Laura Miller - IR, ICR Harold S. Edwards - President and CEO Joseph Rumley - CFO.

Steven Martin - Slater Capital Management.

Good day and welcome to the Limoneira's Third Quarter Fiscal Year 2014 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Laura Miller of ICR. Please go ahead..

Good afternoon, everyone, and welcome to Limoneira Company's third quarter fiscal year 2014 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 third quarter fiscal 2014 earnings release which went out today at approximately 4.00 PM Eastern Time. If you've not had a chance to review the release, it's available on the Investor Relations portion of the Company's Web-site at limoneira.com.

This call is being webcast and a replay will be available on Limoneira's Web-site as well. Before we begin, we would 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 risks and uncertainties, many of which are outside the Company's control that could cause its future results, performance or achievements to differ significantly from the results, performance or achievements expressed or implied by such forward-looking statements.

Important factors that could cause or contribute to such differences include risk 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. 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 measure is included in the Company's press release which has been posted on our Web-site. And with that, it's my pleasure to turn the call over to the Company's President and CEO, Mr. Harold Edwards. Go ahead, Harold..

Thanks, Laura. Good afternoon, everyone, and thank you for joining us. On today's call, I'll begin with a brief overview of some financial highlights for the quarter and provide an update on our progress across all of our business areas.

Joe will review the financial results for the third quarter in more detail, and I'll then discuss our 2014 outlook and open the call up for your questions. We are pleased to report very strong top and bottom line results for the third quarter, our seasonally strongest quarter of the year.

We delivered top line growth of 22%, highlighting our expanding agribusiness, the robust growth of our lemon business as well as higher than historical lemon prices.

In addition to our strong top line growth, we achieved significant improvements in adjusted EBITDA and operating income, which have increased by approximately 70% and 100% respectively in the first nine months of fiscal year 2014 compared to the prior year period.

Based on our financial performance in the third quarter and outlook for the remainder of the year, we are raising our previously issued guidance which I'll review later during today's call. In the first nine months of fiscal year 2014, we generated operating cash flow of $17.8 million.

This has enabled us to make strategic investments into our business and continue to pay down our debt. We have reduced our long-term debt by $10 million year-to-date, strengthening our balance sheet and positioning us to capitalize on additional investment opportunities in the future.

We're excited about the momentum for Limoneira and continue to make progress across all aspects of our business. First, regarding our agribusiness, we're benefiting from the additional 2,300 agricultural acres that we acquired or leased in the last few years and a very strong pricing environment for our lemons.

We are progressing on the expansion of our lemon packing facilities in Santa Paula which is expected to increase efficiency and double the annual capacity of our lemon packing operation when it is completed during fiscal year 2015.

As we continue to acquire additional lemon orchards, build relationship with third-party growers and add lemon customers, the expanded facility will help us maximize growth opportunities for Limoneira and improve operating margins.

Complementing our expanding packing capacity at our Santa Paula location, we recently made a couple of exciting announcements that further increase our packing capacity and underscore our execution on one of our long-term initiatives of enhancing our position as a year-round global supplier of lemons.

In the third quarter, we completed the purchase of the packinghouse property and equipment of Marlin Ranching Company which is located in Yuma, Arizona, strategically near our existing farming locations. We use the facility to wash and pack lemons from Limoneira's orchards in Arizona as well as citrus from other growers in the region.

This acquisition will immediately increase our volume and give us increased flexibility in our export markets. We expect to benefit from improved operating efficiencies from the new packinghouse, particularly during the first quarter of our fiscal year.

We are currently estimating that we will process approximately 500,000 to 600,000 cartons of fresh lemons annually from this facility, generating approximately $400,000 to $500,000 per year in operating income resulting from a combination of cost savings from not shipping fruit to our Santa Paula packing facilities and incremental fruit packing operations.

Last month we announced our first international business expansion with the investment in Rosales S.A, a citrus packing, marketing and sales operation located in La Serena, Chile. We are very excited about this investment and we have been looking for the right opportunity to enter the Chilean agricultural market.

