John Mills - ICR Harold Edwards - President and CEO Joe Rumley - CFO.

Tony Brenner - Roth Capital Partners Eric Larson - Janney Capital Markets Chris Krueger - Lake Street Capital Markets.

Good day and welcome to the Limoneira Second Quarter Fiscal Year 2015 Conference Call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to Mr. John Mills of ICR. Please go ahead..

Good afternoon, everyone. 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 second quarter fiscal 2015 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 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 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 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 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 the non-GAAP financial measure.

A reconciliation of EBITDA to the most directly comparable GAAP financial measures is included in the company's press release which has been posted on our website. And with that, it's my pleasure to turn the call over to the company's President and Chief Executive Officer, Mr. Harold Edwards..

Thanks, John and good afternoon, everyone. Thanks for joining us. On today’s call, I will begin with a brief overview of 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 second quarter in more detail, and I'll then discuss our 2015 outlook and open the call up for your questions. We made solid progress with our business in the second quarter.

Our top line grew 14% to $28 million in the second quarter, reflecting our expanded agro business driven by higher sales for lemons, avocados, and specialty citrus, and other crops.

We also successfully leveraged our operating costs in the second quarter, which enabled us to increase our operating income by 28% to $4.1 million and grow our EBITDA by 24% to $5 million.

During the first six months of this fiscal year, we have continued to execute on our long-term growth strategy and continued to make progress across all aspects of our business. First, I'd like to discuss our agro business.

In the second quarter, we increased our total lemon orchard acreage in California by expanding our agricultural lease agreement with Cadiz to include an additional 200 acres and associated irrigation systems from Cadiz and one of its leasing tenants.

Limoneira now has the right to plant up to 1,480 acres of lemons over the next three years at the Cadiz Ranch operations in the Cadiz Valley, which is in San Bernardino County, California. Including the 200 acquired acres; we currently have 360 acres of lemon trees at Cadiz that are expected to be productive beginning in fiscal years 2017 and 2018.

This acquisition is consistent with our long-term strategy to expand our agricultural acreage and complements a number of investments and acquisitions that we completed last fiscal year including our purchase of the packing house property and equipment of the Marlin Ranching Company in Yuma, Arizona and our investment in Rosales, a citrus packing, marketing, and sales operation located in La Serena, Chile.

We are progressing with the expansion of our lemon packing facilities in Santa Paula and remain on track for its completion later this year. The expanded facilities are expected to double the annual capacity of our lemon packing operations.

We expect to utilize some of this new capacity with the production from approximately 1,000 acres of lemon orchards that are currently in development and expected to become productive over the next five years.

In addition, the new packing house is expected to increase our efficiency and enhance agro business operating margins beginning in fiscal year 2016. As we grow our agro business, our primary focus is increasing our lemon and other citrus properties.

In April, we entered into an agreement to sell our Wilson Ranch, which has 52 acres of land, including 33 acres of avocado orchards located near the City of Fillmore, in Ventura County, California. The sales price is approximately $2.8 million, which represents approximately $80,000 per productive acre.

And the gain on the sale is expected to be approximately $1 million, which we plan to differ for tax purposes utilizing a like-kind 1031 exchange. The property is currently in escrow and is expected to close in July of 2015.

While avocados are an important and profitable component of our agro business, we felt that this was a good opportunity to strategically monetize the land and the water. We currently have approximately 4,000 acres of property in Ventura County, and we've expanded our total agricultural acreage from 4,300 acres in 2010 to 7,300 acres today.

As a final point on our agro business, we recently were recognized by Grocery Headquarters, with the Grocery Headquarters Annual Produce Trailblazer Award. The award recognizes Limoneira for its commitment to growing in the produce category.

Nominees from all produce categories were considered and judged on a number of elements, including innovation, branding, creativity, packaging, sustainability, and social responsibility. This award underscores Limoneira’s commitment to best-in-class practices for our agro business.

