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

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

Good day and welcome to the Limoneira Fourth 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, sir..

Thank you. Good afternoon, everyone and thank you for joining us for Limoneira’s fourth 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 fourth 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 a result of new information, future events or otherwise. Please note that during today’s call, we will be discussing non-GAAP financial measures, including results on an adjusted basis.

We believe these adjusted 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-K and press release which has been posted to its 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, thanks you for joining us. On today's call I'll begin with a brief overview of our financial results for the fourth quarter and full year of 2016 and provide an update on our progress across all of our business areas and how we are positioned as we enter 2017.

Joe will review the financial results in more detail and I will then discuss our fiscal year 2017 outlook and then open the call up for your questions.

I am very pleased to announce that we exceeded our full year earnings per share and EBITDA guidance for fiscal year 2016, which was driven by a number of factors, we’ll discuss today, including our fourth quarter results. In the fourth quarter, revenue increased 37% to $20 million compared to the same period of fiscal year 2015.

Even though our fourth quarter is a seasonally slower quarter, our solid top-line growth reflects higher lemon sales due to higher volume and pricing for the fourth quarter of fiscal year 2016 compared to the fourth quarter of last year.

Our operating loss for the fourth quarter of fiscal year 2016 improved to $900,000 compared to a $4.9 million loss in the fourth quarter of the previous fiscal year. For the full year of fiscal 2016, revenue increased 11% to $112 million, compared to fiscal year 2015.

Operating income for fiscal year 2016 increased 100% to approximately $9.2 million, higher fiscal year 2016 operating income reflects increased revenue for all agricultural crops, particularly lemons and avocados. Our EBITDA for fiscal year 2016 increased 30% to $20.1 million compared to last year.

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 have expanded our customer base to over 170 customers 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, consumer facing strategy, as well as increasing our packing capacity.

Our new packing house in Santa Paula became operational this year and this facility is expected to double the annual capacity of our lemon packing operations and reduce labor costs in fiscal year 2017. We've already begun to see significant improvements in carton processing capacity.

For example, during the last half of fiscal year 2016, we processed an average of approximately 1,400 cartons per hour compared to 900 cartons per hour for the same period in 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 currently have about approximately 7,900 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.

We 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 with 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. In the fourth quarter of fiscal year 2016, we had our first wine grape harvest at Windfall Farms to top wineries including Vogel and Coppola wineries.

We currently have planted 220 acres of vineyards at Windfall Farms and plan to plant an additional 100 acres in fiscal year 2017. Earlier this year we announced the formation of Limoneira South Africa, which underscores our execution on our goal to become a leading global year around citrus agribusiness.

We are working with business partners in South Africa, Chile, Argentina and Mexico and we manage the marketing and sales function from locally sourced citrus. We recently announced another exciting development for our agribusiness operations.

We began 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 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 that help set Limoneira apart 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.

Turning now to our real estate development segment, as many of you know 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.

The total cash that Limoneira expects to receive over the life of the project will depend on several factors, including 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, which includes Lewis's initial $20 million payment for its 50% interest in the joint venture.

During the full year of fiscal year 2016, we contributed approximately $2.3 million to the joint venture, matching Lewis's contribution to fund ongoing development activities. Current project plans indicate that grading should begin during the spring of 2017.

Phase I site improvements to begin during the summer of 2017 and initial lot sales are anticipated to begin in the fourth quarter of calendar 2017.

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.

Interest from potential tenants is very encouraging. The residential and commercial components of the project should create a highly desirable community in a prime selling California location.

We plan to use the expected future proceeds from the project to reinvest in our agribusiness operations and further solidify Limoneira's position as one of the leading global citrus providers.

Lastly, turning to the rental operation segment of our business, last year we began renting 65 additional agricultural workforce housing units, which generated $663,000 higher rental revenues in fiscal 2016 compared to 2015.

Our farm worker housing units are also important as they help us maintain a consistent supply of labor for our agribusiness operations. In summary, we are pleased with our full year performance and our healthy cash flow generation.

