Limoneira Company
Q1 2021 Earnings Call Transcript

Published: 10 Mar 2021

[Operator:]

Greetings, and welcome to the Limoneira First Quarter Fiscal Year 2021 Financial Results. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, John Mills with ICR. Thank you. You may begin.

[John Mills:]

Good afternoon, everyone, and thank you for joining us for Limoneira’s first quarter fiscal year 2021 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 first quarter fiscal year 2021 earnings release, which went out today at approximately 4 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 Limoneira’s website as well.

[Harold Edwards:]

Thanks, John, and good afternoon, everyone. I’m pleased with our start to fiscal year 2021 as we achieved record first quarter lemon volume, solid specialty citrus revenues, and our improved cost structure contributed to improvement in cash flow compared to last year. As a reminder, since our first quarter ends January 31st, the pandemic did not have a material effect on our fiscal first quarter last year. So, this year-over-year improvement was due to our ability to dramatically expand our focus on grocery retail and the reason we believe we are very well positioned to achieve a meaningful increase in domestic foodservice and exports, once dining-out improves from COVID-19 vaccine distribution. In addition, even though it is early in the season, we expect strong results from avocado and oranges in fiscal year 2021.

[Mark Palamountain:]

Thank you, Harold, and good afternoon, everyone. As a reminder to everyone, there’s a seasonal nature to our business with our revenue driven by varying harvest periods from year-to-year. Therefore, we advise that our business be viewed on an annual, not quarterly basis. Historically, our first and fourth quarters are the seasonally softer quarters, while our second and third quarters are stronger. For the first quarter of fiscal year 2021, total net revenue was $38.3 million compared to total net revenue of $41.7 million in the first quarter of the previous fiscal year. Agribusiness revenue was $37.1 million compared to $40.5 million in the first quarter last year. Other operations revenue was similar to the prior fiscal year at $1.1 million. Agribusiness revenue for the first quarter of fiscal year 2021 includes $25 million in fresh lemon sales compared to $27 million of fresh lemon sales during the same period of fiscal year 2020. Approximately 1,320,000 cartons of fresh lemons were sold during the first quarter of fiscal year 2021 at an $18.91 average price per carton compared to approximately 1,280,000 cartons at $21.12 average price per carton during the first quarter of fiscal year 2020. Pricing was lower in the quarter due to COVID-19 pandemic-related foodservice closures, reducing the demand for fresh lemons in the foodservice marketplace and creating an oversupply in the retail marketplace. We also had sales of fruit in South America in the first quarter lowering the overall weighted average pricing. But, if you were to look at just the U.S. price of fresh lemons in the first quarter of fiscal year 2021, it was $20.05 average price per carton. The Company recognized no avocado revenue in the first quarter of fiscal year 2021 compared to $200,000 in the same period last fiscal year. Approximately 125,000 pounds of avocados were sold during the first quarter of fiscal year 2020 at a $1.34 average price per pound.

[Harold Edwards:]

Thank you, Mark. The COVID-19 pandemic continues to affect our foodservice business on a global basis. The Company believes it is prudent to not provide lemon guidance at this time until the COVID-19 vaccine is widely distributed and we begin to see consistent openings of the foodservice market. The higher and more frequent winds during the first quarter will reduce industry volume for the second quarter but will also drive higher temporary pricing for top-grade lemons. Offsetting some of this uncertainty, we do expect to generate strong orange and avocado revenue in fiscal 2021, based on positive market factors and positive initial crop indicators. We also expect improving results compared to last year during the second, third and fourth quarters of fiscal 2021 due to slowly increasing demand from foodservice and export markets, as well as improving cost control measures. We also have an additional 1,200 acres of nonbearing lemons estimated to become full bearing over the next four years, which will enable us to achieve strong organic growth for many years to come. The Company expects 200 of the 1,200 acres to become full bearing in fiscal year 2021. Beyond these 1,200 acres, we intend to plant an additional 250 acres of lemons in the next two years that we believe will further build our long-term pipeline of productive acreage. We anticipate this additional acreage will increase domestic supply of lemons from our 2020 level by approximately 50% 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.