Regarding the California drought, as all of you are probably aware, California is currently experiencing one of its most severe droughts on record.

As we've discussed before and have included in our 10-Q, we believe we have access to adequate water supplies to support our operations, although we have encouraged certain additional irrigation and crop treatment costs, and have had to be more strategic in our water usage.

While our operations have not been significantly affected by the drought, if it continues or worsens or if the state of California or other governmental agencies implement regulatory restrictions or costs, our business could be impacted. Now, turning to our real estate development business.

In the second quarter, we received the final requisite approval to break ground on the Santa Paula Gateway Project. The Santa Paula City Council unanimously approved our updated East Area 1 Master Tentative Tract Map, Supplemental Environmental Report, and updated development agreement.

The Santa Paula Gateway Project consists of a 550 acre master plan community with up to 1,500 residential units, 560,000 square feet of commercial space, and 150,000 square feet of light industrial facilities. The plans for the project also include a kindergarten through 8th grade public school and a 38-acre community park.

In addition, land is earmarked for a future high school or academy site as well as other master plan community amenities. Following the vote, the property is fully entitled, which allows us to move forward with our plans. Rock remediation activities at the property are currently underway.

We are in discussions with potential development partners and anticipate announcing a deal in the coming months. We are focused on entering into an agreement that will maximize the success and profitability of the project and importantly is consistent with our commitment to the Santa Paula community.

In addition to East Areas 1 and 2, we own other real estate assets that we may have the opportunity to monetize in the future.

We believe this development will generate significant cash flow for many years to come, and if it takes a little additional time to complete the transaction with the partner, we believe that it is very prudent in order to position this development to achieve the greatest value for our shareholders.

Now turning to the rental operations segment of our business, we have substantially completed the development of additional agricultural workforce housing units in Santa Paula, California. We rented 20 units in May for June 2015 moving with the balance of the 67 total units expected to be rented in June and July of 2015.

On an annual basis, we expect that this will contribute approximately $900,000 of additional rental income. We also anticipate that the additional farm worker housing units will help us maintain a consistent supply of labor for our agribusiness operations.

As we have previously communicated, our long-term goal is to increase our rental operations, earnings, and cash flow to complement our agribusiness operation. In summary, we are excited about the position of our business as we begin the back half of fiscal year 2015.

With our expanding agribusiness and rental operations, combined with significant progress on our real estate development efforts, this is an extremely exciting and dynamic time for Limoneira. With that, I will turn the call over to Joe..

Thank you, Harold. Good afternoon, everyone. I will discuss some of the details of our financial results for the second quarter and six months ended April 30, 2015. In the second quarter, revenue increased 14% to $28.3 million compared to the second quarter of fiscal year 2014.

Agribusiness revenue was higher by 14% to $26.9 million reflecting higher lemon, avocado, and specialty citrus and other crop revenue. Rental operations revenue was $1.3 million in the second quarter of fiscal year 2015 compared to $1.2 million in the second quarter of last year.

Our second quarter 2015 agribusiness revenue includes $18.8 million of lemon sales compared to $18.1 million of lemon sales during the same period of fiscal year 2014, which primarily reflects higher lemon byproduct and other lemon sales.

Average price per carton was slightly higher than the prior year period and continues to be significantly higher than historical averages. Avocado revenue for the second quarter of fiscal year 2015 was $4.1 million compared to $1.2 million in the same period last year, primarily reflecting increased volume and higher prices.

In addition, second quarter of fiscal year 2015 avocado sales benefited from our decision to accelerate our harvest plan due to early maturing of the California crop and the expected of arrival of Peruvian avocados in the US market in June of 2015.

We recognized $2.6 million of orange revenue in the second quarter of 2015 compared of $3.4 million of orange revenue in the same period last year. The decrease reflects lower prices partially offset by higher sales volume.

Specialty citrus and other crop revenues were $1.4 million in the second quarter of 2015 compared to $871,000 in the second quarter of fiscal year 2014. This increase reflects increased sales volume partially offset by lower prices.

