Greetings. And welcome to Limoneira Third Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn this conference over to your host, Mr. John Mills with ICR. Thank you. You may begin.

Good afternoon, everyone. And thank you for joining us for Limoneira’s third quarter fiscal year 2020 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 third quarter fiscal year 2020 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 the Limoneira’s website 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 details in the company’s 10-Qs and 10-Ks filed with the SEC and those mentioned in the earnings release. Except as required by law, we undertake no obligation to update any forward-looking or other statements herein, whether a result of new information, future events or otherwise. Please note that during today’s call we will be discussing non-GAAP financial measures, including results on an adjusted basis. We believe these adjusted financial measures can facilitate a more complete analysis and greater understanding of Limoneira’s ongoing results of operations, particularly when comparing underlying results from period to period. We have provided as much detail as possible on any items that are discussed on an adjusted basis. Also within the company’s earnings release and in today’s prepared remarks, we included adjusted EBITDA, which is a non-GAAP financial measure. A reconciliation of adjusted EBITDA to the most directly comparable GAAP financial measures is included in the company’s 10-Q and press release which have been posted to its website. And with that, it’s my pleasure to turn the call over to the company’s President and CEO, Mr. Harold Edwards.

Thanks, John, and good afternoon, everyone. Despite COVID-19 continuing to affect our food service business due to temporary closures and reduce seating capacity at restaurants and bars, strong volume and grocery retail enabled us to achieve revenue, EBITDA and earnings growth in the third quarter driven by lemons, avocados and oranges. In addition, we continue to be a leader in food service and export, and are well-positioned as dining out continues to slowly improve. Our team has shown tremendous agility during the past six months by greatly expanding our reach into retail and grocery. And this has led to solid lemon volume growth compared to last year, and we believe we are very well-positioned for solid growth next year, if food service business improves as restaurants and bars continue to slowly open. I’ll now discuss each of our business divisions performances for the third quarter starting with agribusiness. Agribusiness revenue for the third quarter increased to $52.4 million, compared to $49.6 million to prior year and included $35.4 million in fresh lemon sales. During the quarter, our fresh lemon revenue was flat as increased volume was offset by a reduction in pricing from an oversupply of North American fruit due to COVID-19 related food service closures. Despite the reduction in sales from restaurant closures in the quarter, we experienced year-over-year sales growth in both avocados, oranges and specialty crops. We sold approximately 6.1 million pounds of avocados at an average price per pound of $1 for a total of $6.1 million and sold approximately 184,000 cartons of oranges at an average price per carton of $12.13 for a total of $2.2 million in revenue in the third quarter. And our specialty citrus and other crop revenue was $800,000 compared to no sales last year. Turning now to our Real Estate…

Thank you, Harold, and good afternoon, everyone. For the third quarter of fiscal year 2020, total net revenue was $53.6 million, compared to total net revenue of $50.9 million in the third quarter of the previous fiscal year. Agribusiness revenue was $52.4 million, compared to $49.6 million in the third quarter last year. Other revenue was relatively flat at $1.2 million. Agribusiness revenue for the third quarter of fiscal year 2020 includes $35.4 million in fresh lemon sales, compared to $35.8 million of fresh lemon sales during the same period of fiscal year 2019. We achieve significant growth in our grocery channels, but this was offset by COVID-19 related food service closures reducing the demand for fresh lemons and creating an oversupply in the marketplace, which resulted in lower average per carton prices in the third quarter of fiscal year 2020. Approximately 1,979,000 cartons of fresh lemons were sold during the third quarter of fiscal year 2020 at a $17.91 average price per carton, compared to approximately 1,876,000 cartons sold at a $19.09 average price per carton during the third quarter of fiscal year 2019. We have already started to see an improvement in the lemon market as bars and restaurants have started to reopen and continue to expect a steady increase in the market price of fresh lemons for the rest of 2020. The company recognized $6.1 million of avocado revenue in the third quarter of fiscal year 2020, compared to $2.5 million in the same period last fiscal year. Approximately 6.1 million pounds of avocados were sold during the third quarter of fiscal year 2020 at $1 average price per pound, compared to approximately 1.4 million pounds sold at $1 at average price per pound during the prior year period. The company recognized $2.2 million of orange revenue…

