Calavo Growers, Inc.

Greetings. Welcome to the Colabo Growers Third Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Lisa Mueller, Investor Relations for Colabo. Thank you. You may begin.

Thank you, operator, and thank you all for joining us today to discuss Colabo Growers' third quarter 2021 financial results. This afternoon, we issued our earnings release, and this document is available in the investor relations section of our website at ir.colabo.com. I'm here today with Steve Hollister, Interim Chief Executive Officer of Colabo, and Sara Aslam, Interim Chief Financial Officer. On today's call, management will provide prepared remarks And then we will open up the call for your questions. Before we begin, I would like to remind you that today's comments will include forward-looking statements under the federal securities laws. Forward-looking statements are identified by words such as will, be, intend, believe, expect, anticipate, or other comparable words and phrases. Statements that are not historical facts, such as statements about our expected improvements in operating profit, are also forward-looking statements. Our actual financial condition and results of operations may vary materially from those contemplated by such forward-looking statements. Discussion of the factors that could cause our results to differ materially from these forward-looking statements are contained in our SEC filings, including our reports on Form 10-K and 10-Q. With that, I would now like to turn the call over to Steve Hollister. Steve, please go ahead.

Thank you and good afternoon, everyone. we appreciate you joining us to discuss Colabo Grower's third quarter 2021 results. As you saw from today's press release, after more than 10 years with Colabo, Jim Gibson has retired as CEO. Jim was one of the founders of Renaissance Food Group, which was later acquired by Colabo and has been a key growth driver of our company's expansion in the fresh refrigerated foods category ever since. On behalf of the board and the company, we want to thank Jim for his years of service to Colabo and wish him well in his future endeavors. The board has begun a search for Jim's permanent successor, and I am stepping in as interim CEO. A little about my background. I have served on Colabo's board for the last 13 years, and I know firsthand the company and the people I am joining. In my time on the board, The company has tripled in size and grown to be the avocado industry leader that it is today. Personally, my background in agricultural and commercial finance, as well as agricultural operations and management, have prepared me to lead Colabo during this interim period. While there is no perfect time for a transition like this, given our strong team here, the board and I are confident that we can execute a smooth transition. With such a long and rich history, I am honored to be here leading Colabo, a company that founded an industry. Now, turning to the quarter at hand today, I'll structure my remarks in three sections to provide you with. One, a high-level overview of the quarter. Two, highlights on overall trends we are seeing in the industry. And three, an update on our initiatives to improve profitability. including an update on ESG. Following my remarks, Farah will address our financial results, balance sheet, and outlook, and then we will open the line for questions. Now, moving on to the results for the quarter. Our core avocado business was relatively flat year over year. Lower supply and delays in the expected avocado supply for Mexico and California, along with smaller fruit sizes, negatively impacted sales volume, which was 8% lower than a year ago. As we have noted in the past, we are the best position to deliver margin when we have a wide array of avocado sizes to meet the varied demands of our customers. On the positive side, market demand for avocados remains strong, reflected in the 10% increase in our average selling prices. Our RFG and food segments delivered double-digit sales growth as the recovery from the pandemic continues. While sales were higher, RFG's business was negatively impacted by industry-wide inflation and labor and freight costs, coupled with supply issues in some fresh fruit and vegetables. The increase in sales in our food segment was partially due to higher international sales. However, profitability was lower due to higher commodity prices. Taken together, our third quarter revenues were generally in line with our expectations, but with inflationary pressures still present, gross margin and profitability fell far short of our initial expectations. Looking ahead, the same trends impacting our bottom line have persisted into the current quarter. However, for the second half of the fourth quarter, we anticipate a more favorable environment in terms of avocado supply and pricing. The Peru and California seasons are finished, and we expect a larger crop coming from Mexico in mid-September, which should have a better size distribution. This new crop will also benefit our foods business with a higher prevalence