John Mills - IR Harold Edwards - President and CEO Joe Rumley - CFO.
Tony Brenner - ROTH Capital Partners Aaron Steele - Feltl & Company Eric Larson - Buckingham Research Group Chris Krueger - Lake Street Capital Markets.
Good day and welcome to the Limoneira Third 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..
Great, thank you. Good afternoon, everyone and thank you for joining us for Limoneira's third quarter fiscal 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 third quarter fiscal year earnings release, which went out today at approximately 4:00 P.M. Eastern Time. If you have not had a chance to view 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 the 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 and could cause its future results, performance or achievements to differ significantly from the results, performance or achievements expressed or implied by such forward-looking statements.
Important factors that could cause or contribute to such differences include 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. And please note that during today's call, we will be discussing non-GAAP financial measures, including results on an adjusted basis.
We believe these adjustments with financial measures can facilitate a more complete analysis and greater understanding about 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 discussed on an adjusted basis.
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 to our website.
And with that, it's my pleasure to turn the call over to the company's President and CEO, Mr. Harold Edwards..
Thank you, John and good afternoon everyone and thank you for joining us. On today's call I'll begin with a brief overview of our financial results for the third quarter of 2016 and provide an update on our progress across all of our business areas.
Joe will then 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. I’d like to mention that I'm conducting this call from the Asia Fruit Logistica Convention and I'm conducting the call from Hong Kong and hopefully get through this call without any interruptions.
In the third quarter we generated revenue of $39.9 million, a 34% increase compared to the third quarter last year. Our solid topline growth reflects strong agribusiness sales including increases for lemons, avocados, oranges and specialty crops.
Our operating income in the third quarter increased 81% to $14.2 million generated $19.3 million in EBITDA. Third quarter, we recognized approximately $3.4 million gain on the sale of 60,000 shares of Calavo Growers stock. Strategic monetization of assets is an ongoing part of our business and today we continue to own 300,000 shares of Calavo stock.
We reported earnings per diluted share of $0.71 in the third quarter of fiscal year up from $0.36 in the prior period. I'd now like to provide an update on our business segments. Starting with our Agribusiness, over the past few years we have made a number of strategic investments that will drive our top and bottom line growth.
We successfully expanded our customer base and increased distribution by leveraging our domestic and international marketing and sales channels during the past few years due to many factors including our trade marketing strategy, our consumer facing strategy, as well as increasing our packing capacity.
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. We've already begun to see significant improvements in carton processing capacity.
For example during the third quarter of 2016, we processed an average of 1,400 cartons per hour compared to 920 cartons per hour for the same period of 2015.
Long-term this facility will ensure that we have ample capacity for increased production expected in the coming years from our current nonbearing orchards as they become productive as well as newly recruited third-party growers interested in our packing, marketing and sales services.
We have currently about approximately 7,500 planted agricultural acres of which approximately 1,500 are nonbearing lemons and are estimated to become full bearing over the next four years with plans to plant an additional 500 acres of lemons in the next two years.
Anticipate this 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 nonbearing and planned acreage becomes productive. In June we announced that we are adding oranges and specialty citrus varieties to our one world of citrus model.
We began our direct selling program for lemons six years ago and have been very pleased with the success. We are excited to have our oranges and other citrus varieties marketed in Limoneira cartons.
As our lemon business grows our customers recognize the quality and consistency they receive from Limoneira lemons and we are seeing increased demand from our customers for other citrus varieties .In addition to Navel and Valencia oranges Limoneira currently grows Cara Cara Navels, Moro Blood Oranges, Pummelos and Star Ruby Grapefruit.
We are partnering with Cecelia Packing Corporation a company that shares our values and commitment to quality for packing Limoneira oranges and specialty citrus in Limoneira branding cartons.
Earlier this year, we announced the formation of Limoneira South Africa which underscores our execution on our goal to become a leading global year-round citrus agribusiness. We are working with business partners in South Africa and Limoneira plans to manage the marketing and sales function from locally sourced lemons.
We recently announced another exciting development for our agribusiness operations. We will begin using solar energy at our Porterville Ranch which is part of our Northern California operations to generate electricity to power our deepwater well pumps on that property.
