Good day, and welcome to Limoneira Fourth Quarter Fiscal 2018 Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to John Mills of ICR. Please go ahead..

Thank you. Good afternoon, everyone, and thanks for joining us for Limoneira's Fourth Quarter Fiscal Year 2018 Conference Call. On the call today are Harold Edwards, President and Chief Executive Officer; and Mark Palamountain, Chief Financial Officer.

By now, everyone should have access to the fourth quarter fiscal year 2018 earnings release, which went out today at approximately 4 p.m. Eastern Time. If you've 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 Limoneira's website as well. Before we begin, we'd like to remind everyone that 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. Please note that during today's call, we'll 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 of Limoneira's ongoing results of operations, particularly when comparing underlying results from period-to-period. We've 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 is my pleasure to turn the call over to the company's President and CEO, Mr. Harold Edwards..

the San Pablo Ranch and related assets in La Serena, Chile; and the packinghouse and related assets of Oxnard Lemon Associates in Oxnard, California. Both acquisitions help to further our One World of Citrus initiative and provide us with two long-term growth opportunities.

The San Pablo Ranch expands our citrus assets, creates additional scale for our Chilean operation and improves our competitive position globally as a year-round supplier of fresh citrus.

Oxnard Lemon is one of the leading full-line lemon packing companies in the United States and increases Limoneira's share of packing and marketing third-party grower fruit from California facilities. We will continue to look for additional acquisitions as we expand our global citrus footprint.

Mark will discuss in more detail, but our successful $69 million equity raise this year has our balance sheet well positioned for additional acquisitions. Shifting to our business segments and starting with agribusiness. Over the past few years, we have made significant investments that are driving our top and bottom line growth.

We've expanded our customer base to over 200 customers and increased distribution by leveraging our domestic and international marketing and sales channels. We have also focused on our trade marketing and consumer-facing strategies as well as increasing our packing capacity. The 2 acquisitions I just mentioned bolster both of these areas.

These 2 acquisitions combined will be accretive in fiscal year 2019 by adding approximately $0.14 to $0.18 to our earnings per share. And all of these investments are part of our larger One World of Citrus initiative and the platform we are leveraging to become a global leader in overall citrus offerings.

Fortunately, the increasing number of revenue-generating lines of business, geographic diversity, and continued strong lemon pricing enabled us to achieve record revenue and earnings, despite the temporary weather events that occurred in fiscal year 2018.

During the October window of harvesting our District 3 lemons, we experienced persistent rains from hurricanes that delayed the harvest by two weeks, which caused 120,000 cartons we expected to harvest and sell in the fourth quarter at an average price of over $30 moving into the first quarter of 2019.

This resulted in a $2 million operating profit slip and had an $0.08 to $0.10 per share impact on fourth quarter earnings per share. The good news is this will be recuperated in the first quarter and has been factored into the full year 2019 guidance.

However, we did record roughly $600,000 of operating expenses from harvesting the lemons in the fourth quarter without receiving the offsetting benefit of those sales. In addition to the rains, our wine grapes were affected by a late frost in March, which reduced the yield by roughly 40%.

We typically harvest these grapes in the last week of October, which is when we discovered the weight and tonnage of the grapes was lower than our expectations. We lost roughly $400,000 on what was expected to be a breakeven year for wine grapes, and this impacted fourth quarter earnings per share by about $0.03 per share.

And lastly, as we said on the third quarter earnings call in September, we knew the avocado volume was going to be down year-over-year due to extreme heat that occurred in the third quarter.

As expected, we’ve recognized lower avocado revenue in 2018 and expect minimum contribution in fiscal year 2019, but we will be back to normal production in fiscal year 2020. Despite the uncontrollable weather-related issues, our long-term strategy remains intact and our enthusiasm regarding the momentum of the business has not changed.

In 2018, I established an objective to recruit 500,000 cartons from new outside lemon growers, and I'm pleased to say that we have secured over 700,000 cartons to date, with another 500,000 fresh cartons expected by 2020. And as of today, we have over 8,500 planted agricultural acres, with approximately 1,200 acres currently nonbearing lemons.

Beginning in 2020, we expect 300 acres to be full bearing and the total 1,200 acres to be full bearing by 2023.

Beyond these 1,200 acres, we expect to plant an additional 500 acres of lemons in the next 2 years and believe this additional acreage will increase our annual global lemon supply from our current level by approximately 30% or 900,000 cartons to 1.3 million additional fresh cartons, as the nonbearing and planned acreage become productive.

In addition to this, we expect to have a steady increase in third-party grower fruit. Globally, we are now growing our own fruit in the United States and Chile and manage the marketing and sales function for locally sourced citrus grown by business associates in South Africa, Chile, Argentina and Mexico.

