Sweet or unsweet?

Sweet or unsweet?

Just as it was putting its house in order, Alico was hit with news that the state plans to buy U.S. Sugar, its biggest customer. It's just one of the challenges Dan Gunter faces as Alico's new chief executive.

COMPANIES by Jean Gruss | Editor/Lee-Collier

What happens when the state buys your biggest customer?

When Florida Gov. Charlie Crist announced in June the state's plan to buy U.S. Sugar's operations for $1.75 billion, it was such a well-kept secret that Alico executives were as surprised as everyone else.

U.S. Sugar is Alico's largest customer, accounting for 21% of the company's $134.8 million in operating revenues in fiscal 2007. While the acquisition plan was touted as a coup for environmentalists, the impact on Alico and other agriculture businesses on the region will be substantial.

The state has proposed buying nearly 300 square miles of prime agricultural land south of Lake Okeechobee, including 200 miles of railroad, a sugar mill, a refinery and citrus-processing plant.

It's still not clear what the state will do with all the assets it plans to buy. The state is seeking land to restore the flow of water from Lake Okeechobee into the Everglades and doesn't want to operate sugar- and citrus-processing plants.

With the credit markets in disarray, it's not certain any deal will occur soon.

Initially, the plan calls for the South Florida Water Management District to issue bonds to pay for the acquisition. But Charles Dauray, a member of the governing board of the district, says if a request for bids were held today it's unlikely any investment bank would take the risk to underwrite the bond offering because of the credit crisis.

That and the fact that any deal would be implemented over six years gives Alico executives time to consider their options. "We're not overly nervous," says Dan Gunter, president and CEO.

That deal isn't the only challenge that lies ahead. Alico owns about 136,000 acres in Collier, Lee, Hendry and Polk counties on which it grows citrus, sugarcane, vegetables and cattle. Disease and high commodity prices threaten the profitable citrus business and deals the company had to sell land for residential and commercial development during the boom are looking more tentative.

But if anyone can overcome these challenges, it's Gunter. The former executive director of the Florida Department of Citrus got his business training as an executive with Lykes Brothers.

He holds degrees in business management from the University of Arkansas and a Ph.D. in agricultural economics from the University if Tennessee. He is the first chief executive officer of Alico who is not related to the family of Ben Hill Griffin Jr., who acquired the company in 1972. Although heirs to the Griffin family still control the majority of the company's shares, Gunter says he's looking out for all shareholders' interests.

Sugar is sweet

Invoking the names of Harry Truman and Teddy Roosevelt, Crist stood at the edge of the Loxahatchee National Wildlife Refuge in June to announce one of the largest environmental land acquisitions in Florida history. The water management district would purchase 187,000 acres of agricultural land owned by U.S. Sugar, Crist promised.

In the three-page news release detailing the announcement, only a few sentences referred to the economic impact of the decision. But the impact on Alico, which is based east of Fort Myers in LaBelle, and the surrounding communities is substantial. "They buy all our sugarcane and a lot of citrus," says Gunter.

Still, the deal calls on U.S. Sugar to continue farming on its lands for the next six years to smooth the transition to state ownership. That's plenty of time for Alico to come up with a plan.

What's more, Gunter says it's likely another company will fill the void left by U.S. Sugar. He says it's too early to speculate who that might be or even if Alico might buy U.S. Sugar assets.

Alico has been phasing out its sugarcane production because it's not as profitable as the other crops it grows. For the nine months ending June 30, Alico reported $101,000 gross profit on $9.3 million in revenues from sugarcane. By contrast, its citrus operations generated $13.1 million in gross profits on $41 million in revenues.

In the place of sugarcane, the company started growing vegetables such as green beans and sweet corn, though so far vegetables have shown weak results from a profitability standpoint. And Gunter concedes that it's not feasible to replace 13,000 acres of sugarcane with vegetables, which means some land may remain idle.

In the meantime, Alico has mastered the citrus business over the years and its operation is highly profitable despite a 28% decline in citrus prices so far this year and the rising cost of fuel and fertilizer.

In February 2006, Alico acquired Bowen Brothers, experts at harvesting, hauling and marketing citrus. "Florida still has a huge advantage" over competitors. Shipping costs have hurt imports from Brazil and Florida has established its brands through marketing and advertising. "We're still bullish on citrus," Gunter says.

So far, citrus-killing diseases have been manageable, in part because of careful monitoring and geographic dispersion of its groves.

More than ag

In fact, Alico has been shifting its focus more broadly to land management from agriculture. "We are transitioning this company," Gunter says. "It's kind of a subtle thing."

Alico executives are poring over every parcel of its 136,000-acre inventory. "We're looking to entitle properties that are in the path of change," Gunter says. However, he acknowledges that for now it looks like less than 1% of its holdings would be suitable for residential or commercial development. "We're not making any plans that are dependent on a quick recovery in real estate," Gunter says. "I'm not optimistic we'll see a quick turnaround."

Alico is keeping a close eye on deals worth $138.4-million it has with Orlando-based residential developer Bobby Ginn. Because of permitting complications and the real estate downturn, Alico restructured the notes on the sale of land in Lee County on terms more favorable to Ginn.

But word quickly spread this summer that Ginn had defaulted on a $675 million loan to Credit Suisse on an unrelated project. Because each Ginn project is financed separately, the deal with Alico seems safe.