of smaller avocado sizes, which will help with costs. Demand at RFG remains strong, but that business continues to be impacted by all the inflationary pressures that we have discussed. While we are working through pricing improvements to help mitigate those costs, we expect there to be a lag effect, and as a result, we should start seeing a positive impact as we exit the fourth quarter. Now, taking a step back, in the third quarter of 2020, we unveiled our one company initiatives, and I am pleased to share that we have made significant progress on their implementation to date. We have successfully consolidated the organizational structures of our three business segments. Today, we have a centralized leadership team that oversees finance and operations. This allows for better operational efficiency, oversight, and resource allocation. We've also optimized our segments with a unified go-to-market strategy to drive organic growth and profitability. Our highly complementary fresh foods and RFG business segments no longer operate in silos. We have centralized our sales function as Ron Arisa, A produce industry veteran was recently promoted to Executive Vice President of Sales from both Foods and RFG to lead our sales teams as they pursue business development cohesively. As a result, these enhanced synergies provide us with greater visibility across the business and offer a multitude of cross-selling opportunities. Additionally, for our international markets, we are utilizing our Jalisco Packinghouse in Mexico to drive incremental sales. We have also enhanced our employee development program, providing training and opportunity for career advancement, and are using these efforts to identify and mentor talent for future leadership roles. The action we have taken through our one company program, we believe, will lead to long-term success of Colabo growers. While we have made good progress on this front, we are not yet finished. In the third quarter, we launched Project UNO, a strategic review of our business that requires a holistic look at our operations in the face of the changes we see in the marketplace. This profit improvement program is expected to generate additional operating income of approximately $70 million over the next 24 months. Total costs associated with the program are estimated at about $30 million. Through this extensive review of our operations, we have identified potential opportunities for reducing costs and expanding gross margins. Broadly speaking, some of the key opportunities include enhanced commercialization achieved through optimizing our SKUs, our pricing, and customer mix. The optimization of facilities and systems achieved through adjustments in our production, labor, and automation. And finally, sourcing optimization achieved through better distribution and purchasing. We have amazing products of the highest quality, and we are closely analyzing the most advantageous product set that best serves our customers. Ultimately, we want to align our customer and skill set to our most profitable opportunities. Our RFP business has an outstanding distribution platform across the U.S., and we see opportunity to add line extensions to accommodate product sets from our food segments. And it is probably an understatement to say that the impact of COVID has been disruptive to our business. There are new dynamics at play. The shift in the labor force is just one example. And we are working to determine if these shifts are permanent. We're also moving purposefully to match our production with demand and available labor pools. In summary, this profit improvement program is expected to substantially increase our operating profits while delivering new levels of value and performance to our customers. Before I turn the call over to Farah, I want to highlight a few of this year's ESG accomplishments, particularly as they pertain to the environment. We established our first carbon footprint analysis with 2019 as a baseline year. We know that climate change and our ability to mitigate carbon risk is a top priority for investors. And this project sets the stage for us to develop a roadmap to get Colabo a net zero carbon footprint. Given the drought conditions in the West, we undertook a water usage case study since 10 of our manufacturing facilities are in areas with high baseline water stress. Most of the water we use is for washing produce and cleaning our processing equipment. Less than 1% is consumed in our products. So we have significant opportunity to reduce usage through water recycling and reuse processes and technologies. Finally, demonstrating our commitment to the environment, we are ramping up our investments in environmental projects. Over the next four years, we are committing more than $4 million for waste reduction, water conservation, recycling, and energy control projects. They make good business sense with an average payback time of two years. I want to thank our entire team for making these and all our sustainability efforts a reality. With that, I will turn the call over to Farah.

