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.