Greetings, and welcome to Limoneira’s First Quarter Fiscal Year 2023 Financial Results Conference Call. At this time, all participants are in listen-only mode, and the question-and-answer session will follow the formal presentation. [Operator Instructions]. 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.

Good afternoon, everyone, and thank you for joining us for Limoneira’s first quarter fiscal year 2023 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 2023 earnings release, which went out today at approximately 4.00 PM 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 Web site at limoneira.com. This call is being webcast and a replay will be available on Limoneira’s Web site as well. Before we begin, we would 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 risk detailed in the company’s 10-Qs and 10-Ks filed with the SEC and those mentioned in the earnings release. Except as required by law, we undertake no obligation to update any forward-looking or other statements herein, whether as a result of new information, future events or otherwise. Please note that during today’s call, we will 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 provide 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 adjusted EBITDA, adjusted net loss per diluted earnings per share, and diluted net loss per common share, which are non-GAAP financial measures. A reconciliation of adjusted EBITDA, adjusted net loss per diluted EPS and diluted net loss per common share to the most directly comparable GAAP financial measures are included in the company’s press release, which has been posted to its Web site. And with that, it is my pleasure to turn the call over to the company’s President and CEO, Mr. Harold Edwards.

Thanks, John, and good afternoon, everyone. I am pleased with our performance in the first quarter. Despite the heavy rains in California pushing the initial first quarter avocado harvest and a portion of the lemon harvest into the second quarter, we generated over $37 million of revenue in our seasonally softer quarter. We had minimal damage to our crops from the rain and fully expect to recoup the delayed revenue in the second and third quarters, keeping our full year 2023 volume guidance intact. Additionally, we expect pricing for fresh lemon cartons to increase in the second half of the fiscal year. For new investors listening to our call today, I would like to quickly recap our strategic transition plan that is pivoting our business towards an asset-lighter model in order to streamline our operations and sell non-strategic assets, improve the consistency of our earnings, increase EBITDA and dividends per share, reduce debt, right-size the balance sheet and improve the return on invested capital. This plan involve the identification of approximately $150 million of assets for sale, which because of greater value realized in initial monetization efforts, we believe are now worth approximately $180 million and a transition to a more efficient operating plan. We've made significant progress advancing our strategy to monetize certain non-strategic assets with nearly all of those identified assets sold, expanding our One World of Citrus initiative with the recruitment of close to 1 million additional cartons from new grower partners and executing on Harvest at Limoneira, all of which are transforming our balance sheet and positioning us to improve our top and bottom line results. Management will be meeting with our Board of Directors this month for our annual strategic planning session to implement a new strategic capital allocation plan, taking into account our very…

Thank you, Harold, and good afternoon, everyone. As a reminder, it is best to view our business on an annual not quarterly basis due to the seasonal nature of our business. Historically, our first and fourth quarters are the seasonally softer quarters, while the second and third quarters are stronger. For the first quarter of fiscal year 2023, total net revenue was $37.9 million compared to total net revenue of $39.3 million in the first quarter of the previous fiscal year. Agribusiness revenue was $36.5 million compared to $38.1 million in the first quarter last year. Other operations revenue was $1.4 million compared to $1.2 million in the first quarter of fiscal year 2022. Agribusiness revenue for the first quarter of fiscal year 2023 includes $24.7 million in fresh lemon sales, similar to $24.7 million during the same period of fiscal year 2022. Approximately 1,308,000 cartons of fresh lemons were sold during the first quarter of fiscal year 2023 at an $18.88 average price per carton compared to approximately 1,207,000 cartons sold at a $20.48 average price per carton during the first quarter of fiscal year 2022. Of the 1,308,000 and 1,207,000 cartons of U.S. packed fresh lemons sold during the first quarters of fiscal year 2023 and 2022, respectively, 66% and 57%, respectively, were procured from outside growers. As part of the company's strategic plan, it is transitioning One World of Citrus to an asset-light model through the expansion of grower partners. Due to heavy rainfall that occurred during the first quarter of fiscal year 2023, the timing for the initial avocado harvest was pushed from the first quarter into the second quarter of fiscal year 2023. The company recognized no avocado revenue in the first quarter of fiscal year 2023, but expects to recoup this delayed revenue in…