As we enter fiscal year 2017 we are well positioned to continue to expand our agribusiness and make progress on our goal of becoming a leading global citrus provider. And with that, I'd like to 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 fourth quarter and full year of fiscal year 2016 ended October 31. Fourth quarter revenue was $19.5 million which was 37% increase compared to fourth quarter of 2015.

Agribusiness revenue was $18.2 million compared to $12.9 million in the fourth quarter of last year, primarily due to stronger lemon sales. Rental operations revenue was $1.3 million in the fourth quarter of fiscal year 2016, which was similar to the same period last year.

Real estate development revenue was not significant in the fourth quarter of fiscal year ‘16 or ‘15. Agribusiness revenue for the fourth quarter of fiscal year 2016 includes $16.4 million in lemon sales, compared to $11.6 million of lemon sales during the same period of fiscal year ‘15, primarily reflecting increased lemon prices and volume.

Approximately 521,000 cartons of fresh lemons were sold during the fourth quarter of 2016 at a $25.91 average price per carton compared to 388,000 cartons sold at $25.00 average price per carton during the fourth quarter of fiscal year of ‘15.

As anticipated, we recognized minimal avocado revenue in the fourth quarter of fiscal year 2016, similar to last year. We generated $600,000 of orange revenue in the fourth quarter of fiscal year 2016, which was similar to the same period of fiscal year 2015.

Specialty citrus and other crop revenues were $1.2 million in the fourth quarter of fiscal year 2016, compared to $700,000 in the fourth quarter of fiscal year 2015. 2016 specialty citrus and other crop revenues includes our first wine grape harvest from Windfall Farms of approximately 200 tons for $300,000.

Costs and expenses for the fourth quarter of fiscal year 2016 were $20.4 million compared to $19.1 million in the fourth quarter of last fiscal year. The fourth quarter of fiscal year 2016 increase in operating expenses primarily reflects higher agribusiness costs mainly resulting from increased fresh lemon sales volume.

Our operating loss for the fourth quarter of fiscal year 2016 improved to $900,000, compared to a $4.9 million loss in the first quarter of last fiscal year.

Net loss applicable to common stock after preferred dividends for the fourth quarter of 2016 was $100,000, which includes a $1 million gain associated with a conservation easement with the Nature Conservancy. We retain the titles of the property and the easement allows us to continue the agricultural activities on the property.

These results compared to net income applicable to common stock of $500,000 in the fourth quarter of fiscal year 2015. Fourth quarter of fiscal year 2015 net income includes $5 million gain associated with the sale of 140,000 shares of Calavo Growers Inc. common stock and a $900,000 gain on the sale of the company’s Wilson Ranch.

Net loss per diluted share for the fourth quarter of fiscal 2016 was $0.01, compared to net income per diluted share of $0.04 for the same period of fiscal year 2015, with both periods based on approximately 14.1 million weighted average diluted common shares outstanding.

EBITDA was $2 million in the fourth quarter of fiscal 2016 compared to $2.4 million in the same period of fiscal year 2015. Turning to our full year results as Harold mentioned we exceeded our EBITDA and earnings per share for the full year. Revenue increased 11% to $112 million compared to fiscal year 2015.

Operating income increased to 100% for fiscal year 2016 to $9.2 million.

Higher fiscal year 2016 operating income reflects increased revenue for all of our agricultural crops, particularly lemons and avocados, offset primarily by higher third-party grower expense to greater lemon procurement costs and higher packing costs related to increased lemon sales volume.

In addition, selling, general and administrative expenses for fiscal 2016 were less than fiscal 2015 by approximately $500,000, primarily related due to legal and consulting costs being less, which were associated with the Limoneira / Lewis joint venture of last year.

Net income applicable to common stock, after preferred dividends was $7.4 million for fiscal year 2016 compared to $6.4 million for fiscal year 2015.

