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Limoneira (NASDAQ:LMNR)
Q3 2018 Earnings Conference Call
Sep. 10, 2018 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Limoneira third-quarter fiscal 2018 earnings conference call. Today's call is being recorded. At this time I'd like to turn the call over to John Mills of ICR. Please go ahead, sir.

John Mills -- ICR Investor Relations

Great. Thank you. Good afternoon, everyone, and thank you for joining us for Limoneira's third-quarter fiscal year 2018 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 of fiscal year 2018 earnings release, which went out today at approximately 4 p.m. Eastern Time. If you have 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 Limoneira's website as well.

Before we begin, we'd 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 risks detailed 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 as 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 include EBITDA, which is a non-GAAP financial measure.

A reconciliation of EBITDA to the most directly comparable GAAP financial measures is included in the company's 10-Q and press release, which has been posted to our website. And with that, it is my pleasure to turn the call over to the company's president and CEO, Mr. Harold Edwards.

Harold Edwards -- President and Chief Executive Officer

Thanks, John, and good afternoon, everyone. On today's call, I will begin with a brief overview of our accomplishments in the third quarter of 2018 and provide an update on our progress across all of our business areas. Mark will review the financial results in more detail, then I will discuss our updated outlook for fiscal year 2018. After that, we will open the call and take your questions.

I am pleased to announce third-quarter performance that consisted of solid cash flow despite temporary weather-related challenges that I'll discuss in a few moments. We also successfully raised $69 million of capital in June, facilitating two important strategic acquisitions, expanding our long-term One World of Citrus initiative. In July, we deployed $38 million toward these transactions. The first was for San Pablo Ranch in Las Serena, Chile, which is geographically valuable given its proximity to our existing Pan de Azucar assets.

This provides us further capacity in the Southern Hemisphere to provide citrus to our customers year-round. The second was for the packinghouse assets of Oxnard Lemon Associates and an entry into organic lemons right here in California. Oxnard Lemon brings us added packing capacity to efficiently handle our growing carton volume as well as leverage its well-known base of organic fruit developed over several decades, which is growing importance to our customers. Shifting to our business segments, starting with our agribusiness.

Strong lemon and orange results in fiscal third quarter were partially offset by reduced avocado volume and pricing due to a record heat that occurred late in the third quarter. The positive pricing environment and increased volume of lemons continue to improve since the end of the third quarter, and we are very confident we will achieve our full-year guidance. Pricing for lemons coming out of our Chilean facility is now up to approximately $35 per carton. This is a great example of how we are providing year-round fruit to our customers and reducing the seasonality of our business, which you will see in our fourth-quarter results.

The extreme record heat in California during July affected avocado harvest. The timing of the heat hurt our avocados because it occurred during harvest, reducing the quality of our fruit, which reduced the price we received on the fruit by approximately 20%. Over the past few years, we have made significant investments that are driving our top- and bottom-line growth. We've expanded our customer base to over 200 customers and increased distribution by leveraging our domestic and international marketing and sales channels.

We have focused on trade marketing and consumer-facing strategy as well as increasing our packing capacity. In addition, we now are able to provide our customers fruit year-round for our customers by sourcing citrus from different global locations, giving us 365 days of fresh lemons. Collectively, this is the basis of our One World of Citrus initiative and the platform we are leveraging to become a global leader in not only lemons but overall citrus offerings. In July, our One World of Citrus initiative was advanced by our $13 million acquisition of the San Pablo ranch in La Serena, Chile.

The San Pablo ranch currently includes 247 acres of producing lemons, 61 acres of producing oranges, the opportunity to immediately plant 120 acres for lemon production as well as the potential for approximately 500 acres of avocado production. Combined, we are neighboring 200-acre Pan de Azucar Lemon ranch in Chile. We believe our Chilean operations will have the ability to produce approximately 1.1 million cartons of lemons and 100,000 cartons of oranges annually upon maturity of the combined ranches. Beyond our enhanced marketing capabilities, this acquisition enables us to utilize our existing packing operations in Chile to improve margins for San Pablo's production.

We've known the management team at San Pablo for many years and are very excited to leverage our current assets to expand production and distribution within Chile and throughout the world. Our domestic operations also continue to improve. The investments in our new packing house in Santa Paula have doubled our annual capacity and greatly increase the operating efficiency of our lemon packing operations. Since commissioning the new packing facility we have realized a material increase in our packing productivity.

In July we acquired an important strategic asset in Oxnard Lemon Associates' packinghouse here in California for $25 million, which increases our share of packing and marketing third-party grower fruit from California facilities. Oxnard Lemon has built a powerful position in the marketplace, specializing in organic and specialty citrus packing from the local California community of growers. The Oxnard Lemon facility consists of a packinghouse and related equipment on 13 acres, strategically, located less than a mile from the Port of Hueneme and with packing capacity of 4 million cartons per year. The adjacency to Limoneira's headquarters in Santa Paula, California creates additional packing efficiencies for the combined enterprise with its two focused locations, while also nearly doubling our storage capacity, which significantly curtails our future capital needs in that regard as we continue to pursue third-party grower fruit.

