Limoneira Company (LMNR) Earnings Call Transcript & Summary

Hello, and welcome to Limoneira's Ongoing Transition And Northern Properties Sale call. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to John Mills with ICR. Please go ahead, John.

Thank you. Good morning, everyone, and thank you for joining us for Limoneira's conference call to discuss the company's ongoing transition, including the recently announced sale of its Northern Properties. 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 press release, which went out yesterday after market closed. If you've not had a chance to view the release, it's available on the Investor Relations portion of the company's website at limoneira.com. As a reminder, 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. And with that, it is my pleasure to turn the call over to the company's President and CEO, Mr. Harold Edwards.

Thanks, John, and good morning, everyone. Last February, we underwent robust and rigorous strategic planning sessions with our Board of Directors. After reviewing our overall business operations and our strong asset base, we concluded that we had a significant amount of capital that had been deployed to land and water investments that had appreciated significantly, but there was a meaningful difference in the current fair market value of these assets compared to the book value as many of them were acquired years ago at a low-cost basis. We also concluded that our vertically integrated model was no longer the most efficient manner to increase our shareholder value and properly service our global customer base. Based on our planning sessions in April 2022, we formed a strategic plan with a specific road map to pivot our business towards an asset lighter model in order to streamline our operations and sell nonstrategic assets, improve the consistency of our earnings, increase EBITDA and dividends per share, reduce debt, rightsize the balance sheet and improve return on invested capital. This plan involves the identification of approximately $150 million of assets for sale as well as a transition to a more efficient operating plan. We are less than 1 year out from forming that strategic plan, and we've made significant progress with nearly all of those identified assets sold. Our balance sheet transformed and the recruitments to a 1 million new cartons from new grower partners. I want to focus now on discussing the sale of those assets, in particular, yesterday's announced sale of our Northern Properties. Over the past 3 months, we've sold approximately $130 million of nonstrategic assets with the sale of our Oxnard packing facility in October for $20 million; the sale of the commercial property in Harvest at Limoneira in October for $8 million; the sale of our Sevilla property in November for $2.7 million; and yesterday's announced closing of the sale of our Northern Properties for approximately $100 million. We will record approximately a $40 million gain during our first quarter fiscal 2023, and we expect to incur cash tax liabilities of only $11 million. Proceeds from all 3 of our previous transactions totaling approximately $30 million were used to reduce our debt, but the Northern Properties sale is the most transformative as we will now have a net debt position of less than $30 million. It is expected to be accretive on a pro forma EBITDA and earnings basis. It will strengthen the balance sheet and enable us to pursue a range of strategic opportunities to maximize shareholder value. When we were looking for a buyer of our Northern Properties, it was imperative that we find one that allowed us to keep our supply chain intact. The property consists of 3,537 acres made up of 2,700 planted acres, 231 acres of plantable ground and 606 acres of open space. As we laid out in yesterday's press release, as part of this transaction, Limoneira and PAI entered into a farm management services agreement to provide farming services related to the property for an initial term of 1 year. And entered into a grower packing agreement to provide packing, marketing and selling services for lemons harvested on the property for a minimum 5-year period. This piece of the transaction fits squarely with our strategic plan to expand our One World of Citrus in an asset-lighter way as we focus on leveraging our leading global packing, marketing and selling services using more grower partner fruit. The economics of using grower partners is extremely attractive with Limoneira receiving $2 to $2.50 per carton of margin with no additional capital outlay, and it reduces the impact of pricing volatility and rising farming costs on our business and will be additive to EBITDA and earnings per share on a pro forma basis. We have become a very attractive partner to third parties and continue to develop best-in-class grower services to bolster our appeal through investments in our technology and supply chain. Our strategic approach to fresh utilization enables our sales and marketing team to successfully market fresh lemons throughout the year with one of the best fresh utilization rates in the market. This past year, we sold over 78% of lemons fresh at competitive prices compared to our largest competitor who was at approximately 50%. This is obviously a very important draw with grower partners. We are also working to better support our grower partners by reconfiguring our global lemon packing network. This includes reducing certain orange and