Fiscal year 2016 results include a $3.4 million gain associated with the sale of 60,000 shares of Calavo Growers common stock and the aforementioned $1 million sale easement or sale of the easement, as well as $1.2 million of transaction costs incurred in the first quarter in connection with the Limoneira / Lewis joint venture.

Fiscal year 2015 results include the aforementioned $5 million gain associated with the sale of Calavo Growers common stock and a $900,000 gain associated with the sale of the Wilson Ranch. Earnings per diluted share for fiscal year 2016 and ‘15 were $0.52 and $0.46 respectively.

Both shares being based on approximately 14.1 million weighted average diluted common shares outstanding. EBITDA for fiscal year 2016 increased 30% to $20.1 million compared to EBITDA of $15.4 million in fiscal year 2015.

Lastly our long-term debt as of October 31, 2016 decreased to $87.2 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 fiscal year 2017 outlook..

Thanks, Joe. We expect our agribusiness to continue its long-term growth trend in fiscal year 2017 and as we enter the year with a much more efficient packing house that we believe will increase our operating margins.

We expect to sell between 3.1 million and 3.5 million cartons of fresh lemons at an average price of approximately $23 per carton and we expect to sell approximately 8.5 million to 9 million pounds of avocados at approximately $0.80 per pound.

We believe operating income for fiscal year 2017 will increase approximately 25% to a range of $11.4 million to $11.9 million, compared to operating income of $9.2 million for fiscal year 2016. Fiscal year 2017 EBITDA is expected to be in the range of $18.3 million to $18.8 million.

We expect fiscal year 2017 earnings per diluted share to be in the range of $0.38 to $0.42 a share.

Excluding the combined gain of approximately $4.4 million associated with the sale of Calavo Growers stock and the Conservation Easement and the $1.2 million of transaction costs incurred in the first quarter of 2016 in connection with the Limoneira Louis joint venture.

Fiscal year 2016 EBITDA and earnings per diluted share were $16.9 million and $0.39 per share respectively. Our estimates do not include potential equity income from the harvest at Limoneira project. We expect to begin development grading on the project in spring of calendar year 2017 and lot sales are estimated to begin at the end of calendar 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 have been cultivating over the past few years and we continue to look for additional opportunities that lie ahead. And with that, I would like to now open the call up to your questions.

Operator?.

Thank you. [Operator Instructions] And we will take our first question from Tony Brenner of ROTH Capital Partners..

Thank you.

Couple of questions, one it’s been raining here in California for a week and a half or two and I wonder if as a result and if you feel sort of flooded or even if they aren’t make any difference at all at this time of the year?.

Hi, Tony. It really doesn’t affect as that much based on the amount of inventory that we have in storage right now. As you may know we transitioned out of the desert crop and up to the Northern California crop and we have been dealing with good solid inventory. So our supply chain won’t really be affected by it.

If it keeps raining for an extended period that could become a factor, but so far the rains have been a blessing for the state of California and for all of us. So, we’re very pleased with the amount of rain so far..

So you have got avocado on the trees at the moment, will this induce an earlier harvest, if that keeps up..

It can, it doesn’t always. It’s funny how a tree reacts and behaves when natural rainfall occurs, but typically your question, it’s a great question because it can and usually does lead to quicker sizing of the fruit.

And so we'll just keep our eyes on the size of the fruit, the maturity of the fruit and then just keep that compared to where the market values are and for the markets that we serve. And alter our harvest strategy accordingly if we believe we need to.

Right now it looks like our harvest is going to trend more towards probably third quarter a lot like we experienced last year. There were some early size picks that took place just to get weaker fruit off the tree. But it looks like the crop year should play out very similar to last year. .

Okay.

The later the better I presume because of the competition from imports?.

That's right. .

Great. Last question, earlier in your comments you indicated that you expect that lot sales to begin during the fourth quarter. And at the end of your comments you assumed no contribution in fiscal '17.

So what should we model?.

I think we're trying to be conservative Tony. And so we're trying to not create an expectation for lot sales in '17. Although we believe we will have our first lot sales in '17, but to model it I’d push it into the next fiscal year.

