John Mills - Senior Managing Director, ICR Harold Edwards - President and CEO Joe Rumley - CFO.

Brent Rystrom - Feltl & Co..

Good day and welcome to the Limoneira Third Quarter Fiscal Year 2015 Conference Call. Today's conference is being recorded. At this time I would like to turn the call over to John Mills of ICR. Please go ahead, sir..

Thank you. Good afternoon everyone and welcome to Limoneira's third quarter fiscal 2015 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 year 2015 earnings release which went out this morning at approximately 8:00 a.m. Eastern Time. If you have not had a chance to review the release, it's available in 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 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 that differ significantly from the results, performance or achievements expressed or implied by such forward-looking statements.

Important factors that could cause or contribute to such differences include risks detailed in the Company's 10-Q and 10-K 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 included adjusted EBITDA which is a non-GAAP financial measure.

A reconciliation of adjusted 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 CEO, Mr. Harold Edwards. Go ahead, Harold..

Thanks, John, and good afternoon everyone. Thank you for joining us. On today's call I'll 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 third quarter in more detail and I'll then discuss our 2015 outlook and open the call up for your questions. In the third quarter we reported revenue of approximately $30 million compared to approximately $36 million in the third quarter of last year.

Our third quarter of 2015 agribusiness revenue was impacted by the previously discussed shift in the timing of our avocado harvest which pulled revenue into the second quarter from the third quarter.

We reported adjusted EBITDA of $9.1 million, which compares to $14.9 million in the prior-year period, and we reported earnings per diluted share of $0.36 in the third quarter of fiscal year 2015 compared to $0.61 in the prior-year period.

When evaluating our results, in addition to the shift in timing of the avocado harvest, it's important to note that in August of 2015 we completed the sale of the Wilson Ranch for approximately $2.8 million, and the gain on the sale was approximately $900,000.

We have previously expected that the sale of this property would be completed in July and that we would recognize this gain in the third quarter. The gain on the sale represents approximately $0.04 in -- per share, in earnings per share, which will be recognized in the fourth quarter.

During the first nine months of this fiscal year, we continued to execute on our long-term growth strategy across all aspects of our business. Before I discuss the Santa Paula Gateway development transaction that we announced earlier today, I'd like to take you through the process to get us to the deal.

We began a type of request for proposal or RFP process approximately 18 months ago. We started with a list of over 30 potential investors, land developers and home builders. Working with our advisors, we evaluated the potential partners on the list. For many on the list, it was clear early on that the project was not a good fit.

Based on various factors such as transaction economics, financial strength, experience, reputation, and intangibles such as cultural fit and community alignment, we narrowed the list down to three potential partners. The transaction structure and transaction economics were similar for all three.

We decided on the Lewis Group of Companies as the best choice for the gateway project. Based on our initial pro forma results over the life of the project, revenue and reimbursements are expected to be approximately $370 million and the project is anticipated to generate approximately $125 million in pretax profit, which is a 34% margin.

The project is estimated to generate approximately $150 million in cash flow, including an initial $20 million contribution from the Lewis Group, of which Limoneira is expected to receive approximately two-thirds or $100 million. We believe the project and the choice of the Lewis Group will be good for the Company and for our shareholders.

As I indicated earlier today, we issued a press release announcing that we entered into an agreement as the initial step that will facilitate a joint venture with the Lewis Group of Companies for the planned development of the Santa Paula Gateway. This announcement marks a huge milestone for Limoneira.

After receiving all the requisite entitlements that allow us to break ground on the project earlier this, engaging with the right development partner was a key area of focus for us.

The Lewis Group is a leading real estate investment company with a proven track record of developing highly successful and sought after residential projects throughout Southern California and is an ideal partner for Limoneira as we move forward on this project.

The Lewis Group has been in business for approximately 60 years and is a multi-generation company.

We have tremendous respect for their significant accomplishments over their long operating history and we share similar heritage, culture and values that will help make the gateway project a success for both of our organizations as well as for the city of Santa Paula.

This agreement encompasses the development of a 500-acre masterplanned community with up to 1,500 residential units, which represents a significant portion of single-family detached homes expected to be built in Ventura County in the next several years.

The project is also expected to include an elementary school, a 38-acre community park, and other masterplanned community amenities.

Santa Paula Gateway will benefit from its highly desirable location just 14 miles from the Pacific Ocean, easy access to several major highways and other transportation hubs and proximity to the Greater Los Angeles area.

A recent article published in the Washington Post that ranked every county in America by scenery, climate and natural amenities lists Ventura County as the number one most desirable county to live in America. The index combined six measures of climate, topography and water area that reflect environmental qualities most people prefer.