As our lemon business grows, our customers recognize the quality and consistency they receive with Limoneira lemons as well as high levels of service that are a fundamental part of our culture. Turning now to our real estate development segment.

The partnership between Limoneira and the Lewis Group of Companies for the development of harvest at Limoneira is progressing well. Over the estimated 7- to 10-year life of the project, we expect to receive approximately $100 million, including the $20 million that was received from Lewis when the joint venture was formed.

The joint venture has received lots of -- lot deposits from national homebuilders, and initial closings of lot sales with the realized cash flow is anticipated to begin in the first quarter of calendar year 2019. In summary, we are extremely pleased with our progress throughout fiscal year 2018.

We are entering 2019 positioned to continue expanding our agribusiness and progressing towards our goal of becoming the global leader in high-quality fresh citrus. And with that, I'll now turn the call over to Mark..

Due to the Tax Cuts and Jobs Act of 2017, the company recognized a noncash $10.3 million or $0.63 per diluted share onetime tax benefit associated with the decrease in its deferred tax liability balance during the first quarter of fiscal year 2018. Sale of Calavo Growers, Inc.

stock for a $4.23 million gain or $0.19 per diluted share was realized during the fourth quarter of fiscal year 2018. A noncash impairment of Santa Maria real estate assets for $1.56 million or $0.07 per diluted share was realized during the fourth quarter of fiscal year 2018.

Excluding these three nonrecurring items, adjusted earnings per share was $0.50 for fiscal year 2018 based on 16.2 million diluted shares outstanding. Adjusted EBITDA for fiscal year 2018 was $23.5 million compared to $19 million in the same period last year. Before I hand the call back over to Harold, a few comments on our balance sheet.

In June of 2018, we completed a public offering of 3,136,000 shares of our common stock at a public offering price of $22 per share for total gross proceeds of approximately $69 million.

In June and July of 2018, we used the offering's proceeds to pay down debt, purchase San Pablo Ranch and purchase Oxnard Lemon's packinghouse, related land and certain other assets. Long-term debt as of October 31, 2018, decreased to $76.9 million compared to $102.1 million at the end of fiscal 2017.

Now I'd like to turn the call back to Harold and -- to discuss our fiscal year 2019 outlook..

Thank you, Mark. We expect our agribusiness to continue to benefit from the more efficient infrastructure we have in place as we are able to build revenues through expansion of our in-house citrus orchards as well as growth in third-party volumes that we pack and market and additional future strategic acquisitions.

We remain confident in the long-term growth trajectory of the business, and will continue to work to deliver value for our shareholders. Turning to our fiscal year 2019 guidance.

We expect to sell between 5 million and 5.3 million cartons of fresh lemons at an average price of $27 per carton and expect to sell approximately 1.7 million to 2 million pounds of avocados at approximately $1.20 per pound.

We expect operating income for fiscal year 2019 to be approximately $20 million to $23 million compared to an operating income of $9.5 million for fiscal year 2018. Fiscal year 2019 EBITDA is expected to be in the range of $28 million to $32 million.

We are reiterating our previous fiscal year 2019 earnings per diluted share guidance of $0.75 to $0.85 per share based on an estimated 18.4 million diluted shares outstanding. Earnings per share for fiscal year 2019 excludes the impact of potential mark-to-market changes in the value of our 250,000 shares of Calavo Growers common stock.

Beginning in fiscal year 2019, we are being required to measure the fair value of this investment on our income statement instead of our balance sheet. Included in guidance is approximately $0.14 to $0.18 per share in fiscal year 2019 accretion from the recent acquisitions completed in fiscal year 2018.

Longer term, we expect approximately $100 million in cash flow from the Harvest at Limoneira project over the next 7 to 10 years. Phase 1 site improvements are underway, and the joint ventures received lot deposits from national homebuilders. The joint venture is expected to close on lot sales during the first calendar quarter of 2019.

In addition, beginning in 2020, we'll have 300 acres of approximately 1,200 acres reach full bearing and -- full-bearing status and the remaining 900 acres to reach full-bearing status from 2021 to 2023.

Beyond these 1,200 acres, we currently intend to plant an additional 500 acres of lemons in the next 2 years that will further expand our long-term pipeline of productive acreage.

We anticipate this additional acreage will increase annual lemon supply from its current level by approximately 30% or about 900,000 to 1.3 million additional fresh cartons as the nonbearing and planned acreage becomes productive. We also expect to have a steady increase in third-party grower fruit.

This is all organic growth and doesn't include potential acquisition opportunities in our highly fragmented industry. And with that, I'd like to open the call up to your questions.