Joe do you agree with that?.

Yeah I think I am sure that hasn’t been the key, but the other thing that's happening is we may see some deposits on lots in our fiscal year, which wouldn't in themselves generate any earnings they're just deposits. And so we may not see actual sales of the lots until first quarter of our fiscal '17.

So based on just timing based on this thing starting up, based on still a lot of moving parts and factors and just kind of the ability to kind of forecast. I think once we get it rolling a little better we'll be able to give more information.

Right now I think for '17 it's likely to not see any earnings impact even though we might see some cash come in towards the later part of the year..

Great, thank you. .

Thank you, Tony. .

And we will take our next question from Chris Krueger of Lake Street Capital Markets. .

Hi, good afternoon. .

How are you doing?.

Good.

Can you talk about lemon pricing and how that fluctuated throughout the year? And just talk a bit about the outlook how reliable is your estimate for the full fiscal 2017 or could that be conservative?.

At this point through two months internally it appears to be conservative, but we got a long way to go through the rest of the year. The thing that makes the algorithm somewhat complicated Chris is the -- there is three different grades and eight different sizes of lemons.

And so for the sizes with the most demand at the highest grade that's typically where we get our highest transactional sales. However, as you move down towards the off sizes and the off grades, the value of those sales decreases considerably.

It's that whole blend between how much volume will we actually take to market, which is factored into our assumption of giving guidance to 3.1 million to 3.5 million cartons next year, but at $23 it would mean that we would sale a considerable more of what we called standard, which is the third grade of the quality of fruit.

And the standard market today is somewhere between $10 and $15 a carton. So if we have much more of those sales it would logically then bring the weighted average of the total sales price down. So it's too early for us with our visibility today. Right now we're experiencing about a $25 average market across the sizes and the grades we're selling.

But it's too early to say that that’s sustainable through the rest of the year. So I think we try to be conservative in our forecast at $23 given what our experience was in 2016..

Okay.

Then on -- moving onto avocadoes is that simply kind of the two year cycle in California where you have the on year and your off year and this will be heading into the lower volume year?.

Yeah, this is the off year. And so we're very pleased with the volume that we have in off year. And to Tony's question earlier with the amount of rain that we seem to be getting early in the year, we had a great shot of taking the same number of pieces, but making the weight of the more by having them size to a greater size and selling more size.

The wild card in the avocado deal for us really is going to be how much import comes from Mexico and when and what influence that will have on pricing. But pricing today remains very, very strong and well above the $0.80 guidance that we’ve given, but again we’ve tried to be conservative as we try to model this..

Okay.

Then on to the real estate project, as you start clearing trees and grading and all that are there any further legal issues or permitting or anything like that that you had to get through?.

Nothing that presents a barrier that we’re concerned about today. I think the biggest challenge throughout the most recent part of the entitlement process is just being dealing with the bureaucracies at the different level.

So we had federal agencies we were dealing with, we’ve had, state agencies we’ve dealt with, we’ve had county agencies that we’ve dealt with and we have been working the entire time with the city government as well and just making sure that all of those agencies are satisfied and believe it or not sometimes they might have incongruent sort of objectives so that’s been the issue in the past.

But at this point I think we feel very confident and good that we are going to begin grading in March and see those first lots put up and for sale by the end of calendar 2017. It’s really looking good.

So as we have been talking about this project for the last 10 years, I think the amount of impediments that we see in front of us are probably the least we have seen from a political standpoint or an entitlement standpoint it’s now just going in directly into the market forces, which I think we feel very fortunate today have significant tailwinds behind this right now.

How long they will sustain is really the question we are asking, but we feel very, very good as we go into the first phase of this development..

All right, very good. That’s all I got. Thanks..

Thanks, Chris..

And we will take our next question from Brent Rystrom of Feltl..

Yes, could you give me a sense of how you are going to measure the financial productivity of the packing else I’m assuming the cost per carton comes down and at what volume do you start to realize those efficiencies from a financial prospective?.

