizing those assets.

Nothing to really report in terms of being able to speak specifically about any transactions that relates to that 12,000 acre feet of water that we have. But we're working to try to find potential buyers of that water and to structure the monetization of those water rights.

As it relates to our Santa Paula Basin pumping rights, right now those pumping rights are being used for our farming operations. But there's also a demand and supply imbalance where there's more demand than supply of that water. And eventually, some of that we'll begin to monetize. We just haven't -- we haven't found that the right time to do that is now. But we're exploring those opportunities and waiting to put the first transactions on the board.

At this point, though, we don't have anything that's imminent. So as it relates to 2021, we're probably not going to experience much water monetization other than providing surplus pumping rights that we'll sell agriculturally but won't have a significant financial return in 2021 as it relates to monetizing some of those assets and those water rights.

And our next question comes from Mark Smith with Lake Street Capital Markets.

First question for me is just any other insight into changing consumer trends within grocery, retail. And additionally, you already talked about some of the new partners that you added during the quarter. Anybody else to maybe discuss or kind of your long-term prospects with some of these new partners?

We tried to allude it in the comments that we made earlier. But the -- I guess the exciting thing that we're experiencing is we're -- pre-COVID, we were 70% sales to food service customers and 30% to retail. And when COVID hit, we were forced to pivot over to retail. And so that's sort of translating to approximately 50-50. And we've made some great progress with some great new retail customers.

And we're seeing much stronger demand at retail once COVID hit than we saw pre-COVID. And so I guess the hope that we have is as our sales team is out there with sort of uncertainty about total food service demand, there's a much stronger focus on retail penetration. And there's some really exciting new accounts that the sales team have contracted and set up some business for the coming months with some new customers for us.

But I guess the hope here, and it's more of what we suspect -- we suspect that as restaurants and bars and food service gradually begins to recover based on vaccination and restaurants and bars reopening around the country, that we'll see continued high levels of demand at retail, but also now new found demand at food service as it begins to recover. And that total demand and total consumption will actually be up once we get past the pandemic. And that's sort of the -- that's what we're anticipating coming just because of the way that consumers are behaving today doing a lot more in-home cooking and shopping at grocery stores.

And Mark, if I might add, our thesis of still chasing after QSRs and fresh lemonade, we're very focused on that. Obviously, that gets our lowest grade fruit the highest possible value. So one of our bigger customer raising (inaudible), the chicken QSR out of the south expanding, I think there are over 500 stores now. And we pick up 1 or 2 more of those that we're focused on. It really helps with that balance of that lower grade multiple sized fruit. So again, that will be a focus for us.

Okay. And one other question for me is just really looking at the profitability. Can you talk about labor pressure as you look at this new year. Anything else that you're seeing that's maybe impacting costs? And then really just how we improve the profitability here, especially if we stay in an environment with low commodity prices?

Yes. The biggest impact to our profitability, and it's the second year in a row, but for completely different reasons, we've been challenged is our fresh utilization. If we're able to produce a normal percentage of first grade fruit and have good demand for that first grade fruit, find good demand for the second grade fruit and sell that third grade fruit at a percentage that would allow us to get our fresh utilization above 70%, which, by the way, historically was always what we did, then that drives our cost down to a level to restore significant profitability.

We spent a lot of time talking about demand destruction because of the pandemic and the loss of food service. And then the oversupply that, that's created and then the commodity impact on total pricing has been very negative. But we believe that with the pivot to retail, our ability to have a much higher percentage of first grade fruit that we will probably find ourselves and call it -- and this is speculative, but a $20 average price per carton worst-case if we sort of see this slow recovery of food service. And with food service coming back, but if we can get utilization back to the 70% to 75% level, given the realities of our cost environment, we should be able to return our cost to, call it, $15 a carton and restore profitability. And that's the laser beam focus that we have right now.

And through the first -- almost first quarter of the year, we're achieving those levels. The real challenge for us is going to come when we see the big volumes in the big shipment months of March, April and May. But if we can get through those months with above 70% fresh utilization, then we'll restore the profitability of the business and drive the cost down to a level that will allow us to achieve good profitability.

Ladies and gentlemen, we have reached the end of question-and-answer session. Now I'd like to turn the call back over to Mr. Harold Edwards for closing remarks. Thank you.

Thank you, and thank you for your questions and your interest in Limoneira. Have a great day.

This concludes today's webinar. You may disconnect your lines at this time. Thank you for your participation, and have a good evening.