This will complement our first solar facility at our headquarters in Santa Paula that provides energy for our packing operations as well as our solar facility at our Ducor Ranch which powers our deepwater well pumps on that property. We are proud of our efforts to be a leader in using clean energy.
It’s the right thing to do for the communities in which we operate and there's an additional benefit of cost savings for our operations. Furthermore it reinforces our commitment to our sustainable business practices offset Limoneira part as a sustainable agricultural supplier a differentiation that customers value greatly.
We are continually evaluating additional solar conversion projects that make sense for our company. I would like to make some comments regarding the ongoing California drought. Anticipation earlier this year has brought relief to California's drought conditions although the last few years have been among the most severe droughts on record.
We continue to believe that we have access to adequate supplies of water for our agricultural operations as well as our real estate development and rental operation segments of our business and currently do not anticipate that the California drought will have a material impact on our operating results.
However, if the drought conditions persist or worsen or if the regulatory responses to such conditions limit our access to water our business could be negatively impacted by these conditions.
Limoneira is extremely fortunate to have significant water rights in California and Arizona and is working diligently as stewards of this precious resource to implement conservation measures to assure its long-term availability.
As a final note on our agribusiness as many of you are likely aware California's experienced significant wildfires in the past couple of months. We are fortunate that none of our agricultural or real estate properties were impacted by any of these fires.
Turning now to our Real Estate Development segment, in November of 2015, we formed Limoneira Lewis Community Builders LLC a development partnership between Limoneira and the Lewis group of companies for the development of the harvest at Limoneira.
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 expects to receive over the life of the project will depend on several factors including the median home sales price related lot sales price.
But with its highly desirable location near the Pacific Ocean we believe that Limoneira should between 100 million and $130 million from the project which includes Lewis's initial $20 million payment for its 50% interest in the joint venture.
During the third quarter of fiscal year 2016, we contributed approximately $800,000 to the joint venture matching Lewis's contribution to fund ongoing development activities.
In addition to the residential aspect of the project we are also planning the development of approximately 40 acres properties adjacent to the residential development that is not included in the partnership plans and financial projections which represent additional cash flow opportunities for Limoneira.
Strong interest from potential tenants is very encouraging. The residential and commercial components of the project should create a highly desirable community in a prime Southern California location.
We plan to use the expected future proceeds from the project to reinvest in our -- into our agribusiness operations and further solidifies Limoneira's position as one of the leading global citrus providers.
As a final point on our real estate development segment we are recognized by the American Planning Association, California Chapter, Central Coast Section with the 2016 Comprehensive Plan Award of Excellence for the Harvest at Limoneira project. Plan will now move on for consideration at the APA California Chapter State Awards next month in Pasadena.
Lastly turning to the Rental Operations segment of our business, last fiscal year, we began renting 65 additional agricultural workforce housing units attributed to increase third quarter rental operations revenue. On an annual basis we expect that the new units will generate approximately $900,000 of additional rental revenue.
Our farmworker housing units also are very important to us as they help us maintain a consistent supply of labor for our agribusiness operations. Summary we are extremely pleased with our year-to-date financial performance and our healthy cash flow generation.
As we begin the final quarter of fiscal year 2016 and begin to look forward to next year we are well positioned to continue to expand our agribusiness, make progress on our goal of becoming a leading oval citrus provider. And with that I'll now turn the call over to Joe.
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, 2016.In the third quarter of fiscal year 2016 revenue was $39.9 million which is an increase of 34% compared to $29.8 million in the third quarter of 2015.
Agribusiness revenue increased 35% to $38.4 million reflecting higher sales for lemons, avocados, oranges and specialty citrus and other crops.
Rental operations revenue was $1.5 million in the third quarter of 2016 compared to 1.3 million in the third quarter of last year reflecting rental revenue from the 65 additional agricultural workforce housing units which we began last fiscal year as when we started renting those.
Real estate development revenue was $19,000 compared to $34,000 in the same period last year.
Third quarter 2016 agribusiness revenue includes $26.2 million in lemon sales compared to 23.9 million in lemon sales during the same period of fiscal year 2015 approximately 846,000 cartons of fresh lemons were sold during the third quarter of 2016 a $27.19 average price per carton compared to 759,000 cartons sold at $28.06 average price per carton during the third quarter of fiscal year 2015.Third quarter avocado revenue was $9.6 million compared to $3 million in the prior year period.