[Operator:]

Thank you. Our first question comes from the line of Ben Bienvenu with Stephens Inc.

[Ben Bienvenu:]

Hey. Good afternoon, guys. I want to ask you, you mentioned this in your guidance, and you touched on it last quarter as well, just how your positioning in the grocery channel has improved in the midst of COVID. And I want to understand a little bit better how sticky that positioning is as we hopefully return to normal here over the next year or two? And what, if any, difference in profitability there is in that channel versus your traditional foodservice channel, if there was cartons oscillating from foodservice to grocery? Any color you could offer there would be helpful.

[Harold Edwards:]

Sure. As it relates to pricing and margins in the retail channel versus in the foodservice channel, there’s roughly parity between the two. So, no great differential. So, either channel can be equally profitable. We believe that the pivot over to the retail for us will be relatively sticky. Part of the challenge that we had when foodservice markets began to close was we were an unknown commodity or a newly certified vendor for some of these retailers. So, it took us a while to become known but also then proven, and ultimately, our value proposition needs to be proven to some of these retailers. So, we needed to use price in some instances to actually get in the door with some of these retailers. As we became proven and our supply chains were proven and our quality was proven, that price differential between us and our competition diminished. And we’re really pleased to say that, as we just finished our first quarter and now in our second quarter, we have great stickiness with our retail customers, and we’re pretty much selling at parity with the competition. So, that’s all very positive for us. The one thing I can tell you, Ben, is the premium that we receive typically by selling to our export customers can be as much as $5 to $7 a carton into that channel, which is one of the reasons we tend to choose to take our fancy fruit into the export markets whenever we can. But, in terms of the differential between foodservice and retail channels domestically, they pretty much sell at parity.

[Ben Bienvenu:]

Okay. That’s helpful. My second question is related to costs in the business and just cost inflation more broadly, thinking specifically about labor tightness, freight inflation. Does that traditionally manifest itself in higher lemon prices in the industry? And how are you all positioned relative to some of the key cost inflation drivers in the industry more broadly as we think about fiscal ‘21?

[Mark Palamountain:]

Yes. So, I’ll take that, Ben. So generally, I think we were very pleased with our cost control relative to the internals of the Company. We did have some packing costs increase that were attributable to our minimum wage increases in California and some minor COVID costs, PPE, et cetera. But overall, I think some of the costs that we’ve seen start to rise a little bit, a little bit in the paper side into the carton boxes. We were fortunate from the fertilizer side that oil prices and all that have been at a low level, and we’re starting to see that obviously get to 52-week highs. So, we anticipate seeing some inflation there. From the lemon absorption of those costs, I think historically, we’ve seen that kind of go pari passu. When we were starting this adventure back in 2010 as a public company and the prices were $14, $15, and there’s moderate growth in the demand, but we also saw price increases with those cost increases sort of be able to carry the industry.

[Operator:]

Our next question comes from the line of Vincent Anderson with Stifel.

[Vincent Anderson:]

Yes. So, I mean, I guess, in addition to a little bit of weather in District 2, South America has been having some fun over the last few months. Maybe could you just break down, in South America, how much it has impacted lemon production overall and then specifically yourself? And then, if you had any detail at this stage in terms of what the D2 impact is, if it’s just sizing or if there’s scarring issues?

[Harold Edwards:]