Our management team has a long-standing relationship with Rosales, making them the perfect partner for our first international venture. To provide some background, La Serena is located in a coastal region of northern Chile and is a major citrus and avocado growing area of the country.

Rosales primarily packs and sells lemons and currently sells its product in Asian, European and Chilean markets. Going forward, Limoneira will handle Rosales sales into Asian markets, leveraging our existing relationships and providing opportunities to expand our business in Asia, benefiting Rosales and Limoneira.

Limoneira invested $1.75 million for a 35% interest in the business. We will earn equity income from our investment as well as $0.50 a carton on lemon sales to Asian markets, which combined is estimated at $200,000 to $300,000 of additional pre-tax income per year. We continue to see a healthy pipeline of acquisition opportunities.

With our entrance into the South American market, we are well-positioned to capitalize on strategic acquisitions both internationally as well as domestically and to continue to expand our agribusiness. Now, I'd like to comment on the California drought as it relates to our business.

As we have previously discussed, California has been experiencing one of the most severe droughts on record. These conditions have resulted in reduced water levels in streams, rivers, lakes, aquifers and reservoirs.

Federal officials who oversee the Central Valley Project, California's largest water delivery system, recently announced that no water is expected to be provided to San Joaquin Valley farmers this year and only 50% of the contracted amount will be provided to urban areas from this water system.

I would like to reiterate that Limoneira is extremely fortunate in that thus far the drought has not had a material impact on our operations.

Water for our farming operations located in Ventura County, California is secured from existing water resources associated with our land, which includes approximately 8,600 acre feet of adjudicated water rights in the Santa Paula Basin and the un-adjudicated Fillmore Basin.

We use a combination of ground water provided vide wells and water from various local water districts in Tulare County, California which is in the agriculturally productive San Joaquin Valley.

Our Associated Citrus Packers farming operations in Yuma, Arizona sources water from the Colorado River through the Yuma Mesa Irrigation and Drainage District where we have access to approximately 11,700 acre feet of Class 3 Colorado River water rights.

For the first nine months of fiscal year 2014, irrigation costs for our agricultural operations were approximately $300,000 greater than the same period of last year, resulting from pumping more water from wells and basins due to less rainfall.

We expect this trend to continue as we pump more water than historical averages, as demand for limited water supplies increases the cost for such supplies and federal, state and local water delivery infrastructure cost increase to access these limited water supplies.

In challenging conditions such as these, it is beneficial that we have significant water rights and other water access across our agribusiness operations. Our water assets and resources are an important part of our business.

We believe that we have access to adequate supplies of water for our agricultural operations as well as our real estate development and rental operation segments of our business.

However, if drought conditions persist or worsen, or if regulatory responses to such conditions limit our access to water, our business could be negatively impacted by these conditions or responses in terms of access to water and/or cost of water.

Turning to the rental operations segment of our business, we remain on track with the development of 71 additional agricultural workforce housing units in Santa Paula, California that should be available for rent to local agricultural workers and Limoneira employees during the first and second quarters of fiscal year 2015.

We anticipate this will add $850,000 to $900,000 of revenue annually to our rental business. Our rental operations segment provides a dependable revenue stream and source of annual cash flow as well as the unique ability to offer housing to agricultural workers and to our employees.

We also continue to make progress on our real estate development efforts. We believe that we are on track with our East Area 1 project, also known as the Santa Paula Gateway project.

As a reminder, this project consists of a 550 acre master planned community with up to 1,500 residential units, 560,000 square feet of commercial space and 150,000 square feet of light industrial facilities.

We estimate that the residential component represents approximately 25% of all single-family homes, town homes and condominiums that are currently planned or approved in Ventura County over the next 10 years. We submitted the Master Tentative Tract Map to the City of Santa Paula which we expect to be approved this calendar year.

Approval of the tract map is necessary prior to the commencement of development of the property. In the meantime, we continue to engage in discussions with leading homebuilders, land developers and investors.

