John Mills - IR Harold Edwards - President & CEO Joe Rumley - CFO.

Tony Brenner - ROTH Capital Partners Brent Rystrom - Feltl Eric Larson - Buckingham Research Group Chris Krueger - Lake Street Capital Markets.

Good day ladies and gentlemen, and welcome to the Limoneira Second Quarter Fiscal Year 2016 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to John Mills of ICR. Please go ahead..

Good afternoon, everyone and thank you for joining us on Limoneira's second quarter fiscal year 2016 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 second quarter fiscal year 2016 earnings release, which went out today at approximately 4:00 P.M. Eastern Time. If you have 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 risks 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. Please note that during today's call, we will discuss non-GAAP financial measures, including results on an adjusted basis.

We believe these adjusted financial measures can facilitate a more complete analysis and greater transparency into Limoneira's ongoing results of operations, particularly when comparing underlying results from period to period. We have provided as much detail as possible on any items that are added back.

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 measures is included in the company's 10-Q and 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. .

Thanks John, and good afternoon everyone and thank you for joining us. On today's call I will begin with a brief overview of our financial results for our second quarter of 2016 and provide an update on our progress across all our business areas.

Joe will review the financial results in more detail and I will then discuss our fiscal year 2016 outlook and then open the call for your questions.

In the second quarter, we generated revenue of $27.4 million which reflects higher prices and volumes of fresh lemon sold offset by the timing of our Avocado harvesting sales which began later this year than last year.

We reported EBITDA of $3.4 million compared to $5 million in the prior year period and we reported earnings per diluted share of $0.08 in the second quarter of fiscal year 2016 compared to $0.17 in the prior year period. The quarter-over-quarter decline was impacted by the later start to our Avocado harvest.

I would now like to provide an update on our business segments; first, regarding our agribusiness. We believe our agribusiness is well positioned to benefit from the investments and strategic decisions we have made in the past several years. Our new packing house in Santa Paula became operational in March.

This facility is expected to double the annual capacity of our Lemon packing operations and significantly reduce labor costs. The start-up and transition to the new packing facility and realization of its cost efficiencies is taking longer than we originally anticipated.

We expect to begin seeing the improved agribusiness operating margins as we work through the operating transition.

The new facility also ensures that we have ample capacity for increased production expected in the coming years from our current non-bearing orchards as they become productive as well as newly recruited third party growers interested in our packing, marketing and sales services.

We currently have approximately 7,500 planted agricultural acres of which approximately 1,500 are non-bearing and are estimated to become full bearing over the next four years with plans to plant an additional 500 acres in the next two years.

We anticipate these additional acreage will increase our annual Lemon supply from our current level by approximately 30% or about 900,000 to 1.3 million fresh cartons as the non-bearing and plant acreage becomes productive.

In April, we made further progress on one of our long-term goals of becoming one of the leading global citrus agribusinesses when we announced the formation of Limoneira South Africa. Working with our business partners in South Africa we planned to manage the packing and sales function from locally sourced lemons.

We believe this represents another promising opportunity for supplying our global customers year round. Lastly, on our agribusiness, I would like to make some comments regarding the ongoing California drought.

Recent precipitation has brought relief to California's drought conditions although the last few years have been among the most severe droughts on record.

We believe 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 and currently do not anticipate the California drought will have a material impact on our operating results.

However, if the current 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.

Staying with the topic of water, the Ventura City Council passed an ordinance at its June 6, 2016 meeting which imposes a onetime fee of $26,457 for every acre foot of new water a development needs. We think this is a potential indicator for the value of approximately 10,000 acre feet of Santa Paula basin water rights that we own in Ventura County.

Turning now to our real estate development segment, in November 2015 we formed Limoneira Lewis Community Builders LLC which is a development partnership between Limoneira and Louis group of companies for the development of the Santa Paula gateway East Area 1 project which we have now renamed Harvest at Limoneira.

We contributed our East Area 1 property to the LLC and received $20 million from Lewis for a 50% interest in the joint venture.

We expect to receive 25% to 80% of the net cash flow of the project based on cash flow milestones provided in the operating agreement, the net cash flow is estimated to aggregate approximately 70% of total net cash flows to Limoneira, including the initial $20 million payment and the balance of net cash flows to the Lewis Group over the estimated 7-year to 10-year life of the project.

We expect to begin development grading on the project in early calendar year 2017 and lot sales are estimated to begin at the end of the calendar year 2017.

The total cash that Limoneira will receive over the life of the project will depend on the median home price and the related lot sales price but with its highly desirable location near the Pacific Ocean, we believe that Limoneira should receive between $100 million and $130 million from the project.