Those qualities, according to the United States Department of Agriculture, include mild, sunny winters, temperate summers, low humidity, topographic variation, and access to a body of water.

As part of the arrangement between Limoneira and Lewis Group, Limoneira received a deposit of $2 million from the Lewis Group upon entering the contribution agreement.

Upon the completion of certain conditions to close the transaction, which is anticipated in November of 2015 and includes the contribution of the property to the joint venture, Limoneira expects to receive an additional $18 million for a total of $20 million from the Lewis Group for a 50% interest in the joint venture.

We expect to receive approximately $100 million of net cash flow over the estimated seven to ten-year life of the project. Project costs are expected to be shared equally by both Limoneira and the Lewis Group until loan proceeds and/or project revenues are sufficient to fund the project.

We currently estimate project funding requirements will total between $10 million to $15 million for each partner for the first two years of the project.

We expect the developed lots will begin to be sold to builders during the fourth quarter of 2017 and the range of residential unit selling prices expected to be between $300,000 and $750,000, which represents reasonably priced homes for this area.

The project does not include an additional 500,000 square feet of commercial property and 150,000 square feet of light industrial party for future development opportunities.

Adjacent to the residential project, we own an additional 25 acres of property and have 18 acres optioned for potential acquisition, both of which are intended for commercial and retail development. We believe the residential and commercial projects will complement each other as they are developed.

The gateway project is a great example of Limoneira unlocking the value of its extensive real estate assets. The significant cash flows expected from this project are planned to be reinvested into the growth of our business and will allow us to increase the operating results of our global agribusiness.

We are confident that this strong cash flow over the coming years will enhance the long-term value of our Company for our shareholders and deliver on our stated goal of becoming one of the leading citrus agribusinesses in the world. Next I'd like to discuss our agribusiness progress.

Over the past several months we entered agreements to acquire over 900 acres of lemon, orange and specialty citrus orchards in the San Joaquin Valley, which is one of the more important agricultural regions in the country.

We currently lease these properties from the Sheldon Family and the acquisitions are expected to produce incremental operating results and cash flows resulting from the elimination of profit-sharing lease expense beginning in fiscal year 2016.

This is consistent with a number of other investments and acquisitions that we have made to increase our agribusiness operations over the past year, including an expanded lease agreement with Cadiz in San Bernardino County, our purchase of the Packinghouse property and equipment of the Marlin Ranching Company in Yuma, Arizona, and our investment in Rosales S.A., a citrus packing, marketing, and sales operation located in La Serena, Chile.

We are also on track to complete the expansion of our lemon packing facilities in Santa Paula next month.

The expanded facilities are expected to double the annual capacity of our lemon packing operations We plan to utilize some of this new capacity with the production from approximately 1,000 acres of lemon orchards that are currently in development and are expected to become productive over the next few years.

In addition, the new packinghouse is anticipated to increase our efficiency and enhance agribusiness operating margins beginning in fiscal year 2016. As we grow our agribusiness, our primary focus is increasing our lemon and other citrus properties.

As I referenced earlier in my remarks, in August we completed the sale of 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 of $2.8 million represents $53,000 and $83,000, for a total acres and productive avocado acres, respectively, and the gain on the sale was approximately $900,000 and will approximate $0.04 per share in the fourth quarter this year.

While avocadoes are an important and profitable component of our 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 have expanded our total agricultural acres from 4,600 acres in 2010 to over 7,400 acres today.

I would like to make some comments regarding the ongoing drought as well. As all of you are probably aware, California is currently experiencing one of its most severe droughts on record.

As we discussed before and have included in our previous filings, we believe we have access to adequate water supplies to support our operations, although we have incurred certain additional irrigation and crop treatment costs and had to be more strategic in our water usage.

In addition, we have seen some effects of the fruit sizing as a result of the drought. However, our operations have not been significantly affected. If the drought continues or worsens or if the State of California or other governmental agencies implement regulatory restrictions or costs, our business could be impacted.

In response to the drought, we have an ongoing plan for irrigation improvements in fiscal year 2015 and 2016 that include drilling new wells and upgrading existing wells and irrigation systems.

Now turning to the rental operation segment of our business, we have substantially completed the development of additional agricultural workforce housing in Santa Paula, California. We rented 20 units in May for June of 2015 move-in and the balance of the 60 units of the total units were rented in June and July of 2015.

On an annual basis, we expect that this will contribute approximately $900,000 of additional rental revenue. We also anticipate that the additional farmworker 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 operations. In summary, this is an exciting and dynamic time for Limoneira.