Thank you, Steve, and good afternoon, everyone. It has been a pleasure to work with Colabo's finance team for the last few weeks as interim CFO. The organization has strong capabilities that are supporting Colabo's turnaround and the CFO transition. let us review the quarter and provide some color on our outlook for the business. I'll start with revenue. On a consolidated basis, third quarter revenue was $285 million, which is at the high end of our pre-announcement guidance range and up 5% year over year. This was primarily driven by revenue increases in RFG revenue and our foods segment of 14% and 12% respectively. The nice rebound in both segments reflects improved consumer demand as the country reopens from the pandemic. We also experienced higher international revenue in our foods segment as we expand our efforts outside of the U.S. Revenue in the fresh segment was relatively comparable to the prior year period, as higher average selling prices were largely offset by lower sales volume, which was negatively impacted by the delay in avocado supply from Mexico and California, coupled with suboptimal fruit sizes in that segment, as Steve noted. Gross profit for the third quarter was $7.9 million, down from $30.8 million in last year's third quarter. And our gross profit margin percentage declined to 2.8% compared to 11.4%. The decline in gross profit and margin percentage occurred in all three of our segments, and was due to a number of factors, including inflationary pressures on labor, raw materials, and freight, as well as lower sales volume and less desirable fruit in the fresh segment sales mix, both in quality and sizes. In addition, higher avocado costs adversely impacted gross margins in our foods segment. SG&A expenses improved to $12.4 million from $13.4 million a year ago, mainly due to lower stock-based compensation and a decrease in salary and benefit expense as a result of consolidation initiatives and a reclassification of certain items. Consistent with our pre-announcement, adjusted EBITDA was $1 million for the quarter. Net loss in the third quarter was 13 million, or 74 cents per share. Included in this loss were 13.8 million in total provisions for our Mexican tax liability for the 2011 and 2013 tax years, of which 1.3 million was recorded as other expense, and $12.5 million was recorded as a discrete item in income tax provision expense. Additionally, we recovered $6 million in the quarter from FreshRealm, reflecting the fulfillment of its separation agreement with the company. After adjusting for these and other standard items, adjusted net loss was $3 million or $0.17 per share. Now, turning to our balance sheet, we ended the quarter with $144 million of cash, liquid investments, and available debt capacity. Total debt as of July 31, 2021, including finance leases, was $43 million. We continue to have a strong balance sheet and low leverage, enabling us to invest in our current infrastructure to drive future growth and improved profitability. Now, turning to our near-term outlook, the trends in all three businesses are very dynamic, so we are choosing to refrain from providing revenue or adjusted EBITDA guidance until the environment has stabilized. That said, fundamentals in the business are improving in the fourth quarter compared to the third quarter. Margins in the fresh business were compressed in August due to supply pressure of a large Peruvian crop and tight supplies from Mexico and California. In September, as the harvest of Mexico's main crop gets underway, profit margins are improving. The estimates regarding the size of the Mexican crop vary widely, but barring any weather issues, we anticipate having adequate supplies to meet customer needs. The foods and RFG businesses are facing incremental inflationary pressure on freight, labor, and material costs versus the fiscal third quarter. Year-over-year inflation ranges from 10% to 30%, depending on the product and location. We are working to mitigate the impact of higher costs with pricing and cost savings from Project UNO. More of the benefits of our pricing and efficiency efforts will likely fall to the bottom line in fiscal 2022 versus the fiscal fourth quarter 2021. SG&A is expected to be $13 to $15 million, which is in line with our historical run rate. Interest expense for the final quarter is anticipated to be approximately $300,000. We look for a tax rate to return to approximately 25%. in the fourth quarter. With that, I'll turn the call over to the operator for questions. Thank you.

At this time, we will be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You might press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from the line of Ben Bienvenue with Stevens. Please proceed with your question.

Hey, thanks. Good afternoon, everybody.

Good afternoon.

So I want to ask, as it relates to sort of the critical path from here with your strategic review of Project UNO, what steps you've identified and are putting in place today to improve profitability. And then, you know, when you think about your engagement with third-party consultants, when do you expect to have all of the insights from that review of the business at your disposal to move forward and implement change with the business?

Steve, would you like to start?

Sure, I'd be happy to. Some of the things that we've already identified to help us in the profitability and strategic positioning of Colabo moving forward is our footprint, our physical footprints with all of our existing facilities, not only for Colabo but also with RFG and the Project Zuna where we're trying to figure out how to consolidate as much as possible, how to, a good example for that would be you know, taking a look at RFG, where should we be producing certain commodity mixes where it makes more sense, not only from a production standpoint, but also logistically to take advantage of maybe some freight distribution inefficiencies that we've had to dealt with in the past. That gets to be more of a precious commodity. Labor situations, you know, where do we have a beneficial labor pool as opposed to maybe some that are more stressed? Those are some of the major things that we're looking at right now, too, and it's something that we should do on an ongoing basis anyway. As far as maybe some of the other inputs that we're taking a look at, I mentioned transportation, how to get more efficient in doing our business not only to our customers but also in our company. And so those are some of the things that we're already working on right now. And what was the second half of that question?