Crop reports for lemons continue to suggest industry-wide production is expected to be down 10% to 15% in fiscal year 2023 from Mother Nature. However, due to the planned expansion of our grower partner fruit, we are expecting to increase volume and increase our market share in fiscal year 2023. We continue to expect total lemons sales volume to be in the range of 5 million cartons to 5.4 million cartons for fiscal year 2023. This is up from 4.9 million cartons in fiscal year 2022 and 4.4 million cartons in fiscal year 2021. For the second quarter of fiscal year 2023, we expect to experience continued pricing pressure but believe the industry-wide lower production will lead to higher prices beginning in the second half of fiscal year 2023. Also, during the second quarter of fiscal year 2023, we received a patronage dividend from our primary lender AgWest, formerly Farm Credit West, of $1.4 million. We continue to expect avocado volumes for fiscal year 2023 to be in the range of 4 million pounds to 5 million pounds. It's important to note that while fiscal year 2022 was a record year for avocado revenue, the California crop typically experiences alternate years of high and low production due to plant physiology. This, along with adverse weather conditions, is contributing to the year-over-year decline. We experienced unusually high temperatures in early September and a wind event in November that knocked fruit off of our trees and will have a negative impact on our 2023 avocado crop. In addition, we continue to expect to receive $115 million compared to the previous estimate of $95 million from Harvest at Limoneira and the addition of the Limoneira Lewis Community Builders II and East Area II spread out over seven fiscal years, with proceeds of $8…

Certainly. We will now begin the question-and-answer session. [Operator Instructions]. The first question comes from Eric Larson from Seaport Research Partners. Please go ahead.

Hi, guys. How are you doing today?

Hi, Eric.

Hi, Eric.

So my first question, and I think I'd know the answer to this. So on your big asset sales, the water rights are going with those I'm assuming. Is that true or is it not? And is there any way to sort of split or try to figure out what the valuables water rights would have been as part of the sale price?

So part of the compelling price that we received for the Northern Properties, Eric, was due to the access of reliable water and water rights. So the water assets did go with the land assets in those sales. There were a number of different water rights associated with those properties with various and varying ranges of value based on the reliability and the sustainability of each of those sources. But prior to the divestiture of the Northern Properties, we had about 28,000 acre feet of water rights. And that number now is down to 21,000 acre feet. So about 7,000 acre feet of water went with those properties.

And Eric, just further detail. So far and above the best water rights that we have left, which are here the adjudicated Santa Paula basin and Yuma, which equate to over 90% of the prior water value. So still in great shape with water and moving forward there.

Okay. Thank you. That's good clarification. So next question is just the lemon business. Obviously, it was soft again this quarter. You're under $19 per carton. I think you need to be around $20 to kind of even breakeven and make some money. Give us a little more flavor, Harold, about really when does the supply situation really start to tighten up? What is [indiscernible] kind of gradual improving price into the rest of the year, but it seems to be continuing getting delayed and I'm just curious as to how you look at the cadence of how that pricing outlook is going to be?

So that's a great question. So we keep dealing with the reality of an oversupplied lemon market exacerbated by a lot of young plantings throughout California and Arizona domestically, but also a lot of fruit ready to be imported from the southern hemisphere. And so Mark actually -- Mark and his team completed a really fascinating and interesting analysis about the economics of each of the growing districts in California and Arizona. And the profitability of each of the districts as it related to a weighted average sort of here is what the costs of all of them together are and then here's what the price achieved in each of those timeframes of the year when each of those lemons go to market. And what we found was really interesting. So the year starts for us in the desert. And what we found there was that the cost structure was high really driven because it's a tough place to grow lemons, which compromises the yields. And the lower yields equates to higher cost per carton, because you're not generating the amount of fruit that you do in other places, and the cost of transportation to get it all the way from Arizona to our packing house in Santa Paula. So you put that together and that really was a really negative part of the margin that we were achieving. So what's going on in Arizona now is almost -- 50% of what's going on Arizona is more of a water story where we followed 600 of the 1,300 acres, which takes half of the cost of farming out of that equation. And it's now being replaced by a water coupon that we received for the fallowing program. So overnight now the desert operation has become profitable. Now we go up…

Got it. That makes a lot of sense. That's good insight. So when you kind of factor in the whole thing, are you also seeing an increase in imports on lemons, or is this really a domestic issue that can be solved with sort of the analytic that you just laid out?