We believe we are well-positioned to generate strong cash flow, which will enable us to strategically invest in our core global agribusiness operations. With that, I'll 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 third quarter and nine months ended July 31, 2015. In the third quarter, revenue was $29.8 million, compared to $36.5 million for the third quarter of fiscal year 2014.

Agribusiness revenue decreased 19% to $28.5 million, primarily due to lower lemon and avocado sales. Rental operations revenue was $1.3 million in the third quarter of fiscal year 2015, compared to $1.2 million in the third quarter of last year. Real estate development revenue was $34,000, compared to $121,000 in the same period last year.

Our third quarter 2015 agribusiness revenue includes $23.9 million of lemon sales, compared to $26.8 million of lemon sales during the same period of fiscal year 2014, reflecting lower volume of fresh lemon sold, partially offset by higher prices.

Avocado revenue for the third quarter of fiscal year 2015 was $3 million, compared to $6.1 million in the same period last year, primarily reflecting decreased volume and lower prices.

Third quarter of fiscal year 2015 avocado sales were impacted by our decision to accelerate our harvest plan due to early maturing of the California crop and the expected arrival of Peruvian avocadoes in the U.S. market in June of 2015.

This decision resulted in additional revenue in the second quarter of fiscal year 2015 that is typically recognized in the third quarter.

As anticipated, we completed our fiscal year 2015 avocado harvest in July, and avocado revenue for fiscal year 2015 was $7.1 million on 7 million pounds, compared to revenue of $7.3 million on 6.7 million pounds for last year.

We recognized $1 million of orange revenue in the third quarter of 2015, compared to $1.7 million of orange revenue last year. The decrease reflects lower volume, partially offset by higher prices. Specialty citrus and other crop revenues were $560,000 in the third quarter of 2015, compared to $470,000 in the third quarter of fiscal year of 2014.

This reflects increased prices, partially offset by lower sales volume. Turning to costs and expenses, for the third quarter of fiscal year 2015, we incurred $22 million of costs and expenses, compared to $23.1 million in the third quarter of last year.

The year-over-year decrease in operating expenses reflects lower agribusiness costs, real estate development expenses, and selling and general and administrative expenses. In addition, third quarter of fiscal year 2014 costs and expenses include an impairment charge on real estate development assets of $435,000 on the Company's centennial property.

Operating income for the third quarter of fiscal year 2015 was $7.8 million, compared to $13.4 million in the same period last year. Adjusted EBITDA was $9.1 million in the third quarter of 2015, compared to $14.9 million in the third quarter of last year.

Net income applicable to common stock for the third quarter of fiscal year 2015 was $5.2 million, compared to $8.8 million in the third quarter of the prior year.

Earnings per diluted share for the third quarter of fiscal year 2015 was $0.36 on approximately $14.9 million weighted average diluted common shares outstanding, compared to $0.61 on approximately 14.5 million weighted average diluted shares outstanding last year.

Regarding our year-to-date results, for the nine months of fiscal year 2015, revenue was $86.1 million, compared to $87.2 million in the same period last year. Adjusted EBITDA for the first nine months of fiscal 2015 was $14 million, compared to $17.8 million in the same period last year.

Net income applicable to common stock was $6 million for nine months ended July 31, 2015, compared to $9.5 million in the same period last year. Earnings per diluted share for nine months ended July 31, 2015 were $0.42, compared to $0.68 for the same period of the prior year.

Regarding our cash flow and balance sheet, in the nine months ended July 31, 2015, net cash provided by operating activities was $10.2 million, compared to $17.8 million in the same period of the prior year.

Net cash and investing activities was $24 million in the nine months ended July 31, 2015, compared to $15.2 million in the same period of fiscal year 2014, primarily related to our investments in the expansion of the lemon packing facilities and additional farmworker housing units, as well as investments in real estate development projects.

Net cash provided by financing activities was approximately $13.8 million in the nine months ended July 31, 2015, compared to $3 million in the same period of the prior year. As of July 31, 2015, long-term debt was $84.2 million, compared to $67.8 million at the end of fiscal year 2014.

The increase in long-term debt is primarily related to funding our strategic investments, including agricultural property development lemon packinghouse expansion, farmworker housing project, as well as ongoing investments in 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 some changes related to pricing and sales volume in our lemon business.

As you think about our Company, it's important to remember that our agribusiness segment, which is the largest contributor to our operating results, 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 global supply factors, as well as changing demand in the United States and international markets. We continue to expect to sell approximately 2.8 million cartons of fresh lemons for fiscal year 2015.

However, approximately 30,000 fewer cartons are estimated to be sold for the remainder of the year, and the average price per carton is expected to be lower than was previously anticipated.