When you expect to have the full insights from your third-party consultants at your disposal to move forward with their suggestions for what you might do? Or is that just a fluid ongoing process that comes in and waits?

I wanted to highlight that this is a dynamic process that we're engaging in. We're not waiting for sort of a big tome and then going to work. It's rather we're very actively engaging the entire organization in Project UNO, have identified very specific actions that we plan to take, have assigned project owners to lead the efforts, and we as an organization are going after the cost savings starting yesterday. So we're already on it.

Okay. Okay, great. Drilling down into the business segments, if I look at the results in your cloud of foods segment, I know we've seen periods in the past where margins have been pressured on fruit costs. I suspect it has to do with sizing, but you know, if I, if I look at your cost of goods sold in the segment, um, you know, up materially 44% year over year. Um, but if I just look at like standard size avocados 48, their market prices are roughly flat year over year. So does it have to do with the availability of various sizes of the fruits that you need or pulse that you would use in that product? Maybe help me understand the raw material. components that play there driving that clogged increase to your rear.

Steve, would you like me to take that?

Sure. Most of what we do with the food segment is we use products that would be fairly low on the consumer demand, whether it's number three avocados or some that have a significant amount of scarring, but generally stuff that we don't pack as a number one or number two. And what we found out in Mexico is that from a production standpoint, there is a disproportionate number of fruit available for us to use in the food segment as opposed to that which is going fresh market. So that has led to some problems getting the right sizing, and then also the costs have been a little higher typically. I mean, it's more of a factor of what we're paying for the fruit. Our labor costs don't tend to change that much down in Mexico. Laura, you want to add anything else to that?

Yeah, there's strong Mexican demand in Mexico for a smaller crop, and that pushed up our fruit costs. We'll continue to see that elevated expense in our P&L in the fourth quarter, but we are starting to see some of that inflation begin to mitigate. So as we progress into fiscal 2022, we do expect margins to incrementally improve from current level.

Fair enough. That has to do with the new crop coming in in Mexico. We're basically weeks away from that. And that always leads us to maybe a more beneficial pricing scenario as well.

Okay. Very good. Thanks so much for the color and best of luck.

Thank you.

Thank you. Our next question comes from the line of Rob Dickerson with Jefferies. Please proceed with your question.

Great. Thank you so much. A couple quick questions. I guess, you know, first question is, I mean, it sounds like these pressures continue through into Q4 to some extent until you get to the latter part of the quarter, given, you know, hopefully some changing dynamics in the kind of forthcoming Mexican crop. So, you know, obviously there are going to be some movement or there'll be some movement on the volume side and then hopefully a better product and hopefully there's still better pricing. But just in terms of kind of the other costs, maybe this is more for you, Farah, as you kind of call out freight and labor, it seems like that could continue, and this is what a lot of companies are saying perfectly, that could continue for you through next year, but the hope is that kind of that price relative to crop sizing hopefully gets better next year, so therefore what you're kind of implying and saying somewhat implicitly is that next year would be better, right, but maybe not as good as you would historically because there's just a higher cost inflationary environment in other parts of the business. Is that fair?

I think fundamentally you've got it right, Rob. We are facing higher freight, labor, and material costs. And we are working to pass it through in terms of higher pricing. But we're also taking a look at our own business and working to optimize our SKU mix, rationalize our customer base and product base to improve the margins and ensure that we are producing products at the right place. to really minimize the labor and the freight needs for our production.

Okay.

As we implement those pricing and cost improvement efforts, we expect our margins to recover.

