Alico, Inc. (NASDAQ:ALCO) Q3 2023 Earnings Conference Call August 3, 2023 8:30 AM ET

Company Participants

John Kiernan - President and Chief Executive Officer

Perry Del Vecchio - Chief Financial Officer

Conference Call Participants

Gerard Sweeney - ROTH Capital Partners, LLC

Operator

Welcome to Alico's Third Quarter 2023 Earnings Conference Call. At this time all participants are in a listen-only mode. As a reminder, today's conference is being recorded.

Earlier today, the company issued a press release announcing its results for the third quarter ended June 30, 2023. 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 also contribute to such differences, including risk details 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 thereto 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 and for reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures, please refer to the company's press release issued earlier today.

With that, I'd like to turn the call over to the company's President and CEO, Mr. John Kiernan.

John Kiernan

Thank you, Mark. And thank you, everyone, for joining us for Alico's third quarter 2023 earnings call this morning. The 2022, 2023 citrus harvest season has been a difficult one for Alico, because of the impacts from Hurricane Ian last September, but we are looking forward to the upcoming season with guarded optimism.

Historically, it has taken two or more seasons for citrus production to recover from such a devastating storm, but our consistent grove caretaking practices, combined with the new citrus greening therapy we began to apply this year, gives us confidence that Alico’s production will substantially increase for the 2023, 2024 citrus harvest season, as compared to the 2022, 2023 harvest season. Of the millions of trees, we have planted beginning in 2017, many are now mature enough to produce meaningful quantities of fruit this season and help support a level of expectation for a better upcoming harvest for Alico.

We have reported the overall decrease in box production for Alico was 51.4% for the 2022, 2023 harvest season versus the prior year. Although this is better than the 61.5% decrease in box production for the overall Florida orange crop forecasted by the USDA, as compared to the same period in the prior year.

This lower level of production was insufficient to meet our operating cash flow requirements, but Alico had the balance sheet strength to weather this temporary impact to our business. Because loss production is always a weather-related risk, Alico maintains crop insurance on all of our groves. Through June 30, 2023, we have received approximately $21.4 million in crop insurance proceeds and another, $0.3 million of crop insurance proceeds was received in July.

We suffered minimal damage, but did receive approximately $800,000 for property and casualty claims we filed after Hurricane Ian. Nearly all of our citrus trees appear to have made it through the storm with no permanent damage, but one of our groves near Punta Gorda sustained a direct hit for hours with 150-mile an hour per winds and a significant number of the trees there were lost. We filed a claim for that damage under our tree insurance coverage with our insurer.

Finally, the Fed relief is still pending. The Consolidated Appropriations Act, which was passed into law in December 2022, has federal funds earmarked for disaster relief. We hope that these funds eventually follow the funding mechanism previously established for the disbursement of the Hurricane Irma relief funds. We continue to support Florida Citrus Mutual, our industry trade group, and government agencies as they work to finalize federal relief programs available under the Act; however, we cannot determine the amount, if any, of federal relief the Company may be eligible for related to the damage Hurricane Ian caused us.

One highlight for the overall Florida citrus industry this past year, has been the use of oxytetracycline as a government-approved citrus greening therapy. We began treating our trees in January 2023, with the new application of an OTC product via truck injections as a citrus greening therapy following its approval by the Florida Department of Agriculture and Consumer Services in October of 2022.

This application has been utilized in citrus, apple and other crops. It is applied once a year and through June 30, 2023, we have treated more than 35% of our trees. We expect this treatment to mitigate some of the impacts of citrus greening, decrease the rate of fruit drop as well as improved fruit quality. The extent of any benefits of the OTC application therapy will not be measurable until the completion of the fiscal year 2024 harvest.

Everyone in the industry is hopeful that OTC helps improve the 2023, 2024 citrus harvest. Currently, Alico expects that pricing next season will be in line with the past season. We have the majority of our fruit under contract for the 2023, 2024 harvest season and have extended one of our contracts with Tropicana through the 2024, 2025 harvest season with improved pricing. Although Alico is not making any financial productions, for the next fiscal year at this time, we are observing lower market prices for some of our required fertilizer and chemicals.