Combined, these two acquisitions will be accretive in fiscal year 2019 by adding approximately $0.14 to $0.18 to our earnings per share next year. Including these acquisitions, we now have over 8,500 planted agricultural acres, of which approximately 1,200 acres are currently non-bearing lemons and are estimated to become full-bearing over the next four years. Beyond these 1,200 acres, we currently expect to plant an additional 500 acres of lemons in the next two years that will further build our long-term pipeline of productive acreage. We anticipate this additional acreage will increase our annual global lemon supply from our current level by approximately 30%, or about 900,000, to 1.3 million additional fresh cartons as the nonbearing and planned acreage becomes productive.

In addition, we expect to have a steady increase in third-party grower fruit as well. Globally, we are now growing our own fruit in The United States and Chile, and managing the marketing and sales function for locally sourced citrus from business associates in South Africa, Chile, Argentina, and Mexico. As our lemon business grows, our customers recognize the quality and consistency they receive with Limoneira lemons as well as high levels of service that are a fundamental part of our culture. These efforts combine to make us an important and consistent source of year-round fresh citrus supply to our growing roster of global customers.

From an operational standpoint, we believe vertical integration of international production and marketing combine to maximize our revenue and margin opportunities while smoothing out the seasonality of our business over the long term. Turning now to our real estate development segment. The partnership between Limoneira and the Lewis Group of Companies for the development of Harvest at Limoneira is progressing well. With its highly divide location near the Pacific Ocean, we believe we will receive approximately $100 million of the estimated seven- to 10-year life of the project, including $20 million we received from Lewis when the joint venture was formed.

The lot bidding process was successful and we're now receiving initial deposits for the 250 lots in Phase 1 with cash flow to the partnership from the lot sales beginning in the first quarter of fiscal year 2019. In summary, we are extremely pleased with our progress to the first nine months of fiscal year 2018. We have made many strategic investments in all aspects of our business during the past few years that are helping us drive margins and profitability. The two acquisitions of San Pablo and Oxnard Lemon are further supporting our financial goals while advancing our global supply of fresh citrus.

We operate in a very fragmented industry and based on our strong platform, global presence, and leading brands, we are very well positioned to capitalize on the long-term consolidation trend that is occurring in many of our markets. And with that, I'll now turn the call over to Mark.

Mark Palamountain -- Chief Financial Officer

Thank you, Harold. good afternoon, everyone. I will discuss some of the details of our financial results for the third quarter ended July 31, 2018. For those of you new to our story, it is worth noting that due to the seasonal nature of our business, revenue is driven by varying harvest periods from year to year.

We believe it is prudent to view our business on an annual basis. For the third quarter of fiscal year 2018, total net revenue was $40 million, compared to total net revenue of $40.4 million in the third quarter of the previous fiscal year. Agribusiness revenue decreased slightly to $38.7 million, compared to $39.1 million in the third quarter last year, primarily due to smaller-than-expected avocado crop it was negatively impacted by the record heat wave Harold discussed. Rental-operations revenue was flat versus the prior-year period at $1.3 million in the third quarter of fiscal year 2018.

There were no real-estate-development revenues in the third quarter of fiscal year 2018 or 2017. Agribusiness revenue for the third quarter of fiscal year 2018 includes $30.7 million in lemon sales, compared to $30 million of lemon sales during the same period of fiscal year 2017, with the increase primarily the result of higher volume offset by lower prices of fresh lemons compared to the same period in fiscal year 2017. Approximately, 992,000 cartons of fresh lemons were sold during the third quarter of fiscal year 2018 at a $25.91 average price per carton, compared to approximately 919,000 cartons sold at a $28.45 average price per carton during the third quarter of fiscal year 2017. Avocado revenue for the third quarter of fiscal year 2018 was $5.6 million, compared to $7.5 million in the same period last year, which was primarily the result of lower prices partially offset by higher volume compared to the same period of fiscal year 2017.

The company recognized $2.2 million of orange revenue in the third quarter of fiscal year 2018, compared to $1.1 million in the same period of fiscal year 2017, primarily attributable to higher prices of oranges sold, partially offset by lower volume compared to the same period in fiscal year 2017. Specialty citrus and other crop revenues were $300,000 in the third quarter of fiscal year 2018, compared to $400,000 in the third quarter of fiscal year 2017. Total cost and expenses for the third quarter of fiscal year 2018 were $28.5 million, compared to $27.2 million in the third quarter of last fiscal year. The increase in operating expenses was primarily attributable to increases in agribusiness cost and expenses due to increased volumes of lemons and avocados versus the prior year.