Thank you, Mark. Well, it is true that we are seeing our food service customers begin to open their doors, they’re doing so at a cautious pace and at a reduced capacity and for those reasons, along with the unknown duration and financial impact of COVID-19, we will be continuing to not issue specific guidance for fiscal year 2020. We continue to expect record lemon volumes in fiscal year 2020 and we believe our housing unit sales will continue at a strong pace. Looking beyond fiscal year 2020, we believe we are very well-positioned to achieve solid growth in fiscal year 2021, as we continue to perform well in the grocery channel and in restaurants and bars as they continue to slowly open back up. We also have an additional 1,200 acres of non-bearing 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 non-bearing and planned acreage becomes productive. We also expect to have a steady increase in third-party grower fruit. And with that, I’d like to open up the call to your questions. Operator?

[Operator Instructions] Our first question comes from the line of Vincent Anderson with Stifel. You may proceed with your question.

Yeah. Thanks, and good afternoon, guys.

Hi, Vince.

Before going into -- hey. Before going to lemons, I just want to ask quickly, with copper prices and gold prices performing really quite well recently. Has there been any progress in talks over your Colorado River Water rights recently?

There’s been a lot of talks as it relates to the Colorado River rights specifically more as it relates to the Central Arizona Project and the housing requirements in Phoenix, Scottsdale, all the way to Tucson for reliable supplies of water. And there’s been more interest in following programs and the reallocation of that water from agricultural usage to urban development usage, less so from the industrial mining companies that you’re referring to, but more for just the systemic over allocation of that water resource as it relates to ongoing requirements for housing and urban dwelling. So while we don’t have anything to specifically announce as it relates to our Colorado River Water rights at this time, we are actually beginning to make investments into creating more efficiency and how we irrigate to free up potential supplies for potential sales, mostly for urban development uses.

All right. That’s interesting. Thank you. So just recently with the heat wave, kind of statewide, it looks like District 2 is stayed under 100 degrees for any kind of prolonged period of time, but it does kind of raise fears of what we saw back in 2018. But can you comment on what you’re seeing there, whether it’s District 1 or District 2 in terms of any impact from the heat?

Yes. At this point, we think District 1 made it through the heat very effectively with minimal damage. Here in District 2 on the coast, we reached temperatures that were very comparable to 2018. The biggest difference, Vince is, if you recall 2018 that heat event took place in July and here we are in September and the difference of the timing of that heat seasonally makes a huge difference. So as it relates to our avocado trees, the fruit that’s hanging on the trees were bigger, stronger, and actually were able to endure the heat much more effectively than in 2018. Some of the younger lemon trees did suffer from the event, but nothing at this point that we can point to that says that we’ll be significantly off of our initial forecast for next year. So we think we cautiously optimistic that we’ve made it through the -- this series of heat events in this last week with most of our production intact.

Great. Thanks. And then just last one, if I could sneak it in, I actually found one of your branded lemons from Mexico and a food delivery service that I use, is that an area of focus with decent economics and then just kind of overall, how are the conversations with kind of larger contract customers, whether in food service, restaurant, grocery, how have those changed as we sort of went back to normal, not just volumes, but kind of the nature of those discussions?

Yeah. So the retail environment is incredibly competitive as you know very well from your work with not only Limoneira, but many of, some of your other clients that sell into the retail channels. So, just seasonally every August, we experience a shift from supply from the California Coast going to the Mexican supply. We have a co-packing relationship. That’s a 7% deal down there where a Mexican co-packer puts Mexican fruit, very high quality, the same quality standards of the fruit that we pull out of California and Arizona, into a Limoneira box for sales. And we do that because our customers specifically asked for that. And I’d say that going very well. That’s why you saw it in the club -- in the home delivery service that you used. We do see that as seasons change, behavior changes at the retail level also. So an example was all through the first part of the summer, we had very, very strong sales to a Texas based retailer called H-E-B, which you know, you probably know of H-E-B. And as the season shifted towards supplies from Mexico, we saw our percentage of sales into H-E-B declined because of relationships that have -- H-E-B has with other suppliers, specifically out of Mexico. So it’s dynamic. It always has been. And most retailers maintain multiple sources of supply. So it’s not always surprising when you pick up a new customer or you lose a customer, but our sales team stays active every day knocking on doors and offering our full array of product offerings to the retailer just to continue to try to grow that business.