We are committed to entering into a deal with a reputable builder or builders that will optimize the success, cash flow and profitability of the project and ultimately maximize shareholder value. We remain focused on our goal to break ground on the project during 2015.

Also, last month we entered into a nonbinding letter of intent to sell our Centennial property for $3.1 million in cash. The anticipated closing date is expected in the second quarter of fiscal year 2015.

This is another step in our efforts to divest non-core real estate assets which will allow us to reinvest capital in our agribusiness growth and/or further reduce our long-term debt. We are also pleased to update you regarding our Windfall Farms property located near Paso Robles, one of the premier winegrowing regions of California.

As a reminder, Windfall Farms is a 720 acre property that may be subdivided into 10 to 40 acre lots and includes extensive equestrian facilities and access to deepwater wells. During the nine months ended July 31, 2014, we planted 100 acres of Cabernet Sauvignon grapes.

We expect to plant up to an additional 300 to 400 acres of wine grapes over the next several years. The vineyards are expected to generate income and cash flow when they are fruit-bearing and enhance the potential for lot sales. In summary, we are very excited about the project we have made with our business.

As we begin the final quarter of fiscal year 2014, we're on track to deliver solid financial performance for the year driven by our expanding agribusiness. With our strong cash flow, we remain positioned to acquire new orchards and make other strategic investments into our business as we have over the past few months.

And importantly, we are moving ahead with our real estate development efforts and look forward to capitalizing on our rich portfolio of real estate assets. With that, I'd like to turn the call over to Joe to discuss our third quarter financial results..

Thank you, Harold. Good afternoon, everyone. For the third quarter ended July 31, 2014, revenue was up 22% to $36.5 million compared to the third quarter of fiscal year 2013. Agribusiness revenue increased 23% to $35.2 million, primarily reflecting higher lemon revenue.

Rental operations revenue was $1.2 million in the third quarter of fiscal year 2014 compared to $1.1 million in the third quarter of last year.

Our third quarter 2014 agribusiness revenue includes $26.8 million in lemon sales compared to $19.1 million of lemon sales during the same period of fiscal year '13, primarily reflecting a higher average price per carton due to more favorable market conditions as well as a slight increase in cartons of lemons sold.

Lemon prices we are currently enjoying are significantly higher than historical averages and while we expect favorable prices to continue for the remainder of the year, we anticipate a settling back to historical averages in the coming months.

We generated avocado sales of $6.1 million in the third quarter of 2014 compared to $7.7 million in the same period of fiscal year 2013, reflecting lower pounds of avocados sold partially offset by higher prices.

We anticipate that avocados sales will increase next year as the physiology of the trees is expected to generate higher fruit volumes in next year. We recognized $1.7 million of orange revenue in the third quarter of 2014 compared to $1.5 million of orange revenue in the same period last year.

This increase reflects an increased number of field boxes sold at a higher average price per field box. Specialty citrus and other crop revenues were $470,000 in the third quarter of fiscal 2014 compared to $296,000 in the third quarter of 2013, primarily reflecting higher pistachio revenue compared to the third quarter of '13.

Turning to costs and expenses, for the third quarter of fiscal year 2014, we incurred $23.1 million of costs and expenses as compared to $20 million in the third quarter of last year.

The year-over-year increase in operating expenses primarily reflects increased agribusiness costs mainly associated with higher cost of fruit procured from third-party growers, certain SG&A expenses associated with our strategic initiatives and higher employee incentive compensation resulting from increased profitability of the Company.

Costs and expenses for the third quarter of fiscal 2014 also include an impairment charge on real estate development of $435,000, which was recorded as a result of entering into a non-binding letter of intent to sell our Centennial property, as Harold discussed in his remarks.

Operating income for the third quarter of 2014 increased 34% to $13.4 million and adjusted EBITDA increased 40% to $14.9 million in the third quarter of fiscal year '14 compared to the third quarter of fiscal year 2013.

