Alico, Inc. (ALCO) Q4 2020 Earnings Report, Transcript and Summary

Welcome to Alico's Fourth Quarter and Full Year 2020 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded. I would like to now turn the call over to your host, Mr. John Mills with ICR.

Thank you, Darryl. Good morning, and thank you for joining us for Alico's fourth quarter and full year 2020 conference call. On the call today, are John Kiernan, President and Chief Executive Officer; and Rich Rallo, Chief Financial Officer. Earlier this morning, the Company issued a press release announcing its results for the fourth quarter and fiscal year ended September 30, 2020. If you've not had a chance to view the release, it is available on the Investor Relations portion of the Company's website at alicoinc.com. This call is being webcast, and a replay will be available on Alico's website as well. Before we begin, we would like to remind everyone that the prepared remarks today contain forward-looking statements. Such statements are subject to risks, uncertainties and other factors that may cause actual results to differ materially from those expressed or implied in these statements. Important factors that could cause or contribute to such differences include risks detailed in the Company's quarterly reports on Form 10-Q, annual reports on Form 10-K, current reports on Form 8-K, and any amendments filed with the SEC and those mentioned in the earnings release. The Company undertakes no obligation to subsequently update or revise the forward-looking statements made on today's call, except as required by law. During this call, the Company will also discuss non-GAAP financial measures, including EBITDA and adjusted EBITDA. For more details on these measures, please refer to the company's press release issued earlier this morning. With that, I'd like to turn the call over to the Company's President and CEO, Mr. John Kiernan.

Thank you, John. And thank you, everyone, for joining us for Alico's inaugural earnings call this morning. Since this is our first earnings call together, I'd like to start with a bit of context. Alico has rebounded well from a tough year. I joined more than five years ago to help transform Alico into a more competitive company. In early 2017, we implemented a comprehensive modernization program called Alico 2.0, to improve our operational efficiencies and optimize our asset returns. This initiative scrutinized every key aspect of our citrus and land operations, including our corporate and operational cost structures, crop costs, purchasing and procurement programs, professional fees, and human resources efficiency. We also identified non-performing and underperforming assets. The result was to combine our three legacy businesses into one efficient enterprise - Alico Citrus. We eliminated certain costs that we believed would not negatively affect our citrus production, divested assets, and lines of business that generated low rates of return, and outsourced parts of our operation that were not profitable. We decreased operating costs by more than $16 million, which represented a 19% reduction, and two years after executing on this initiative, we continue to maintain this reduced operating cost levels. At the end of 2018, we had substantially completed these changes and began to concentrate our focus on improving our competitive position as a leader in the global citrus industry. Today, as a result of these initiatives, we are the leading high-quality, low-cost producer of citrus in Florida, and one of the largest citrus growers in the United States. While we have completed our work under our Alico 2.0 Modernization program, we have continued to focus on controlling and managing costs and unlocking additional value for our shareholders to ensure that the legacy of Alico thrives for decades to come. Over the course of fiscal year 2020, we did just that. Our Board of Directors has consistently utilized our cash flow to enhance shareholder value. This strategy has been reinforced by Alico's history of paying quarterly dividends, as we have done for the past five decades uninterrupted. Last year, the Company increased Alico's dividend by 50% to $0.09 per common share. And today, we announced that the Board of Directors is raising Alico's dividend by another 100% to $0.18 per common share, effective for the first quarter of fiscal 2021. We believe these successive dividend increases reflect our Board of Directors' continued confidence that the business strategy we have developed will support higher level of return of capital to our shareholders over the long-term. We repaid approximately $4.5 million of debt, above and beyond our required mandatory principal payments of $10.7 million, and improved our debt-to-equity ratio to 0.68:1 from 0.82:1 a year ago. Over the past five years, we have reduced our debt by 28%, making net principal payments of over $57 million. We continue to evaluate our non-citrus assets, and opportunistically sold off ranch land at premium prices to generate cash flow, which returns rates of return for our investors. The Alico Ranch is no longer strategic to our business, and over the past fiscal year, we have sold off acres of this pristine land and reinvested in our primary business, as well as returned some proceeds to our shareholders. Most recently, in September, we sold approximately 10,700 acres for $28.5 million to the State of Florida under the Florida Forever program, marking the second sale we have completed with them under this program, for an aggregate of approximately 16,000 acres. Because as those acres sold in September would have been critical for our dispersed water management project, we suspended those permit approval activities and renamed that business unit, Land Management and Other Operations. We continue to evaluate real estate opportunities and anticipate additional sales of smaller parcels of the Alico Ranch in the near future. We continue to assess opportunities to acquire citrus acres at attractive prices, and announced two land acquisitions this fiscal year. In May 2020, we purchased 334 grove citrus acres, which are adjacent to one of our own citrus groves. More significantly, in October 2020, we acquired