I’ll take start Brent and then welcome Joe’s ideas. So what we really focused on was really the throughput and the efficiency of the facility. And so it begin by putting data collection points throughout the packing house that allows us to truly monitor the cartons per hour that we actually pack.

And so right now we’ve essentially doubled our throughput on a cartons per hour so that was the first thing.

The next thing is what’s our labor experience going to be in this process and that’s the part that we kind of talked about the last time we discussed the packing house that took some time as we transitioned through permanent labor and then now temporary labor as we’ve begun to reduce the headcount in the actual shift-to-shift operation.

So we have very, very specific throughput targets, we have very specific goals for man power and then the biggest thing that trips us up is what we call reworking the fruit where we actually put it into a box it goes into the cooler and then for whatever reason it needs to be repacked, wrong carton size, customer rejects an order whatever and that has that takes its toll on the packing cost too.

So we try to monitor the amount of repacking in the operating and keep that at a minimum and I think that as I have been directly involved with the whole process and I have been very, very pleased with how we started the year and what we are seeing so far. So Joe any other comments..

Yes, I would say that we’ve certainly as Harold said got off to a little bit of a slower start than we want, but if you actually look at last year versus this year it actually went up a bit but finished off the year at lower per carton cost.

So we finish the year at 722 versus 731 not a huge improvement but certainly noteworthy and going the right direction. And early in '17 for the first two months, while the numbers certainly for December are pretty preliminary. We're continuing to see nice improvement in that cost per carton come down.

I think we hopefully turning the corner now and getting the cost kind of managed and taking advantage of the efficiencies that the new packing house can give us. And all of that is of course reflected in our '17 guidance.

So we're looking to start to see some of that cost coming down, but really we'll see it and we’ll all see it for sure in our first quarter and that will be a good measurement to how we're starting to see that packing cost efficiency translate..

And then Joe just to clarify that was that 722 per carton?.

Yes. .

Versus 731. What's your long-term goal, when you're leading expectation what do you think that….

We've always I think talked to you for a while now in that $0.50 to $1 range. So that still remains the target.

And not only that the packing house itself as we've been kind of thinking about more strategically not only is there a cost opportunity, savings opportunity, but because of the additional volume because of our ability now to take care of customers in different ways, we're actually also seeing some revenue opportunities on just packing different configurations and so forth.

So I think net-net we're going to see more than just the cost savings, but also a top-line benefit as well from the new house..

Alright.

How many grape acres did the 300,000 represent, how many acres were harvested?.

About 100 of the grapes. Yes so we have -- we planted about 114 and about 115 and as we said about another 100 coming in '17. So the ‘14 planting wasn’t a full size harvest if you will, but it was commercially viable and was actually probably ahead of the game. So we're very pleased with it. So as that was off of the 100.

So we’ll this year '17 we expect it all 200-220 we’ll be having harvest and we'll see some improvement there..

And in the past we've talked about a possibility of $5,000, $6,000, $7,000 an acre of proceeds from wine grape harvest, is that still seem reasonable?.

That seems reasonable. And again trying to air on the side of conservative, but that was on the Cabernet Sauvignon wine grapes that we harvested they were in their second leaf and we got 3 tones to the acre, which is very, very high for a new planting. And all of it went into contracts that had annual contracts in place at $1,600 a ton.

So very, very good start to the yields, but I think our assumptions of $6,000 to $7,000 are still pretty good..

While the 300,000 is the 3000 on an early harvest. So yeah I think that that would be reasonable to think in that direction..

Yeah and I think it will all come down to the yields Brent and I think they're going to be there. .

From the contribution I may have missed this, but did you say which property that was on?.

It's on Orchard Farm which is if you've been in our headquarters and you go South towards the river it's the river bottom land of Orchard Farm..

We won't have any impact on our operations..

How big it is?.

It was 236 acres..

235, okay..

It was essentially to keep it in habitant. Most of it’s not being farmed today..