The increase reflect higher prices and volume of avocados sold compared to the same period last year. The year-over-year increase is partially due to the typical volatility in avocado production and/or acceleration of the harvest to sell a greater percentage of the avocados in the second quarter of fiscal year 2015 compared to this year.
The avocado harvest for fiscal year 2016 is substantially complete with 11.4 million pounds sold at an average price of $0.95 compared to 7 million pounds at $1.02 in fiscal year 2015 which again reflects typical volatility in avocado production resulting in strong volume this year.
We recognized $1.9 million of orange revenue in the third quarter of fiscal year 2016 compared to $1 million in the same period of 2015.Specialty citrus and other crop revenues were $759,000 in the third quarter of 2016 compared to $560,000 in the same period of fiscal year 2015.Third quarter of fiscal year 2016 results for oranges and specialty citrus reflect higher volume partially offset by lower prices compared to the same period last year.
Turning to costs and expenses for the third quarter of fiscal year -- of this fiscal year we incurred $25.7 million of costs and expenses compared to $22 million in the third quarter of last year.
The 2016 third quarter increase in operating expenses was primarily attributable to increases in our agricultural cost due to higher sales volumes for this segment of our business.
Third quarter real estate development expenses were approximately $200,000 compared to $300,000 in the third quarter of 2015.Agribusiness costs and expenses increased 21% in the third quarter of 2016 compared to third quarter of last year primarily related to packing, harvest and third-party grower costs and the volume that I refer to a minute ago.
Operating income for the third quarter of fiscal year 2016 was $14.2 million an increase of 81% compared to $7.8 million in the third quarter of last year. EBITDA was $19.3 million in the third quarter of 2016 compared to $9.1 million in the same period of2015.
Net income applicable to common stock after preferred dividends for the third quarter of 2016 was $10.6 million compared to net income applicable to common stock of 5.2 million in the third quarter of 2015.
Net income per diluted share for the third quarter of fiscal year 2016 was $0.71 compared to $0.36 for the same period in 2015 based on approximately 15.1 million and 15.0 million and weighted average diluted common shares outstanding respectively.
Excluding the gain on the sale of Calavo shares during the third quarter our earnings per diluted share would have been $0.57. Regarding our year-to-date results for the nine months ended July 31, 2016 revenue was $92.3 million compared $86.1 million in the same period last year.
EBITDA for the first nine months of the fiscal year was 18 million compared to 13 million in the same period last year. Net income applicable to common stock was approximately $7.6 million for the first nine months of 2016 compared to $6 million for the same period last year.
Net income per diluted share for the first nine months of 2016 was $0.53 compared to $0.42 in the same period of the prior year.
Excluding $1.2 million of transaction costs incurred in connection with the Limoneira Lewis joint venture and excluding the gain from the Calavo Grower stock sale fully diluted earnings per share would have been $0.45 for the first nine months of 2016.
EBITDA and net income for the third quarter and nine months ended July 31, 2016 includes approximately $3.4 million gain on the sale of Calavo Grower stock and the nine month period also includes a $1.2 million joint venture transaction costs.
Regarding our cash flow and balance sheet for the first nine months of fiscal year 2016, net cash provided by operating activities was $10.9 million compared to 10.2 million in the prior year period. Net cash used in investing activities was $7.9 million in the first nine months of 2016 compared to $24 million in the prior year period.
Net cash used in financing activities was 2.9 million in the first nine months 2016 compared to net cash provided by financing activities of 13.8 million in the same period last year. As of July 31, 2016 long-term debt was $87.1 million compared $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 updated our annual guidance at the end of August 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 approximately $24 per carton.
Avocado harvest was substantially concluded in the third quarter and we sold 11.4 million pounds at $0.95 per pound in fiscal year 2016.We are reiterating our guidance range for operating income and updating our ranges for EBITDA and earnings per diluted share for fiscal year 2016.
We estimate our operating income for fiscal year will be approximately 8.6 million to $9.1 million including approximately $3.4 million gain on the sales of stock in Calavo.
Fiscal year 2016 EBITDA is now expected to be in the range of 18.9 million to $19.4 million and earnings per diluted share is expected to be in the range of $0.45 to $0.50 per share.