Higher prices for oranges and specialty citrus in the second quarter of fiscal '14 were primarily the result of reduced market supply, resulting from a period of freezing temperatures in California's San Joaquin Valley during December of 2013. Turning to costs and expenses.

For the second quarter of fiscal year 2015, we incurred $24.1 million of costs and expenses compared to $21.6 million in the second quarter of last year.

The year-over-year increase in operating expenses primarily reflects increased agribusiness costs mainly associated with higher harvest costs due to increased volume of avocados, oranges, and specialty citrus harvested as well as higher packing and growing costs.

Operating income for the second quarter of fiscal year 2015 was $4.1 million, a 28% increase compared to operating income of $3.2 million in the same period last year. EBITDA increased 24% to $5 million in the second quarter of fiscal year 2015 compared to $4.1 million in the second quarter of last year.

Net income applicable to common stock for the second quarter of fiscal year 2015 was $2.4 million compared to $2 million in the second quarter of the prior year.

Earnings per diluted share for the second quarter of fiscal year 2015 was $0.17 on approximately 14.1 million weighted average shares outstanding compared to $0.15 on approximately 14.1 million weighted shares -- average common shares outstanding last year. Regarding our year-to-date results.

For the first six months of fiscal year 2015, revenue was $56.3 million compared to $50.7 million in the same period of last year. EBITDA for the six months of fiscal year 2015 was $3.8 million compared to $2.9 million in the same period last year.

Net income applicable to common stock was approximately $800,000 for the first six months of fiscal years 2015 and '14. Earnings per diluted share for the six months -- first six months of fiscal year 2015 were $0.06 compared to $0.05 in the same period the prior year. Regarding our cash flow and balance sheet.

In the first six months of fiscal year 2015, net cash used in operating activities was $1.5 million compared to net cash provided by operating activities of $2.7 million in the same period of the prior year.

Net cash used in investing activities was $16.4 million in the first half of fiscal year 2015 compared to net cash used in investing activities of $9.4 million in the same period of fiscal year 2014 primarily related to our investments in the expansion of lemon packing facilities and additional farm worker housing units as well as investments in real estate development projects.

Net cash provided by financing activities was approximately $17.9 million in the first six months of fiscal year 2015 compared to $6.7 million in the prior year period. As of April 30, 2015, long-term debt was $87.5 million compared to $67.8 million at the end of fiscal year '14.

The increase in long-term debt is primarily related to funding our strategic investments, including agricultural property development, lemon packing house expansion, farm worker housing project as well as ongoing investments in the Santa Paula Gateway real estate development project.

Now, I'd like to turn the call back to Harold to discuss our fiscal year 2015 guidance..

Thanks, Joe. We're updating our fiscal year 2015 guidance based on a change in expected harvest sizes in our agribusiness.

As you think about our Company, it's important to remember that our agribusiness segment, which is the largest contributor to our operating results at this point, is subject to production volume and price fluctuations typical of the crops that we produce.

These fluctuations may be further impacted by weather events and other supply factors as well as changing global demand in the U.S. and international markets. In fiscal year 2015, we now expect to sell approximately 2.8 million cartons of fresh lemons compared to our previous guidance of 3 million cartons of fresh lemons.

Lower production volume is due to continued dry weather, which has hindered fruit sizing. We expect the average price per carton will increase to approximately $25 per carton compared to $24 per carton that we previously estimated.

As we stated on previous calls, certain of our avocado orchards experienced freezing temperatures earlier this year, the damage to portion of fiscal year 2015 crop.

Following our assessment of the damage, we now expect to sell approximately 7 million pounds of avocados compared to our previous guidance of approximately 6.5 million to 7.5 million pounds of avocados. Our anticipated price per pound is approximately $0.90 versus $1 per pound price we previously expected.