Costs associated with agribusiness include packing cost, harvest cost, growing cost, costs related to the fruit we procure and sell for the third-party growers and depreciation expense. Operating income for the third quarter of fiscal year 2018 was $11.4 million, compared to income of $13.2 million in the third quarter of the previous fiscal year. Net income applicable to common stock after preferred dividends for the third quarter of fiscal year 2018 was $8.1 million and compares to $7.7 million in the third quarter of fiscal year 2017. Net income per diluted share for the third quarter of fiscal year 2018 was $0.50, compared to net income per diluted share of $0.52 for the same period of fiscal year 2017 based on weighted average diluted common shares outstanding of approximately 16.6 million shares and 15 million shares, respectively.

The additional shares outstanding in the fiscal 2018 are due to the recently completed equity raise. EBITDA was $13.4 million in the third quarter of fiscal year 2018, compared to $14.9 million in the same period of fiscal year 2017. For the nine months ended July 31, 2018, revenue increased 9% to $114.7 million, compared to $105.4 million in the same period last year. Operating income for the first nine months of fiscal year 2018 grew 18% to $19.1 million, compared to an operating income of $16.1 million in the same period last year.

Net income applicable to common stock after preferred dividends was $23 million for the first nine months of fiscal year 2018, compared to net income of $8.8 million in the same period last year. Net income per diluted share for the first nine months of fiscal year 2018 was $1.50, compared to a net income per diluted share of $0.62 in the same period of fiscal 2017. Our fiscal 2018 results include a noncash $10 million, or $0.61 per diluted share, one-time tax benefit associated with a decrease in its deferred-tax liability balance during the first quarter of fiscal year 2018. Excluding this noncash tax benefit, diluted net income per share for the first nine months of fiscal year 2018 was $0.86.

EBITDA for the first nine months of fiscal year 2018 was $24.6 million, compared to EBITDA of $21.5 million in the same period last year. Lastly, a few comments on our balance sheet. In June of 2018, the company completed a public offering of 3,136,000 shares of its common stock at a public offering price of $22 per share for total gross proceeds of approximately $69 million. The company used $26.1 million of the operating -- offering proceeds plus cash from operations to pay down $37.1 million of long-term debt during the third quarter for an ending balance of $70.6 million as of July 31, 2018.

Additionally, as Harold commented on earlier, we deployed $38 million of capital in July for the purchase of the San Pablo Ranch and Oxnard Lemon packinghouse and related assets. Now I would like to turn the call back to Harold to discuss our fiscal year 2018 outlook.

Harold Edwards -- President and Chief Executive Officer

Thanks, Mark. We expect our agribusiness to continue to benefit from the more efficient infrastructure we have in place as we are able to build revenues through expansion of our own citrus orchards, growth in third-party volumes that we pack and market as well as additional future potential strategic acquisitions. We are very excited about the long-term growth trajectory we are on and look forward to continue delivering value for our shareholders. Turning to our fiscal year 2018 guidance.

The underlying fundamental business drivers for our core agribusiness and recent acquisitions are summarized as follows, we now expect to sell between 3.2 and 3.4 million cartons of fresh lemons at an average price of approximately $25.50 per carton, compared to previous range of 3.1 million and 3.3 million cartons of fresh lemons at an average price of approximately $24.50 per carton. The increase in average price per carton is primarily due to increasing fourth-quarter pricing and volume that is coming from all our locations, including strong contributions from our Chilean operations that will be reflected in our fourth-quarter results. We have sold approximately 6.3 million pounds of avocados at approximately $1.04 per pound, compared to the expected range of 6 million to 6.5 million pounds of avocados at approximately $1.30 per pound. As a reminder, the lower price per pound is due to the adverse heat effect on our avocados during the latter part of our third quarter.

We expect operating income for fiscal year 2018 to be approximately $15 million to $16.1 million, compared to previous range of $15.7 million to $17.8 million. Fiscal year 2018 EBITDA is now expected to be in the range of $22.5 million to $23.5 million, compared to the previous range of $23 million to $25 million. We are narrowing our annual adjusted earnings per share guidance range to $0.65 to $0.70 compared to the previous range of $0.65 to $0.75. This fiscal year 2018 adjusted earnings-per-share guidance is using a weighted average share outstanding of $16.3 million, which accounts for the additional shares that were sold during our June 2018 secondary offering, compared to the previous weighted average shares outstanding of $15 million.

The increase in shares equates to fiscal year 2018 adjusted earnings per share dilution of approximately $0.06. To summarize our guidance, lemon pricing and volume is coming in much stronger than we previously expected, which is slightly offset by the heat effect on our avocados. Guidance also includes approximately $0.02 to $0.03 accretion from our San Pablo acquisition. There is no material accretion from Oxnard Lemon expected in fiscal year 2018.

