Calavo Growers, Inc.

Good afternoon and welcome to the first quarter 2022 Colabo Growers Earnings Conference call and webcast. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. I will now turn the conference over to your host, Larry Clark, Investor Relations for Colabo. Thank you. You may begin.

Good afternoon, and thank you for joining us today to discuss Colabo Grower's financial results for the first quarter of 2022. This afternoon, we issued our earnings release, and it's available in the investor relations section of our website at ir.colabo.com. With me today on today's call are Brian Cooker, President and Chief Executive Officer of Colabo, and Mariela Matute, Chief Financial Officer. We'll begin with their prepared remarks and then open the call for your questions. Before we begin, I'd 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 expected improvement in revenue and operating profit, are also forward-looking statements. Our actual results may vary materially from those contemplated by such forward-looking statements. Discussion of the factors that could cause a material difference in our results compared to these forward-looking statements are contained in our SEC filings, including our reports on Form 10-K and 10-Q. With that, I'll now turn the call over to Brian Cooker. Brian?

Thank you, Larry, and good afternoon, everyone. We appreciate you joining us. It's my pleasure to speak with you today in my first earnings call as President and CEO of Colabo Growers. I joined the company February 1st and six weeks into this new role, I'm confident that I made the right decision at the right time with the right company. I'm impressed by the talent of the Colabo team and their willingness and desire to drive our financial performance and achieve our potential. I'm encouraged by the early results of Project UNO and that we are on track to reach $70 million in EBITDA improvement in 2023. Most importantly, I'm excited at our opportunity to improve month by month and quarter by quarter. We carry a mantra forward, be better today than yesterday and better tomorrow than today. We can see the impact of that mindset by the sequential improvement in gross profit, adjusted EBITDA, and adjusted net loss from quarter four to quarter one. We are making solid progress toward our goal of improved profitability, but challenges still remain. We must address these challenges in multiple ways in order to continually enhance our operating performance. As it relates to headwinds, the pandemic is becoming endemic, and the inefficiencies associated with labor shortages have eased, but they have not been eliminated. We must remain vigilant managing our labor costs, having them become more stable and predictable. And we'll do this through productivity improvements, process initiatives, and further automation where possible. Higher freight costs have continued to be an issue. To address this for the first time, we launched an RFP for freight and consolidated our transportation under one national program. This should result in substantial savings and reduce volatility as we implement our new carrier agreements throughout the balance of the year. Although stabilizing and reducing costs are important, I'm excited that we have also made good progress on our pricing initiatives to date, as customers recognize the need for price increases in this higher cost environment, but also appreciate the value we provide in the marketplace. Additionally, we are working with each of our customers to ensure they have the right product mix, and this will support our continued efforts in SKU rationalization. Another structural component that is part of Project UNO relates to asset utilization. Last fall, we announced the closure of our Florida RFG plant and spent November and December consolidating operations into our Georgia facilities. The Georgia facility is one of our newer plants and required substantial reconfiguration to accommodate the volume, so it is taking a little longer to reach optimal throughput. It is also worth noting the consolidation began during the Omicron surge in the southeast when labor supply was especially problematic and certainly caused short-term inefficiencies during our December transition. In fact, We have already seen labor stabilize and corresponding productivity improvements at our Georgia facility in both January and again in February. Lastly, and importantly, Project UNO has helped shape our reality of One Colabo. Over the course of the last three months, human resources, finance and accounting, and transportation have all consolidated into shared service centers that enable the entirety of Colabo to operate more efficiently. we will continue deploying best practice sharing and central services where they make sense to drive improved productivity across Colabo. Despite the ongoing challenges that our industry is facing, we are navigating them head on. We are optimistic that with the plans we are implementing, we're well on the road towards improved profitability and stability in our business. Now, Let me take a few moments to talk about our business segments. In our fresh segment, avocado prices were 64% higher compared to the first quarter of 2021. Lower available supply in Mexico drove prices higher and also impacted our volume during the quarter, which was down 12% year over year. Our gross profits were down year over year, mainly due to 1.6 million adverse swing in foreign currency rates. Excluding the impact of foreign exchange, gross profit per carton for the first quarter of 2022 was $3.31, which was 54 cents a case higher than the prior year period. Additionally, as a sign of continuous improvement, fresh gross profit also improved by 4.3 million from the fourth quarter of 21, as higher prices more than offset the cost pressures that we've been experiencing. In our RFG segment, our overall operating performance improved, with the exception of our Georgia facility. Sales increased 6% compared to Q1 last year. Our gross margin loss widened slightly during the quarter, as increased pricing and improved product mix were offset by headwinds from commodity cost inflation, higher labor turnover that led to increased costs, and some short-term ramp-up costs as our Georgia facility transitioned Florida customers. However, excluding our Georgia facility, RFG's gross margin improved by $700,000 from the same quarter as last year and $150,000 over the fourth quarter of 2021. To continue improving sequential results at RFG, we are passing along higher input costs to our pricing initiatives with our customers, driving labor productivity through process and automation, revising our raw product sourcing procedures to stabilize input costs, and our rationalizing SKUs where it makes sense. In our food segment, sales increased 4% year over year due to improved retail demand. However, increased fruit and labor costs pressured gross profit for the segment, which was down $2.5 million from the first quarter of 2021. but up 300,000 from the fourth quarter of 21. We are currently working with our customers on pricing, which we expect to see reflected in our results in the coming quarters, and are constantly assessing our raw product sourcing model and techniques to stabilize costs and improve margin. Let me just briefly touch on two items that are not part of our quarterly results but are worth mentioning. As you are probably aware, the USDA temporarily banned the export of avocados into the United States from the Michoacan region of Mexico, effectively halting shipment of avocados into the country. Fortunately, the ban lasted only seven days, and it occurred the week after the Super Bowl, which is typically a slow week for avocado sales. We had enough inventory to continue servicing our customers, and because the ban was resolved quickly, the effects on our customers and our business was minimal. The disruption to the supply chain has caused choppiness in the volume of the fruit coming into the US, and that could lead to temporary shortages. However, we expect this choppiness to resolve within the next few weeks. The second area to discuss relates to avocado supply. As we move from the Michoacan harvest into the California crop, we anticipate prices to remain firm and supplies to remain tight. As was mentioned in our previous call, the state of Jalisco was approved to ship fresh avocados into the U.S., and we expect the fruit to enter the country by mid-year. We are looking forward to the added flexibility when managing market dynamics that will come from an additional sourcing region and an additional facility. In the back half of the year, as fruit from Jalisco begins to move into the U.S., our volume should improve, and we have already accounted for that impact in our overall sourcing strategy. Before turning it over to Mariela, I would like to make a few closing remarks. I'd like to thank Steve Hollister for his leadership while serving as interim CEO and for his support as I joined Calabo. Steve was able to shepherd Project Uno and get the ship headed in the right direction, and Colabo is better for it. I'd also like to congratulate Steve on being named chairman of the board. We have a strong, diverse board of directors who take their governance responsibilities very seriously, and it's my privilege to work with Steve and the board to move Colabo forward. As CEO, I want to bring clarity to our organization through a common purpose. with goals and objectives that make us better decision makers and better operators focused on what matters to us and our customers. We will relentlessly execute this focus and the discipline necessary to drive operational and financial improvements. We will put Colabo back on a path of sustainable profit growth with the ultimate goal of generating shareholder value. With that, I'll now turn the call over to Mariella.