Also as previously noted, due to early maturation of the crop and anticipated price pressure from the expected entry of Peruvian avocados this month, we accelerated the avocado harvest this year and began selling avocados in March, instead of April, which is when we typically start the harvest. We plan to substantially complete the harvest in June.

As a result of the updated lemon and avocado revenue, and expected lower orange and specialty citrus revenues resulting from lower prices, we are revising our guidance for operating income, pre-tax income and net income.

We expect to earn $7.6 million to $8.1 million in operating income for fiscal year 2015, compared to previous guidance of $9.4 million to $10.2 million. Fiscal year 2015 income before tax is expected to be approximately $8.8 million to $9.3 million, compared to previous guidance of $10.4 million to $11.1 million.

We also expect fiscal year 2015 per diluted share to be in the range of $0.36 to $0.40 compared to previous guidance of $0.42 to $0.46. Also note that our fiscal year 2015 income before tax and earnings per share guidance includes the estimated gain of approximately $1 million on the expected third quarter sale of the Wilson Ranch.

It’s important to note that our guidance does not reflect any potential cash flow from expected transactions for the Santa Paula Gateway project.

While we anticipate that a development transaction will generate significant cash flow over the estimated five to ten year life of the project, we believe it’s prudent to wait to update our guidance until a deal is reached. We remain focused on capitalizing on opportunities to expand our core agribusiness.

We also remain confident that following the execution of a development transaction in the coming months, final track mapping, development phasing, permitting and other planning steps will occur with land development expected to begin in 2016. We expect to benefit from the significant cash flows associated with this project.

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

Operator?.

Thank you. [Operator Instructions] And the first question comes from Tony Brenner with Roth Capital Partners..

Thank you. I have two questions. First, Harold, I think I recall that earlier you had talked about the Santa Paula packing expansion being completed by mid-year, and then later, it was talked about being completed by the -- during the summer and now apparently it’s not going to be done until around fiscal year end or maybe later.

Is there anything in particular delay to that completion or --?.

Yeah. So unfortunately we live in an extremely bureaucratic county in Ventura County and permit -- and permitting requirements is what’s caused the delay, Tony. I still am optimistic at this point that we will be packing our late district to lemons there by the end of the season.

At this point, our sort of target is to be running the first lemons in sort of mid to late August, and so I do believe we will actually be utilizing the facility sort of at the back half of our fourth quarter, but you’re correct in noticing a delay and a very frustrating delay based on the permitting requirements of our County..

Okay.

Why were events subject to delay, the – [indiscernible] your release and that you mentioned earlier that you are in discussions with potential partners for East Area 1, is that really true?.

Yeah. It’s very true. It is really true and I appreciate the question, I appreciate the patience. We believe we are very, very close. We have a – I think a very, very good potential partnership to announce in what I would characterize as the near-term.

And I am confident that by the next time we have a call, prior to the call though, there -will be an announcement and we will be able to give much more clarity, not only to who the partner is, but also a much more focused and specific pro forma of not only cash flows, but also of earnings as it relates to the development of the Gateway project..

Okay.

So the language in your release is not exactly accurate, in other words, the final details of the agreement with the partner that you have selected are being worked out, would that be more accurate?.

That is accurate. We are trying to be as general as we can – so we are trying to once again err on the side of being more general, but I do understand based on everybody’s patience or in some cases, lack thereof that we need to be more -- or as specific as possible and so I think that’s sort of where we are.

But I think at this point, I feel very, very comfortable and confident that not only is there an announcement imminent, but I think our management team is extremely excited about who the partner will be, the financial capability of the group, as well as the experience of the partner. .

I appreciate it. Thank you..

Thank you, Tony..

And moving on to Eric Larson with Janney Capital Markets..

Yeah, good afternoon everyone. .

Hi, Eric. .

I have a couple of questions. The first is related to some of your guidance numbers Harold and Joe. First, of your Avocado pricing assumption, you are at $1.05 for the quarter, good numbers, a little bit better than I think the $0.97 from a year ago.

