2020 Annual Report
Total Page:16
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CHAIRMAN’S LETTER TO THE SHAREHOLDERS Unlike last year, the weather was kind to us in 2020. Unfortunately, along with everyone else, our world was turned upside down by the COVID-19 pandemic. For Limoneira, the challenges began in January with our lemon export markets. By the end of March, our food service business (restaurants and bars) was down 50%. Our retail sales (grocery stores) were up, but not enough to make up for lost export and food service business. We worked hard to gain new retail customers and meet the needs of current customers. More lemons were packed in bags to meet the changing preferences of our retail customers. Our costs went up, prices and overall demand went down. It was a challenging and disappointing year in the lemon business! Unlike lemons, demand for oranges was strong. The loss of food service sales was more than made up by sales in the grocery stores. We had a good crop of good eating navel oranges. Prices were strong and we made a profit in oranges. Like oranges, avocado demand was also strong. Shoppers bought almost all avocadoes not used by food service. Prices began the year at high levels, then fell rapidly to a modest level when the pandemic shutdowns hit the market in March. We had a good size crop and made a respectable profit in avocados. Amazingly, because of the pandemic, Harvest at Limoneira, our master-planned community, sold houses at a record pace in 2020. Low interest rates meant mortgage payments were not much more than the cost of renting. As I write this letter, all four of our guest builders are essentially sold out and they are building new houses as fast as they can. We continue to sell lots to these builders as fast as we can get them ready. Fourteen years of investment, planning, and permitting are producing real results. Harvest at Limoneira is a growing community with over 100 homes occupied. Seeing the community come to life with houses becoming homes, children playing in the parks and families out for walks is gratifying. Our vision for this addition to Santa Paula is being fulfilled. As we begin 2021, we continue to deal with COVID-19 shutdowns around the world. Responding to the rapid fluctuations in the food supply chain is changing how we approach our business, and we will be better as a result. We will continue to be innovative farmers and marketers to make certain we are leading the way in an ever- evolving industry. As always, we will support and promote our employees so we can achieve greater things together. At Limoneira, we are a rich and diverse company with no asset more valuable than our dedicated people. The passion, dedication, and hard work with which they grow citrus and avocados is inspiring. I look forward to “seeing” you at the virtual annual meeting in March. Sincerely, Gordon E. Kimball Chairman of the Board CEO’S LETTER TO THE SHAREHOLDERS 2020 was a difficult year for Limoneira despite some significant accomplishments for our Company. Following the challenges Mother Nature threw our way in 2019, with extreme heat, wind and then rain that hindered our lemon harvests in the late Spring, we welcomed 2020 with open arms and a great deal of optimism. Our avocado set was strong in 2020, our orange and specialty citrus crops were solid with good yields and size and our lemon crops across each of the three growing districts in California and Arizona appeared to be in good shape despite lower percentages of fancy fruit in District 2 caused by strong east winds in the Fall. Our fiscal year 2020 began in November with good lemon movement and strong export and food service demand and we felt we were off and running towards a successful operational and financial year. Little did we know that just after Christmas, on January 5th, our export demand in Japan, Korea, Hong Kong, and China would drop to literally zero as those markets closed in response to what would become the COVID-19 global pandemic. Unknown to us at the time, the closure of the export markets would serve as a terrible harbinger of things to come later in the year as the COVID-19 virus made its way to the United States and around the world. Limoneira’s 2020 lemon marketing plan had a specific focus on serving premium, high- paying export markets with its fancy (1st) grade fruit and serving the domestic food service channel with its choice (2nd) grade fruit. Loss of the export markets due to the COVID-19 pandemic forced our Company to pivot towards the domestic retail sales channel (grocery stores) to keep our sales volume moving. Our pivot was successful as we picked up new business from Walmart, Costco, HEB and other retailers across the United States and we enjoyed a 100% lift in our retail lemon sales volume while our