All right. Thank you.

Our next question comes from the line of Ben Bienvenu with Stephens. You may proceed with your question.

Hey. Thanks. Good afternoon.

Hey, Ben.

I want to focus it on some comments Mark that you made. You talked about selling your costs. It looks like when you look through the buckets of the agribusiness costs on a per carton basis, really you guys manage costs really nicely everywhere except for the packing cost per lemon carton. So just curious kind of what was going on there. And then, when we look at harvest cost growing costs, your third-party grower costs, all those kind of pieces with business on the cost side that were down substantially on a per carton basis, kind of what you’re doing over there that’s working to lower your cost structure?

Sure. That’s great question, Ben. So, if you recall, we started this big COVID rush in mid-March and as there was that’s basically the prime time of D2 season. And so we got into another utilization place, where we actually had a much bigger harvest than we thought and so as we progressed and we went through until the basic first openings in June, we were experiencing utilization in the, call it, low-to-mid 50s, again, similar to last year, where we saw those really hit the per unit. And so, as June started opening, we started aggressively harvesting again. And where we had a -- we probably had one of the better June’s that we’ve seen in which we were even more optimistic about the Q3 then they turned out to be. So I think right now at the end we’re about 60% utilization, and as you know, our goal is 70% to 75%. So every increment below that really takes its toll on the per unit cost, specifically, because you have to harvest all of it, right? It all has to come off the tree, you got to put it through the packinghouse. For the most part, there are instances where it comes off the front of the line where you’ve seen at the wash, but that’s primarily the reason on a per unit basis. And then, the demand really wasn’t there for certain part of that. So as you -- we had to let it sit longer in the coolers, more of that fruit got older and tired, it couldn’t go export it if at all was possible, so not unlike last year from utilization perspective just a different reason. I think your second question we’ve really tried to buckle down on all of our costs. Harvest, individually, you have different components of that to pick and haul transportation. We’re working diligently with some outside vendors to attack all of our expense accounts and specifically our G&A target was to reduce G&A starting in March for $2 million for the year, which we’re on track for that outside of some discrete items that are related to our ERP implementation, which we’re continuing to enhance on that. So, hopefully, I answered your question and all of that.

Yeah. That’s great color. Thanks. And I want to ask, recognizing the demand side of the equation is challenging and choppy. Though -- I think we’re all hopeful that things continue to improve as we get into next year and we can get back to normal. Can you comment at all on the supply side of things both from a lemon and avocado perspective? Glad to hear that your acreage and the crops largely spared from some of the heat issues that Vincent referenced, but just I am curious to hear any color that you have at this point on what supply might look like going forward?

Happy to Ben. Thank. Thanks. Great question. We are cautiously very optimistic about next year, mostly for this very question. So at this point, it looks like the desert crop, which is our District 3 crop, which typically begins in call it, mid-to-late August and then carries its way through to usually the new year. That it’s later and potentially 30% smaller as it -- as an industry than it was last year. So we believe that bodes very well for the next couple of months of improved pricing. And we’re starting to begin to see some of those harvests take place and not only will that be very helpful from reducing or minimizing an oversupply situation, but also the quality of the crop looks good, the percentage of the first grade, fancy grade fruit is back to what we would call normal sort of in the 40% to 50% range, which means a lot of that fruit will find its way to very valuable export markets, and I’m very pleased to say that, the export markets of Japan and Korea and many of the smaller Asian Tiger countries have found their way back to sort of pre-COVID levels. So that’s really exciting for us. We’re chomping at the bit to get after that fruit because the irony for us right now is we’ve got the orders but we can’t fill them because we don’t have the fruit yet, because we haven’t been able to start harvesting in the desert. But that’s just starting now and we should see that that should pick up here very soon. As it relates to the District 1 crop, that’s the San Joaquin Valley crop, that crop typically starts in, say, November and carries on through March, April. The quality looks excellent. The size…

That’s awesome. Great. Thanks so much and congrats on a good quarter.