Well, I think that the greatest challenge is also the greatest opportunity is that when you get pricing down at this level, it kind of creates a moat around the market because it becomes uneconomic for the southern hemisphere shippers to ship into the market at this price because their costs of logistics to get it here makes that prohibitive. So I think it really takes -- I think it takes an overall price above $20 a carton to make the import reality, a competitive threat and we're just not there yet. We want to be there, right, because our domestic fruit can enjoy those economics. But right now, I think that as we look forward, we don't see any catalysts until the second half of the year to drive pricing up. So we'll just have to see where we get when we get to the summer -- the late spring, early summer. But because it is a smaller crop domestically, we are optimistic that we'll see higher pricing in the late spring, early summer.

Got it. Okay. Final question, you guys are just getting -- you think now in the next few days just hammered with rain and stuff again, you don't complain about moisture because when you don't have it you realize how much you miss it. But are the weather conditions here still going to be such that it is going to be prohibitive for you to harvest, or how are you looking at -- I think there's six to eight inches of rain in some parts of -- in mountains right to the East of you in the next few days. So how are you looking at all that?

Yes. So we had a -- it's another great question. We had an all hands on deck meeting on that very subject this morning. And I guess the good news is that we have good inventory across all size and grade structures. We do anticipate being delayed in picking for the better part of this week. As you're pointing out, there's a lot of rain coming to Central and Northern California. We are ready right now with the crews ready to go here on the coast if we need to go get fruit. But we anticipate being just fine in terms of continuing on with our harvest in District 1. Right now the crop is kind of midway through the season, up in the San Joaquin Valley. And so we think that'll finish out in a kind of a normal way, even with this weather and this rain, and then transition smoothly into District 2 onto the coast. I think as you might remember, Eric, the District 2 crop is always there, because the trees are blooming here year round. So we do have access to good amounts of fruit. Inventories are good. And unlike 2019 where we had that situation where the lemons got big because we weren't able to get into harvest, we're all over that this year and making sure that that does not happen, and trying to make sure that our inventories are balanced by size and grade so that we can keep the supply chains cooking right along even with this weather.

All right. Thanks. I'll get back in queue.

The next question comes from Raj Sharma from B. Riley. Please go ahead.

Hi. Thank you for taking my question. I had a -- sort of following up on the lemons, you just mentioned that you expect a significant pickup in the cartons with improved pricing. Where is this increased production going to come from? Can you talk about that? I know you said there were external growers as well. And also, you did just talk about why you thought the pricing was going to improve and that was going to be a second half event. What kind of a pricing increase can we expect on lemons?

Hi, Raj. That's a great question. I wish I could answer that directly with my crystal ball. But what we know is that we're behind in our harvest up in the valley, and kind of on par with our harvest for the remainder of the season on the coast. And as we look at our tree crops, we have ample production of our own production. But also we were successful in recruiting an additional 1 million cartons of new fruit across all three of the districts that are in combination with our own production and the grower partners that we serviced in 2022. And so even though Mother Nature brought us a lower tree crop of about 15% across each of the districts, our recruiting actually give us great belief that we'll be able to grow and have access to enough fruit. And so we're still sort of hanging on to our guidance of 5.2 million to 5.4 million cartons for the year, which would demonstrate some pretty good growth year-on-year. I think we finished last year with 4.9 million cartons. And so the fruit is there and we've got enough time to go get it and the weather is not causing that much disruption at this point in terms of changing size or grade structure. So we're optimistic that we'll be able to get it and put it through the packinghouse and get it into the market.

Yes. And to follow up on pricing, as Eric asked earlier, it all comes down to that supply-demand balance from the imports that typically start from Argentina in late April, early May. So if the transportation costs aren't there, if the price isn't high enough for them to break even, we'll usually get a $2 or $3 lift from current pricing, which is right about just below $18 right now. And then Mother Nature does the rest of her thing. But that's historically how we've looked at it from a budgeting perspective.

That's great. Thank you. And then on the avocado production, clearly lower this year than last year. How much of a recovery do you see in Q2 onwards? What's happening on the production side? Are you going to be able to recover a lot of it, most of it? Can you talk about that please?