export sales virtually disappeared. Strategic investments in new packaging technology facilitated our successful increase in retail sales as we began to serve new grocery stores across the country with lemons packed in convenient bags. When the COVID-19 pandemic struck the United States in mid-March, closing restaurants and bars across the country, the food service sales channel, which normally consumes 70% of all lemons in the country, fell nearly 70%. Since restaurants and bars typically consume choice (2nd) grade lemons, the loss of this demand was devastating to Limoneira and the entire lemon industry as an oversupply of choice grade lemons negatively impacted pricing. The COVID-19 pandemic significantly reduced the number of lemons consumed in the world and left all lemon handlers like Limoneira competing for a much smaller lemon market. Despite the challenges caused by the global pandemic, Limoneira was able to achieve record lemon sales volume in 2020 selling 7 million 40-pound cartons of fresh lemons - 4.6 million from the United States, 1.2 million cartons from Chile, 900,000 cartons from Argentina and 300,000 cartons from Mexico. Considering the average 40-pound carton has 150 fresh lemons in it, this meant that Limoneira sold over 1 billion lemons in 2020 – a noteworthy accomplishment since our Company’s sales volume has grown seven-fold over the past ten years. Limoneira produced 40% of these lemons in 2020 and our affiliated growers in California, Arizona, Chile and Argentina produced 60%. Our customer base grew in 2020, and the power of our One World of Citrus business model expanded as our customers enjoyed year-round supplies of fresh Limoneira citrus. Unfortunately for us, Spring/Summer lemon markets were significantly oversupplied due to the COVID-19 pandemic, which caused our costs to go up and overall demand and pricing to go down. The financial results were disappointing despite our achievement of record lemon sales volume during the year. As COVID-19 vaccines are successfully distributed across the United States and around the world, restaurants and bars will begin to re-open, people will begin to eat and drink out again, and we believe the recent uptick in retail citrus sales will continue given people’s desire to enjoy the many health benefits of fresh fruit. We are optimistic that this will lead to higher citrus and avocado consumption than before the pandemic, playing right into Limoneira’s growth plans of delivering high-quality citrus and avocados year-round to our retail and food service customers around the world. Today, Limoneira has 1,200 acres of non-bearing lemons planted throughout California and Arizona that will become full bearing in the next four years as well as having young citrus plantings in Chile and Argentina that will increase our production from South America. Our agribusiness team is doing more with the acreage we farm in order to increase yields and quality. This will increase our tree crop, giving us more sellable, high- quality fruit. We have ample packing capacity in our Ventura County, California, Tucuman Argentina and La Serena Chile facilities to pack and distribute our current and future year- round supplies of fresh lemons. Our global sales team is opening new sales opportunities by winning new customers for us daily. The growth trajectory of Limoneira’s One World of Citrus is exciting, and we are optimistic about our future as we move closer towards a vaccinated, pandemic free, market environment around the world. A silver lining within 2020’s COVID-19 pandemic cloud for Limoneira has been the acceleration of value for Limoneira’s real estate development operations. When the global pandemic began to severely impact the United States, home sales velocity in Harvest at Limoneira, our development partnership with The Lewis Group, tripled. Weekly sales in Harvest at Limoneira grew from two houses a week pre-pandemic, to an average of seven home sales per week by our guest builders Lennar, KB Home, K. Hovnanian and Richmond American. This velocity also accelerated the pace of our partnership’s sale of finished lots to home builders and in 2020, we sold 144 finished lots and recognized a second year of equity earnings from the project. We also anticipate selling even more new lots in 2021 versus 2020 due to increased housing demand for our project. With shelter-in-place requirements forcing people to work from home and historically low mortgage interest rates, those choosing to leave dense urban centers for more rural settings enjoy state-of-the-art broadband connectivity (1 gigabyte) in Harvest at Limoneira. This increased rate of home sales in our project is both understandable and, we believe, sustainable as increased housing demand has improved the value of finished lots within our project.