During the second quarter of fiscal year 2016, we contributed $450,000 to the joint venture and an additional $450,000 in May 2016 matching Lewis contributions to fund ongoing development activities.

In addition to the residential aspect of the project, we are also planning the development of approximately 40 acres of commercial properties adjacent to the residential development that is not included in the partnership plans and financial projections, which represent additional cash flow opportunities.

We have been extremely encouraged by the strong interest from potential tenants, including big box retail, drugstores, banks, outpatient medical facilities and educational centers. The residential and commercial components of the project will create a highly desirable community in a prime Southern California location.

We plan to use the proceeds to reinvest into our agribusiness operations to further increase Limoneira's position as one of the leading global citrus providers.

As a final point on our real estate development segment, we recently were recognized by the American Planning Association California Chapter, central coast section with the 2016 comprehensive plan award of excellence for the companies harvest at Limoneira project.

Limoneira's plan will now move on for consideration at the APA California chapter state awards this October in Pasadena. Lastly, turning to the rental operations segment of our business, last fiscal year we began renting 65 additional agricultural workforce housing units which contributed to increase second quarter rental operations revenue.

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

In summary, we are excited about the position of our business in the progress we continued to make. We remain focused on our goals of establishing a global agribusiness presence and working towards supplying our customers the leading citrus on a year round basis. With that, I will now 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 ended April 30, 2016. In the second quarter of fiscal 2016, revenue was $27.4 million compared to $28.3 million in the second quarter of 2015.

Agribusiness revenue decreased 4% to $25.9 million, primarily due to the timing of our Avocado harvest which began later in fiscal year 2016 versus last year.

Rental operations revenue was $1.4 million in the second quarter of 2016, compared to $1.3 million in the second quarter of last year, reflecting rental revenue from 65 additional agricultural workforce housing units which we began renting last fiscal year as Harold mentioned earlier.

Real estate development revenue was $8,000 compared to $18,000 in the same period last year. Second quarter 2016 agribusiness revenue includes $20.8 million in the lemon sales compared to $18.8 million of lemon sales during the same period of fiscal year 2015.

Approximately 780,000 cartons of fresh lemons were sold during the second quarter of fiscal year 2016 at an average price of $22.44 compared to approximately 711,000 cartons sold at $21.94 average price per carton during the second quarter of fiscal year 2015.

Second quarter Avocado revenue was $1.2 million compared to $4.1 million in the prior year period, a decrease in Avocado revenue was a result of decreased prices and volumes of Avocado sold impacted by less favorable market conditions primarily driven by increased volume of Mexican Avocados imported in the US market.

The lower sales volume also reflects our decision to accelerate our harvest plan in fiscal year 2015 which we did not do this year.

We recognized $2.6 million of orange revenue in the second quarter of fiscal year 2016 and 2015, specialty citrus and other crop revenues were $1.3 million in the second quarter of 2016 compared to $1.4 million in the second quarter of fiscal year 2015.

Second quarter 2016 results for oranges and specialty citrus reflect lower prices partially offset by higher volume, compared to the same period fiscal year 2015. Turning to costs and expenses for the second quarter of fiscal year 2016 we incurred $25.2 million of costs and expenses, compared to $24.1 million in the second quarter of last year.

The 2016 second quarter increase in operating expenses was primarily attributable to increases in our agricultural cost, partially offset by lower selling general administrative costs. Second quarter fiscal year 2016 real estate development expenses were $200,000 which is the same as the second quarter of 2015.

Agribusiness costs and expenses increased 6% in the second quarter of 2016 compared to the second quarter of last year, primarily related to increases in packing, harvest and third-party grower costs, mainly due to higher lemon sales and harvest volume partially offset by lower growing costs.

Packing cost also includes certain labor costs associated with starting up and learning the operating requirements of our new packing house. Operating income for the second quarter of fiscal year 2016 was $2.2 million compared to operating income of $4.1 million in the second quarter of last year.

EBITDA was $3.4 million in the second quarter of 2016 compared to $5 million in the same period of fiscal year 2015. Net income applicable to common stock after preferred dividends for the second quarter of 2016 was $1.1 million compared to net income applicable to common stock at $2.4 million in the second quarter of 2015.

Net income per diluted share for the second quarter of fiscal year 2016 was $0.08 compared to $0.17 for the same period of 2015 based on approximately $14.2 million and $14.1 million weighted average diluted common shares outstanding respectively.

Regarding our year-to-date results, for the first six months of the fiscal year 2016 revenue was $52.4 million compared to $56.3 million in the same period of last year. EBITDA for the first six months of fiscal year 2016 was a loss of $1.3 million compared to earnings of $3.8 million in the same period last year.