The newly created Oxnard division of Limoneira will be included Limoneira's consolidated results of operations from the date of final closing beginning November 1, 2018. However, in order to allow the sellers of Oxnard Lemon to satisfy its preexisting sourcing obligations, Limoneira has engaged in a sale-leaseback agreement with the sellers for a period extending through October 2018. Beginning November 1, 2018, Limoneira will realize the full financial benefit of Oxnard Lemon's operations. And as a result, the transaction will have a nominal impact on fiscal year 2018 operating results.

For fiscal 2019, the company expects the acquisition to add $0.08 to $0.10 in earnings per diluted share, reflecting the addition of 2 million to 2.5 million cartons of additional fruit from Oxnard Lemon's operations. This fiscal year 2018 guidance continues to exclude the one-time deferred benefit of $0.61 per diluted share that the company recognized in the first fiscal quarter of 2018, inclusion of the company's deferred tax benefit results in an updated fiscal-year GAAP earnings per share range of $1.26 to $1.31 per share. As we enter the final quarter of a very strong fiscal 2018, we're looking forward to continued growth in fiscal year 2019. Our two recent acquisitions are expected to add an additional $0.14 to $0.18 in earnings per share to fiscal year 2019 results, and we will have approximately 400 additional acres that will be bearing fruit compared to fiscal year 2018.

We are currently assessing the effect of the record heat during the third quarter on our fiscal year 2019 avocado crop. Any decrease in revenues are expected to be partially offset by crop insurance proceeds. Also in fiscal year 2019, we expect our partnership to begin receiving cash flow from Harvest at Limoneira project. And with that, I'd like to open the call up to your questions. Operator?

Questions and Answers:

Operator

Well, thank you. [Operator instructions] Our first question today comes from Farha Aslam with Stephens Inc.

Farha Aslam -- Stephens -- Analyst

Hi. Good afternoon.

Mark Palamountain -- Chief Financial Officer

Hello.

Farha Aslam -- Stephens -- Analyst

Questions -- a couple of questions. The first one is for Mark. I just want to make sure you've done an equity offering and two acquisitions, does the numbers you provided include costs related to those transactions? And roughly, what the cost would be?

Mark Palamountain -- Chief Financial Officer

They do include those costs. A lot of those costs were capitalized. I don't have that exact number in front of me, Farha, but I -- we can get that offline to you.

Farha Aslam -- Stephens -- Analyst

OK. That's helpful. And then for Harold, you talked about the heat impacting avocado trees. Did the heat impact lemon trees as well? And how should we expect the extended impact of the heatwave?

Harold Edwards -- President and Chief Executive Officer

The heat definitely impacted all agriculture production in this part of California. So I think the way to think about it, Farha, is that in California and Arizona, we're producing in all the different production areas. And so in the coastal region, which is where the impact of the heat was most severely felt, we feel the impact on next year's crop could be somewhere on the magnitude of a 20% reduction in fruit. Typically, when we see these kinds of reductions, which typically you see associated with colder temperatures, you see dramatic increases in pricing due to the shortage of -- of fruit in the market at that time.

So what we'd anticipate next year would be a shorter crop, but offset by much higher pricing going into next year.

Farha Aslam -- Stephens -- Analyst

And so my final question's related to your Chilean acquisition. So given that you're going to be selling into a higher price environment, will your imported product really benefit? And how much of a benefit should we expect going into next year for that product?

Mark Palamountain -- Chief Financial Officer

Yes. We believe that the timing of the acquisitions are perfectly suited for the impact of the reduced volume forecasted for next year of coastal California production due to the heat. So the impact on the imported Chilean product should be significant, and those lemons will be coming into, we believe, a much higher pricing environment due to the shorter California crop at that time. It's a little too early to predict the actual pricing and the impact that that will have and we will give a much more granular and specific guidance to that at the conclusion of our fourth quarter when we have a better view of what that looks like.

But at this point, we feel very pleased with the acquisitions that we've made in Chile. We see great progress on the maturation of the fruit that are coming along as the younger trees are getting older and producing more fruit. And we think we're in a good position next year to benefit from that as the shorter California crop should be offset by stronger imports, not only of volumes but also with stronger pricing.

Farha Aslam -- Stephens -- Analyst

That's very helpful. Thank you.

Operator

And our next question comes from Vincent Anderson with Stifel.

Vincent Anderson -- Stifel Financial Corp. -- Analyst

Great. Thanks for taking my question, guys. So just sticking with the lemon markets for -- for a minute. You talked about normally these conditions follow cold weather, but given what we've seen, prices increasing across both quality and size even with the volume shortfall, how do you market into this going into next year? Do you have firm export commitments that you can't really pull back and take advantage of the U.S.

market? Do you get better, fresh market utilization out of your crops? Or do you on net have a negative impact for more fruit going to process? Can you just walk us through how you've approached markets like this in the past?