approximately 3,280 grove citrus acres for a purchase price of $16.45 million. And by using proceeds from the sale of ranch land to the state, we're able to defer almost $4 million of gain from that sale. These acquired citrus acres were well-maintained and are close to other existing Alico groves, and we believe that this new investment will allow us to further leverage the economies of scale for our grove operations and back office. Additional acquisitions remain an option within our excess cash deployment strategy. However, we will continue to be highly selective and disciplined and we'll seek to only act on well-sized, well-maintained, and strategically-located properties, so that we can operate as a low-cost, high-producing citrus leader, and deliver competitive returns for shareholders. In May 2020, we announced two new four-year citrus fruit supply agreements with our largest customer, Tropicana. As a result of our leadership position within the Florida citrus industry, and the respectful professional relationship developed with Tropicana in recent years, we struck an arrangement, which has mutually beneficial terms for both parties. These contracts, which replaced Alico Citrus supply agreement that expired in September of this year, provides certain protections against significant market price dips, such as the one the citrus industry experienced in this last fiscal year. And there are also certain provisions which protect Tropicana through market pricing increase substantially, which was last seen after Hurricane Irma, in 2017. These long-term contracts, which when combined with our existing continuing agreements, commit substantially all of Alico's fruit to Tropicana for the next several years, and will enable the Company to realize competitive margins for at least the next four years. In August 2020, we announced a new long-term agreement to provide citrus grove management services, including harvest and haul responsibilities for approximately 7,000 acres owned by Barron Collier Companies, another top-10 Florida citrus grower. This business was a natural extension for us because we have been conducting third-party caretaking services for many years, albeit, on a smaller scale within our largest grove for many smaller customers. This is a business that allows us to monetize decades of operational knowledge, especially the efficiencies we have refined for Alico 2.0 Modernization program. We will manage these 7,000 acres just as we manage our own 35,000 net citrus acres, including fruit sales, and are paid a management fee on top of all out-of-pocket cost and expenses. We look to expand this new business segment over the next fiscal year by focusing on companies with significant size groves near our existing groves, who have good operations, but where we can add economic value. In addition to those inorganic growth initiatives executed this year, we've also continued to invest heavily in our business for organic growth. Because of our strategic decision to replace trees lost in Hurricane Irma, and increase the density of our citrus groves, Alico has planted more than 1.3 million new trees over the past four years. This level of planting has been substantially higher than the normal level of tree attrition. We will continue to evaluate the density throughout our groves and determine the appropriate tree plantings, moving forward. Typically, citrus trees become fruit-bearing approximately four years after planting, and begin to peak around seven to eight years after planting. We anticipate seeing the positive impact of those recent tree plantings in the next couple of years. Now, briefly, to discuss our fiscal year results. As expected, and previously announced, our fiscal year results were negatively impacted by citrus pricing pressure, with market prices at their lowest level in the past 10 years. We saw our average blended price per pounds solid fall by 23%, from $2.42 last fiscal year to $1.86 this fiscal year. We, along with the rest of the Florida citrus industry, also experienced a decrease in production. However, due to our rigorous cost controls and the pricing protections provided by our long-term supply contracts, we are more fortunate - we were more fortunate than many of our competitors. The downward pressure on citrus pricing is not expected to persist in the next fiscal year. Consumption for NFC, Not-from-Concentrate orange juice has remained strong in 2020. We suspect that the reasons for that are because consumers have increased their focus on health and wellness, as well as spending more time at home enjoying breakfast. This surge in demand for NFC orange juice since March 2020 has not abated. We do not believe that this has been a case of panic buying, but rather a sustained level of increased consumption. Nielsen data, reports - reflect NFC orange juice consumption increasing 14% for the 52-week period ended September 26, compared with the prior year, and an increase of approximately 19% in the latest four-week period ended October 31, 2020. How does this impact Alico? Well, indirectly. The increase in demand has driven down inventory levels at Florida citrus processors, which we suspect will bode well for market pricing in the next year. Additionally, the harvest season for both Brazil and Mexico, the top exporters of citrus fruit into Florida, are forecasted to be substantially down from the previous year. Brazil's fruit crop, which is currently being harvested is forecasted to be down anywhere from 25% to 30% from the prior year. And Mexico's crop, which is just beginning to be harvested is expected to be down in the 50% range from the prior year. Alico is well-positioned to benefit significantly from these shifting dynamics as prices rise, because we have one of the lowest cost structures in the citrus industry and very strong long-term supply contracts in place. With higher marketing pricing for citrus, we anticipate that Alico will realize improved margins for our Company during the next - this fiscal year, and be positioned to utilize our strong cash flow to increase the long-term value of our Company. With that, I'll turn the call over to Rich to discuss our more detailed financial results.