Net loss applicable to common stock was approximately $3 million for the first six months of 2016 compared to net income of $800,000 for the same period last year. Net loss per diluted share for the first six months of 2016 was $0.21 compared to earnings per diluted share of $0.06 in the same period of the prior year.

The decrease in operating results for the six months ended April 30, 2016 compared to the same period last year is impacted by $2.9 million lower avocado sales because we began our avocado harvest later this year compared to last year.

In addition, the six months ended 2016 results include $1.2 million of transaction costs incurred upon entering the previously announced joint venture with the Lewis Group.

Regarding our cash flow and balance sheet for the first six months of fiscal year 2016; net cash and operating activities was $5.9 million compared to $1.5 million in the prior year. Net cash used at investing activities was $7.5 million in the first six months of 2016, compared to $16.4 million in the prior year.

Net cash provided by financing activities was $13.4 million in the first six months of 2016 compared to $17.9 million in the same period last year. As of April 30, 2016 long-term debt was $102.5 million compared to $89.1 million at the end of fiscal year 2015.

Now I'd like to turn the call back to Harold to discuss our updated fiscal year 2016 outlook..

Thanks, Joe. We are re-confirming our guidance for fiscal year 2016. For the fiscal year ending October 31, 2016 we continue to expect to sell between 2.7 million and 3 million cartons of fresh lemons at an average price of $23 per carton and we expect to sell approximately 8.5 to 9.5 million pounds of avocados at approximately $0.80 per pound.

We are reiterating our guidance range for operating income, EBITDA, and earnings per diluted share for fiscal year 2016. We estimate our operating income for fiscal year 2016 will be approximately $8.6 million to $9.1 million. Fiscal year 2016 EBITDA is expected to be in the range of $14.6 million to $15.1 million.

We expect fiscal year 2016 earnings per diluted share to be in the range of $0.28 to $0.33. Excluding transaction costs incurred in connection with the Limoneira Lewis joint venture, fiscal year 2016 earnings per diluted share are estimated to be in the $0.33 to $0.38 range.

We plan to substantially complete our avocado harvest in the third quarter, and typical of the seasonality of our business, we estimate that the third quarter will be the most profitable quarter of the year.

Our fiscal year 2016 estimated operating results reflect an anticipated increase in operating income, primarily related to cost savings from our new lemon packing facilities, increased revenues for additional farmworker housing units, and the elimination of lease expense resulting from the acquisition of the previous leased Sheldon Ranches offset by transaction costs of $1.2 million incurred on the close of the Limoneira Lewis joint venture and an expected increase in depreciation and expense resulting from the new packing facilities, the acquired Sheldon Ranch property, and the additional farmworker housing units.

In addition, interest expense is expected to increase in fiscal year 2016 related to the new packing house and the additional farmworker housing units being placed into service because of related interest costs were capitalized during the construction period. As we conclude, I want to leave you with a few highlights of our upcoming opportunities.

During the next four years, we are expecting an additional 1,500 acres that are currently non-bearing to become full-bearing, increasing our annual lemon supply approximately 30% or from 900,000 to 1.3 million fresh cartons, which our new packing house is expected to efficiently manage, contributing to our top line beginning in 2017.

We are also excited to be working with the Lewis Organization on the harvest at Limoneira project. We expect to begin development grading on the project in early calendar year 2017 and lot sales are estimated to begin at the end of calendar year 2017.

The total cash that Limoneira will receive over the life of the project will depend on the median home price, but with its highly desirable location near the Pacific Ocean, we believe that Limoneira should receive between $100 million and $130 million.

We remain focused on capitalizing on opportunities we have been cultivating over the past few years and continue to look for additional opportunities that lie ahead. And with that, I'd like to now open the call up for your questions.

Operator?.

Thank you. [Operator Instructions] And your first question will come from Tony Brenner with ROTH Capital Partners..

Thank you very much. Harold, could you talk a little about what opportunities you've got beyond the efficiencies of the packing houses that comes fully onscreen to reduce costs and expenses for the balance of the year? I notice G&A or SG&A is down sequentially in the second quarter.

Is that sustainable or is there more there or is there an opportunity on agriculture costs as well to obtain some reduction?.

A couple of things there Tony, thanks for the question. We, at the beginning of this year pulled the management team together and challenged ourselves to pull costs out of the business to the extent that we'd be able to do that. And so we did a couple of things.

One, we received some pretty good cooperation from Mother Nature throughout our California and Arizona operations, as it related to adequate rainfall to reduce our irrigation cycles fairly significantly. So the amount of irrigation costs associated with our operations in 2016 versus 2015 are significantly lower than last year.

We also have challenged ourselves internally with our SG&A costs to pull costs out of the business and in essence tighten the belt a bit around the organization, the operation. We've cut back on some of our sales and marketing activity to the extent that we felt we could without impacting the overall business.