Thank you, Ben.

Thanks, Ben.

Our next question comes from the line of Ben Klieve with National Securities Corporation. You may proceed with your question.

All right. Thanks for taking my questions. First one regarding lemon pricing that the second quarter -- assuming the third quarter had obviously a wide range of end market given the how kind of fluid COVID-19 was and I’m wondering if you could elaborate a bit on how lemon pricing really evolved from, say, the beginning of the quarter to the end of the quarter and where it stands today?

So maybe I’ll start with just a quick explanation and then Mark will provide his comments. So the thing that really hurt the pricing more than anything, Ben, was as the company pivoted to retail, that’s where all our fancy grade fruit ended up going. And so it left not only our company, but the majority of the industry with very few homes for that second grade choice fruit. Typically, that’s the fruit that find its way into food service. In June, as parts of the country began to pick up, we saw the demand increase to a level that actually absorbed a lot of that fruit and so we saw a much stronger pricing, as Mark alluded to in some of his earlier comments in June. But in July, we all felt another pullback at food service level and that did -- that was very, very challenging for us as it related to a utilization perspective, fresh utilization, but also a price perspective as the second grade fruit really was massively over supplied because of the restaurants and the bars pulled back and closed again. And it was just an oversupplied situation. So what we experienced as a total company in the lemon category was a product mix issue where we got good pricing for our first grade fruit but we got very poor pricing for our second grade fruit and that in total led to a total decline in the average price per carton of, I think, something like $2 per carton versus the third quarter of last year. Mark any other color?

Yeah. As Harold alluded to it’s up at the product mix and as District 2 ended season and then the fruit gets what we call tired, you lose the ability to get that export potential, which has that, call it, 25 or higher product mix into it and so that’s really what the effect. So we’re just basically now finishing up our coolers with D2. I think we have 100,000 or so cartons left of that to go. And then we start to see that increase in the export. Currently our prices is about $20 average in the market from choice to fancy, all the sizes, it’s between $15 and $28, with some exceptions around. But we really like the way we see it shaping up with an industry overall down volume. And as we commented earlier that we think we’ll see steady prices into the end of the calendar year, I think, really starting to show up sort of mid-to-end of October our fiscal year and really benefiting starting in our fiscal ‘21.

Perfect. Very helpful. Thank you. And on harvest Limoneira, I have a question, but first, a quick clarifying question on, you alluded to use seven lots sales per week over the last eight weeks, was that the last eight weeks of the fiscal quarter or is that last eight weeks up till present day?

Both.

Well, okay…

And so those -- just to clarify, those are the home builder home sales, not the actual currency that we have the lot sale. So it’s really the proof in the pudding that shows the velocity that the homes are selling, which then allows us to then put more lots out.

And the other exciting sort of data point is that, while we don’t control pricing for our guests builders, their prices are going up right now and we’ve seen home price improvement from a seller’s perspective and that that bodes very well to the future of the project as well.

Got it. Perfect. And I guess two questions then on this, first, this -- can you remind us kind of how this weekly sale total compares to kind of your the goals that were laid out by this project. I mean, it’s seven homes a week, substantially greater than whatever the predetermined goal is kind of -- help us kind of quantify that, if you will?

Yeah. So every year we do an operating budget and a forecast for the year, which comes out in November, December for The Lewis Group and this year was forecasted to be two homes per week. So, substantially greater velocity. It all started really right around COVID. You had the interest rates, obviously, basically going to zero and also the departure from urban areas for people the ability to work and live at home. And if you recall, we are a 1 gigabyte community, which is one of the fastest, if not fastest internet providing at our harvest location. So all those I think together really boosted the velocity and it’s quite incredible to see.