But you’re looking for kind of $0.90, I believe, for the full year, which when you look at the third quarter of last year, I think you were closer to $1.12 and you had about 5.5 million tons of shipments in Q3. So why – is the Peruvian volume – is it fairly substantial that would add that much pressure to the Avocado pricing. .

Eric, I will try to synthesize the response and try to keep it simple, but there is a lot of moving parts and pieces to what’s going right now. But last year, Peru came in in an extremely heavy way. The entire Peruvian crop, which is a very, very large crop, because of maturation concerns of that fruit, needs to be moved in a nine-week window.

And so there is just too much volume for them to jam into this market with normal amounts of California fruit and Mexican fruit, which would in essence overload the market and really put negative downward pricing pressure on the returns for the growers.

So, as a result of that, the California shippers and the California growers of which we’re the largest accelerated – we all accelerated our harvest and what happens when that takes place, Eric is, the fruit that is basically being inventoried on the tree because we are harvesting it early, earlier than normal I would say, comes off at smaller sizes than normal.

So when you put that fact in combination with the impacts of the drought and the dry conditions we have, we have been selling much more smaller fruit, which has received a much lower price than the fruit that we held on tree last year, allowed it to mature, it got a little bigger, and it got a little better price.

And that explains the roughly $0.10 delta that we are anticipating, experiencing in our pricing even though our harvest to-date have been at very strong pricing. But remember, our harvest to-date were all size picked where we went after that big fruit that had better pricing returns earlier.

So that’s why it looked good up through the first six months, but I think we are bearish on the pricing as we look forward. .

Okay. So the consumers prefer a bigger Avocado and you get better pricing for that.

So with 3.9 million pounds shipped in your second quarter, you’re more than half way to the goal line for the full year?.

Joe, you want to fill that?.

That's right, yeah, so we're -- like we said expecting approximately 7, so roughly 3 million to go or so, 2.5 million, 3 million..

Okay.

So that would be a substantial reduction of volume relative to a year ago?.

Yes..

Right, and as you noted and we've been noted, and we've been trying to figure out the effects of the freeze, we originally thought this year's crop was going to be larger, our original very early thinking was 8 million or north thereof.

So, as the freeze, et cetera and the sizing and everything is kind of settled into, where we are, we think it's going to be in that 7 million range or GBP7 million pound range..

Okay. And somewhat of the same argument for lemons, although it's more of a dry weather induced issue, unfortunately your lemons are smaller, so you're probably putting more lemons in per cases, fewer cases, you’ll get good pricing for it, but your lemons are just smaller due to the dry weather..

Not necessarily with lemons, the dynamic is slightly different. Really, the bigger impact it has to do with how many of the lemons [technical difficult] successful or have been successful in getting into a fresh box.

And as you may recall from some of our discussions in the past, there are eight different sizes and three different grades of lemons that we're able to send into the fresh markets. Everything else that doesn't meet that size or grade configuration goes to the juice markets at a significantly lower value then if we're able to sell it fresh.

Because of the impact of the freeze, severely windy conditions earlier this year, and then a little bit to your point about the size and the lack of rainfall and the drought, we had lower than we'd hoped or actually managed to fresh utilization and that's really the biggest impact.

Now the one thing that I'll say that is actually very interesting and is very bullish of what's going on in our business right now is as we look at our current lemon pricing, we're seeing lemon, our average lemon pricing for the fresh product across those eight different sizes and three different grades in the $29 to $30 level.

And remember, we just gave guidance at $25, so I think we’ve tried to be conservative as we look forward, if these pricing -- if these prices hold up and we are able to make it to the remainder of the summer and towards the back half of the fourth quarter, then we could beat our guidance, but at this point, we wanted to try to be more conservative..

Okay..