Harold Edwards -- President and Chief Executive Officer

Yeah. I think that's a great question, Vincent, and my expectation is that you'll see the fresh utilization increase nicely as a result of -- in a short market, we typically have a much greater opportunity to sell our lower-grade fruit into the market at pretty good pricing. So our choice grade and our standard grades, which sometimes can get built-up in a seasonal time frame when there's abundant fruit in the marketplace. In a short environment, that fruit sells itself very nicely.

And at this point, Mark and I and the team have just returned back from the ASIA FRUIT LOGISTICA conference in which we met with many of our Southeast Asian customers and many of our export customers and demand continues to be very, very robust. We continue to operate in a demand-exceed-supply situation. And as a result, we've stayed away from making long-term commitments in terms of pricing or supply agreements at this point just because we do believe that it will be a shorter crop next year, we believe that there'll be great opportunity to see strong pricing. And so we'll be more -- operating more on a spot basis next year.

So net-net, I think it's going to be a very, very positive situation for our company. Demand continues to be high from our customers, and it looks like we're going into a very strong pricing environment next year.

Vincent Anderson -- Stifel Financial Corp. -- Analyst

That's very helpful. Thank you. So with some of the shortage in the U.S. being exacerbated by issues in production overseas, have you seen that translate into -- into maybe some buying opportunities in countries like Mexico, for instance, that you weren't really expecting to land on your doorstep quite so soon? And has that impacted your capital deployment decisions over the next, call it, six to 12 months?

Harold Edwards -- President and Chief Executive Officer

Less in Mexico, Vincent, more in Argentina. We -- this was the first year in quite some time that The United States market has accepted importation of Argentine fruit, and Limoneira handled approximately 40% of the total volume that was imported into the U.S. this year. And I think by most people's assessment, the season of -- the shipping season of the Argentine fruit blended very nicely with the California fruit that it was competing with or at least being complemented -- complementary to.

And we saw very little market disruption from the importation of that fruit. I think because of the very positive experience that the Argentina shippers had, you'll see much more enthusiastic appetite for Argentina to ship aggressively or more aggressively into the U.S. market next year. I think that will also be the experience from Chilean producers as well as from Mexican producers as their various windows of market opportunity do open up into what it looks like is going to be a shorter California crop not only in the coast but also of the desert production and up in the San Joaquin Valley.

So it looks like another year next year, preliminarily anyways, of being a year in which demand continues to grow nicely and should be supported by volume that will struggle to keep up with the demand, which should translate into a strong pricing environment for us next year.

Vincent Anderson -- Stifel Financial Corp. -- Analyst

Great. Thanks. And if I can just highlight all together in one more question. All of this kind of paints, especially, with your fourth-quarter guidance raising your ASP for the full year for lemon prices kind of the implied move for your fourth-quarter realizations, it doesn't necessarily couple with the narrower -- well, lower at the midpoint for your EPS.

So can you kind of walk us through maybe what's -- what's going to be changing maybe on the cost side of the equation in fourth quarter that's going to eat up a lot of that higher ASP?

Harold Edwards -- President and Chief Executive Officer

I think -- I think it's less of a cost issue. I think it's more of the dilutive impact. Remember the original guidance was put out there on the original number of shares that were issued before we made the equity raise. The impact of the dilution was $0.06.

On top of the $0.06 was $0.02 of accretion from San Pablo. So there is a $0.04 move there. And so that brought us down sort of the midpoint of the $0.65 to $0.75 range. And at the -- at the other side of that there was more front-end loading of total lemon volume in our total fiscal year.

So as we're dealing now with less avocado price going into the fourth quarter, we do expect to have strong Chilean imports in the fourth quarter, which should enjoy much higher pricing. We've tried to capture that in the guidance going from 2,450 on all the volume up to 2,550 per carton in the total volume, and that puts us somewhere in sort of what we think is the mid-range of the volume. So that's why we've tried to narrow the guidance from $0.65 to $0.70 rather than the wide range of $0.65 to $0.75. Mark, any other comments on that?

Mark Palamountain -- Chief Financial Officer

Yeah. Just one other comment. I would say that we do -- from the cost side there, we do have more outside-grower fruit than in prior years, which was where you'll see some of that additional cost, I think, coupled with your question.

Vincent Anderson -- Stifel Financial Corp. -- Analyst

All right. Thanks.

Harold Edwards -- President and Chief Executive Officer

Thank you.

Operator

Next will be Eric Larson with Buckingham Research Group.