We actually raised the bar as it relates to our management incentive program, so that we actually were in an effort to gaining greater profitability out of the year, working to a much higher target to trigger bonus payments throughout the management structure.

So the bottom line to answer your question is, the SG&A -- we challenged ourselves to pull approximately a $1 million of costs out of the business, out of the SG&A part of our business, 2016, this year versus last year.

And we believe that the other cuts that we've made to-date are sustainable and that we're on-track to achieve that $1 million of cost reduction for the year..

Okay. So for the quarter, that's about a $1 million run rate or pretty close to it..

Yes, we believe it's sustainable..

Okay.

Would you repeat the particulars of the Ventura County water fee and the impact that you think that might on Limoneira?.

Sure. So the particular Tony are, the Ventura City Council met last week and that the City of Ventura lies approximately three miles to our west with the border of Ventura about three miles to our west.

And they met and approved in ordinance that says that any new development that is conceived residential or commercial, that needs to come to the City Council and Planning Commission of Ventura County, sorry, the City of Ventura, needs to come with either of its own source of new water or in the absence of that water for the amount of water that is required to bring to the project, pay a one-time fee for that water of $26,457 an acre foot..

Okay.

So that being said, other developments will potentially be buying water from Limoneira for that amount?.

It's more of a benchmark figure, whether they buy from Limoneira, whether they buy it from the City of Ventura's own internal source of water, whether the City of Ventura is forced to go out and acquire new water shares or access new water in the Santa Paula Basin, that's an amount of money that we can now reference as a value per acre foot..

Okay.

And your -- the number of acre feet settlement as in the Santa Paula Basin was?.

Approximately $10,000..

Okay. Thank you very much..

Thanks, Tony..

Next, we'll hear from Brent Rystrom..

Thank you.

Harold, could you give us a sense when you think about your lemon groves kind of where the EBITDA per acre is right now for a mature-fully producing lemon grove?.

Sure, Brent. It's all over the map by district because remember we grow in three very different areas, we grow in the desert in Yuma, Arizona in the fall season, and that shifts up in the winter, up into the San Joaquin Valley, and then in the summer months it falls down to the coast here in Ventura County.

And so the EBIDTA reality in each of those places is different based on where the market is at that time. But in total, we're looking at approximately -- right now it's about $6,000 an acre EBIDTA net..

And Joe, you mentioned that four to six -- so would the four be something more typical in those other districts? And the six is in the coast?.

Yes. And as Harold said, depending on the ranch, depending on its production, depending on how its age, every year is a little different, so there is that range in there. But with the prices that we've been seeing over the last few years at this $23, $24 price range, those are the relative acreage per return on an EBITDA cash-on-cash kind of a basis..

Another component to that, Brent, is the yields that come-off of those areas are very different, so we expect to get about 600 fresh cartons with normal fresh utilization per acre out of our Yuma production. That goes all the way up to 1,000 cartons per acre up in the San Joaquin Valley.

And then here on the coast, we expect to get somewhere around 800 cartons per acre, so all of that factors into the question that you just asked..

And to that point too as you would have seen in our first quarter, D3, Arizona was a little lower this year in production than it has been the last couple of years, which will directly translate into a lower-per-acre return, so that's the other thing too as you don't always get the same thing every year..

Yes, that makes sense, that's helpful.

Thinking of the guidance that's here for 2.7 million to 3 million cartons of lemons, how are those sourced? What's the proportion that's coming from your properties and then how much of it is from others?.

So this year about 60% of everything that we sell will be internally grown and 40% will be outside grown and that's….

That's about right..

And remember, Brent, that when we started off in our fall season at the beginning of our fiscal year, out of our District 3 desert crop 300,000 cartons below our internal plans and below the guidance.

The significant thing that happened in the second quarter that we can comment on is that we fought back significantly and overproduced and overperformed with our lemons in the second quarter in the San Joaquin Valley, and now as we come forward and we are beginning our summer harvest here in District 2, we're very, very optimistic by what we see hanging on the tree, so we believe we'll be able to more than fight back on that 300,000 carton deficit we faced in the first quarter and we'll more than make up for that.

But the other very exciting part of that is the very, very high FOB sales prices right now which the entire industry is enjoying..

Through the second quarter, it was 49%, 41% -- 49% was the outside growers..

So that's 50-50?.

Yes. But I think it will lead to your point as the year goes on, it typically is in that 60-40 range..

Because we own more in District 2..

Yes..

Alright. And just so I can clarify that, the 60%, 40% split projection, is that on the $2.7 million as a base or is that on the….

No, no, it's on the $2.7 million to $3 million forecast..

Yes, on the whole year of production..