Thank you, John, and good morning, everyone. As this is our first earnings call in many years, I would like to remind everyone of the seasonality of our business. The majority of our citrus crop is harvested in the second and third quarters of our fiscal year, and the majority of our profit and cash flows are typically recognized in the second and third quarters as well. Based on this aspect, today, we will focus primarily on full-year results of our business. For the fiscal year 2020, total operating revenues was $92.5 million compared to $122.3 million for the previous fiscal year. Citrus revenues were $89.4 million compared to $190 million for the previous fiscal year. For the fiscal year ended September 30, 2020, we harvested approximately 7.6 million boxes of fruit, a decrease of 6.6% from the prior fiscal year. The decrease in processed box production was the result of greater fruit drop and smaller fruit size in the current harvest season as compared to the prior harvest season. As mentioned previously by John, the average blended price per pound solids decreased from $2.42 in the prior fiscal year to $1.86 in the current fiscal year. The decrease was primarily due to Florida citrus crop being greater than expected in the 2018-2019 harvest season, leading to high inventory levels at Florida citrus juice processors at the beginning of the 2019-2020 harvest season. The price was also impacted by the continued inflow of imported orange juice, though at lower levels than the prior year. As we look ahead into fiscal year 2021, we do expect an improvement in pricing due to increased consumption of not-from-concentrate orange juice by retail consumers, which in turn is resulting in lower inventory levels. This inventory trend has us well-positioned for the upcoming harvest season, which recently commenced. The increase in operating expenses for the fiscal year 2020 as compared to the fiscal year 2019, primarily relates to the Company receiving less federal relief proceeds, which are recorded as a reduction of operating expenses through the Florida Citrus Recovery Block Grant, relating to Hurricane Irma, during fiscal year 2020 as compared to fiscal year 2019. The Company received federal relief proceeds of approximately $4.6 million and $15.6 million during the fiscal years ended September 30, 2020 and 2019 respectively. The Company also recorded additional Grove Management Services expense of approximately $3 million. Partially offsetting this decrease in operating expenses was a reduction in harvest and hauling costs being recorded by the Company as a result of fewer processed boxes being harvested during the fiscal year ended September 30, 2020, as compared to the same period in the prior year. Regarding Grove Management Services expense, in July 2020, the Company executed an agreement with Barron Collier Companies to provide citrus grove caretaking and harvest and haul management services for approximately 7,000 acres. Under the terms of this agreement, Alico is to be reimbursed by Barron Collier for all costs incurred related to providing these services, and is also to receive a management fee based on acres covered under this agreement. As we provide these citrus grove caretaking management services, we will be recording both an increase in revenues and expenses. For the fourth quarter ended September 30, 2020, the Company recorded approximately $3.3 million of operating revenue, including the management fee, and approximately $3 million of operating expenses relating to this arrangement. With regard to the current COVID-19 pandemic, we believe it is important to point out that our harvesting activities were not materially impacted by the pandemic, and there were no disruptions in delivering fruit to the processors this past year. Additionally, to-date, the Company has not experienced any material challenges to its operations from COVID-19. Our Land Management and Other Operations, which was previously called Water Resources and Other Operations, comprised a small percentage of our operating revenue and expenses. This segment includes leasing income from grazing rights leases, hunting leases, a farm lease, a lease to a third party of an aggregate mine, leases of oil extraction rights, and other miscellaneous income. As a result of the decision to no longer pursue permit approval activities for the water dispersed storage project, the Company renamed this segment Land Management and Other Operations to better reflect the components of this segment. Revenues for Land Management and Other Operations for the fiscal year ended September 30, 2020 decreased slightly this year as compared to the prior year, primarily due to a reduction in leased acreage relating to a cattle grazing lease. The reduction in leased acreage was due to a certain acres, which were included under this lease agreement, being sold in September 2019. General and administrative expenses for the fiscal year ended September 30, 2020 decreased 27% to $11 million compared to $15.1 million for the fiscal year ended September 30, 2019. The decrease was primarily due to professional fees relating to a corporate litigation matter of approximately $2.3 million being incurred in fiscal year 2019. This litigation was settled, and no further expenses were incurred relating to this matter during the fiscal year ended September 30, 2020. Additionally, as part of this settlement, the Company recorded consulting and separation fees of approximately $800,000 during the fiscal year ended September 30, 2019. The Company also recognized reductions from a one-time pension expense related to its deferred retirement benefit plan of approximately $1 million in fiscal year 2019, a reduction in payroll expenses for the fiscal year ended September 30, 2020 of approximately $300,000 relating to one of the senior managers resigning in December 2019, and a reduction in bonuses granted to senior management, a decrease in stock compensation expense of approximately $200,000 as a result of certain stock option expense being accelerated in fiscal year September 30, 2019, and other smaller decreases