Yes. So, I’ll start with the latter part of that, which is the impact of the winds on our California production, and it’s really right here on the California Coast. So, the last few years, we’ve seen unusually high levels of east winds. And as you know from your visit in looking inside a lemon tree, lemon trees have thorns. And when the wind blows, the fruit sometimes rubs up against those thorns, and it’ll scar the fruit and downgrade the quality from a perfect-looking, fancy grade piece of fruit to a choice grade of fruit. And so, in District 2, what normally would be forecasted 40% of the total tree crop being harvested at fancy grade for the Limoneira production and that of our affiliated growers, we’re estimating that now closer to 25% fancy grade and then the choice grade upwards of 40% to 45%, where that’s typically a little lower than that. So, the challenge will be that -- there’ll be really two, which is the overall tree crop size is 20% down in total as an industry. The percentage of first grade fruit will be down because of the winds. And then, the choice grade fruit will be up in terms of the percentage of being up. And the choice grade is typically the fruit that finds its way into the foodservice market. So, I guess, the potential challenge or risk that we’re all looking at out there is that if the foodservice markets or channels are slow and restaurants and bars are slow to reopen, the choice-grade fruit could build up and become overcrowded, which will put negative pricing pressure on us to sell that fruit. So, that’s sort of the overview domestically. And we’ll just have to keep reporting on it as we go into the second and third quarters. But, as it relates to the production in Chile and Argentina, I guess, the good news is in Argentina, our production is way up north, in the northern part of Argentina. The middle part of Argentina is going through a pretty severe drought right now, and production is significantly off as a result of that drought. We believe, ultimately, that’ll help us because there’ll be a much better balance between the supplies of Argentine fruit and then its ability to find the markets. And then, we also are experiencing drought conditions in parts of Chile. Our production is actually in pretty good shape. So, we believe that the production that you’ll see coming out of our operations in both, Chile and Argentina, should be quite favorable. And we have a normally excellent percentage of fancy grade fruit that should find its way into the U.S. market in order to take advantage of the decreased coastal fruit that you’ll have here, the fancy grade fruit. So, we believe this is all sort of part of our One World of Citrus model. And we believe that we’ll see the benefits of our Southern Hemisphere production in 2021, unlike we’ve seen in years past, and it should really be a significant value producer for the Company.

[Vincent Anderson:]

Excellent. And then, this one, maybe a little bit more of a stretch, but you’ve had a couple of tough marketing years to try and ramp up your third-party recruiting. As you think about your ability and really the necessity to keep your pack house filled, has the thought process changed at all to where maybe you need a little bit more, call it, juice exposure, to help retain growers in down years even if it sacrifices fresh utilization on the margin, or is the sales pitch really still the same in recruiting third party?

[Harold Edwards:]

Yes. The sales pitch is still the same. Certainly, we took some hits as a result of the challenges that we’ve had over the last two years. And in 2021, admittedly, our grower returns for part of the year were not at the top of the market, and we did have some grower attrition. The good news about that is that that actually is coming right into a time of the year where there’s general oversupply so -- and that’s in the spring and the summer. So, even though it will be negative in terms of running less units across our line -- and by the way, the total tree crop in all districts is down anywhere from of 15% to 30% in each of the districts. So, overall, I think the total tree crop across California and Arizona is down 20%. So, that should help. But also, not having to handle the buildup of fruit that we’d accumulated in District 2 in the spring and the summer should actually become a much better profit formula for our Company because our fresh utilization should be better. With that being said, though, the goal is to fill our packinghouses up with volume and to sell all of the volume that we do handle. So, as bad as it might have been over the last two years, if we’re able to maintain higher levels of fresh utilization, our grower return should be more competitive, which they will be. And we’ll make it our business to make them more competitive, which will greatly enhance our ability to attract and recruit and retain outside growers. So, we fully expect that in years to come, we’ll be able to continue to recruit outside growers and stay right on our plan of filling our packinghouses up, and ultimately, being able to sell all of their lemons as markets and market demand return to pre-pandemic levels.

[Mark Palamountain:]

And Vince, I’ll just add there that as we saw some of that grower attrition this year, even though seeing we have that industry crop down 20% as a total, our overall internal crop will be up, given the fact of those new acreage that are coming on and some different techniques that we’ve been using. So, we anticipate that to more than offset any of that grower loss.

[Operator:]

Our next question comes from the line of Mark Smith with Lake Street Capital Markets.

[Mark Smith:]

First one from me is just, are you guys seeing any change yet in foodservice that’s really impacting your business yet?