Excluding the $1.2 million of transaction costs incurred in connection with the Limoneira-Lewis joint venture and excluding the gain from the Calavo Grower stock sale fiscal year 2016 EBITDA is expected to be in the range of 16.7 million to $17.2 million and earnings per diluted share are expected to be approximately $0.33 to $0.38 per share.
Our fiscal year 2016 estimated operating results reflect an anticipated increase in operating income primarily related to strong avocado sales, potential cost savings from our new lemon packing facilities, increased revenues from additional farmworker housing units, the elimination of lease expense resulting from the acquisition of previously leased Sheldon ranches and $3.4 million gain on the sale of Calavo stock offset by transaction costs of $1.2 million incurred on the close of the Limoneira-Lewis joint venture and an expected increase in depreciation expense resulting from 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 related interest costs were capitalized during the construction period. As we conclude I want to reiterate a few highlights of our upcoming opportunities.
During the next four years we are expecting an additional 1,500 acres of lemons that are currently nonbearing to become full bearing, increasing our annual lemon supply approximately 30% or 900,000 to 1.3 million fresh cartons which our new packing house is expecting, 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 this 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 is expected to receive over the life of the project will depend on several factors including 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 which includes the initial $20 million payment from Lewis. We are well positioned to capitalize on opportunities we’ve been cultivating over the past few years and we continue to look for additional opportunities that lie ahead.
With that I'd now like to open up the call for your questions.
Operator?.
[Operator Instructions] And we do have our first question from Tony Brenner with ROTH Capital Partners..
Thank you.
Two questions, first of all, given the strong volume in avocados for this year, is it correct to assume that fiscal 2017 will be a down year for your avocado production?.
Hi, Tony. So at this point we can see what’s hanging on the tree for next year and you know, preliminarily I think we are very pleased with what we see. And just preliminarily we think we're sort of in the 9 million pound range of fruits.
One thing that we’ll need to keep in mind is that with the phase development of harvest at Limoneira we think approximately 200 acres are going to come out of service and we're working hard with the Lewis group right now to make sure that we can timely harvest that 200 acres prior to obviously taking the trees out.
So when you put it all together I think we're feeling like the variation in volume won't be as significant as otherwise we might have expected..
And prices should be similar as well?.
Pricing is the top one. What we know right now is California has a small crop but Mexico has a much larger crop approximately 85% as I believe by following Calavo about 85% of the fruit that is sold in the United States comes from Mexico. So we're really unsure about that impact on the California pricing.
Preliminary discussion with Calavo about the year and with the California Avocado Commission suggest that we should be in a range of $0.75 to $1 per pound next year which sort of back to your question suggests that it could be similar pricing.
But with a with a sort of a word of caution that that if avocado -- if Mexico continues to import at very high levels and pricing is impacted by that that will really be out of our control..
Sure.
And second regarding the 1,500 acres of nonbearing or nonbearing acreage that comes on stream over four years, can you discuss some of the timing of that how much is coming on stream quickly and how much do we have to wait four years for?.
I'll take a crack at it and then I’ll hand it over to Joe and see if he has a thought on it. But next year there should be little impact but the following year 2018 we’ll see significant increases.
And I think -- while I don't have the model in front of me but I think our projections call for about a third of the increase in 2018 and then a third in 2019 and then a third in 2020.
Joe, do you have a thought on that?.
Yes, that’s close. It will be significant in2018 around a third like you say maybe a little more and then 2019 again will be not all that significant just by timing and what’s planned in the year that comes on.
2020 will also be pretty big additional acreage coming online and then as we talked about that 500 acres that we’ll plan over the next couple of years which will take us to the 2000 in total depending on the actual timing looking like that might be in 2021, 2022range..
Okay. Thank you very much. .
Our next question comes from Brent Rystrom with Feltl & Company..
Hi. This is Aaron Steele on for Brent Rystrom.
I was hoping if you can give us a - I was hoping if you can give us a better sense of the timing of the cash flows related to harvest both of the remaining cash outflows you expect to contribute and then the cash inflows on the lot development progresses?.
Thanks for your question and Joe I will hand that over to you. .
Okay. Well what we've said and at this point we still believe it to be a reasonable estimate is that the first two or three years which we are in now most of the cash if not all the cash will come from the partners and estimated likely to be on an equal basis to fund the development.