So if you do $2.7 million or you do $3 million, you still expect to do 60% either way and your production would just reflect what the industry has available?.

Yes..

Alright. Can you refresh -- we've talked over the last couple of years about the packing house adding at least a $1 per carton of cost savings.

Can you give us an update even though it's starting off, I know, with some higher startup costs -- what are you seeing right on the packing house once you get past these costs as far as what these savings per carton might be?.

So I'll break it down into three areas. We're living it right now, it's very, very exciting but it's really putting a lot of pressure on the organization; it's good pressure. And I would really characterize the transition we're making as really I would characterize it as a cultural change for our overall business.

Just given the level of modernity and just how incredible this new technology of this packing house is but the first thing that we wrestled with and have made huge strides overcoming has been getting the machine to actually perform at the level that we basically signed up for when we made the investment into the packing house, and the metric we use to follow our progress is in cartons per hour that we're able to pack using that new packing house and for matter of reference, the old packing house in March actually let's use the month prior so February, achieved a 750,000 carton per hour average packed throughput rate in the month of February.

We are now averaging approximately 1,500 cartons an hour so in essence we have doubled the throughput in the same amount of time from February to today.

Theoretically, the machine can operate at something around 2,200 cartons an hour and we are seeing that kind of performance for small intervals but unless you are able to string together hours and hours of consecutive operations for those levels, you don't know, that's really the game.

So we have in essence doubled the throughput as the first sort of hurdle we had to clear.

Then the next part of the hurdle was to do that without adding hours of overtime and double time as we tried to meet the sales orders for given week and we have been able to cut the amount of overtime and double time that we have thrown at this effort down by 75% in the last month. So we are really making progress there.

The final piece of the puzzle is on overall headcount and actual labor costs and right now when we have issues of running the plant. As we are learning to run the plant we are actually doing it more bodies than necessary as we go through the production.

We think we have the opportunity to pull a significant amount of bodies off the line as we reduced the total head count from where we are today by as many as 50 people over the course of, and these are temporary people and temporary employees as we go through it. As we regain confidence and skills to do that.

We believe that transition will take probably the next three to six months as we acclimate and get the confidence to be able to do that but when we do that we are still very focused on the idea that our year-on-year savings will be significantly greater than the dollar than we signed up for this year per carton. .

Thank you.

From acreage perspective, can you guys give us an update? I know you had mentioned, I think you said you had 7500 acres now planted, would that 7500 acres of total crops?.

Total crops, yes..

And was that 7,500, is that a producing number so there's another 1,500 beyond there or is the 1,500 part of the 7,500?.

Yes, 7,500 less 1,500. 1,500 is non-bearing so 6,000 acres is bearing and 1,500 is non-bearing..

And is the breakdown roughly, I know lemons are close to 4,000 acres of this, is that correct?.

Yes..

How else is the breakdown Joe? Can you give us the oranges, avocados, specialties, rental?.

Oranges are around 1,000, specialties around 500, from going on from memory..

Yes. So I have got the deck in front of me, 4,200 acres of lemon, and 1,100 acres of Avocados, 1,400 acres of Oranges and 900 acres of specialties. .

Okay.

And then I believe you have about 1,000 acres you rent to others, is that still correct?.

500 to 600 -- 600 right now..

600, okay. And then I know it's a long ways off yet, but can you give us a sense of how you think from a flow perspective, how lot sales will kind of start, just a time flow sort of thing and then kind of start off with some strips, you know where you are selling off a bunch of lot.

Will there be piece mill where you are selling a lot or two? And then how should we think about cash flows those first couple of years? Because I seem to recall when you first start developing lots, more cash flow will go to the Lewis Company as you get further in the cash flow build the yield?.

So I will make a couple of comments and Joe can jump in, so Joe's spending a lot of time performing this with the Lewis group. But the first phase that will be developed at this point, it's estimated to be 640 lots. It will be lumpy but we believe that the absorption would be over the next three years. .

More than that I think because it will start at the end of 2017..

So 2017 would be the first. Over the three years, 640 lots would be developed and it will be something like this where the assumption 300 units per, for the second year it is 300 units. .

I think yes, directionally think about different years, there is a 250 unit year, there is a 300 unit year so based on the projections, it is going to be significant in any given of those three years to add up to that 600 units but it will be with multiple builders and so on. .

Yes, and the average lot take down, I asked this question to Lewis in the last Executive Committee meeting, they think the average takedown from any one builder might be 50 lots and so maybe so, if you are thinking about a modelling perspective Brent, we might want to think in terms of, because the first lots would really sell in the back part, end of 2017, there will be a modest amount of lot sales and cash flow and earnings in 2017.