Yes. So the rain is actually really helpful for the avocados. So I think it gives us optimism that we should be in the high range of sort of the targeted volume numbers. The harvest really now at this point will be driven by the opportunities that we see in the marketplace. Great news was we saw an uptick in avocado pricing last week. 48s are now getting a little over $1.20 in the marketplace. And that's kind of directionally where we were hoping to harvest. So we find the market seems to be improving and coming to us at this point. And we're pretty confident that there's on the upper end of the 4 million to 5 million pound range that we guided to. So I think our overall avocado number and guidance is intact. Fingers crossed that it comes in a little better, but if it does, it'll be driven by more favorable market pricing. And it's just too difficult for us to pin that down. But we watch the market every day. And when the market moves, we will start harvesting. I think if I had to guess how the fruit flow would play out, I'd say 50% of 5 million pounds in Q2 and 50% in Q3.

Got it. And then just if I can move on to profitability, can you kind of philosophically talk about where you see EBITDA improvements and do you see EBITDA improvements, sort of profitability improvements in terms of margins this year? Is that coming from a greater sort of brokering and shipping?

Yes, so a great question and a bunch of niches to that.

How much of an EBITDA can we expect?

So as we've alluded to, this transition period is going to be about 12 to 18 months, which we'll see accretiveness from the transaction side accretiveness, both from an EBITDA perspective and EPS. The areas that we will see benefit from are, as you said, the new recruiting, so 1 million new cartons, which comes into effect basically starting in the fall of this year and then circles all around through the seasons. And that's the targeted $2.00 to $2.50 a carton operating profit. And then also the brokerage agency business, which this prior year was just over 1 million cartons trying to ramp that to about 1.5 million this year, and then about 3 million to 3.5 million over the next five years. So as we've tried to highlight, we're subject to lemon pricing. Our costs have been relatively under control. Our packing costs this quarter year-over-year was down versus prior year per unit. So all of the measures that we put in place from the cost efficiencies have really started to come to play. So we still see ourselves targeting plus $30 million of EBITDA in the next five years.

Got it. And just last question from me, the additional $50 million in sales that you just mentioned that would happen in the next year or two years. Can you give us generally the areas? Is that water rights sales, land, any color on that?

Yes. So the additional 50 million, if I got the question right, is the two specific assets, our southern hemisphere Chilean farming, which is two ranches, lemons primarily, and then our Windfall vineyard estates. And so those are placeholders at 50 million, pretty close to book value. So we felt that that was an appropriate number. But I think depending on the right opportunity and the right buyer and the water circumstances, there will be opportunity for upside in there.

Great. Well, thank you for answering my questions and good luck. I'll take this offline. Thank you.

Thank you, Raj.

Thank you, Raj.

The next question comes from Ben Klieve from Lake Street Capital Markets. Please go ahead.

Thanks for taking my questions. Just a couple for me. First of all, on the avocado side, I want to make sure I understand kind of the strategy and the timing here. The weather caused delays of harvesting in the first quarter. And Harold, your comments earlier suggested that you'd kind of maybe intentionally delayed harvest kind of in February, at least through February, because of kind of pricing conditions. So first of all, is that accurate that you could have harvested avocados so far in the second quarter, but you've kind of chosen not to strategically?

Yes, that's exactly right. We could have harvested. There's fruit that is harvestable right now, but the markets have been -- I don't know if you're following the markets, but they've been pretty soft. And they're just starting to improve now. And when you layer on the benefits of the rain, which is sizing the fruit faster, we actually find ourselves in pretty good shape to start our harvest beginning next week.

Okay, great. That's helpful. Yes, I have been following that market and the grind, and I think I've also been watching the same weather reports that Eric has. And so I've been concerned about that. But that's good to see that how you guys are navigating that. And then my other question is, it looks like you've got a pretty impressive gain in market share this year so far, and I'm wondering if you can comment on a high level about the correlation between lemon prices and your ability to take share? When prices here are down in this just kind of dreary $17, $18 range, are you able to get these relationships developed with farmers faster than if you're in $20, $22 range?

So part of gaining share is gaining supply first. So we're really having a lot of success with that, with our grower services team, our very high fresh utilization rates, and then our very competitive returns going back to growers. So as a result, we really made huge progress in our ability to access new supply. And then with that supply, then it allows us to go into the marketplace at food service and retail and be much more competitive with reliable levels of supply. And so I think the combination of those two things is what's driving our growth and allowing us to pick up share. You may recall when we first started kind of talking about the business together, we always sort of as a placeholder suggested that food service represented 70% of our market opportunity and retail was 30%. There was sort of a structural change in the marketplace driven by COVID that really hasn't changed that much since we've all returned back to normal life. But I'd say the actual demand is from a consumer perspective is probably 50-50 now, 50% food service and 50% retail. And so our biggest pickups in gains have been at the retail level. And so that's the battlefield for us right now. And we're really honing in on new big retail accounts. And as you go out to your local market, you'll have a much better chance of finding Limoneira stickered lemons in those supermarkets now because of this new approach and really where we're focusing.