Alright.

So this is basically considered kind of part of the repairing area there when there is water?.

Correct exactly. And it was the easement was put in place with the nature conservancy. And it was to balance the amount of cultivated agricultural acres with habitat that now remains intact for us. .

And then my final question. You gave us some great granularity on the residential development at Harvest at Limoneira.

Have you thought that you’re willing to share on the timing and the possible structure of the development of the 40 acres that's the more commercial part of the property?.

Yeah the reason we're less granular there is that today we're not able to be granular mostly because the initial infrastructure for the first 640 lots, which is the first phase of the residential piece needs to go in in order to service the commercial piece.

So now that that’s going in, I think you will see much more granularity towards the middle to back half of 2017, because now we can really go start to talk to potential tenants and see if we can put some deals together attracting them into that space..

Do you expect that you will retain ownership of that land and lease that land out for others to build you know basically in pads, do you think you’ll actually build buildings and lease them, or do you think you will just outright sell the land or some combination all of that?.

That’s exactly what’s being discussed right now and it will really just come down to the quality of the deals we can put together.

So I hesitate to give you specific clarity in an answer because it will probably go the other way, but I think the nice part about our business model is that we have the ability to go both directions and we would look forward to adding more rental income properties to our portfolio, especially ones that are local with solid tenants..

Thanks, guys. .

Thank you. .

And we will take our final question from Eric Larson of Buckingham Research Group..

Yeah, good afternoon everyone. Thanks for taking my question. I just want to drill down a little bit more kind of on Brent’s question. In your guidance for lemon cartons for the year, it’s 3.1 million to 3.5 million.

How much of that is owned fruit versus third party, are you putting much third-party fruit into that volume number?.

Joe you want to fill it..

Yes, if you look at ‘17 it’s a range, so based on the range, the Limoneira fruit should be let’s use the 3.5 million, around 2 million and the third-party fruit around 1.5. So that’s kind of that takes you to the 3.5 million and plus or minus that to get within that range..

Okay..

And 1.5 are third party. And this year it was 1.7 million Limoneira and 1.2 million third party just for reference..

There you go that’s what I was trying to get at.

So with your new packing plant, I mean is it there a potential upside on the third party, obviously you don’t make nearly the margin with that, but obviously you could pick up a margin and then reduce that overhead costs per carton pretty nicely with your facility, is that still -- is that potential upside in the next several years going forward?.

Eric it really is and that’s you put your finger on the ascents of what the opportunity is. So besides the 1,500 planted but nonbearing lemon acres that we have in the ground, which should add 900,000 to 1.3 million new cartons over the next three years.

We also have the ability to go out and attract lower margin but still very profitable and valuable outside growers to leave our competitors and come utilize our services.

We’re targeting margins per carton on that fruit of $1 and I think we’re going to be able to achieve it, we challenged the team in 2016 to recruit another 500,000 cartons from the outside growers, it appears on paper that we have done that, we will see if it comes to provision.

But that fruit from the third party grower is incorporated in the guidance that we gave on the 3.1 million to 3.4 million cartons, that we’ve given guidance to for 2017..

Okay.

And then your -- I think well Joe gave specifically the cost per case this year for your packing plant, but when I look forward I believe I saw that your packing plant optimally it wouldn’t be your name plate capacity, but -- it’s a tongue twister your optimal running volumes would be somewhere between I think you said some time ago 1.8 to -- 1,800 to 1,900 cases per hour.

You’re at 1,400, if you get to that 1,800 to 1,900 cases, what does that due to your cost per case?.

There is a linear math formulae algebra that you could do answer that question, but it would immediately fall on to the sales can the sales guys sell it, that’s the issue. So assuming they could sell it and assuming certain grades and sizes that the market wanted at prices that we wanted sell it to them for.

Go on a limb, but I think at $1.50 of opportunity of margin that we could capture if we got that kind of throughput and efficiency..