2018 will be a big year because you will have the full push of the 300 units and the following year will be the balance, 2019 will be when the balance sell but there will also probably be more cost associated with that so the cash flow will be limited in 2017, it will be pretty big in 2018 and it will start to be limited in 2019 as we begin to go forward with the next push of development.

.

And as a reminder, Brent I think as we have talked before on this, this is an equity investment to Limoneira so these, the performance, the earnings and cash flow, any of that from an income statement standpoint will be reflected as one line equity earnings on our income statement so it won't be the revenues and cost flooring through our financials we don't expect.

The entity itself is an LLC and the standalone entity will have the revenues and cost and then you would expect an allocation of costs and so forth and bear in mind that there is some new revenue, re-commission rules coming down the pipe so we have intentionally stayed a little bit vague, I guess if you will, on the earnings right now as we start to figure out how some of those costs and some of those accounting will affect.

But from a cash flow standpoint what Harold just said, you know would be a general range to think about. In other words, the cash flow and the earnings won't necessarily match. .

Alright. And then so thinking about that, this is probably that one more step Joe.

So if 2017 and the first lot will start in 2017, I would assume that would be possibly some earnings but probably not any cash flow?.

No, 2017 we are now projecting that 2017 in theory could have some deposits.

The general way we understand this works is just they will shows up at the end of 2017, necessarily and by lots and typically get in front of that, get the arrangements, get the contracts, get things sort of going in commitment etcetera so we would expect some cash flow that may or may not accrue back to Limoneira but certainly at the entity level there will start to be some cash flow in forms of deposits and then lot sales more cash flow and we start to go from there.

.

And then so carrying on a step further, and so in 2018 what you are saying is that you may actually have fairly substantial earnings because the acceleration of the lots, your cash flows from it could be even more substantial than if you cycle into your second big year, your earnings could also be big, your cash flows will start to come down a bit as you ramp for the next phase of development?.

Yes, I think that's generally a way to think about it. In fact, to that point before we get to the end of 2017 as we noted so far this year we have contributed $900,000 to the joint venture.

Lewis has contributed that more how to get matched up to get equal equity interest in that sense and then as we said earlier in other releases, between now and when deposits and lot sales etcetera and when the joint venture gets to a financial place that makes sense to start getting some loans at that level.

The expectation the partners will fund, significant part of those development costs, so like we said still we don't think there's any reason to think otherwise somewhere in the $10 to $15 million range in total each between now and call it even in to 17 or 18 as it starts to turn the corner. .

That $900,000 of first upper of that $10 million to $15 million are that a way to say..

Exactly, that is right.

We think it might be two to three this year a rough estimate subject to change as we see out of the speed of the developments starts to rollout. .

And then when thinking about this. I don't know if you can even answer this.

The first 604 lots are these going to be typical of how the 1500 total lots, not will be a mix of different types of a lot? Will be more entry level? Will be have any particular variation that you'd like to highlight for us relative to the overall life of the project?.

Yes, we actually had this discussion in our last executive session, executive committee meeting.

And we believe that at any given time so this is going to be what's called an aspirational master plan, in which there's going to be multiple multi segment types of product being built simultaneously, and we believe that the types of lots that will be sold will be representative with various different values and very different price ranges, to different builders concurrently we believe at this point that there could be as many as five different builders, building on five different product types, who have just taken down and purchase a certain number of lots to meet whatever they're part of that first stage is going to be.

So we think the answer is that the bottom line answers to your questions we think it's going to be very representative from a product mixed stand point to the overall absorption of the 1500 units. We also think this is very early that assuming the pro forma and the economy etc.

cooperate, and the development starts to look that much better, that first piece, that first houses start to get a real neighborhood in, and the amenities and all the nice things of the master plans.

So in the later years the thinking is that while still be a mix of different segments and home types, that are somewhat higher mix the values we would appreciate, that the thinking today. I had to say subject to cooperation from the economy in the market everything else..

So basically, we build a nice community with the back of that filled out in real life the better we turn because you're going to have a limited ability to absorb the on a certain point and then you get calls from through to the end pricing, you can work higher..

Perfectly Said. .

Thanks guys..

Thank you, Brent..

Next we'll go to Eric Larson from Buckingham Research Group..

Good afternoon, everyone. First question is more of an accounting question for Joe.

Joe can you just give us what kind of fiscal 2016 interest expense you would expect and then what a fully loaded full year interest expense number would be?.

Hang on one second rather than going from memory I think we can do a little better than that. Yes we think the interest expense should be somewhere in the $1 million to $6 million you know plus minus maybe little more range for 16 for the year..

And you're not you're not putting on a rate now, you're not decommissioning other things, so that would be a full run rate number again for 2017 assuming you don't pay any debt?.