The average price per carton of fresh lemons sold is expected to be $24 to $25 per carton for fiscal year 2015, compared to $25 per carton previously anticipated, and the average per carton price for the remainder of the year is estimated to be approximately $25.50 per carton compared to $29 per carton that was previously anticipated for the fourth quarter of 2015.

The lower expected production volume is due to continued dry weather which has hindered fruit sizing, and lower prices are expected due to an increased supply of imported lemons in the market.

In addition, we estimate that a larger percentage of fresh cartons sold will be procured from third-party growers than lemons grown on Limoneira owned orchards than previously anticipated. Lemons that are procured from third-party growers have a lower profit margin than lemons grown on our own orchards.

We currently expect to earn approximately $5.8 million to $6.3 million in operating income for fiscal year 2015, compared to previous guidance of $7.6 million to $8.1 million. Fiscal year 2015 income before tax is expected to be approximately $7.3 million to $7.8 million, compared to previous guidance of $8.8 million to $9.3 million.

We also expect fiscal year 2015's earnings per diluted share to be in the range of $0.28 per share to $0.32 per share, compared to previous guidance of $0.36 per share to $0.40 per share.

Also note that our fiscal year 2015 income before tax and earnings per share guidance includes the gain of approximately $900,000 on the fourth quarter sale of the Wilson Ranch. Recall that we had previously expected to recognize this benefit in the third quarter but are now recognizing it in the fourth quarter.

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

Operator?.

Thank you. [Operator Instructions] We will go first to Brent Rystrom with Feltl..

Thank you. A couple of quick questions.

When you talk about the real estate development, when we think of the $20 million upfront and then you talk about proceeds of $100 million, is it 20 plus 100, or is 20 part of the 100?.

It's $20 million plus that is part of the $100 million..

Yeah..

Part of the 100. Okay.

And I would assume you're kind of looking at this as kind of the bell curve that you'll have cash in the start, cash-outs development, and then as the property starts to sell lots over a five, six-year period, you kind of swell to a peak and then come back down, you know, would you time its [ph] maximum cash flow should be sometime around 2020?.

Yeah, you're exactly right. It will resemble a bell curve, and based on our initial pro forma, around 2021, thereabouts. So you're about right on the timing. And that'll be high watermark. There's a couple of good years of some very significant cash flows and then it starts to tail off as the number of lots available to be sold starts to come down..

Okay. And then as we think about your opportunity to start redeploying cash, there's the $20 million you're getting [inaudible] cash you're going to have to reinvest, and there was this future cash flow out there.

Do you anticipate that you'll try to monetize that cash flow in some way? Will you be able to secure lending, for example, to go out and leverage your acquisitions, or do you think you'll just go with the cash as it comes in..

I think what we're doing, Brent, is we're constantly turning over rocks right now, and in essence, engaged in a series of due diligences, if you will, on a number of very exciting acquisition potential opportunities. And as we've discussed on previous occasions, these - the cycle time for these transactions takes a long time.

They're typically generational family farms that involve a lot of nurturing and a lot of confidence and comfort building as we go through the process. So they've been difficult to predict in terms of the timing of when they will actually present themselves.

And so we've been financing our growth using low-cost agricultural debt primarily up to this point.

As we begin to monetize, we'll begin to address the balance sheet portion of prior acquisitions, but also look to make opportunistically acquisitions as we move forward using the strength of our balance sheet and a combination of debt and equity as each deal presents itself.

And in some cases, some of the acquisitions that we're targeting want to transact with Limoneira securities, some of them want all cash. And so as those opportunities present themselves, that will really guide us in terms of how we manage our capital structure on a go-forward basis..

Is there a simplistic way you can say, you know, given where we are now, given the visibility for this cash coming in, Limoneira anticipates a capacity to [inaudible] $100 million of acquisitions over the next two years, would you have a number that you would say is in the ballpark of what you would consider?.

I'd hesitate to answer that with any real conviction because we're looking at all kinds of transaction sizes involving lots of different capital structure considerations, so I'll probably defer answering that.

Joe, how would you answer that?.

Well, I guess, part of the answer is, as Harold said, we see opportunities and some are better than others, some are more concrete than others, but certainly over the last year or two we've seen potential deals, $70 million, $80 million deals, we've seen smaller deals. So it takes a while to bring them together, as Harold said.

So we would try to make a good deal with the way that we can do it at the time with equity issues, like Harold said, or debt. So we would entertain any size deal I think at this point relatively speaking..

And just to pile on to that, Brent, I think what I would also say is that our primary focus as we consider transactions is first and foremost that it would be accretive right out of the gate in terms of bolting it on or bringing it in to the company.