lemon acreage globally, while still maintaining the packing and marketing of the fruit grown on these locations. Today, roughly 50% of our source volume comes from grower partners, and our goal is to have that number closer to 75%. The structure of our deal with PAI is a great example of the direction we are headed, growing the service part of our business as we focus on packing, marketing and selling. And in return, you will begin to see meaningful improvement to our returns on invested capital with better margins, cash flow and earnings that become a lot more stable and predictable. As for our remaining assets, we have another $20 million of the $150 million in assets identified that we plan to monetize over the next 12 to 18 months. Even after the Northern Properties transaction, we continue to own approximately 11,900 acres with over 21,000 acre feet of owned water rights, usage rights and pumping rights. We are finding great monetization opportunities for our water rights by either selling the wet water on a lease basis or by actually selling the pumping rights or by selling the actual asset for significant appreciation over what we invested in it. A near-term water monetization opportunity is the 1,300 acres of farmland we have in Yuma, Arizona, that has associated Class 3 Colorado River water rights. The Department of Interior has instructed the 7 states that derive water from the Colorado River to reduce their intake by 1/3, and the cuts will first come from Class 8 water rights all the way down. These states will be forced to go to those with senior rights like ourselves and pay for their water. They have just started the first following program, of which we took advantage with 400 of our 1,300 acres and we expect to receive $1,400 an acre to divert the water we would have used to farm to now go towards an urban use. Through the monetization of water, sales on this property, we have the potential to receive approximately $100 million upon selling the water rights, of which Limoneira would be entitled to 50%. We realized a number of events need to occur before such large appreciations are realized, but there are opportunities out there we are currently exploring. And if you look at our overall business, you can see the book value of the land today, versus the potential fair market value tomorrow may lead to an improvement in our EBITDA and earnings. In addition to these assets, we have our real estate development project, Harvest at Limoneira. We announced at the end of December that we increased our cash proceeds projection for this project by 20% to $115 million and updated our time line to include both the Harvest development and the Harvest Medical Pavilion across the highway. We received the first $8 million of proceeds in the fourth quarter of fiscal year 2022 and expect to generate the full $115 million over 7 fiscal years. The project is currently approved to develop 1,500 dwelling units, and we are in negotiations with the city of Santa Paula to expand that to up to 2,000 units. We believe we will be able to announce the additional 500 lots this year. Finally, we look forward to transacting on $5 million of land sales at the Harvest Medical Pavilion in the fourth quarter of 2023. So what is next for Limoneira now that we have a very strong balance sheet and a clear path to stronger EBITDA cash flow and earnings. Over the next 12 to 18 months, you can expect to see our continued transition to an asset-lighter business model and focus on the best use of our assets to enhance shareholder value. The proceeds from the Northern Properties sale will significantly reduce our overall net debt position and allow us to pursue a range of strategic opportunities that will maximize value for our shareholders. The sale of $130 million of assets was much sooner than our internal time line, and we expect to monetize the remaining $20 million of identified assets in the next 12 to 18 months. Our Board and management team will continue to evaluate how to best leverage our expertise in packing, marketing and distributing citrus and avocados, combined with our valuable portfolio of agricultural lands real estate properties and water rights in order to enhance long-term shareholder value. As for the longer term, we have upcoming strategic Board of Director planning sessions that will review different areas where we can potentially reinvest that will produce more consistent and more reliable returns. Potential areas of investment could be in our supply chain through investment in the forward distribution, forward warehousing and packing capacity. Or expanding our avocado production and potentially adding value to avocados beyond production in packing, marketing and selling as a complement to our One World of Citrus product offerings. Before we open the call for questions, I would like to also address the current rain we've had in Southern California. We've experienced minimal damage to our trees, but we did experience erosion to a few roads, which we will have to fix in the coming weeks. And with that, I'd like to open the call for your questions. Operator?

[Operator Instructions] Our first question today is coming from Ben Bienvenu from Stephens.

Congratulations. I want to ask -- you noted in the press release that you expect after this announcement, pro forma accretion to EBITDA and EPS. Can you detail a little bit more for us kind of the components of how you get to that outcome?