Operator?.

[Operator Instructions]. And we'll take our first question today from Ben Bienvenu with Stephens Inc..

I wanted to ask with respect to your carton guidance of 5 million to 5.3 million cartons of lemons in 2019.

Could you provide a little bit of detail on the mix between third-party cartons and Limoneira cartons within that guidance?.

Sure. So the shift is going to be more heavily weighted towards third-party cartons. And when at the end of 2019, we expect 65% of the, call it, 5.3 million cartons to be provided by outside growers, and 35% will come from our own acreage..

Okay, great. And then you talked about, Harold, the recruitment of third-party growers. That's great to hear that update. Can you talk about how your retention of the Oxnard growers has been? And then just maybe talk a little bit more about why you've been so successful in recruiting third-party growers to your platform..

Sure. I'd be happy to, Ben. So the main dynamic that we faced in recruiting the outside growers is balancing the good economic principles of providing superior grower returns and providing excellent customer service to those growers, but at the same time combating years and years of loyalty to existing marketing structures.

And so for many of these growers, we're facing somewhat of a paradigm shift as we're bringing new concepts that we believe will provide greater value for these growers in the form of greater service but also in greater grower returns.

And so we've been very successful in our own marketing and sales effort at being extremely competitive in providing superior grower returns to our competition since we became an independent marketer and seller in 2010, and our track record continues to be excellent as we compare our returns against our competitors.

That being said, it's a slow, long, drawn-out process, usually driven because of years and years of loyalty to our competition in successfully recruiting those growers.

That said, though, as we continue to perform at a superior level in those returns and as word gets out that our marketing system and our sales efforts are rewarding other growers, that word-of-mouth has really been helpful.

And as I reported earlier, we exceeded our expectations in terms of the amount of outside grower fruit we were -- we set out to recruit. We set out to recruit 500,000 cartons, and we actually recruited 700,000 cartons from outside growers in 2018 for the 2019 season.

Now as we go into the 2019 season and we work on all outside growers but, more specifically, on the outside growers from our Oxnard Lemon acquisition, we believe, right now, we're tracking on a level of about 80% retention, and we believe that, that should bring an extra 2 million cartons into Limoneira's marketing and sales system from the outside growers that previously were affiliated with Oxnard Lemon prior to our acquisition..

Okay, great. Last question for me.

How much of the -- how much bearing does the market price for lemons have on your ability to recoup the $0.08 to $0.10 per share, that is supposed to shift from 4Q to 1Q with the delay of the harvest of 120,000 cartons?.

We think pricing is going to be fairly neutral as it relates to Q4 of '18 and Q1 of '19.

It's pretty close, isn't it Mark?.

Yes..

So it's basically just a volume price shift from Q4 into Q1 of '19. We're not banking on any increased pricing..

Next, we'll hear from Vincent Anderson with Stifel..

Does your 2019 lemon carton guidance include international lemons at all?.

It does not. And approximately -- we're looking at approximately 600,000 to 700,000 cartons from our Chilean operation. And then there'll be some additional outside of that from third party. But if you're looking at it from a whole lot basis worldwide, it would be 5.7 million to 6 million total cartons..

So when we think about modeling that, you gave the volume.

When you think about the Chilean market going into the U.S., how should we think about price and volume -- price and margin or maybe do you have any plans to increase your disclosure around your international operations this year and make it even easier?.

Yes. I think that's going to be one of our goals this year, and so we can -- and have a bunch more visibility for everyone as we're putting the model together.

Pricing, we see sort of homogenistic [ph] worldwide where the summertime fruit, which is where we'll get the Chilean benefit from, is typically obviously, the higher-priced lemon, so increased margins there. But we'll try to -- we'll do that on the first quarter call potentially, and see if we can get some more clarity into that so you can see that..

Great.

And just following on that, I think I know the answer to this given the seasonality in Chilean sales, but are you seeing any effects from the port strike down there right now or is that anything that concerns you?.

Right now, we're not seeing any impact on it, but we've got our eye on it and we're hopeful for a speedy resolution..

Great. And if I could just fit in one more, so the USDA's most recent estimates, I think, are calling for about a 5% decline in U.S. lemon production year-over-year next year. 2018 imports were about flat. So even if we saw flat demand year-over-year, it looks like we should be heading into 2019 with a pretty good supply shortfall.

Do those numbers flip more or less with what you're seeing in the market? And does that imply a fair amount of confidence in your 2019 average selling price guidance?.

The bottom line, it does. To provide a little bit more granularity, Vincent, as you know, we deal with 3 very different and distinct growing districts that all sort of are -- experience different microclimates, and so they have different seasonality components to them.

