Alico - Earnings Call - Q4 2020

Transcript

Speaker 0

Welcome to the ELECO's Fourth Quarter and Full Year twenty twenty Earnings Conference Call. At this time, all participants are in a listen only mode. 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.

Speaker 1

Thank you, Daryl. Good morning, and thank you for joining us for ELECO's fourth quarter and full year twenty twenty conference call. On the call today are John Kernan, 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 09/30/2020. If you have 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 risk details in the company's quarterly reports on Form 10 Q, annual reports on Form 10 ks, current reports on Form eight ks 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 Kernan.

Speaker 2

Thank you, John, and thank you, everyone, for joining us for ELECO's inaugural earnings call this morning. Since this is our first earnings call together, I'd like to start with a bit of context. Aleco has rebounded well from a tough year. I joined more than five years ago to help transform Aleco into a more competitive company. In early twenty seventeen, we implemented a comprehensive modernization program called Alico two point zero 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, growth costs, purchasing and procurement programs, professional fees, and human resources efficiency. We also identified nonperforming and underperforming assets. The result was to combine our three legacy businesses into one efficient enterprise, AlicoCitrus. 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 $16,000,000 which represented a 19% reduction.

And two years after executing on this initiative, we continued to maintain these reduced operating cost levels. At the 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 two point zero 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 twenty twenty, 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 $09 per common share. And today, we announced that the Board of Directors is raising OEKO's dividend by another 100% to $0.18 per common share effective for the 2021. We believe these successive dividend increases reflect our Board of Directors' continued confidence that the business strategy we have developed will support a higher level of return of capital to our shareholders over the long term.

We repaid approximately $4,500,000 of debt above and beyond our required mandatory principal payments of 10,700,000.0 and improved our debt to equity ratio to 0.68:one from 0.82:one a year ago. Over the past five years, we have reduced our debt by 28%, making net principal payments of over $57,000,000 We continued 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 Aweco 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 $28,500,000 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 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 three thirty four gross citrus acres, which are adjacent to one of our own citrus groves. More significantly, in October 2020, we acquired approximately 3,280 gross citrus acres for a purchase price of $16,450,000 And by using proceeds from the sale of Rancho Land to the state, we're able to defer almost $4,000,000 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 will 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's citrus supply agreement that expired in September, provide 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 should 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 Aliko'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, with our largest growth for many smaller customers. This is a business that allows us to monetize decades of operational knowledge, especially the efficiencies we have refined through our WICO two point zero 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 costs and expenses. We look to expand this new business segment over the next fiscal year by focusing on companies with significant sized 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 1,300,000 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 ten years. We saw our average blended price per pound solid fall by twenty three percent 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 cross 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, nonferrous 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 fifty two week period ended September 26 compared with the prior year, and an increase of approximately 19% in the latest four week period ended 10/31/2020. How does this impact the week go? Well, indirectly. The increase in demand has driven down inventory levels at Florida citrus processors, which we suspect could bode well for market pricing 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. OEKO 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 OEKO will realize improved margins for our company during 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.

Speaker 3

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 $92,500,000 compared to $122,300,000 for the previous fiscal year.

Citrus revenues were $89,400,000 compared to $119,000,000 for the previous fiscal year. For the fiscal year ended 09/30/2020 we harvested approximately 7,600,000 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 solid 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 twenty eighteen-twenty nineteen harvest season leading to high inventory levels at Florida citrus juice processes at the beginning of the twenty nineteen-twenty twenty 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 twenty twenty one we do expect an improvement in pricing due to increased consumption of not food 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 twenty twenty as compared to the fiscal year twenty nineteen 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 4,600,000.0 and $15,600,000 during the fiscal years ended 09/30/2020 and 2019 respectively.

The company also recorded additional Grove managed services expense of approximately $3,000,000 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 09/30/2020 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 whole management services for approximately 7,000 acres. Under the terms of this agreement, Oligo is to be reimbursed by Barrancalia for all costs incurred related to providing these services and is also to receive a management fee based on acreage covered under this agreement. As we provide these citrus growth caretaking management services we will be recording both an increase in revenues and expenses. For the fourth quarter ended 09/30/2020 the company recorded approximately $3,300,000 of operating revenue including the management fee and approximately $3,000,000 of operating expenses relating to this arrangement.

With regard to the current COVID-nineteen 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 processes this past year. Additionally to date the company has not experienced any material challenges to its operations from COVID-nineteen. 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 lease 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 09/30/2020 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 09/30/2020 decreased 27% to $11,000,000 compared to $15,100,000 for the fiscal year ended September 3039. The decrease was primarily due to professional fees relating to a corporate litigation matter of approximately $2,300,000 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 09/30/2020. Additionally, as part of this settlement, the company recorded consulting and separation fees of approximately $800,000 during the fiscal year ended September 3039. The company also recognized reductions from a one time pension expense related to its deferred retirement benefit plan of approximately $1,000,000 in fiscal year 2019, a reduction in payroll expenses for the fiscal year ended 09/30/2020 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 3039. And other smaller decreases in rent, consulting, 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 3039 as a result of a former senior executive forfeiting his stock options as settled litigation and an increase in directors and officers insurance of approximately $200,000.

Other income for the fiscal years ended September 2039 was approximately 24,500,000 and approximately $5,000,000 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 twenty twenty we recorded a gain of approximately $30,400,000 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 3039 the company recorded a gain of approximately $13,200,000 Additionally the company recognized a reduction of approximately $1,200,000 in interest expense as a result of the reduction of its long term debt attributable to making its mandatory principal payments, prepaying approximately 4,500,000.0 on its debt obligations and a reduction in interest rates. As mentioned during the fiscal year ended 09/30/2020 we received approximately $4,600,000 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 $20,200,000 of proceeds under this program which represented reimbursements under Part one and Part two of the program. The timing and the amount to be received under Part three of this program has yet to be finalized. For the fiscal year ended 09/30/2020 the company reported net income attributable to Aleco common stockholders of approximately $23,700,000 compared to net income attributable to Aleco common stockholders of approximately $37,800,000 for the fiscal year ended September 3039. The net income for the fiscal year ended 09/30/2020 was in line with the company's most recent net income guidance of $22,000,000 to $24,000,000 Additionally for the fiscal year ended 09/30/2020 the company's EBITDA of 51,800,000 was in line with the company's EBITDA guidance of $49,500,000 to $52,500,000 We continue to show strength in our balance sheet and expect stronger cash flows in fiscal year twenty twenty one. Our working capital at 09/30/2020 was $30,700,000 representing a 2.5 to one 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 point six eight to 1.82 to one and one to one 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 $4,000,000 of taxes related to the gain on sale. We also announced today a doubling of our dividend to $0.18 per share compared to $09 per share. The $0.18 per share dividend will be paid to our stockholders of record as of 12/24/2020.

As of 09/30/2020, the company had term debt including lines of credit net of cash and cash equivalents and restricted cash of approximately $131,500,000 down from $139,600,000 for the same period last year. I would like now to pass the call back to John to discuss our fiscal year 2,001 outlook.

Speaker 2

Thank you Rich. Aliku is the leader in the florist 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 twenty seven billion dollars 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 1,300,000 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 bit 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 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 $7,500,000 to $10,000,000 adjusted net income of $4,500,000 to $6,900,000 EBITDA between $29,000,000 and $33,000,000 and adjusted EBITDA between $25,000,000 and $28,800,000 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 two fifty 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.

Speaker 0

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.