That's a good question. Interest expense or interest costs for us because of the still relatively intensive capital investments we always have in our planning grapes up and when Paul got this 1,500 acres working on.

So anytime we have development properties even the East Are 1 project was still under accounting rules permitted to continue to capitalism interest.

So there's interest Cost and there is interest expense, the $6 million over the year would be subject to the accounting and so 2017 will be different as certain property start to come, some of these orchards start to become producing, like the windfall grapes, we have 100 acres will become live next year, and that kind of thing.

So I'm going to go from memory, I think it's around $3 million of total interest cost for any given year, 2016, of which $1.6 million would be expensed, the other $1.4 million or so is capitalized, something like that, but directionally it's something like that..

Okay, thanks, that helps kind of clarify that web of interest expense dilemma. The next question is for Harold. And Harold, obviously we are seeing producer returns come down fairly sharply in the avocado business, we've got increasing production in Mexico.

Strategically, does it make sense at some point to -- it probably doesn't make sense to expand avocado acreage, but is it possible to actually convert some avocado acreage to lemons? I think you said that avocados were 1,000 acres earlier..

Avocados, I think are 1,200 acres now..

At 1,200, yes..

I think at our peak we were at about 1,500 acres. Since the last time we've debriefed, and since the last real communication we've had, something amazing has happened. So Mexico -- so the U.S. market is going to consume at this estimation about 2.4 billion pounds of avocados; 80% of the supply is going to come from Mexico.

The California crop this year is estimated to be somewhere around 350 million to 400 million pounds, and Limoneira, which is the biggest grower in California still, our guidance is somewhere around 9 million pounds. So where we -- so the first part of the harvest, which we've already experienced, Mexico was exporting and the U.S.

was importing about 52 million pounds of Mexican avocados each week until about six weeks ago when they -- Mexico finished their old crop and pushed pause while they waited for the off bloom avocados to begin and then their new crop to start, which we estimate to begin sometime around probably the middle of July and when -- what unexpectedly happened is literally overnight, Mexico went from exporting 52 million pounds a week to 20 million pounds a week.

When Mexico was exporting 52 million pounds a week, the average price for a size 48 piece of fruit which is about an 8-ounce piece of fruit, was going for about $0.50; when Mexico reduced their amount of exports, it sort of artificially shorted the market, and we saw the value of those 48's to go from $0.50 to right now, about $1.20 a pound.

And so overnight the market improved to the point where California had a window in which it was able to jump in at significantly greater producer prices than we thought we'd see this year.

So when we caught wind of this and we saw the opportunity, we put our foot down on the gas and we really started to accelerate our harvests and consequently we'll get through our full approximately 9 million or slightly greater pounds of avocados and we feel very confident that we'll get this $0.80 that we forecast.

So to that case, we used to harvest over the course of what amounted to about nine months a year. The way that's working now, that's been truncated to somewhere around three to four months, but if you can get your entire crop off in that time period, you can still enjoy some pretty good prices.

One of the things I will say, Eric, that we're experiencing in the avocados is we're seeing smaller sizing than we thought. I think that's a function of just the overall drought over the last few years.

We haven't seen the size of the avocados getting to where we wanted to but we've been very pleased with the number of pieces so we're going to get the total weight.

The smaller fruit has a slightly lower value, but we think the Avocado forecast is intact and to get to the final part of your question, we have some Avocado still remaining on the flat lands in Ventura County where we could very easily convert it very easily to lemons in fact that is the plan on some of it.

But for the majority of our Avocados they are planted up on hill sides where today there really isn't a great substitute or alternative.

You could introduce the idea of wine grapes down here but we are reluctant to do it because there are certain pests that are naturally living in citrus that carry diseases that are very damaging to wine grapes and so citrus and wine grapes haven't lived very well together over time so we like our mix and while we see the amount of acreage of Avocado come down slightly, we still think it is the best way to utilize our hill side acreage in Ventura County.

.

Okay.

And all that hill side acreage I assume has water to it, I mean you are able to irrigate?.

Yes, so I mentioned the rainfall earlier so this year was a great year. We received approximately 10 inches of rain down here, in this part of Southern California.

Well levels are actually up so our access to water has been excellent and just to the other part to the way the rain cycle work this year is even though it wasn't the maximum amount of rain predicted for El Nino, that actually hit up more closely to Northern California in the form of great snow in this year in Nevada which really helps our Northern California operations.

Here in Southern California though, the way that the storms were stretched out it really helped us to avoid the irrigation cycles and there is just something about a natural rainfall that physiologically does something to a tree versus having to irrigate it.

It leeches the soil like it's the salts of the root system and the trees generally get more healthy and consequently more productive. So it actually in a strange way was a really really good year from a rainfall perspective for us this year. .