in rent, consulting, and Board of Director fees aggregating approximately $400,000. Partially offsetting these decreases were reductions in stock compensation expense of approximately $800,000 recognized in fiscal year September 30, 2019 as a result of a former senior executive forfeiting his stock options as part of the settled litigation and an increase in Directors and Officers insurance of approximately $200,000. Other income for the fiscal years ended September 30, 2020 and 2019 was approximately $24.5 million and approximately $5 million, respectively. The increase in other income was primarily due to the Company recording a higher gain on sale of real estate, property and equipment, and assets held for sale in the fiscal year 2020, as compared to fiscal year 2019. In fiscal year 2020, we recorded a gain of approximately $30.4 million, which was generated primarily from the sale of land on our West Ranch in September 2020 to the State of Florida. For the fiscal year ended September 30, 2019, the Company recorded a gain of approximately $13.2 million. Additionally, the Company recognized a reduction of approximately $1.2 million in interest expense as a result of the reduction of its long-term debt attributable to making its mandatory principal payments, prepaying approximately $4.5 million on its debt obligations and a reduction in interest rates. As mentioned, during the fiscal year ended September 30, 2020, we received approximately $4.6 million of additional proceeds under the Florida Citrus Recovery Block Grant program relating to Hurricane Irma damage sustained in September 2017. To date, the Company has received approximately $20.2 million of proceeds under this program, which represented reimbursements on the Part 1 and Part 2 of the program. The timing and the amount to be received under Part 3 of this program is yet to be finalized. For the fiscal year ended September 30, 2020, the Company reported net income attributable to Alico common stockholders of approximately $23.7 million compared to net income attributable to Alico common stockholders of approximately $37.8 million for the fiscal year ended September 30, 2019. The net income for the fiscal year ended September 30, 2020 was in line with the Company's most recent net income guidance of $22 million to $24 million. Additionally, for the fiscal year ended September 30, 2020, the Company's EBITDA of $51.8 million was in line with the Company's EBTIDA guidance of $49.5 million to $52.5 million. We continue to show strength in our balance sheet and expect stronger cash flows in fiscal year 2021. Our working capital at September 30, 2020 was $30.7 million, representing a 2.5:1 ratio. In addition, we have experienced a steady improvement in our debt-to-equity ratio for the past three years. In 2020, 2019, and 2018 the ratios were 0.68:1, 0.82:1, and 1:1 respectively. As part of our acquisition in October 2020 of the 3,280 gross acres, previously mentioned, we utilized a portion of the proceeds from the sale of approximately 10,700 acres to the State of Florida in September 2020 to fund the purchase, which was structured to allow us to defer approximately $4 million of taxes related to the gain on sale. We also announced today a doubling of our dividend to $0.18 per share compared to $0.09 per share. The $0.18 per share dividend will be paid to our stockholders of record as of December 24 2020. As of September 30, 2020, the Company had term debt, including lines of credit, net of cash, and cash equivalents and restricted cash of approximately $131.5 million, down from $139.6 million for the same period last year. I would like now to pass the call back to John to discuss our fiscal year 2021 outlook.

Thank you, Rich. Alico is the leader in the Florida citrus industry with huge cost and scale advantages. We believe that we have transformed the Company into a low-cost producer with strong margins, and are well-positioned for long-term growth within this $27 billion global industry. We have an experienced, stable management team, focused on growing the business and returning capital to our shareholders. We have invested heavily in our business to fuel organic growth through the strategic decision to increase the density of our citrus groves by planting more than 1.3 million new trees over the past four years, which we expect to be fruit-bearing in the next couple of years. We are also fueling growth inorganically by constantly evaluating opportunities to acquire well-managed neighboring citrus groves and deploying capital thoughtfully when we see a strategic acquisition at an attractive price. Additionally, we have expanded into fee-generating lines of related businesses, as you saw this past fiscal year with the growth of our third-party management service. The increased confidence we have in the rebound of market pricing in the next fiscal year, along with our control of our cost structure will allow us to provide some guidance as to net income, adjusted net income, EBITDA, and adjusted EBITDA for the upcoming fiscal year. We are projecting net income of $7.5 million to $10 million; adjusted net income of $4.5 million to $6.9 million; EBITDA between $29 million and $33 million; and adjusted EBITDA between $25 million and $28.8 million. These projections do not include any gains from asset sales. In the event that asset sales are realized, Alico may decide to update these projections. We believe that we have built Alico into a low-cost, high-margin Company dedicated to unlocking value for our shareholders, and believe our fiscal year results and accomplishments demonstrate our commitment to being the long-term citrus leader. I'd like to end now by thanking our 250 or so dedicated employees and our management team for their incredible work this past fiscal year and thanking everyone on the phone today for their continued support of Alico. We look forward to speaking with everyone again on our first quarter earnings call in February.

Thank you. That does conclude today’s conference. you may disconnect your lines at this time. Thank you for your participation and have a great day.