So we think it's in the neighborhood of $10 million or $15 million each. And as we get out into 2018,2019 range that the corner will both start to turn meaning that even before then but if you just think about macro cash flows it will start to get to a place where we can put some debt on the project that would make sense.
And we’ll also obviously start to see some lot sales like we said late in 2017.
So then those two things will start to from a cash flow and impact start to offset and after that shortly we expected to be pretty cash sufficient either between construction loans and/or cash generated from the project .It's really kind of that first few years that we’re expecting the $10 million to $15 million range from each of us of the partners.
And then going forward as cash starts to be distributed out of the partnership we've been pretty cautious just because in terms of getting too specific on the timing other than to say it's going to be some very significant years, pretty lumpy based on lot sales, construction costs, loans and everything else.
But we're looking at probably out in the 2019 we should start to see some decent cash flow distributions. That's really kind of depend on that as well as some CFD some bond financing we're thinking about to help finance and a lot of that still a little bit in the planning stages though..
Okay. Great, thank you.
And then can you give us a sense of the types of lots that are going to be developed in that first year on whether it would be high-end or multifamily or entry-level, kind of types the home or what mix do you expect?.
Sure. I will be happy to fill that question. So the first phase which the grading will begin in the first part of 2017 will include 640 dwelling units and it will be a fair mix of multifamily for sale and single-family homes for sale.
The lots have now been laid out and the types of homes that that will then go out and in essence auction off to homebuilders to come in to build will provide a spectrum of homes that will probably range from entry-level single-family and multifamily condominiums all the way up to sort of the lower end of the executive homes.
But this is sort of if you’d have think about think about it, this is more of the higher density product that will that we’ll see in the total projects in other words smaller lots and more tightly concentrated houses.
As in terms of the pricing on this first phase of housing it's still too early for us to forecast what those lots will sell for and what the median home sales will be in that first phase. But we should have a much better idea of that once we start our grading in the first part of 2017..
The other thing to think about to is I think our original thinking was pretty broad spectrum of anywhere from 400,000 or so on up to 700,000 or so. And then again that could change but that was initial thinking.
And also if you picture the property itself this first part of the building if you picture the property with a slight upgrade up into say a view homes and things like that these earlier models and houses and lots to be sold are a little bit on the lower end of that property.
So, as we build out subsequent to phases that will be somewhat larger and more desirable lots and therefore we would expect higher end housing to be put on those lots and to be built as well..
Okay, great.
And then where you’re seeing right now in the market force usually in pricing have value kind of remain steady or have they weakened a little bit as some of the other sectors in agriculture economy have seen some signs of weaker pricing?.
So we’ve actually seen agricultural land values strengthen year-on-year. In the Ventura County region we continue to see land selling in the $100,000 an acre range all of it is really dependent on where it is so it’s typical real estate but also its access to sustainable supplies of water which in California is becoming increasingly more of an issue.
As you move up in the San Joaquin Valley for good citrus grown we're seeing values and the oranges sort of in the 20,000 to $25,000 range so there has been some capital appreciation of that land. And in lemons it's a kind of all over the map but at a much higher end of anywhere from 25 to up to $30,000 an acre up there.
In the desert region Coachella Valley, Imperial Valley all the way over to Yuma Arizona, we continue to see land values anywhere from 12 to call it $20,000 an acre in those areas.
But as from kind of looking at the way that crops are produced each one of those areas have very different market timing and seasonality's which is partly represented in the land values as well..
All right, thank you very much.
And then just one last one here, if you could refresh us on how many acres windfall farms is planned to-date? And then when do you see those acres start producing?.
Yes. So to-date 220 acres of grapes have been planted. We actually are realizing our first harvest after the second leaf right now. It's too early to say what the yields are but I think they’re going to be somewhere in the one ton to two tons per acre range which in the second leaf is actually pretty good.
And it's too early to say what we will receive in terms of financial benefit or income from the first harvest. Although we are very pleased with the contracts that we've established with a number of reputable wineries but of note our Coppola Vogel the wine group and then a local winemaker called Chronic in the greater Paso Robles area..
All right, thank you very much. That’s it for me..
[Operator Instructions]And our next question comes from Eric Larson with Buckingham Research Group..
Yes. Good afternoon everyone.