Got it. Okay. Perfect. And then on a segment level, Coming back, kind of the prior question asked, but then to focus on RFG versus foods. You know, RFG was posted a bit of a loss in the quarter, but it would seem as if maybe some of the demand would kind of gradually be coming back just given your channel exposure. So I just want to clarify that, you know, the loss posted in the quarter you know, somewhat a function of just supply, frankly, not meeting that demand, you know, later on top of, you know, other additional cost pressures. And I'm asking really because obviously that one thing with the business is kind of more volume recovery. There's a loss, so it's kind of less about the volume recovery. It's really just more about the near-term dynamic between cost and pricing and supply.

Rob, you're right. We are seeing really strong demand in our RFG business. And really the constraint in that business today is labor and the availability of getting folks into our plants. Now, as we optimize our product mix to reduce the labor component in our product mix, we should see our margins recover.

Got it. Okay, fair enough. This last question, probably more for Steve, because I'm sure people will ask outside of myself. It's just, you know, over the past year or so, you had the The CFO kind of resigned over the summer, but that was off of the prior CFO having left to, if I still know well, it was great. And then I feel like with Jim, Jim seemed to be doing a decent job. Jim was there for quite some time at Colabo overall, helped implement with the board's assistance kind of the go-forward strategy But now I just have to ask that Jim, Jim is leaving, right? Kind of really kind of when you would think things would start to start, you know, would start to pick up a bit. So I'm just, you know, the direct question is just, you know, when you sit down, you know, with the entire board at this point, you know, what is that conversation? Is there an issue with employee retention? Was there something that's not occurring that maybe they had expected to occur? And then how do you prevent kind of that, you know, unexpected departure, you know, to recur going forward? And maybe that's, you know, around vesting plans and overall incentive compensation. So just kind of the broader question of what do we do? What do we do that we now don't have a permanent CEO and a CFO? Sorry to ask directly. Thank you. Well, first off,

From the CFO standpoint, we're right on the cusp of hiring a new CFO. We've been, from the board committee standpoint, for less than a week, and we have identified two applicants. So we're getting close to doing that. The CEO search is underway. Part of what you're, when you were talking, my reception is not out in the field today. So I may have missed a little bit of what you said there, but I think it was more about how are we getting back on track, and is that a fair assumption?

Yeah. You know, if you're close to hiring a CFO, that's great. It's just kind of the broader, you know, question is, you know, if as you go through the search process and look for a new CEO so we can try to limit the turnover, you know, is there a way, you know, let's say, to try to retain that talent for longer than a 12-month period of time.

That's all. I'm sorry. Can you answer that?

Sure. I'm happy to step in. So, Rob, we anticipate hiring a new CEO and new CFO that will serve And really shepherd this turnaround at Colabo and then take the organization to our goal in Project Uno from being a $1 billion company to be a $2 billion company within five years. And we're very confident that we have a robust process and we'll find the right leadership for this organization. And in the meantime, we have a very, very deep, capable organization that is operating well during this transition.

Okay, perfect. Good answer. Thank you so much. I'll pass it on.

Thank you.

Thank you. Our next question comes from the line of Mitch Piniero with Sturdivant & Company. Please proceed with your question.

Hi. Good afternoon. Hey, I have several questions. So, you know, if you go back, you know, historically, you know, obviously Colabo is an agricultural-based company. And if you go back pre-RFG and even through current, you know, the fresh business and even Colabo Foods, has been, you know, while it's volatility, you've been able to control it pretty well. Your profitability has been stable. And, you know, that's, you know, given the underlying growth of the whole category and your leadership and your long years of experience, I'd expect, you know, I'd expect you to be able to, you know, get the avocado business back up and running in a normal fashion. It's the RFG business that I'm beginning to question. You've done really well with it growing from, you know, whatever it was when you bought it, $100 million in sales, and now it's, you know, approaching, well, it was over, you know, approaching $500 million. So that's good. But I wonder whether and how that business really fit on the other side. And not to say that I'm suggesting, you know, we punt that business right now, but is it It might be, is it a business that you can control the volatility to not give guidance? And a lot of it seems centered on RFG. But to not give guidance, it's like this business, it seems like you don't have visibility. And, you know, I remember asking in a prior conference call about, you know, RMG was certain that all the open salad bars that you had were going to be all pre-packaged from here on out because of COVID. But I'm actually finding most of the salad bars where I live to be open-air bars, self-serve. And it's actually – so I'm wondering whether we even know as a leadership there, do we know what's happening in RMG? And so can you talk a little bit about your confidence there and – whether I misspoke on any of my premises.