Eric Larson -- Buckingham Research Group -- Analyst

Yes. Good afternoon, everybody.

Harold Edwards -- President and Chief Executive Officer

Hi, Eric.

Eric Larson -- Buckingham Research Group -- Analyst

So couple of questions. Yeah. Thanks for the question. Last quarter you thought that you might benefit from some positive gradation in lemons.

I'm assuming that the -- that your guidance on lemon pricing, your volumes are going up, your pricing is going up, which is clearly a function of demand as opposed to an improvement of mix, but is there -- is that -- is mix helping you too in terms of getting a better grade?

Harold Edwards -- President and Chief Executive Officer

It's actually working the other way. We're actually selling a lot more of our total grades, which because we're now able to sell more of the standard and the choice fruit, has a greater impact on bringing the price down because of the lower pricing of those lower grades relative to the higher pricing of the higher grades, if that makes sense.

Eric Larson -- Buckingham Research Group -- Analyst

Got it. Yup. Yup.

Harold Edwards -- President and Chief Executive Officer

So even that -- it does give us an opportunity to sell more volume, but it's sort of the -- it's -- the calculus is selling more volume with more lower grade, but at the same time, a higher guided total FOB.

Eric Larson -- Buckingham Research Group -- Analyst

Got it. Yes. So your secondary derivative is actually going down a little bit. Your slope is going down.

If you had -- if you had more cases and higher grade, you have higher pricing is what you're saying?

Harold Edwards -- President and Chief Executive Officer

You got it. That's it. Perfect.

Eric Larson -- Buckingham Research Group -- Analyst

Got it. OK, OK. And when you -- when you look at -- and this is just -- this question is just, sort of, off the wall and it's hard for us to pick this out, but is there any chance at all that you can participate in any of the $12 billion agricultural program -- some city program that Washington is coming out with right now? Do you get -- are you part of that in any way, shape or form?

Harold Edwards -- President and Chief Executive Officer

We -- I guess that the answer is we think so, but it's not granular enough for us to know exactly how. The latest correspondence that we received suggest that California citrus shippers do have an opportunity to participate; however, we're still not exactly sure what that is. So at this point, we're assuming the answer is no, but we have received some optimistic sort of communications that suggest that we will be able to participate, but at in this point we're not sure how.

Eric Larson -- Buckingham Research Group -- Analyst

Yes. When I looked through, I couldn't tell either. It was really hard to figure out whether or not you could participate in it or not, but shame on them if you can't, right, too bad.

Harold Edwards -- President and Chief Executive Officer

Right. RIght.

Eric Larson -- Buckingham Research Group -- Analyst

And then, the -- in your prepared comments and in your press release, you talked about national homebuilders already -- already coming to the plate. Does that not trigger you to receive cash? You actually have to have lot sales to start generating that cash.

Harold Edwards -- President and Chief Executive Officer

No, that's a very insightful question. And the real answer to that, Eric, is that all of the homebuilders that make offers and once the offers are accepted have a time period of due diligence. And typically, these are 30- to 40-day time periods, at which point then a percentage of the agreed-upon sales price for the lot is contributed into an account as a down payment. And so we have received down payments and we are in the process of receiving down payments for those first lots right now.

The actual lots closing for full payment are what -- what I -- what we referred to in the prepared remarks, which is anticipated to be in the first quarter of 2019, but we have received and are receiving the down payments right now, which is cash flow to the partnership.

Eric Larson -- Buckingham Research Group -- Analyst

That's what I thought, and -- but then the partnership will not distribute that cash until when or how do you recognize that on your P&L?

Harold Edwards -- President and Chief Executive Officer

So the partnership -- once that we get to the closing period, which will be approximately sometime in the first quarter of next year for us, yeah, then so that's when all that will happen.

Mark Palamountain -- Chief Financial Officer

And there will be two pieces to that, Eric. There'll be, one is actually reflected using the equity method of accounting on the P&L. That will be one piece and then there'll be the actual cash flow from the partnership out to the partners. And those will be two very different things that we'll need to be communicating very closely to all of you about of what those differences are and how that actually works

Eric Larson -- Buckingham Research Group -- Analyst

Yes. I know. It gets -- it gets pretty complicated. But just from the layman's point of view right now, we should just think of it that the cash will accrue to Limoneira at -- really we should just think it's time of closing is the best way to think at this point, I would assume.

Harold Edwards -- President and Chief Executive Officer

That's right. And that's what we've tried to communicate in the prepared remarks.

Eric Larson -- Buckingham Research Group -- Analyst

Got it. OK. Thank you, everyone.

Harold Edwards -- President and Chief Executive Officer

Thank you.

Mark Palamountain -- Chief Financial Officer

Thank you.

Operator

And next will be Gerry Sweeney with Roth Capital.