[Harold Edwards:]

So, it’s just starting. We’re just starting to see it. It literally is changing on a day-to-day basis as we’re seeing increased orders in different pockets of the country that are opening up. And some areas are growing faster and increasing faster than others. So, we’re cautiously optimistic. But, certainly, everything we’ve been reading and seeing on the news suggests that in certain parts of the country, they’re opening up very rapidly, and people are going out and eating and enjoying restaurants and bars. And that’s exactly the areas where we’re seeing the lift in demand.

[Mark Smith:]

Perfect. And then, as we look back at the storms that rolled through the south, primarily Texas, any real damage in crops that you can point to, or any changes in fruit pricing that impacts you guys?

[Harold Edwards:]

Not that really that affects us on the fresh side. Texas got clobbered with really cold weather and snow, as you know. And then, part of the Mexican production got hit as well. I guess, what we would expect to see, if there is any impact on our business, is -- would be slightly less production coming out of Mexico, which typically begins in August. And we’d see that benefit in our fourth quarter. So, we do believe there’ll be slightly fewer lemons from Mexico coming into the U.S. market. But, as it relates to Texas, that really impacted more the grapefruit and some orange production, which had less of an impact on our total business.

[Mark Smith:]

Okay. And then, any update on export market, on what you guys are seeing there? Any impact that the ports are having, or any update you can give us there would be great.

[Harold Edwards:]

Yes. You just touched on it with that question, which is a very insightful question. As you know, containerized shipping lanes are -- have been significantly compromised in terms of their service levels due to challenges that the pandemic has caused with longshoreman and the ability for vessels to berth, load, unload, and basically, enjoy port services. And so, there’s huge backups around the ports around the world. And we’re caught up in a lot of that. A great example of how that’s impacting our business is our Japanese market, which still is coming out of pandemic-related demand issues. So, they’re probably at about -- I’m going to make it up, but maybe 60% or 70% of pre-pandemic demand levels. We’re seeing rapidly escalating pricing opportunities in Japan, but it’s driven more by our inability to service the market with reliable containership services because of the challenges at the ports. What we’re finding in our Korean shipments, we’re -- we’ve been very fortunate to be able to deliver pretty consistently in the Korean market. And demand in Korea now is at pre-pandemic levels. Different sort of scenarios in different countries in the Asian markets, but all-in-all, we’re seeing improvement in each of those markets. And we’re just hopeful that as the vaccine finds its way around the world and as different markets open up that the port situation will improve, and we’ll begin to see more reliable shipping opportunities again, which should really help the supply chains, not only for us but for everybody, as those markets improve, not only due to the pandemic and the improvement in the spread of the vaccine, but also in the improvement of their port openings and people going back to work and opening the ports.

[Mark Smith:]

Okay, great. And maybe one more for me, and I’m not sure if Mark wants to take it. But, as we look at SG&A expense, any insights you can give us on cost cutting, effectiveness of some of the cuts that you guys have made, maybe an outlook through the remainder of the year as we look at SG&A?

[Mark Palamountain:]

Yes. No problem. So, I’ll take that. So, in general, costs have been lower. Simply, there’s a lot of COVID costs that aren’t in the business travel expenses, those kinds of things. And we’ve really taken a look at the whole organization and really where the efficiencies and inefficiencies are. If we look last year to this year, year-over-year, we’re about $500,000 less in the first quarter of SG&A. So, we feel like that’s a positive trend for us. But typically, I think, we run anywhere from about $1.3 million to $1.5 million in any month. And so, that will probably hold true from where we go forward. And that does include a pickup in travel expenses for us as we’ll see the sales groups and us hosting more conventions and whatnot.

[Operator:]

There are no other questions in the queue. I’d like to hand the call back over to Mr. Edwards for closing remarks.

[Harold Edwards:]

Thank you for your questions and interest in Limoneira. Have a great day.

[Operator:]

Ladies and gentlemen, this does conclude today’s teleconference. Thank you for your participation. You may disconnect your lines at this time. And have a wonderful day.