Got it, okay. That helps frame it, because I know there is a lot of mix issues like you’ve said different grades etcetera. So just I am just looking for a kind of a ball park number and that was terrific. Thank you, Harold. Then the final question I have, obviously I am focusing a lot on your citrus.

We’re hearing that there is going to be more fruit coming in, more lemon citrus coming in from Argentina this year et cetera.

Can you give us a little bit more color on what’s happening with your South African arrangement, maybe what’s going on in South America more of your international sales piece of it as well?.

Yes, I’d be delighted to Eric.

So it’s just been very, very exciting for all of us, to experience the amount of demand that we’re experiencing all over the world, but essentially as you have burgeoning middle classes, you have burgeoning economies and you have restaurants and food service investments and you have retail behaviors in those markets, they creates opportunities for us to sell our lemons.

And when you put that into combination then with us now being able to stuff a 40 foot container, rather than having a dedicated vessel that goes out to these markets, it gives us a lot of opportunity to sell a lot more fruit than we have ever sold into the export markets, but by doing that take sort of the pressure off, the potential over supply from production that’s here, but also that potential over supply from fruit that are now coming from new source to supply like Argentina.

So ultimately, when we read about and you hear about these new sources of citrus and lemons that could make their way into now open markets like the United States, like just recently happened, it maybe slightly disruptive at periods of time as we sort of figure out, who is going to be in what market and with what grades and how that’s going to work, but long-term ultimately it’s going to be a significant benefit.

Because as long as we’re able to put that lemon in a Limoneira box and then let the customer decide based on the freshness, the quality and ultimately the price of that lemon that’s coming from those other places, it means we never have to lose touch with the customers. And that’s our great sort of long-term opportunity.

So I think that’s really where we’re headed and I think 2017 is showing a lot of promise to absorb all this fruit. You have read a lot of the potential unhappy growers in California that maybe don’t like the Argentine fruit coming to the U.S. market.

I think what we’re going to find is it’s less expensive to land a 40 foot container from Buenos Aires to New York City, than it is to roll a truck from Santa Paula to New York City of lemons.

So that’s really what’s going to dictate and drive, who gets the business probably is who is willing to go into the markets with the freshness product at the best prices and I don’t necessarily see a massive competitive deterioration of value that we can create.

I think it’s just going to be another source of supply that ultimately will complement our global supply chains..

The two follow-up questions to that is how much volume does Argentina represent right now, I mean what do you think it could be? And then is Argentina competitive with the top end grades, will you get your real value, the proper grade et cetera are they competitive at the top end or is it more inferior fruit? How would you characterize it?.

Okay, so their timing is why it’s scary for some California growers, is their timing is really March to say July. So it’s exactly what our coastal California lemons are that’s why there has been the concern. The Argentine -- the industry was planted in Argentina mostly to go after the juice and the oils and the industrial side of lemon production.

So when we talk about their production, we talk in terms of 25% to 30% fresh utilization versus what we try to get in California, which is more like 70% to 90% fresh utilization just for comparison.

So they have a harder time putting up that to -- your great question, they have a harder time putting up that super fancy lemon that we’re able to put up.

Where they're going really be disruptive or it's going to be some bumpy roads maybe is they’re going to take that their top quality and really get it in there into the -- what we call our fancy grade, which is the number two grade. And that's where I think they can have stronger impact. It would be very interesting to see how it plays out.

But taking a step back and looking at it I think it ultimately could be complementary. Your other question about how much volume is it? I think initially it will be about 1 million cartons from about March to say July. It could be as much as 3 million cartons.

However right now we're consuming in the United States somewhere between 32 million to 35 million cartons a year. So just in relative perspective it's at the most 10% of consumption over the year..

Okay, thanks. I appreciate the flavor and kind of framing what the impacts. Thanks guys. .

You bet..

And I would now like to turn the call over to Harold Edwards for any closing remarks. .

Thank you for all of your questions and interest in Limoneira. Thank you again and have a great day. .

And ladies and gentlemen this does conclude today's conference. Thank you for your participation. You may now disconnect..