Gerry Sweeney -- Roth Capital -- Analyst

Hey, good afternoon, Harold and Mark. Thanks for taking my call.

Harold Edwards -- President and Chief Executive Officer

Hi, Gerry.

Mark Palamountain -- Chief Financial Officer

Hi, Gerry.

Gerry Sweeney -- Roth Capital -- Analyst

Question for you and I -- hopefully, I can get this out in a succinct manner. So at the top level, we have some heat that's negatively impacting the lemon crop that appears to be going into fiscal 2019. My question was we also have the second 1,200 acres that are going to come on at different points over the next several years. I don't think any of this new -- those 1,200 acres were anticipated to hit in 2019.

But we also have third-party recruiting plus we have Oxnard. How does this all play out in total cartons for 2019 over 2018? Will we see a decline in cartons? Or will we see maybe a push or an increase with either additional acreage coming on and third-party potential recruiting? Can you sort of square that off if possible?

Harold Edwards -- President and Chief Executive Officer

So that's a great question and we'll -- I'll try to answer it anecdotally and avoid specifics because we're still taking inventory of what we believe the actual impact will be, but it will be something as follows. We believe that the coastal lemons, which took the full brunt of the heat will be down in total production, not only our own production but all the outside growers that we work with here by approximately 20%. We believe the fruit that comes out of the desert in our Yuma, Arizona, operations as well as the outside growers in that region will be up. And we believe that the converses 2018 and we believe that the production in the San Joaquin Valley year over year will be up as well.

So when you put the combination of all of those together, we're not sure what the total impact of the total year will be. And so that -- we'll sort of stay somewhat vague on that until the fourth quarter when we have a much clearer view. But we do believe that it's going to lead to a much stronger pricing environment for us next year. And later, on top of that also much stronger production coming from our Chilean operations that will come into this stronger pricing next year as well.

So net-net we think it's going to be a great opportunity for growth in the lemon business and should be a -- should be great year for us.

Gerry Sweeney -- Roth Capital -- Analyst

And then speaking of Chile, you have a minority ownership, I think, in the Rosales packinghouse. Is that correct?

Harold Edwards -- President and Chief Executive Officer

Correct. Yes, 47%.

Gerry Sweeney -- Roth Capital -- Analyst

47%. Is that an opportunity longer term as you, I mean, I think you have Pan de Azúcar and I think what is it, San Pablo?

Harold Edwards -- President and Chief Executive Officer

Yes. I think the way to look at that is, as that operation grows, we have a very tight partnership and a group there that we think that we could take that position into a majority position. We do also have aspirations as these operations grow to create a new packing operation similar to what we've done here in the coming years. So all of that will come together, I think, in the next few quarters.

That's the strategy.

Gerry Sweeney -- Roth Capital -- Analyst

OK, got it. And then finally, avocados, obviously, we've talked about this in the past, so I think they're alternate bearing, so bigger crop on your smaller crop. With some of these heat impacts buyers last year, is this year a smaller crop expect larger crop next year? Or are we, sort of -- how's that going to work out just from a timing perspective?

Harold Edwards -- President and Chief Executive Officer

So our feeling, unfortunately, is that 2018 was the big year.

Gerry Sweeney -- Roth Capital -- Analyst

OK.

Harold Edwards -- President and Chief Executive Officer

We had a big wind event in the beginning of the year and then we had that extreme heat in July. So those two things factored together to not what we thought at the beginning of the year was somewhere directionally of a 10 million pound crop to allow us to get to a final number of about 6.3 million pounds to market. And that was 2018. Next year is a smaller crop that looks like, and it looks like the impact of the heat next year was severe.

So that it should be a -- we anticipate a much smaller avocado crop next year. The one thing that will help offset that is we have very strong crop insurance on our crops and in meetings with our underwriters and our adjusters, we believe that we'll be able to significantly mitigate the financial impact -- negative impact that we would anticipate from a much lower crop next year that was caused by this heat. So again, it's a little too early to give specific guidance. But financially, next year, the impact should be mitigated from what otherwise would be probably a very difficult situation without the insurance.

Gerry Sweeney -- Roth Capital -- Analyst

So but -- some of that heat was industrywide, so -- if -- and next year if it's a smaller crop for the industry, we should expect higher prices as well though that's the offset for next year's price. [Inaudible]

Harold Edwards -- President and Chief Executive Officer

No -- yes, unfortunately, the thing that makes avocados more challenging, it's very different than lemons is, lemons don't have an immediate substitute of alternative supplies from other production areas like Mexico or Chile or Argentina or South Africa. And so as a result when there is a shortage, it shorts the market, which has a very strong impact on the price. Avocados, as a California producer have a ready alternative source of supply from Mexico and in some cases from Peru or from Chile. So when in this condition, when California has a shorter crop and comes to the market with less fruit, we can't anticipate that strong uptick in pricing like we can in lemons because there is an alternative source of supply, which tends to just fill that space in the marketplace and you don't see the material impact on the pricing.