A couple of questions, first of all, regarding the sale of your Calavo stock I think you did say you’ve what 300,000 shares left, is that a viable alternative to help finance the upfront next several years 10 million to $15 million of potential development costs that you will have rather than look at other forms of debt financing, is that a reasonable option?.
H, Eric. Yes definitely it is. It's been a wonderful investment. We purchased a million shares of Calavo at $10 a share in 2005 based on the significant success and growth of that company that's grown to be trading today at around $70 a share.
And I think in the close of market today our 300,000 remaining shares were worth somewhere around $21.5 million. And so yes, it's absolutely a viable source of additional capital for our growth and I wouldn't be surprised if we continue to patiently monetize it selectively to continue to help us finance our continued growth..
Okay.
A quick focus on your lemon business, you raised your average price per case for the year I think by $1 I think the last week it was 2.7 million to 3 million cases at 23 and this is now at 24.And then obviously your avocado sales, number one that the pricing was better than sort of what you would kind of guided to before and it looks like you might be 2 to maybe 2.5 million pounds better on the top side.
I guess the question I have is particularly on avocado side, why has your operating EPS guidance remain unchanged or something in the fourth quarter that might be an expense that we need to know about, it would seem that your guidance should have come up along with the improved results in both fresh lemons and avocados?.
Well, that’s a great question Eric. Thank you. And I'll answer it or try to answer it and I'll hand it to Joe. But and again I don't have the exact number but I think we guided to we gave a range of guidance when we came out with the guidance earlier and with these changes that we've made we are at now the top end of guidance.
We felt that moving guidance up was not prudent at this point just given the uncertainties. There's nothing that we know today in the fourth quarter that that we're aware of that's extraordinary or would impact it in any other ways.
But I believe that and I don't have the number in front of me but I believe that on the top end we were at $0.38 and when you take out all the stuff and I think we're in that range now on the top end. We just to be conservative we decided not to guide up but more just really deliver on the high-end of the range.
Joe do you have a comment there?.
Yes, that's correct. In addition to that there’s a couple things to understand. The first off that that let’s say the net income number of 8.6 to 9 last year it was $4.6 million. So it’s important to know that we're directionally almost doubling last year.
The other thing we would like to think it is a bit conservative like Harold said but our fourth quarter is typically the worst of the year for us just due to kind of the transition from the D2 and D3 Arizona.
And as Harold said some of that uncertainty that as that district starts up they actually get some rain out there believe it or not in the desert I think they’re actually expecting some significant rains. So getting in the field sometimes and starting to harvest stuff, it’s always a little bit unpredictable is another thing to consider.
And so we want to make sure we bear that in mind as we go forward. The other thing to think about couple of factors is when we gave the second quarter guidance for the year as we typically do that included some expected efficiencies in the packing house that are coming slower as we talked about before.
So we had to kind of beat that be a little bit careful because that doesn’t quite hit to its full magnitude. And then the last thing to just understand is in the second quarter when we gave guidance versus this quarter and as we look out into the year it’s going to be year as it is turning out to be.
We’ve hit on some management performance criteria some incentive criteria so there’s actually a little more bonus anticipated based on to start set criteria for our bonus plans which are driven off a net income versus where we were at the second quarter to now.
So there's few things going on there but also we think it should be at the higher end of that range it fits appropriately..
Okay, good. No, that was a good explanation.
The sizing of your lemons, have you been able to realize on a percent basis more higher percentage of lemon sales and sizing of improved sizing in the third quarter?.
Eric the fun part of our business is that you really make your money by producing what other people don't and can't. So ironically or interestingly that's not always associated with size and so sometimes everybody has big fruit. So the smaller fruit sells at a premium and vice versa.
This year we’ve had a really good sort of range of sizing and when we talk about the $24 FOB remember that's for all sizes and grades. So if we're really successful at what we do it means that we're selling a lot more of that standard or lower quality fruit also which in total brings down our average sales price.
But it means we move a lot more fresh cartons and that's what's going on right now in our business and we've just been extremely pleased with how many fresh lemons we’re getting into a box and actually selling fresh.
So the pricing is been very strong but the movement has been significantly stronger than a year ago and just sort of anecdotally comparing last year to this year in terms of average prices for all grades and all sizes markets are very consistent.
So we're very pleased about that because it continues to suggest that demand is outstripping supply and we are experiencing greater pricing stability in the lemons than we anticipated..