Okay. Interesting and now thank you for that explanation. It's now clear why you put the brakes on for your production of Avocados in Q2 and now have the gas peddled on in Q3.

Do you think this is kind of the new norm then? Is this window going to be relatively consistent with Mexico going forward or is it unique to Mexico this year too? How does that play out going forward on a consistent basis?.

Now, that's a great question and the reality is that Mexico's the 10,000 pound gorilla and so we really need to be aware of the Mexican crop and how the very disciplined Mexican industry is going to behave.

They have been good partners because they are very communicative and they work very closely with our handlers, Clavo [ph] is one of the biggest importers of Mexican fruit into the U.S. so that relationship has been incredibly helpful.

In terms of our ability to predict what's coming, and when it's coming from Mexico which then allows us to see where our windows might be and so the bottom line answer to your question is that it's going to differ year-to-year based on the size and the structure and the type of crop that's coming out of Mexico so California will continue to have to be increasingly nimble in terms of our ability to get in or get out when the window is open but I do believe that every year there will be a good window and with our logistical advantage being close and more proximate to the U.S.

market, it's actually a really interesting niche that's developed where consumers actually seek out California Avocados and because of that we are able to command a premium price in some places and that little niche opportunity is going to keep us in a good place with our Avocado production. .

Okay, great. And the final question and then I will pass it on; your lemon pricing continues to creep up gradually. It's really nice to see $23 kind of outlook for a carton of lemons.

Talk a little bit more about the driving factors there, I think you talked a little bit the last time that you were thinking that your fruit was going to be, your sizing was going to be a positive mix this year as well larger fruit.

Can you give us just a quick snap shot of what's going on similar to what you just did for Avocados for lemons?.

Sure, two exciting things going on. But as it relates to this year versus last year for us, so remember in lemons there is three different grades of fruits. There is the fancy which is the really good stuff, the choice which is the more food service oriented, sort of middle of the road quality and then standards.

The standards are if you can get into a fresh box and selling it to the juice plant or sending it to the juice plant, you get a good return.

Because of the way the rain fell this year, because of our cultural practice with good aggressive pruning but also very aggressive pest control work we are seeing a much greater percentage of fancy fruit this year so from a product mix standpoint we are really enjoying the benefits of higher Appleby's because we are selling more valuable fancy fruit than we did last year.

So that's very very exciting and then the other thing to mention which is probably the most exciting thing from an industry standpoint is we continue to benefit from what we predict of being about 10% to 12% increase in the size of not only the U.S.

but the global markets for fresh Lemons right now so it has put us in this really unique position of being in a demand exceed supply position.

As we go into the North American summer months when demand is at its highest anyways because of consumption trends as Lemons are used as a garnish in the drink and all that iced tea you are drinking back in Minneapolis and the Lemonade that you are drinking back there, you are using a lot more lemons at much higher pricing this year than the year before and all of those things together make us very very bullish on not only this year, but looking forward at the price and the value of lemons.

.

Okay.

So obviously kind of to summarize the whole thing, the higher value you are seeing per carton is really a function this year of a much better, higher quality lemon mix?.

That's part of it and also just the overall market year-on-year is tighter and it's driven because of increases in demand. .

Got it, okay. Thanks everyone I will pass it on..

Thanks, Eric..

From Lake Street Capital Markets we will hear from Chris Krueger..

Hi, good afternoon guys, most of my questions have been answered but can you just go over the South African partnership and what it means to you?.

I think the main thing it does is we have been, and have been and will continue to look at different international markets and regions that are politically stable, good rowing ground and circumstances and environment so as we have been checking that out you know that couple of years ago we made an investment down in Chile, we have looked around at other opportunities and we have studied South Africa to understand as it is one of the largest growers of citrus and lemons in particular, literally in the world.

So there is an excellent opportunity.

Happens to be pretty far away but it is very stable, good market and actually opens up whole different opportunity in the year up etcetera so this is a first cautious step to start tip our toe in the water, partner with some people we know down there, to get to know the lands better, the markets better, the growers better and so the idea is to, as we said to partner with some people and work with growers there, the local market to participate in sales that we would get into potentially the East Coast of the U.S.

and more importantly Russia and Europe and so forth. And as we play that out overtime, it's down the road a bit we would certainly like to see a scenario where we could actually make more significant investment to start our own property down there. That's the long term strategy that we have stated before overall as we grow our business. .

Alright great, thanks..

And at this time there are no other questions. I would like to turn this call over to management for any additional and concluding remarks..

Thank you for your questions and interest in Limoneira. We look forward to updating you again in September on the third quarter call. Thank you again and have a great day..

And that does conclude today's presentation. We do thank everyone for your participation..