Yeah, let me give a few comments about RFG. And I was on the board when we were looking at RFG and then ultimately consummated the purchase of it and then the earn out through all of that. And I have a bit of background in produce as well. It's a segment that has always been growing since I've been on the board in the supermarkets. We viewed it as a perfect complement to what we do with the fresh and the food segment. And it's unfortunately, or fortunately, however you want to look at it, it's a dynamic business that is constantly changing as the consumer tastes change and get defined in more areas, maybe slack on some others. And so we have to deal with that along the way. And maybe we haven't done the best in the past at making some of those There's changes, but we are certainly focused on right now. In fact, in Project Uno, that is one of the major things that we are working on. And we've identified a number of areas there where we're probably going to reduce some SKUs that maybe don't fit in with our product set as well as they used to and are probably being produced in areas that are most efficient for us. And so not only just looking at all of our SKUs and maybe reducing some of those, but also where are we going to produce them in a better area that's maybe – and require less freight to get the product in there. And typically in that industry, it's the nickels and dimes that you make, not so much the dollars. And so we're focusing on the things that we can control primarily, which is the cost inputs and the locations, dealing with the staffing shortages that have been present since the COVID era, and also taking a look at the products that we sell and trying to align the pricing that we're getting for our products more in line with what our costs are. So all of those things together are giving us, I think, a much better footprint to move forward with. We're very bullish on that product and that business, and that's why we're trying to consolidate it with our food segment in the one Colabo footprint and move forward with it under that. And I think we're going to see not only benefits from the direct cost that we have into it and the sales price, but also the indirect costs from SG&A to maybe – utilizing resources within greater collabo framework to complement what RFG does. Laura?

Thanks, Steve. So RFG has been impacted by COVID perhaps as much as any business in the food industry. And initially there was some uncertainty regarding how permanent the inflation we were seeing was. And that's why pricing has lagged. Now, when we see that labor is probably going to be inflationary on a more sustained basis, that we're probably going to see higher freight costs both for incoming food and fruit products as well as our delivery costs, that we need to pass those on. And our customers are starting to recognize, yes, those costs are more permanent and that we do have the need to take pricing. And therefore, we are getting it in the market. So we're optimistic about those margins recovering. And as Steve highlighted, our commitment to the business is really anchored in what we view as probably the most on-trend dynamic part of the food industry. Consumers want to eat fresh, they want to eat healthy, and they want the convenience that RFG offers. And that is why we are going to continue to invest to grow this business. Does that help?

Yes, it does. Thank you. Staying on RFG for a second, if Sarah, could you highlight like if so so rfg sales were up about 14 million in the quarter yet we're down about 14 million in gross profit what what were the uh can you talk either percentage wise or dollar wise what some of the buckets of those costs were i mean i know we've gone over labor and freight and some material costs but can you just um somehow work work us down and to the to the How we went from $8 million to minus $6 million, $114 million dollar increase.

You know, for me to tease out those costs individually would be difficult. But we can follow up offline to give you some color. But know that the entire supply chain is facing that inflation. but that our customers are recognizing that we are experiencing very real cost increases in our business. And so therefore, as we go, it's taking some time, but we are getting pricing. And at the same time, our entire organization is very engaged in reducing those costs and They're doing it pretty successfully and are working to deliver the bottom line as quickly as possible.

Two more questions as it relates to Project UNO. Did I hear you correctly where you say you're looking for $70 million of operating income cost savings over the next 24 months with about $30 million in costs to achieve that? Is that correct?

That's correct.

And so 70 is a big number, you know, it was like, you know, that's, that's like a whole year's worth of operating income that you think you can take out and deliver over two years. And, and that's okay. And that's, I'd love to hear, but as that relates, as it relates to, um, you know, you're, you're going to have a new CEO. um you know do we the i know there's a lot of low-hanging fruit no pun intended but there's a lot of you know stuff that you can get on as you said far you know you're working on yesterday and um so is are we sure we got 70 million of savings is that is that uh just ballpark number is that conservative um You know, we're just starting to look at all the various places we can save money, and we're sure that's the right number.