Got it, very helpful. Okay. Thanks for taking my questions. I'll get back in line.

Thanks, Ben.

Thanks, Ben.

[Operator Instructions]. The next question comes from Vincent Anderson from Stifel. Please go ahead.

Thanks. Good afternoon.

Hi, Vince.

When I look at just how many overseas growing regions have yet another year of poor production, I can definitely understand where your price expectations are coming from as we move through the balance of this year. But what I'm still trying to wrap my head around is just the recent pressure we've seen. So I guess a two-parter then. On the demand side, how have Asian exports been looking, particularly since apparently China told everyone to start drinking lemon water? And then on the supply side, how much of this pressure maybe is being caused by unseasonable Mexican imports into the U.S. and what on earth is causing that? Because I can't remember the last time I saw this kind of volume from them this early in the year.

Yes. So we continue to hope that it's the first part of your analysis, which is that it's demand pickup, but that's what's moving more slowly than supply pickup. There was just an awful lot of young plantings across each of the districts. And that's really what's driving the oversupply domestically. And then when you layer into that the massive amount of plantings out of Argentina and some of the other southern hemisphere suppliers, that's what's really exacerbated the entire situation. What's caused the sort of the malaise in the market and the softer pricing now is, remember last year, we were really proud of our fresh utilization rates and our ability to move fruit fresh for higher returns back to the growers. Our primary competitor really underperformed. And so they've kind of took the gloves off this year and said, all right, we're not going to let that happen again. And so there's a lot more chasing price down to try to hang on to share. And if you looked across all of the -- so we're a member of what's called CALGA, the California/Arizona Lemon Growers Association, which is a consortium of all of the shippers. I think it represents almost 90% of the domestic supply of U.S. lemon production. Limoneira’s pricing is right at the top of the list right now. And we try to remain as disciplined as we can as we go about doing that. Typically what happens though is when coolers get full, and you can imagine how this works, when coolers get full and fruit has a hard time moving, competition typically will use price to move fruit. And that's what's exacerbating the pricing problem in the marketplace.

Okay, that's very helpful. And then as I just kind of speculate on the potential deployment of your capital beyond deleveraging, it sounded like maybe there were some citrus assets in Europe that might be looking for a new home. I'm just wondering if it makes any sense to make an investment in that market from a packing and brokering perspective, especially if there's a way in which you can have it become another like valve for your South American fruit, or if that's not really a high return market in your mind?

Well, I think that's a really astute observation. And it is actually something we've been studying and have been thinking about. The biggest winner in that equation would be Argentina, because a lot of that Argentina fruit can find its way into the European markets competitively. The U.S. fruit, because of logistics, it's pretty tough. Foreign exchange doesn't help that as well. So that's really less of an opportunity for us at this point. I think we see pretty -- and our Board will help us with this in our upcoming strategic planning session, but we see really interesting opportunities to invest in our supply chain through automation and enhanced capabilities through storage and capacity improvement to take advantage of the supply chains that we have, but to drive cost out of the business. And the other thing to remember is remember when we sold Oxnard Lemon, we actually did a sale leaseback on the initial part of that sale to take advantage of that storage that we still depend on. So within three years, we're going to be in a position where we're going to need to find alternative storage. And we're sort of -- we've got the calculators out and are running the numbers of what investing in increased storage capabilities here in Santa Paula would do. But the results are pretty significant. And so we think there'd be a great return on invested capital to invest in storage here in Santa Paula, as a complement to our recently updated packinghouse. So look sort of towards something like that. And also -- and we've talked about this before, investments in increased packing capacity in Chile.

Okay. All right, very helpful. I appreciate it.

[Operator Instructions]. This concludes the question-and-answer session. I would like to turn the conference back over to Harold Edwards for any closing remarks. Please go ahead.

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

This concludes today's conference call. You may disconnect your lines. Thank you for participating. Have a pleasant day.