"They have been paying per contract," Gunter says. "We have no reason to believe our deal is not going to continue." The Ginn land is located near Southwest Florida International Airport and Florida Gulf Coast University in Fort Myers. "Those properties are in the path of change," Gunter says.

Despite this challenge, Gunter says Alico is looking at opportunities, though he won't say exactly what those are. "We are always looking for opportunities to diversify in agriculture and real estate," Gunter says. "We do have an appetite for growth." Diversification is the key to smoothing out earnings volatility, he says.

Alico has access to $175 million from Farm Credit of Southwest Florida and it has settled a long-running dispute with the Internal Revenue Service for $64.5 million. Alico had estimated its tax liability could have been as high as $82.3 million and had set aside enough to cover the settlement, so that uncertainty was removed earlier this year.

In addition to the IRS settlement, Alico scrapped plans for an ethanol plant and discontinued operating Alico Plant World, an unprofitable greenhouse operation that grew vegetable seedlings.

Investors have been well rewarded so far this year. The company's stock (symbol: ALCO) recently traded at $46 per share, an increase of 26% for the year to date. That contrasts with a 17% decline for the Standard & Poor's 500-stock index for the same period. Its five-year average annual return on equity is 4.34%, more than one percentage point better than its industry peers, according to Thomson Reuters.

Some of the Griffin heirs control just over 50% of the shares through Atlantic Blue Group. John Alexander, who retired as chief executive officer this year but remains chairman of the board, is married to one of the Griffin heirs.

The concentrated ownership means Gunter can focus on building the company's value rather than generating enthusiasm for the stock. He says shareholder presentations can be distracting and don't increase the share price.

Risky ethanol

If you think ethanol is a viable alternative fuel today, consider Alico's short-lived experiment.

Even with the possibility of more than $35 million in federal and state government grants, Alico's board of directors decided building an ethanol plant in Florida was too risky.

The idea was to turn citrus waste and yard clippings into energy. "This is technology that had never been proven in a commercial application," Gunter says.

Alico had been working with a Los Angeles-based company called New Planet Energy to produce cellulosic ethanol. But Alico decided not to be the guinea pig, even with $35 million in subsidies.

"We're a more traditional kind of company," Gunter says. Translation: We want to show real "green" to our shareholders.

REVIEW SUMMARY

Company. Alico Inc.

Industry. Agriculture

Key. Diversification is the key to smoothing out earnings volatility.

BY THE NUMBERS

Alico Inc.

INCOME STATEMENT Fiscal YTD

6/30/07 6/30/08 %change

Operating Revenue

Agricultural operations 121,655 107,102 ‑12%

Non-agricultural operations 2,410 2,009 ‑17%

Real estate operations 3,329 3,870 16%

Total operating revenue 127,394 112,981 ‑11%

Operating expenses

Agricultural operations 94,571 94,023 ‑1%

Non-agricultural operations 300 448 49%

Real estate operations 1,398 1,727 24%

Gross profit 31,125 16,783 ‑46%

Corporate G&A 9,760 10,365 6%

Profit from continuing operations 21,365 6,418 ‑70%

Other income and expenses

Profit on sales of bulk real estate:

Sales 1,454 817 ‑44%

Cost of sales 177 0

Profit on sales of bulk real estate, net 1,277 817 ‑36%

Interest & investment income 5,553 7,437 34%

Interest expense ‑3,851 ‑4,969

Other 199 82 ‑59%

Total other income, net 3,178 3,367 6%

Income from operations before income taxes 24,543 9,785 ‑60%

Benefit from or provision for income taxes 35,199 ‑453

Income or loss from operations ‑10,656 10,238

Losses from discontinued operations, net of taxes ‑282 ‑927

Net income or loss ‑10,938 9,311

BALANCE SHEET

Assets 6/30/07 6/30/08 %change

Current assets:

Cash and cash equivalents 31,599 43,278 37%

Marketable securities available for sale 46,511 38,778 ‑17%

Accounts receivable 14,848 12,028 ‑19%

Federal income tax refundable 5,696 5,580 ‑2%

Mortgages and notes receivable 3,832 3,985 4%

Inventories 27,232 20,651 ‑24%

Current deferred tax asset 2,661 3,163 19%

Other current assets 2,719 2,040 ‑25%

Total current assets 135,098 129,503 ‑4%

Mortgages & notes receivable, net of current portion 6,688 4,545 ‑32%

Investments, deposits and other 3,237 3,772 17%

Deferred tax assets 3,805 6,354 67%

Cash surrender value of life insurance, designated 7,656 7,331 4%

Property, buildings and equipment 178,968 179,180 0%

Less: accumulated depreciation ‑50,422 ‑54,229

Total assets 285,030 276,456 ‑3%

Current liabilities

Accounts payable 1,943 4,118 112%

Income taxes payable 9,114 10,966 20%

Current portion of notes payable 1,350 1,351 0%

Accrued expenses 4,425 4,464 1%

Dividend payable 4,048 2,027 ‑50%

Accrued ad valorem taxes 2,105 1,374 ‑35%

Other current liabilities 2,153 1,630 ‑24%

Total current liabilities 25,138 25,930 3%

Notes payable, net of current portion 134,534 119,260 ‑11%

Deferred retirement benefits, net of current portion 5,098 5,328 5%

Commission and deposits payable 4,265 4,327 1%

Total liabilities 169,035 154,845 ‑8%

Total stockholders' equity 115,995 121,611 5%

Total liabilities and stockholders' equity 285,030 276,456 ‑3%

Source: Securities and Exchange Commission