Sure. You bet. So if we're looking at our year-on-year budgets, the properties that we sold have traditionally underperformed over the last 10 years. And this year, we were looking at a down lemon market in a sort of flat orange market. The new line we'll have on the revenue side will be farm management service revenues, which will basically replace the revenue that we had at a breakeven basis. It's the cost that's coming against, we'll bill at our cost and then have a margin on top of that, which is between $750,000 to $1 million. It's a per acre basis charge that we've negotiated with PAI. And so that and the reduction in that -- will no longer have a harvest expense of over $1.5 million. We project about $1.5 million to $2 million of additional EBITDA on our current budgets over the year. That's how we come up with that. . From the -- when we get down below the line, we talk about the interest expense component. And so $130 million of debt in a rising rate environment. We were borrowing at LIBOR, which is obviously SOFR now plus $150 million for a long, long time. And our interest expense was anywhere from about $3 million to $3.5 million before our patronage dividend. So we're using about $2.5 million on a net basis on the interest expense reduction. And then the -- between Oxnard Lemon and the sale of the Northern Properties, depreciation will go down by about $1.8 million. So all of that equates to approximately $0.20 to $0.22 of EPS. And so both the EBITDA and EPS accretive based on our budget starting at the beginning of the year.

Okay. Very helpful. I want to ask about this transition to an asset-light model. By that descriptor, it sounds like it should be less capital intensive. You're going to have quite a bit of cash coming in the door over the next several years. It sounds like you're mostly past the debt paydown phase of this transition. So how should we be thinking about use of capital as we go forward? And maybe conversion of EBITDA to free cash as we go forward?

So that's a great question and not to be sort of vague about the answer. We are about to have the next round of strategic planning sessions with our Board of Directors. But we will be looking at our capitalization and what we'll think about doing with the cash and the cash generation. The company has been in a position where we've been sort of a net free cash flow negative, company investing back into the company for many, many years. So all of a sudden, we're about to find ourselves in a free cash flow generating position. We're going to look at potentially exploring the idea of a special dividend of increasing the ongoing dividend rate, potentially purchasing our stock back if the stock doesn't perform to the level that we believe it should. But we'll also be very patient but opportunistic in the use of future capital as we find opportunities in our supply chain to invest to create more streamlined operations, but also opportunities to create value for our shareholders. So I know that's kind of vague, but at the same time, that's -- we're in this enviable position, we believe, of being virtually debt-free and now free cash flow generating. And we want to take advantage now of really putting our foot down on the gas pedal to grow the service part of the business as packers, marketers and sellers. And now as farm managers of the business in a much less capital-intensive way.

And 1 thing I might add is that we're -- we mentioned the $30 million net debt position today and we paid off $130 million of debt. But we're -- typically, this seasonality is our heavy working capital trough of the year. So we're still projecting to be at the end of the year with the sale of the medical campus in the fourth quarter, which we've talked about to be close to net 0 debt. So as we get into the heavier carton periods out of the winter and the summer demand. We expect June, July probably is a timing to be close to net 0 debt and in that trough. And our business is, as we've grown the outside grower component, and we've grown the agency business, we put a lot more capital out in certain periods. So our trend is about $25 million to $30 million up and down just in working capital. So -- but we're really confident in our position to be at the end of the year and then have a -- we've that $40 million piece that we'll keep. It's fixed at 3.5%. And so those rates are in a good place, and we'll have a net cash position, which will have an opportunity to figure out where to invest in.

Your next question today is coming from Gerry Sweeney from ROTH Capital.

Could you let us know or remind us what the sort of average production out of the Northern Properties have been over the last couple of years? On average, obviously, every year is a little different.

Yes. So from a lemon perspective, it was about 750,000 cartons. And remember, some of those acres were new planting. So we believe full-bearing status should be around 1 million to 1.2 million annual cartons of production, which because of the agreement, we'll continue to run through our packing house.

Got it. And then what would the -- generally, you've sort of I'm not sure if you have done this yet, but given sort of a breakout of how many cartons do you think are going to be produced this year? And how does this change Limoneira produced potential cartons versus third party?

So it will go down by about 750,000 cartons. We've looked at the P&L of lemons over the last 3 years in all of our districts. And we have a rising cost environment where our cost is now $19 to $20, and especially in the north where we transport everything down here. And obviously, our FOBs last year were below that. And so that's why we're talking that this is going to be accretive, where we pick up the risk free side of the $2 and $2.50 of representing those 750,000 to 1 million cartons. So -- and the orange side of the business, which we call the noncore, nonstrategic side has also been -- has been somewhat disappointing for us over the last 5 years in different handlers and production. And so really, overall, we project this business coming into this year, being about breakeven, and now we're going to have the accretiveness of just the service so without the risk.