Labor and fuel remain critical resources for us and although we utilize both as efficiently as possible in our daily operations, inflation over the past few years has increased the base level of those operating expenses. Our relationships with our lenders remain strong, and we have $76.8 million of undrawn capacity on our revolving line of credit, which matures in November of 2029 and our working capital line of credit which matures in November of 2025 to provide ample liquidity as Alico recovers from Hurricane Ian.

Through June 30, 2023, we have sold approximately 1,436 acres of ranch land for net proceeds of approximately $7.6 million. The company is actively engaged with third parties interested in certain parcels of additional ranch land and prices, we continue to believe are competitive. Also, in the current fiscal year, we acquired two very small citrus grow purchases that are contiguous with one of our groves or approximately 49,500 citrus acres are located throughout the State of Florida and we are continuing to work with land use planning professionals to evaluate how to optimize the long-term potential value for all of our real assets.

For the three months ended June 30, 2023, the company reported net income attributable to Alico common stockholders of approximately $11.8 million as compared to net income attributable to Alico common stockholders of approximately $2.7 million for the same period in the prior year. Third quarter 2023 results were primarily impacted as a result of receiving approximately 17.5 million crop and property insurance proceeds during the three months ended June 30, 2023. And partially offset by the decrease in gross profits for the Valencia crops when excluding insurance proceeds received as a result of impact of Hurricane Ian causing an increase in fruit drop.

With that, I'll turn the call over to Perry to discuss our more detailed financial results.

Perry Del Vecchio

Thank you, John, and good morning, everyone. Due to the seasonal nature of our business, the quarterly results for our third quarter are not indicative of our full-year results. Majority of our citrus crop is harvested in the second and third quarters of the fiscal year, with the majority of our profit and cash flow is also recognized in the second and third quarters.

Total operating revenue for the quarter ended June 30, 2023, was approximately $7.3 million compared to approximately $25.9 million for the quarter ended June 30, 2022. Our citrus revenue was approximately $6.7 million and $25.5 million for the quarters ended June 30, 2023 and 2022 respectively.

The decrease in revenue for the three months ended June 30, 2023 compared to the three months ended June 30, 2022 was primarily due to a decrease in the Valencia fruit harvested, and, to a lesser extent, a decrease in revenue generated from grove management services. The decrease in the Valencia fruit harvested was primarily driven by increase in processed box production and a decrease in pound solids per box as a result of the greater fruit drop from the impacts of Hurricane Ian.

The USDA in its July 12, 2023 Citrus crop forecast for the 2022, 2023 harvest season indicated it expects the overall Florida orange crop will decrease from approximately $41.2 million boxes for the 2021, 2022 crop year to approximately 15.9 million boxes for the 2022, 2023 crop year, a decrease of approximately 61.5%. With respect to the Early and Mid-season crop, the USDA forecasted a 56.5% decline. Our Early and Mid-season crop for the season was down 55%.

Regarding the Valencia crop, the USDA is forecasting the decrease of 55% and our Valencia box production was down 49%. While there was an impact to our fiscal year 2023 crops, there does not appear to be long-term measurable damage to our trees.

The decrease in pound solids per box was mainly due to the internal quality of our fruit not being as strong as it was in the previous year. In addition, we accelerated the harvesting of both the Early, Mid-Season and Valencia crop to minimize the fruit drop as a result of the impact of Hurricane Ian with the intent to maximize our box production. As a result, we realized a lower pound solids per box.

Partially offsetting the decrease in processed box production in pound solids per box was an increase in the price per pound solids. The 4.4% improvement in the price per pound solids for the three months ended June 30, 2023, as compared to the same period in the prior year was due to the overall lower production of citrus fruit, which has led to reduced inventory levels.

Total operating expenses were approximately negative $8.2 million for the three months ended June 30, 2023, as compared to $24.6 million in the same period in the prior year. The decrease in operating expenses primarily relates to the insurance proceeds received during the quarter ended June 30, 2023.

Inventory adjustments recorded in fiscal year 2022's ending inventory balance as a result of the impact of Hurricane Ian, which effectively lowered the inventory to be expensed in fiscal year 2023 and a reduction in harvest and haul expense as a result of the lower box production.

The company experienced significant cost increases and fertilizer herbicide labor and fuel in maintaining its groves. These cost increases, coupled with the timing of the harvest and the lower box production for both its Early and Mid-Season and Valencia harvest resulted in a higher cost of sales per box for the three months ended June 30, 2023, as compared to the same period in the prior year.