Well, also you got to think about the math if that's right, but at this point, it's 22 or thereabout, and it’s in its you know through the first six months, and if we're at 29 now, with another a million or so go, at some point that $25 number is for the year, so it will come down to averages and math and what it plays out be but hopefully it could end up a little higher than that..

Okay. And then, just so I'm clear on this point, the million dollar gain that you're going to recognize from the sale of the Wilson Ranch that is included or excluded in your $0.36 to $0.40 guidance..

Included, it's in there, it's included..

Okay and that was not in your guidance previously, correct?.

This is a new development, and in essence, this is the announcement of that transaction..

Got it, okay, thank you, I'll pass it on to someone else..

Great, thank you..

[Operator Instructions] Moving onto Chris Krueger with Lake Street Capital Markets..

Hi, good afternoon..

Hi, Chris..

Hi. So essentially if we look at your ag business, agro business outlook, is it fair to say, essentially the consumer demand for these products remain strong but it's more of a yield issue that results in the reduced guidance..

I think that's fair to say. We still believe that the U.S. market has grown somewhere in the 10% to 12% range this past year and we continue to be delighted with the level of consumer response as well as trade response for the lemons and sort of commensurate high pricing..

Okay, moving on, I believe a couple of months ago, there is a fire at your plant there, anything to talk about there, any update on that?.

Yes, it was a scary event.

I was in the middle of a meeting in my office, and actually Joe walked down the hall and informed me that the packing house was on fire, and by the time I got out in front of our office to take a look at the packinghouse, all of our staff, all of our personnel, all of our employees had been safely evacuated and I was there right one when the first emergency responders showed up, the fire departments.

What had happened was, there was a welder that was welding diamond plate on the packinghouse floor and ember had ignited some of the support beams on the floor above our storage facility and the welder was just unsuccessful getting the ember to go out and it created a lot of smoke.

There was never any real open flames, but there was a lot smoke that was created.

The fire department did a wonderful job getting into the facility with minimal damage and extinguishing the fire and evacuating all the smoke out of the inventory rooms and we are able to successfully re-run all of the fruits that we had in packed inventory and didn't lose a single carton of fruit.

And so the damage was very, very minimal and at this point, we are still waiting for estimates.

Joe, do you have an estimate on the total financial impact of the fire?.

We don't have an estimate, actually there won't be any financial impact, meaning that there wasn't any financial impact of the operations, because none of the fruit was damaged. It just all had to be repacked. Within really I guess 48 hours we were back to full production.

So some delay there, but it all -- no real impact and any damage to the packinghouse itself was expected to be covered by insurance..

Okay. And then the last question.

Any update on your water rights and any potential ability to monetize that or whatnot?.

It's great question and we anticipated it. It's an interesting time, Chris, because while we sit in all of our assets with good water rights and good access to good water that we believe is self-sufficient and sustainable, the regulatory environment in California is really interesting right now.

And when the Governor of California declared the state of emergency, he mandated that every single ground water basin create a ground water management authority and a groundwater management plan.

And so to the extent that we don't have those plans in place, which is in the majority of our properties with the exception of Santa Paula, Santa Paula is an adjudicated basis that was adjudicated in 1996 and as such protects our interests and our rights.

We are now working cooperatively with not only governmental agencies, cities and the county as well as the state, but also with the agricultural and municipal pumpers to create management plans with each of these basins.

Until those plans have been established, we really aren't in a good position to monetize the resource because until they are adjudicated and in essence finalized, then pumping and access to the water is in essence valueless.

Once the amount of pumping is limited, then we will be able to better assess what we actually need versus what we actually have and then be able to lay strategy or plans for potential monetization of some of the surplus..

Alright, thanks. That's all I got..

Thank you..

And that does conclude the question-and-answer session. I will now turn the conference back over to Mr. Harold Edwards for any additional or closing remarks..

Thank you for your questions and interest in Limoneira. We hope to speak with many of you over the next months before our third quarter call in September. Thank you again and have a great day..

Thank you. And that does conclude today's conference. We do thank you for your participation today..