Mitch, we highlighted that this is not just a cost savings. It's a profit improvement. So it's really what we think of a profit recovery plan for Colabo from current levels. So $70 million would get back closer to our historical norms. And that is what gives us confidence because this business has delivered that level of profitability in the past in terms of adjusted EBITDA. And we have very specific numbers across multiple project streams. And that number is very doable in our expectations.

And the final question is it relates to the dividend. So, you know, your cash balance has declined. When you look at the balance sheet, you can see some working capital use, but with spending $30 million on other capital spending with, you know, related to Project Uno, with the decline in EBITDA just from the pressures that you've mentioned, How should we look at the dividend? I mean, you've increased it. I just wonder whether, you know, is it safe? Are we in a period where we're probably not going to see dividend increases at all? I'm curious your thoughts on that.

Our plan at this point in time, and we're going to be addressing the dividend very shortly, but our plan at this point in time is not to change it. We think that the problems that we've got at this point in time are temporary and that we, as we mentioned, we think we can get back to historical levels here within the next couple of years. So we don't think that we need to take any type of action to the contrary against what we've been doing with them. We're comfortable in that amount. I think we can make it back fairly quickly.

I mean, so, I mean, all right. So just looking at my own cash flow projections, I just, it looks like you may have to borrow to pay the dividend. Is that, at least temporarily, is that fair? Or you think you're going to be able to do it with cash flow, free cash flow?

Barbara, you've been a little closer to that than I have.

Sure thing. So it'll depend on the timing of our recovery, Mitch, and the pace. But our view is that we have a strong balance sheet to fund our recovery efforts.

Okay. I appreciate the answers. Thank you very much. Thank you.

Thank you. Our final question comes from the line of Ben Cleave with Lake Street Capital Markets. Please proceed with your question.

All right, thanks for taking my question. I kind of have some similar sentiment to Mitch around the RFG segment and had a question about that segment specifically. Really, I'm curious about the performance that you've seen kind of from across your facilities And if the degree to which you're seeing a meaningful delta in profitability from one location to another, most notably based upon how new the facilities are, the degree of automation that are included within those facilities, and labor costs from one location to another. Can you talk about if there are pieces within RFG that are performing well? and kind of lessons you're taking from any of the locations that may be doing so.

Steve, would you like me to? Take a quick comment on that. Yeah. We constantly take a look at the facilities we have at RFG and have a number of different metrics that we measure them against. And it's obvious that some do perform better than others. And there's a number of reasons for that, too, the cost of labor in certain parts of the country, availability. You know, weather can enter into it, too, in places like down in Florida or Houston, you know, that have been hit in the past. But those are not specifically due to those external factors, I would call them. In our case, a lot of it is just moving the product around, getting raw product into the Southern plants is much easier for us because it's more available and less afraid to get it into places like Riverside or Houston. And so, as I mentioned earlier, we're trying to get our product mix more synchronized with the best places to produce it. And those areas that are not particularly beneficial to us to produce a certain product mix, we either will relocate that to another plant or we will discontinue it. And so that type of thing is helping us. In fact, when you take a look at our facilities and going through the Project 2-0 mix, those type of decisions are some of the ones that present themselves more readily than others. Whereas you may have tried to make something work in the past, and if we don't have the customer mix or the customer base to sustain those plants in their current footprint, then we take a look at other ways to try and accomplish the same thing at a lower cost.

Ben, thanks, Steve. Ben, the key is freight in that equation. So what we are doing is working to minimize inter-plant freight costs to really optimize production to be close to the customer so that we can reduce our expenses for those products.

Okay. All right, fair enough. Well, best of luck navigating all these issues. That does it for me. I'll get back and queue.

Thanks, Ben.

Thank you. Thank you. Our next question comes from the line of Eric Larson with Seaport Research. Please proceed with your question.