Okay. And I’ll just ask one more question and then we’ll let you guys go. Your plant utilization you quoted a number of 1400 cases I think per day versus 920 or 930 I don’t have the number right in front of me….
Yes, that was per hour..
Excuse me - yes per hour, yes.
Remind us what you know when you get that thing tuned perfectly in the way you wanted et cetera what should that rate be Harold?.
Okay. So there's theoretically what it should be and what we wanted to be and then what we can actually deliver and that's a function of a number of different things. Some of them are in our control and some of them are out of our control.
An example of what wouldn’t be in our control would be the amount of decay that's really coming through the line which if you’re going for more yellow fruits where you're experiencing a higher level of decay but you're really trying to get your utilizations up to get more fresh cartons pack you'll see a much slower throughput than if it's all fresh green turning yellow fruit and so on and so forth.
So the theoretical capacity is 2300 cartons per hour and in my sort of estimation when things are going perfectly we've been able to achieve full day runs in the call it 1800 to 1900 cartons per hour. And that would be my expected sort of results.
I've heard from others energy that they think we can get that higher but I think just based on what I've seen so far and again as Joe pointed out, it's still early and we're still learning. But I think 1800 to 1900 cartons per hour is probably something we can anticipate..
Okay. Thanks for that. That sounds great. Thanks guys. I appreciate your help. .
Our next question comes from Chris Krueger with Lake Street Capital Markets. .
Hi, good afternoon guys.
Just two quick ones, on the harvest at Limoneira project I know you laid out what's the current timeline is, to get to that point are there any more regulatory hurdles or any permitting type issues that you have to get through or is that not the case?.
I will take a stab at it. So we've gotten through more of the political issues and so now it’s down to more city council and planning commission approvals. Always risk in any of these approvals but in essence the overall project as it's been laid out is beyond the political risk side.
We are dealing with a number of different agencies at the local at the state and in some cases believe it or not at the federal level.
And so some of those issues as it relates to Santa Paula Creek which was channelized which now forces to deal with the Army Corps of Engineers and the National Marine and Fisheries to society are forcing us to have to work with these agencies that don't always see things the same way.
And when they don't see things in the same way it creates inconsistencies which in California oftentimes creates delays and cost. At this point we've been very fortunate to have been able to navigate through a number of these issues.
I feel very, very confident that we've got the majority of them behind us but there's always those risks and until we've actually graded and put the lots up and sold the lots I guess you know it would be wrong for me to say that there is no risk.
But every day that we move closer towards pulling the grading permits and then actually effectively grading and clean the lots up, we're de-risking the project every step of the way.
And Joe do you have a comment on that?.
I think the only thing I would add I guess to think about what you just said if you think about three categories of being the early categories, political environmental that should be basically behind us. And if you think about kind of the routine category which we will be obtaining permits all the way through.
That's more no problem should be expected in terms of just getting building permits and just routine things of engineering and blocking and tackling. And it’s that middle category that you talked about that might be the unknowns and the agency as you go out, you start to put a bridge in or you start to put a water tower.
And some of these bigger elements of the infrastructure that are getting into a little bit of the unknown those should be manageable. I think we have seen Lewis more than once we’ve been I guess confirm that we have a good partner they definitely know what they’re doing in these areas.
But as you said you never know but if you think about three buckets like that the middle one sometimes something could pop out. But so far we've been able to manage it. .
All right. That’s good detail.
Last quarter I know you guys gave the brief mention of water rights and what the city is requiring for those one user I believe it’s their water rights, is there have been any kind of update on that topic in the last three months since then?.
No, at this point we're in good shape with water. There continues to be increasing demand for our water. I think we announced earlier this year that the city of Ventura put a requirement for any new developments would have to pay a one-time $26,000 per acre foot fee that would then allow the city to go out and procure water rights.
So nothing new although with everything that’s going on in Ventura County right now we anticipated that value will continue to increase as demand [farce] outstrip supply of available water resources..
All right. That helps. That’s all I got. Thanks..
That does conclude our question-and-answer session. I will turn the call back over to CEO, Harold Edwards for closing remarks..
Thank you for all your questions and interest in Limoneira. We look forward to updating you again in January on our fourth quarter call. Thank you again and have a great day..
Once again that does conclude today’s call. We appreciate your participation..