The company realized an overall decrease in its harvest and hauling expenses. However, the harvesting cost per box increased for the three months ended June 30, 2023 as compared to the same period in the prior year due to an increase in the harvesting labor cost as well as the increased time spent by harvesters to fill the boxes as a result of the increased fruit drop caused by Hurricane Ian. During the three months ended June 30, 2023, the company received approximately $17.5 million in Hurricane Ian crop and property insurance proceeds.

The company also incurred additional costs related to the cleanup and repairs as a result of Hurricane Ian. The decrease in Grove Management Services expense is directly related to the termination of the Grove Management Services by the Grove owners in June of 2022.

As mentioned above, the decision by the Grove owners to exist the citrus business eliminated the need for caretaking management services for the Grove owners. As a result, caretaking expenses decreased significantly during the three months ended June 30, 2023, when compared to the same period in the prior year.

General and administrative expenses for the three months ended June 30, 2023 were approximately $2.9 million compared to approximately $2.6 million for the three months ended June 30, 2022. The increase was primarily due to an increase in salaries and wages and increased legal and professional fees as compared to the same period in the prior year.

Other income net for the three months ended June 30, 2023 and 2022 was approximately $1.4 million and $4.9 million, respectively. The decrease to other income net is primarily due to the timing of the gains on sale of real estate, property and equipment and assets held for sale.

During the quarter ended June 30, 2023, the company sold approximately 548 acres from the Alico Ranch, recognized a gain of approximately $2.6 million. By comparison for the three months ended June 30, 2022, the company recognized gains of approximately $5.8 million relating to the sale of real estate, property and equipment and assets held for sale.

In addition, the Company recognized an increase in interest expense of approximately $0.4 million for the three months ended June 30, 2023 as compared to the same period in the prior year as a result of higher balance on the working capital line of credit and an increase in the overall interest rates on its variable rate term debt and a working capital line of credit.

For the fiscal quarter ended June 30, 2023 and 2022, we reported net income attributable to Alico common stockholders of $11.8 million and $2.7 million, respectively. Our adjusted EBITDA was approximately a loss of $1.3 million for the third quarter ended June 30, 2023 as compared to $2.8 million for the same period in the prior fiscal year. Alico continues to maintain a strong balance sheet. Our working capital was approximately $32.3 million on June 30, 2023, representing a 3.1:1 ratio.

We continue to maintain a solid debt-to-equity ratio at June 30, 2023, September 30, 2022, and September 30, 2021, the ratios were 0.49 to 1, 0.45 to 1, and 0.5 to 1 respectively.

I will now pass the call back to John.

John Kiernan

Thanks, Perry. Alico, along with the rest of the Florida citrus industry is focused on our caretaking for our respective groves for the next harvest. We are guardedly optimistic that the consistent grove caretaking practices we perform every day, combined with the anticipated benefits from the new citrus green therapy utilizing OTC truck injections to over 35% of our trees and the millions of new trees we have planted since 2017, some of which are now mature, support our expectations of a substantial increase in our harvested fruit next season.

Progress with sales of parcels of the Alico Ranch continues, and our balance sheet remains strong. We are grateful that our insurance providers paid our crop, property and casualty claims quickly and expect that our limited tree damage claims to be paid soon. We are patiently awaiting decisions from Congress regarding the funding mechanism for Hurricane Ian relief funds. Our work with land use planning professionals to optimize the long-term potential value for our real assets is expected to conclude later this calendar year.

And as we have reiterated for more than a year now, Alico wants to provide investors with the benefits and stability of conventional agricultural investment with the enhanced optionality that comes through active land management.

And with that, we will now open the line up to questions from industry analysts. Mark?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And we have a question on the line from Gerry Sweeney of ROTH Capital. Please go ahead. Your line is open.

Gerard Sweeney

Hey. Good morning, John and Perry. Thanks for taking my call.

John Kiernan

Good morning, Gerry.

Perry Del Vecchio

Good morning.