Gerry Sweeney -- Roth Capital -- Analyst

Got it. OK. That's helpful. I appreciate it.

Thanks, guys.

Harold Edwards -- President and Chief Executive Officer

Thanks, Gerry.

Operator

[Operator instructions] Next will be Chris Krueger with Lake Street Capital Markets.

Chris Krueger -- Lake Street Capital -- Analyst

Hi, good afternoon.

Harold Edwards -- President and Chief Executive Officer

Hey, Chris.

Chris Krueger -- Lake Street Capital -- Analyst

Can you hear me? I just got a couple of quick ones. If I look out to next years, for modeling purposes, what's a good share count to use now?

Harold Edwards -- President and Chief Executive Officer

Eighteen point two million shares for diluted.

Chris Krueger -- Lake Street Capital -- Analyst

OK. Next, on the rental units that were destroyed by the wildfires last fall. Have they been replaced again? And what the situation was there?

Harold Edwards -- President and Chief Executive Officer

So they are in the process of being replaced and will be replaced by next year. I wouldn't -- I wouldn't factor them in for additional revenue though. However, because the ones that we lost we've been using for the guest worker program that we take advantage of the guest workers that come from Mexico as sort of a strategic asset for our labor pool. So we fully expect them to be back online but will be sort of useful in our H-2A participation.

Chris Krueger -- Lake Street Capital -- Analyst

OK. And my last question is, I know it's a pretty small piece of the business, but can you give us an update on your wine grape efforts and what potentially you're seeing there?

Harold Edwards -- President and Chief Executive Officer

Wine grapes are going great so far. They are -- the costs this year have been just under budget, so we've been pleased with that. The harvest is a little bit behind maybe a few weeks compared to normal, if you will. But we still think everything is on track for this year, a little bit better than breakeven, I think, is where we are and we'll be all of it in this fiscal year.

Mark Palamountain -- Chief Financial Officer

And to look forward, Chris, it looks like we've got another 100 acres that will be teed up for planting going into next year and which will bring our total production to just above 400 acres of plantings. And most of the production that's coming off -- coming online right now are going into very solid contracts at about $1,600 a ton with the wine producers that we're working with currently.

Chris Krueger -- Lake Street Capital -- Analyst

All right. Thank you.

Mark Palamountain -- Chief Financial Officer

Thank you.

Operator

And next will be Vincent Anderson with Stifel.

Vincent Anderson -- Stifel Financial Corp. -- Analyst

Hey. Thanks for yammering me. I have one more. When you think about prior periods where you've seen heat effects like this and where the market is gone and your prior experience as a member of a cooperative and the kind of contract structures that they use, would a period like next year be one where you would be very advantaged in recruiting growers away from a cooperative into your -- into your third-party grower program?

Harold Edwards -- President and Chief Executive Officer

That's a great question, and we'll find out. I'm not really sure that we have the experience with heat like this, Vincent. This is -- it's sort of an event that I, in my experience, have never gone through. I've gone through cold temperatures and freezes, which is probably a very similar situation.

And growers are pretty loyal and are very kind of understanding of the impacts of mother nature. So they're very slow to really beat up the market or in the event that there is a situation where they perceive may be an advantage or a disadvantage between the different go-to-market options that they have. The one thing I would say is that the information that the outside growers get relative to actual performance among the handlers that are competing for their fruit is at best imperfect and oftentimes the actual results aren't known until the end of the season anyway. So when you put it all together, it's very, very difficult to use sort of in an event like this and sort of a clear example of why one handler might be better than another, although we're going to try to use it.

It's not necessarily an event that makes recruiting that much better or easier for us.

Vincent Anderson -- Stifel Financial Corp. -- Analyst

All right. Thank you. That's very helpful.

Harold Edwards -- President and Chief Executive Officer

Thank you.

Operator

And that does conclude the question-and-answer session. I'll now turn the conference back over to Mr. Edwards.

Harold Edwards -- President and Chief Executive Officer

Thank you for your questions and interest in Limoneira. We look forward to updating you, again, in January on our fourth-quarter call. Thank you, again. And have a great day.

Operator

[Operator signoff]

Duration: 53 minutes

Call Participants:

John Mills -- ICR Investor Relations

Harold Edwards -- President and Chief Executive Officer

Mark Palamountain -- Chief Financial Officer

Farha Aslam -- Stephens -- Analyst

Vincent Anderson -- Stifel Financial Corp. -- Analyst

Eric Larson -- Buckingham Research Group -- Analyst

Gerry Sweeney -- Roth Capital -- Analyst

Chris Krueger -- Lake Street Capital -- Analyst

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