But that being said, we're also very conscious of what is potentially out there, a rising interest rate environment, and we want to make sure that our balance sheet is right-sized with the amount of debt that we have on a go-forward basis.

So, taking all that into consideration, I think right now as we're entering the fourth quarter, we're sitting with somewhere around $83 million to $85 million of long-term debt, and that feels like it's getting heavy.

So I think we're going to want to bring that down a little bit just with the potential of rising interest rates sort of in the near to midterm..

All right. Is there a simple way to think of -- about the -- well, first of all, is there a reason that the Lewis Company didn't get involved with the commercial and light industrial, is that an area that they're -- I've noticed in the past they've done particularly promotional development as well.

Was there a reason you or they chose not to do that [inaudible] as part of this agreement?.

More -- the answer to that is to really bring focus to the residential piece of the project and to really scratch out a deal and get that deal done, which we've now done. And now we can turn our attention to exploring the potential of venturing together with Lewis and other potential partners on the commercial piece.

But as you point out, we are very impressed by Lewis' capabilities on the commercial side of the business as well, and we think they bring a lot to the table on that side. So I would say they're sort of frontrunners, partners for the future development of the commercial piece of gateway, and then other Limoneira commercial assets as well..

And do you have an expectation that the commercial will get developed? Does it need the gateway project to be complete, does it need the gateway project to be 50%? You know, at what point do you feel that the commercial property would be likely developed?.

That's a key part to the strategy and was one of our key decision points in working with Lewis and creating what will become our partnership and joint venture with the Lewis Group is they have created an extremely thoughtful masterplan where they've actually created the nearly 1,500 single-family home lots and created now the strategy for phasing the project that will involve required infrastructure to actually put ourselves in the position to sell finished homes towards the back half of 2017.

But when you think about the immense amount of infrastructure investment that is in front of us, which involves things like water and sewer and utilities, and involves a significant amount of grading and moving water around, etcetera, that infrastructure needed to be in place before we could tackle any of our commercial investment opportunity.

And so all of that being said, the project has been phased where at the end or the completion of the first phase of infrastructure, which will then lay down the first pads or finished lots to sell to homebuilders, that will also lay the requisite infrastructure that will allow us to begin to develop the commercial property as well.

And so all of that is, in essence, being handed to Limoneira that overnight enhances the value of the commercial property, which we would not have been able to begin without those investments taking place anyways. So it's timed with the first phase of development.

So I think to answer your question, you'll see the first part of the commercial properties being at least announced in what they will become and the development parts of that starting towards the back half of 2017..

Brent, to take your point [ph], there definitely is some synergy, and I guess even a bit of interdependency, meaning that while it doesn't have to be finished by a long shot, it's going to be well in advance, as Harold just said.

But I think the residences and people moving in to the houses will want to see some of that new commercial and retail that's envisioned. And I think the new commercial and retail that's envisioned will want to see some new residence out there. So they kind of work together and I think there's some good synergy there..

Yeah, makes sense.

My final question then would be, the 18 acres that you have optioned there in addition to the 25 acres, can you give us a little sense of what that option looks like both mechanically as far as timeframe and financially as far as pricing?.

Yes. We entered into this option, I believe it was five years ago, Joe, and --.

Three I think actually..

Three years ago. And in essence, it has an escalating value per acre option purchase value that's associated with it. So as we get closer and closer towards the inevitability of that development, that value goes up.

At the same time though, now that we're at a point where we have entitlement, we have a partner, we're developing the infrastructure, we're getting very close to being able to pull the trigger and exercising our purchase option on that property.

And in essence, if you think about East Area 2, it's predominantly the property on the south side of the 126 Highway, contiguous or adjacent to Halick Drive [ph] on the south side, and it is the -- where the entryway to the 25-acre commercial property will be. And so it's a critical part of the 40-acre, 43-acre commercial development.

So I fully expect that we'll be working on a transaction of that piece of property here in very short order..

And then do you have, you know, is the agreement publicly visible, so you can tell us roughly here's kind of what this looks like at this time or here's what it'll look like in a year?.

Yeah. The option I'm pretty sure is publicly available. I'm just trying to remember, I haven't looked at it in a while. So I forget off the top of my head. We can get it to you, on what the price per acre is. But we can exercise it at any time, and as I said, I can't recall off the top of my head what the price per acre is, so we'll have to get that..

All right guys. Well, thank you. Congrats on getting the deal done..

Thank you..

[Operator Instructions] And we have no other questions at this time..

Great. Thank you for your questions and interest in Limoneira. We hope to speak with many of you over the next months. And thank you again. And have a great day..

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