And to go through it, we begin the year every year in the desert in District 3, and that crop is up approximately 30% year-on-year from last year. Then it shifts up into the San Joaquin Valley, and that's the winter lemon. It was seasonality, call it, November to March. And that crop size is up about 10%.

And then we come down in the California coast, whose seasonality is anywhere from March all the way till July, August, and that's the area in California that got hit by the severe heat last July. And we believe that's down by somewhere directionally 20% to 30%.

So all of that said, it corroborates your idea that, I guess, it came from the USDA that the total supply or production in California and Arizona is down by 5%. That's probably right. We do expect that to drive great pricing in the late spring and early summer months.

But we always have to sort of keep our eye on our friends and our businesses in Chile and Argentina that will take advantage of some of that increased pricing. And we expect to see the level of imports expand dramatically this next year. And we also look forward to participating in that..

We'll now hear from Eric Larson with Buckingham Research Group..

Just a couple of questions.

First, on the quarterly markup of your Calavo shares, are the current value just marked on your balance sheet right now as of the closing price on the last day of December, is that where -- is that the base?.

Yes..

That's right. And so, Eric, just a little color on that. So as you know, we made a significant investment in Calavo shares. Our original basis is $10 a share. And the stock ran to as high as $107 a share, I think it's trading for directionally somewhere around $78 a share. So what we'll need to do is go back and see where that....

It's on 10 31, Eric. So it was roughly about $97 at that point. And so that is where we are today..

Yes..

Okay. So is that still -- there's no economic impact. That's a non -- that will just be -- I don't know why they're forcing people to put it through the P&L rather than the balance sheet. It doesn't make a lot of sense. But there won't be any cash tax consequences or anything. It's just a noncash markup or down on your income statement.

Is that also correct?.

Correct..

Correct..

Yes, correct..

I just want to make sure that we don't get surprised that all of a sudden you've got a big cash tax liability and there goes your -- some cash in the balance sheet. I assume that I knew the answers to that, but I just wanted to verify it..

No, I appreciate all the questions because it's creating a lot more noise, that, ultimately, companies that own ownership or have ownership in other publicly traded companies will need to mark-to-market each quarter through their P&Ls..

Yes, it just creates more earnings volatility that is not needed. And as you guys know, I do cover Calavo, too. So I'm familiar with the whole -- I am familiar with where the stock price has gone and stuff. So I just wanted to make sure that we were all on the same page with that.

So looking at your fourth quarter margins in lemons, it looks like your fourth quarter margins were actually pretty good, maybe a little bit below what they were in the third quarter.

Is that again -- is that mix on your -- on the type of cases that you sold again, Harold?.

You know what it was, Eric, it was a couple of things, but it was great performance in the packinghouse so driving great margins through our packing. But it was also great margins coming out of Chile and our imports coming from Argentina and Chile. So the combination of all of those things were very helpful for us..

Got it. So when you look at your packinghouse, Harold, we've talked about this and I think I've talked with Mark about it as well quite a few times. You, at one time, had set some pretty aggressive cost savings per carton in that facility.

And I don't think we've ever really talked about what it means if you put an additional 700,000 cases -- or cartons through it now that you're -- and then even some international fruit.

But what is the leverage up in your EBIT margins by putting, let's say, a couple hundred thousand cases more through that packing facility? I would assume that it's pretty positive..

So at the risk of overcommitting, I'm going to try to be careful with this. But we think there's $0.50 of incremental margin that we can pick up. And I think that, hopefully, is a sandbag number. In other words, we think there's directionally more than that. But until we experience it, we want to be careful.

But in our own pro formas internally, we've taken our margin up by $0.50 year-on-year for that third-party fruit where we're providing that marketing -- that packing service..

Okay, okay. I mean, that gives us a little effect -- it gives me a definite base to kind of think about the whole process here. And then my final question -- well, there's a couple of questions.

Avocados, the timing of when you get insurance payment for this, is this from regular insurance companies? Does that have something to do with the USDA, which is now shut down, pretty much? So how should we look at the timing of the cash insurance benefits of that 2.5 million that you are kind of projected to get this year for avocados that you can't produce?.

So that's a great question and one that I've already begun the arm wrestling over this issue with our auditors. So there's going to be two important dates. There's going to be the date that our insurance company commits to an amount to pay, and then there'll be the date in which they actually pay.

And those are two dates that typically have potentially months between them. And our preference is to make that announcement and to record that at -- when the commitment to pay is made, so we can record that. We believe that the actual payment will be made in the late fourth quarter of 2019, probably October-ish..