Thank you, everyone. I'm sorry I queued in a little bit late. So, I guess my first question is back to Project UNO. Jim sort of announced that program early on in his CEO tenure. So the question I have is, at what stage of completion are you in in the program? Are you a 30% the way through it, 50? Did COVID delay a bit of it? And I guess that's the first question.

Farah, why don't you take an answer?

Sure. So, Eric, Project UNO, we anticipate completing it in the next 24 months and achieving $70 million in profit improvement from current levels.

Yeah, I think Mitch kind of got to that point. So, what is the heavy lifting that's left? Do you have to do IT conversions? I mean, what is... What is in front of you to complete that project within 24 months? What are the big components of that integration?

Sure. So it's going to be implementing pricing, taking a look at our manufacturing footprint, really optimizing our SKU and customer mix, increasing automation in our plants and really focusing on reducing labor and distribution costs in our product cost of goods sold and sourcing more efficiently. Those are some kind of examples of key areas that we are working on.

Okay, so you've got some heavy lifting to do. So when you look at each division, you know, RFG is probably the most labor-intensive. So how labor-intensive is RFG? Employees per million dollars of revenue, is there a way that you can help quantify that for us so that we maybe can understand the magnitude of the labor issue?

Labor is a significant cost in RFG. I can't unpack it in such detail for you on a conference call for competitive reasons. But one of the factors we can address is working to optimize our mix. to reduce the labor component, and that is what we are doing as part of Project UNO.

Okay. So my final question is this.

To add a little bit to that is that the automation portion in RFG is simple.

Ladies and gentlemen, we are experiencing some technical difficulties. Please stand by while we reconnect our speaker, Steve Hollister. Ladies and gentlemen, we have reconnected Steve Hollister. Please proceed.

I'm sorry for that. Oh, that's okay. Steve, it's Eric again. I guess I just have one final question. I guess I'm a little confused about the avocado sizing supply demand. You're saying that the number one, number twos are in short supply, excess supply of the smaller fruit, three and four. You're saying that, you know, there's strong demand in Mexico with a short crop. So it seems to me they would be consuming the threes and the fours. Can you just summarize the issues you're having with sizing again on your avocados and the pricing and the cost of those?

Sure. You know, without getting into actually direct costs and things like that, because that's Again, that's information that I'm sure our competitors would like to know what we're doing. But in Mexico, the number threes are used primarily in Mexico. That is a very popular size for the Mexican population. And unfortunately for us, that's also the size that we use most of all in processing for our foods. And so if you get the sizing off in an orchard, you might end up with more larger sizes and fewer smaller sizes. And so there's much more competition for that, and so the costing goes up. And that's a direct input into what we do in foods. And so you never know. When you're going out and looking at it, you can get a pretty good estimate, and looking at an orchard, the sizing is going to be, but you never really know until you bring it in and process it. And that's the way things are done in Mexico. You're typically bringing the crop in by the acre, not doing any type of size pickings. And so that's how we can sometimes find ourselves on the wrong side of that curve, not only from a sizing standpoint, but also from a pricing standpoint. And it ebbs and flows throughout the year. Historically, that has been the case, where you get periods of real high cost for fruit, and then when it's lower, you try and really make up some volume on that. But we've just, this last year has been more difficult for us than most. Okay.

So there isn't, I may have misheard this then, there's not an oversupply of three and fours, even though that's where the majority of the crop has been coming in?

Well, typically any oversupply that you get of the smaller sizes is just absorbed in Mexico. And so, you know, the crop has been fairly normal in Mexico. I don't think it's been too, you know, it's been off too much. They're such a large producer. But for us, it's been a lack of the sizes that we need to make, and so we've had to use alternate sources for coming up with that product, either using some different sizes that have a higher cost to them or maybe going to different packers and things. Okay, thank you. I'll follow up later with you folks. I appreciate it.

Thank you. Ladies and gentlemen, we have reached the end of the question and answer session. I will now turn the call over to Farah Aslam for closing remarks.

Thanks, Alex. And thanks to all of you for your interest in Colabo Foods. We look forward to sharing with you updates on Project UNO next quarter. Until then, be safe and well. Thanks very much.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.