Okay. Got it. And then final question. Obviously, China sort of reopening, I think this goes back to even your comment on FOB prices. I'm not sure how much of an impact that potentially may have on just demand out of that area or region? Any thoughts on that for this year?

The China is definitely absorbing more of the fruit that otherwise would have been imported into the U.S. So that's been helpful. It's firming up markets. I wouldn't say it's necessarily moving the needle in an overall sort of price per carton basis that we can see. But it's certainly making the market stronger and it's giving sort of more opportunities for our fruit produced here in California, Arizona, to find homes here domestically.

Got it. And one more question, I probably should have asked that because this before, the China one. What is your total packing capacity here, well just say, in the U.S.?

Yes, that's a great question. It's kind of a loaded question because if you could take 52 weeks a year and you could run the optimal out through it, that's one answer, but that's not kind of how it works. So just based on demand and the seasonality of it. So our internal number is 7 million to 7.5 million cartons. So we're about 5 million to 5.5 million cartons on our way to 7 million.

Got it. okay. And that begs another question. Can you -- I'm assuming you can't, I guess, rejigger the packing house in all season for other fruit? Or I mean -- or is it lemons or nothing? Or any thoughts on that?

Yes. Well, right now, we're operating at 12 months a year, and it's very, very efficient, and it's -- but it has a range of somewhere between 150,000 cartons a month up to 700,000 cartons a month. So the optimal situation would be just to run 700,000 cartons a month. Now we know that's not realistic based on supply chains and fruit availability and whatnot. But the goal is to run as many units as we possibly can, but also recognizing that we're hauling fruit from a long way away when the seasons in the desert are up in the San Joaquin Valley. So most likely, we'll be looking to expand our packing capacity in the future up into the San Joaquin Valley to be closer to the fruit that we serve up there.

Next question is coming from Ben Klieve from Lake Street Capital Markets.

First, congratulations on the sale. I know it's a long time coming, I guess I know you did a lot of work this, congratulations on getting the finish line here. I have 2 questions. First of all, on the -- on the non-lemon avocado side, did the property really encompass the entirety of the, what I would call, noncore agricultural production with the expense [indiscernible] Is there anything left in the any noncore crop that you have [ pay ]?

So yes, the -- we still own a vineyard and Paso Robles and we're working sort of diligently behind the scenes on putting a land plan on that vineyard right now. And seeking sort of a higher and better use than just a productive vineyard. The vineyard was profitable this last year after's years of development. And we believe it's sort of in the sweet spot from a development perspective to create more value by putting parcels up for sale that basically could become vineyard to states. So we're working on that plan right now. And the other assets that we're also sort of looking to find value are in South America, We have an opportunity, we believe, to expand our packing capacity in South America. And we want to make sure that we do that in sort of a capital-efficient way. So we're looking at a lot of strategic opportunities to monetize assets in Chile to create capital to invest in packing opportunities that we see there. And just like with this announcement of the Northern Properties, find a sort of a transition to more asset lighter opportunities to grow our Chilean citrus business.

Okay. Got it. That's very helpful. And then second, following up on your comments about weather conditions this year [indiscernible] can you hear the impact fairly much. But curious if all that water has been [indiscernible] in the lemon [ once ] few years ago? Are you seeing [indiscernible] higher in the range than you ordinarily or preferably would? Or is the sizing still kind of in your prior expectations and what you'd be hoping for?

Yes. No, that's a great question. So at this point, we have -- we and everybody else in the industry have had the opportunity to get into the orchards to pick whereas for many, many -- like, I think it was 8 weeks in a row in 2019, nobody could get into the orchard. So we've had big weather rain events, but we have been able to get in pick so the sizing issue that we ran into in 2019 hasn't affected us yet. So far, inventories are sort of at a manageable level. The manifest of sizes and grades are excellent and market demand has been strong. So we're moving the fruit, and we don't see any real disruption there. And as it relates to the avocados, rain is such a good thing for getting size in avocados. So I ultimately think that the rain is going to be super helpful for getting more pounds produced per acre, not only for us, but everybody up here in Ventura County and in California.