In the third quarters of 2014 and 2013, all interest incurred was capitalized on non-bearing orchards, real estate development projects and significant construction in progress.

Non-cash interest income as a result of fair value adjustments on our interest rate swap was zero in the third quarter of fiscal year 2014 compared to $269,000 in the same period of last year. The interest rate swap that generated income in the prior periods expired in June 2013.

Net income applicable to common stock for the third quarter of fiscal year 2014 was $8.8 million, compared to $6.5 million in the third quarter of the prior year.

Earnings per diluted share for the third quarter of fiscal year 2014 was $0.61 on approximately 14.5 million weighted average common shares outstanding, compared to earnings per diluted share of $0.49 on approximately 13.3 million weighted average common shares outstanding in the same period last year.

The year-over-year increase in shares outstanding is primarily due to shares issued in connection with the acquisitions of Associated Citrus Packers and a citrus packing operation in Yuma, Arizona.

Now turning to our year-to-date results, for the first nine months of fiscal year 2014, revenue was $87.2 million, compared to $70.6 million in the same period last year. Operating income for the first nine months of fiscal year 2014 increased over 100% to $14.4 million.

Net income applicable to common stock for the first nine months of fiscal year 2014 was $9.5 million, compared to $5.8 million last year.

For comparative purposes, it's important to recall that net income for the first nine months of fiscal year 2013 included $3.1 million gain associated with the sale of Calavo Growers common stock and a $1.8 million equity loss related to the sale of the Company's investment in HM East Ridge, LLC.

These two transactions combined generated approximately $900,000 of net income and $0.07 earnings per diluted share last year for the nine months ended July 31, 2013.

Earnings per diluted share for the first nine months of fiscal year 2014 were $0.68 on approximately 14.2 million weighted average common shares outstanding, compared to $0.46 on approximately 12.5 million weighted average shares outstanding last year.

The year-over-year increase in shares outstanding is primarily due to shares issued in connection with acquisition of Associated Citrus Packers and a packing operation in Yuma, Arizona.

Regarding our cash flow and balance sheet, during the first nine months of fiscal year 2013, net cash from operating activities was $17.8 million, which is $12.8 million greater than the same period of last year.

Net cash used in investing activities was $15.1 million in the nine months ended July 31, 2014, with net cash provided by investing activities of $2.5 million in the same period of fiscal year 2013, primarily related to our investments in the expansion of the lemon packing facilities and additional farm worker housing in 2014 and proceeds from the sale of Calavo and our East Ridge investment in 2013.

We reduced long-term debt in the first nine months of fiscal year 2014 by approximately $10 million due to improved cash flow and the proceeds from the issuance of series B-2 convertible preferred stock. Long-term debt as of July 31, 2014 was $51.5 million, compared to $61.6 million at the end of our fiscal year, October 31, 2013.

Now I'd like to turn the call back to Harold to discuss our fiscal year 2014 guidance..

Thanks, Joe. Based on our third quarter results and outlook for the remainder of the year, we are raising our previously issued guidance for fiscal year 2014. For the fiscal year ending October 31, 2014, we expect to sell approximately 3 million cartons of fresh lemons and expect to sell approximately 6.7 million pounds of avocados.

The avocado harvest was substantially concluded in the third quarter. As a reminder, the California avocado crop typically experiences alternate years of high and low production due to plant physiology. Fiscal year 2014 was a lower avocado production year and fiscal 2015 is expected to be a higher avocado production year.

Due to a number of positive factors including the continuation of higher lemon prices than previously expected, we are raising operating income guidance to a range of approximately $12.6 million to $13.7 million compared to previous guidance of approximately $10.6 million to $11.8 million.

The expected increased operating income in fiscal year 2014 represents a more than 100% increase over fiscal year 2013 operating income of $5.4 million. Fiscal year 2014 pre-tax earnings are anticipated to be in the range of $13.2 million to $14.2 million compared to previous guidance of $11.3 million to $12.4 million.