Yes, October. Yes..

Do you have a sense of when we'll actually get the commitment from the insurance company?.

Well, it's typically at the end of the harvest period, and then we true-up where we are versus the guarantee. And so most times, we're done by early July. So we should have a commitment theoretically by the middle to end of July, yes..

I hope that answers your questions. .

Yes, this is going to be a weird -- it will be a little strange from that period. So at the end of the day, you will account for that once the insurance company has made a commitment. You will account for that full lump sum in the quarter in which that occurs. You won't spread it across future volumes on future quarters.

It will just be a onetime -- it will just be a onetime recognition of income?.

Yes. That's right. And you're giving me an opportunity to kind of reiterate what I think the main point here is, and that is that for the second year in a row, our avocados are really performing well below what we consider to be an average performance.

And so for us to guide from -- if you adjust everything from $0.50 in 2018 up to $0.80 for 2019, it's important to understand that all of that was done really without any avocado performance. If we return back to normal, that should add a significant amount of benefit to future years. And we do anticipate being back to "normal" in 2020..

Chris Krueger with Lake Street Capital Markets has our next question..

Just have a couple of quick ones. Most of my questions have been answered. I know there's been a lot of volatility with the weather, especially in California with fires and mudslides, things like that.

Can you just kind of give us overall what your thoughts are in the impact on your egg business and if there's any impact on the Harvest at Limoneira business?.

So the big impact, as you recall, was last year, 2018, with the Thomas Fire that burned right by a number of our assets and actually damaged some workforce houses that we have. And we actually did file insurance claims on some damage to some agricultural properties. That being said, though, the impact on the financial results in 2018 were negligible.

Actually, I guess, the fire was 2017. I misspoke. So the impact on 2018 was negligible. The actual fires that you recently heard about started just to the south of us and actually burned south and southwest all through Malibu and down into Los Angeles County. So we were spared from that situation.

As it relates to the mudslides that you're referring to, that's really where the biggest problems are occurring right now. As you speak, it's raining in California right now. There are some areas of concern that we'll watch very closely around our agricultural operations as it relates to mudslides. But so far, so good.

And this rain is very, very welcome. We believe that by the end of this week, we should have had almost 10 inches of rainfall for the year, which is a wonderful start to our year..

All right. The other question is on Harvest at Limoneira. If I understand it, it looks like your initial closings are a couple of months later than previously expected, if I understand it correctly.

If that's the case, is there any reason for that?.

Yes. So it's actually probably more weeks, not months. Although going back, there was some slippage as the infrastructure was taking a little bit longer in certain areas to put it in place.

When we actually made the commitments and got the deposits from the homebuilders, though, we had a target of being the end of our fiscal year fourth -- first quarter. And so it has slipped by 30 to, call it, 60 days maybe. But it's mostly weather-driven, Chris.

What determines a delivered lot that makes it so that we can deliver the lot to the homebuilder has certain requirements of roads and utilities that get stubbed into each of the lots. And because of the rain, we haven't been able to get in there to get those done. With the gaps in the rain, we believe that will happen in the next, call it, week or 2.

And so you'll see those closings in very short order now..

Our final question will be a follow-up from Vincent Anderson with Stifel..

I just had one more. So could you give us an update if you have any news on the issue of Argentine lemons going into the EU? I think they found some CBS disease.

Have they shut down all of that? Is that something that could persist into next year and send more Argentine lemons to the U.S.? How should we think about that?.

Too early to say at this point. It is a concern because Europe is a great outlet for much of that fresh citrus from Argentina. So if the question was sort of wondering whether it would get diverted to the U.S., I think we have to keep our eye on that.

At this point, it's too early to say whether the market is going to be closed in Europe indefinitely or whether there's resolution there. So we're watching it very closely. But at this point, it's a little too early to predict which way it's going to go..

And so worst case, if you get this big shift from Argentina to the U.S., do you have networks established in the EU where you can move lemons from Chile to balance the U.S.?.

That will have to be what happens. But I think the biggest outlet or purge valve that we have is just domestic Chilean consumption, which was one of the reasons we were so attracted to the Chilean opportunity, is that in the event that the export markets aren't there, the Chileans consume lemons at a great level with good economics.

And we can remain commercially very viable just keeping them in Chile and not taking the risk to ship them into crowded export markets..

That will conclude today's question-and-answer session. At this time, I will turn the call over to CEO, Mr. Harold Edwards, for any additional or closing remarks..

Thank you for your questions and interest in Limoneira. We look forward to updating you again in March on our first quarter call. Thank you again, and have a great day..

That does conclude today's conference call. Thank you for your participation. You may now disconnect..