Gerard Sweeney

A couple of questions. I'm going to start with the 2023, 2024 harvest. I know it's a little bit early. I think you alluded to it at least in the prepared remarks about how the harvest is taking shape or the quality of the tree. So one, I just wanted to circle back for that and just see as of today, what your initial take is on the trees and harvest; and two, when will you get a better view as to how this is shaping up?

John Kiernan

Sure. It is too early for us to actually make any further forecast on 2023, 2024. We really want to start harvesting until late November, early December. But the inspection of the tree is right now, there appears not to be any permanent damage from the storm from Hurricane Ian last September. And as you drive around, it looks good, but again, it is too early for us to make any sort of forecast. So we don't have a reason for concern, but we can't actually quantify for you potentially what next season looks like.

Gerard Sweeney

Got it. Will you be able to have like a forecast sometime in that early fall pre-harvest or should we just wait until the harvest?

John Kiernan

Yes. It's probably based on recent years, it makes sense to wait later as we get closer to harvest before we should really try to estimate and quantify.

Gerard Sweeney

Got it. How big is the Punta Gorda or I know I can probably look it up in the documents but just curious of the size?

John Kiernan

Total acres, I think, is around 1,000.

Gerard Sweeney

Okay. Got it. And then switching gears to OTC, obviously, this is probably some of the bigger news out there. And I know you've been touching upon 35% of your [indiscernible] have been treated, just curious as to any thoughts on: one, when you will – any testing that has been done in terms of yield and yield enhancement et cetera. Then two, again, I know it's probably a little bit early, but some of our checks have indicated that the average cost, I think, per tree is less than $1. Now I'm not sure if that is that is a $1 per dose or $1 per treatment per year, so just if you could, I know there is a couple of questions there or may be unpack that a little bit?

John Kiernan

Thank you. That's a very, very good question, and I'll try to do my best to answer it as transparently as we can make it. Alico doesn't have proprietary testing data that we can share. We did some trials last year. And unfortunately, the damage from the hurricane prevented us from [indiscernible] what actually measure kind of the benefits of what we had tried. There is some publicly available information through the State of Florida and some of the research facilities and there are some other statistics in the press, but it is clear from everything that we've seen and some anecdotal evidence from some of our friends and peers and competitors that there are some meaningful and measurable benefits of doing this trunk injection application of OTC. And it basically is once a year and you do it per tree.

So you had asked a question of kind of how this all goes. We start about 35% of our trees in all the different groves that we own. So it's spread throughout the state. And as far as the cost per tree goes, originally, I think the estimates were somewhere between $2.50 and $3 a tree. I think, just from sheer economies of scale that has probably gotten below $1, but we don't have any specific statistics we can give you, but less than $1 per application per tree is not a bad figure to start with.

Gerard Sweeney

Got it. Final question. I guess, maybe a follow-up on the comments. It was a contract, you mentioned that one of your Tropicana contract that has been extended to the 2024, 2025 season. Could you just walk us through maybe the laddering of the contracts when they expire at roughly the size of them, if you have that info at your finger tips? So apologize it’s a little different?

John Kiernan

Sure. I have been dominating all the Q&A. So I'll let Perry Del Vecchio answer that.

Perry Del Vecchio

Thanks, Gerry. As it relates to the contracts, this contract is one of the smaller contracts with Tropicana, the larger contracts do come up for expiration next year, at the end of next year’s harvest.

Gerard Sweeney

At the end of fiscal 2024, just…

Perry Del Vecchio

Yes.

Gerard Sweeney

Okay. Got it. And then historically, you have renewed them I would say, a good amount of time before the end of the harvest is that the way of looking at it?

John Kiernan

Yes. I mean, we typically will do it within a year of when the expiration comes out. And right now, we've been doing them on shorter durations, so the shorter-term contracts. And I anticipate in the middle of next season, we'll be negotiating to renew those contracts that are expiring at end of next season.

Gerard Sweeney

Got it. Okay. That’s it for me. I really appreciate it. Thank you.

John Kiernan

Gerry. Thank you, again.

Perry Del Vecchio

Thank you.

John Kiernan

Mark, do we have any other queries?

Operator

There are no questions on the session. I'd like to hand the call back over to Mr. Kiernan for the closing remarks.

John Kiernan

I just want to say thank you to everyone for joining our call today and for your support of Alico. We look forward to speaking with you on our fourth quarter call and our full-year results in December.