We now expect fiscal year 2014 earnings per diluted share to be in the range of $0.57 to $0.62 per share compared to our previous guidance of $0.45 to $0.50 per share based on estimated weighted average diluted common shares outstanding of approximately 14.3 million shares.

Consistent with the typical seasonality of our agricultural operations, we expect to report a net loss in the fourth quarter. Overall, I'm very pleased with our performance during the first nine months of the year which has enabled us to raise our full-year guidance.

We've got several exciting opportunities on the horizon and we believe we are well positioned for a strong year in fiscal year 2015. We anticipate adding the new rental income to our financial results and expect to complete the packinghouse expansion in Santa Paula during fiscal year 2015.

We also expect to benefit from our investments in the packing operations in Arizona and in Chile. We plan to continue to invest in our strategic and growth initiatives and capitalize on acquisition opportunities where appropriate. We also expect to break ground on our East Area 1 development project in 2015.

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

Operator?.

(Operator Instructions) We will go to Steve Martin with Slater..

Congratulations. We know lemon pricing was really strong last quarter I guess.

Can you talk about lemon pricing for the fourth quarter and how you see it going forward? And additionally, I know you can't project volumes yet for 2015 but if you just look at acreage, planted acreage for lemons, what would you expect your acreage is up on a year-over-year basis?.

Steve, I'll go ahead and handle the question on the pricing and then I'll turn it over to Joe on the volume for next year, but essentially we continue to be extremely pleased with lemon pricing. It continues to be robust and well above historic averages.

We would have expected to see it begin to decline at this point, primarily due to the importation of Mexican fruit which typically hits the U.S. market at this time of the year.

We have seen the importation of that Mexican fruit but due to a slower harvest transition in the desert regions from Coachella Valley all the way over to Yuma, Arizona where we are, we're still experiencing supply constrained environment in the United States and really around the world, and as such pricing continues to hold firm if not slightly increasing.

We expect that as the desert kicks into full production mode, call it October, November or our first quarter of next year, we'll begin to see prices begin to come off of where they are today but we've been extremely pleased with these very high prices and continue to benefit from the high pricing..

In addition, in the past there were some drought conditions earlier in the year that resulted in your expectation that your volumes were going to be reduced this year. It seems like you ended up higher than what your original expectation was.

Can you comment on that?.

So there are eight different sizes and three different grades of fresh lemons that we sell. So part of our thinking in terms of what the actual trees will bear has some relevance related to fruit sizing and ultimately how many pieces of fruit we'll be able to create during the year given what's going on in the market conditions.

Remember it was a freeze that really impacted us here in our California and Arizona production that for the rest of the industry stunted production somewhere to the tune of 20% but Limoneira's overall production we believe was sort of comparatively less affected, and as such I have been very pleased with the volumes that have come out, and it looks like we're going to come in pretty close to 3 million cartons to slightly below 3 million cartons for the year.

I'll let Joe comment on next year's.

What do you see for the volume next year, Joe?.

And also just for clarification, earlier in the year we had actually expected between 3 million to 3.3 million. So we had said at different times during the year on that lemon production for this current year.

And so with a combination of a slight impact from the freeze that Harold just spoke about and also just a little bit of drought conditions in certain locations here in California, we're going to end up on that lower end of that range.

As we look at fiscal 2015, we are pretty early in the thinking but now starting to pull together our budgets and forecasts and volumes, and over the last few years we continue to plant new acreages and all.

So I think our early thinking is probably going to be similar to a little bit more on that 3 million to 3.3 million, probably slightly above that, but directionally that way and slightly higher as we start to pull the expected volumes together..

Alright, thank you..

(Operator Instructions) There are no further questions at this time. Mr. Edwards, I will turn the conference back to you for closing remarks..

Great. Thank you for your questions and interest in Limoneira. Over the last several months, we will be attending select investor events and we hope to see many of you there. Thank you again and to everyone have a great day..

This does conclude today's conference. Thank you for your participation..