Very good. Well, you actually just answered my final question. So congratulations on a great quarter and I’ll leave it there and get back in queue.

Great. Thanks, Ben.

Thank you, Ben.

[Operator Instructions] Our next question comes from the line of Mark Smith with Lake Street Capital Markets. You may proceed with your question.

Hi, guys. I want to ask about kind of end markets as you focus on grocery growth, can you break out how much growth there was really within existing locations versus new customers?

So happy too. Part of the success in the pivot and the growth was related to some CapEx that we made in the packing house where we put in new state-of-the-art bagging technology and the sound bite of it, it goes something like the old bag per minute rate was, I’m trying to remember what it was, but it was something like 20 bags a minute and that’s now 100 bags a minute is, so they just the productivity is massively more successful. But the main thing was it allowed us to be able to accept these larger orders from larger retailers. Specifically, we picked up H-E-B. We picked up a lot more Costco business and we picked up Wakefern back on the East Coast and a little bit more Kroger business than we normally have. Those were all new and actually we did a little bit of Costco business pre-COVID, but certainly not at this level. And so, I’d say to specifically to your question, 50% of the growth was to new customers and 50% were to sort of more supply to existing customers.

Excellent. And then looking at labor costs, can you just talk about kind of what’s on market like right now as far as being able to find employees and bring people on where needed?

Yeah. So for -- labor has been tight the last two years. But because Limoneira has very strategic workforce housing capabilities, we’ve been able to take advantage of H2A programs [ph] and at any given time have upwards of 100 guest workers from Mexico who are living here and working with us. You’ve probably read about some of the challenges that COVID provided, not from us, but from some of the other workforce housing developments here in California. So we’ve been working very closely with the Ventura County Healthcare agency at making sure that all of our facilities were appropriately socially distance, everybody was masked and that nobody basically came down with COVID, so that we wouldn’t experience any outbreaks. And we’ve been very fortunate that we have been able to avoid that and keep our workforce healthy and safe, but also intact and that’s kept us in business through this challenging time.

Perfect. The last one for me just looking at the avocado business and kind of the year-over-year growth, how much of that -- if you can talk to, how much of that was driven by just the price difference this year versus last year versus kind of these new end markets and new customers?

Yeah. So avocados are kind of the perfect fruit because it’s 100% utilization. This demand is voracious in the marketplace. Consumption around the world continues to grow. And so, the bottomline is if you can grow it, then you probably can sell it. There’s two grades. There’s the first grade and the second grade of fruit. We try to keep our second grade sort of in the 5% to 10% range as we farm. The biggest difference in the year was, last year just with a smaller crop, it got a higher price. So it was, I can’t remember the total volume was it 4.5 million, I believe.

Yeah. Right.

But it was at $1.80, where this year, it was just the perfect combination of weather. We had a pretty good set of fruit, but the late spring, early summer was very temperate. It was -- it wasn’t too hot, it wasn’t too cold and that allowed the fruit to stay on the tree and grow. And that gave us another 20% to 30% of actual production. If you can picture a piece of fruit growing it actually gains weight as it grows. So by being able to keep it on the tree and Mother Nature cooperating with us to allow us to do that we picked up another 20% to 30% of total pounds produced. That was unexpected and unbudgeted and unplanned and unforeseen and then ended up getting a pretty decent price for the fruit. So, all in all, it was a good avocado year for us this year. And as I alluded to before, we believe that next year has the opportunity to be even better, because we believe the initial set on the trees which we can now see and the fruit is getting to be right now about 4 ounces to 5 ounces per piece is -- there’s a lot of pieces and it’s coming into an industry crop in California that we think is going to be 100 million pounds smaller than it was this last year, which gives us the belief that we could see some pretty good pricing next year as well.

Okay. Excellent. Thank you.

Ladies and gentlemen, we have reached the end of today’s question-and-answer session. I would like to turn the call back over to Mr. Harold Edwards for closing remarks.

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

This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation and have a great day.