Calavo Growers, Inc.

Good afternoon and welcome to the second quarter 2022 Collavo 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, Julie Kegley of Investment Relations for Collavo. You may begin.

Good afternoon and thank you for joining us today to discuss Colabo Grower's financial results for the second quarter of 2022. This afternoon we issued our earnings release and it is available in the investor relations section of our website at ir.colabo.com. With me on today's call is Brian Cooker, President and Chief Executive Officer of Colabo. We will begin with his prepared remarks and then 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 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 improvements in revenue and operating profit, are also forward-looking statements. Our actual results may vary materially from those contemplated by such forward-looking statements. Discussions 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 reports on Form 10-K and 10-Q. With that, I will now turn the call over to Brian Cooker.

Thank you, Julie, and good afternoon, everyone. We appreciate you joining us today. Let me start off right away with how proud I am of the progress we made and the sequential quarter-over-quarter improvement we delivered in Q2. We are focused on the right initiatives and making the necessary changes in our organization to deliver results. In fact, the quarter has been very busy in terms of improving our business and our future. I'd like to highlight four of the most significant accomplishments. In April, we announced plans to reorganize our leadership and business segments to clarify roles, authorities, and accountabilities. As a result, we believe we have strengthened our ability to execute Project UNO and to realize resulting customer service and efficiency improvements. We streamlined the organization into two reporting segments, grown and prepared. The grown segment will consist of fresh avocados, tomatoes, and papayas. The prepared segment is a combination of our previously disclosed RFG segment and food segment aggregated together. We expect to report under the new segment structure beginning with our third quarter results. Secondly, we launched a brand refresh of the company logo, tagline, brand personality, and website to support Colabo's one company vision. The new branding reinforces our core values, which can be found on our careers page at collabo.com, and allows us to consistently present our broad portfolio to the market under one name. Now and into the future, we will have connected the dots for our customers and the trade so they can clearly see the power our consolidated business brings to the produce aisle. Thirdly, we continue to advance Project UNO with initiatives such as product and ingredient optimization, procurement and labor effectiveness, freight consolidation, and administrative synergies across the business. We made progress up and down the P&L by driving efficiencies, improving controls, managing inflation, and importantly, raising prices at a continuously increasing pace. Finally, and the most important accomplishment in the eyes of our team, we translated the initiatives and projects to the P&L and are reporting tangible, visible progress in our financial results. We've delivered continued sequential improvement for the third quarter in a row. As a highlight, from the first quarter to the second quarter of this year, gross profit improved by $8.5 million, Net loss improved by 3.7 million, or 21 cents per diluted share. And adjusted EBITDA improved by $7.9 million. Let's dig a little bit deeper into our segment results. In the fresh segment, for almost the entire quarter, supply was constrained and the cost of fruit was historically high. We serviced accounts and kept our customers supplied by leveraging our sourcing expertise and our inventory management processes to meet the needs of our market. Though fruit costs were high, given extremely constrained supply coming out of Mexico, our price increase covered these higher fruit costs, inflation of other input costs, and modest negative currency effects, leading to a higher gross profit per case compared to both Q1 of this year and Q2 of last year. For context, Even considering the headwinds in supply cost and currency, we improved our average gross profit per case of avocados compared to Q1-22 and Q2 of last year by $1.50 per case and $1.30 per case, respectively. As a result, total gross margin dollars more than offset the 13% volume decrease caused by lower available export volume from Mexico. As a note, our market share was flat year over year and versus Q1 22, and our decrease in volume sold was consistent with the decrease in total exports from Mexico. Turning to our RFG business, I'm proud of our team's daily focus on execution. We have seen improvement in nearly every one of our key performance indicators. We increased pricing by 3% compared to Q1 of this year and by 6% compared to Q2 of last year. Our customer fill rate continued its upward trend, reaching an industry-leading 99% by the end of the quarter, up from a very solid 96% in the first quarter of 2022. Simultaneously with improving order fill rate, we decreased customer and consumer complaints by over 17% compared to Q2 last year, and by 8% versus Q1 this year. On materials cost, we managed to temper inflation through e-sourcing strategies and production yield programs as part of Project UNO. Labor has also improved. Through employee engagement plans, we improved production staffing levels to 96% of required positions. Now that our facilities are fully staffed, Our training and efficiency initiatives resulted in labor productivity gains of 9% sequentially from Q1. In terms of resource allocation, we eliminated more than 30 inefficient new product development projects and repurposed those resources to our product and ingredient optimization teams. The sum of our accomplishments and initiatives positively impact RFG's performance in the quarter. Our segment gross profit percentage improved sequentially from negative 1% to positive 2%, and our margins have continued to improve as we progress through the third quarter. Transitioning to our foods business, we are experiencing some challenges. The same constrained supply situation that pushed fresh avocados to historically high prices has had an adverse impact on our processed avocado and guacamole operations. The price of fruit used for processing nearly doubled versus the same time last year. While our team raised prices with contract customers on three separate occasions during the quarter, we couldn't keep up with the increase in cost of fruit. As a result, gross margins for our food segment, even after our series of price increases, decreased sequentially Q1 to Q2 of 2022 from $2.2 million to $1.3 million. We do see some light at the end of the tunnel for our guacamole and processed avocado products. During the quarter, we expanded our sourcing operations for processed fruit and acquired some volume from new sources that have helped slow the inflationary pressures. Immediately, we have incorporated these new options into our everyday supply chain. Additionally, customers and consumers have been receptive to price increases. And we are seeing retail prices on the shelf continuing to increase with little impact on sales velocities at present. Proactively, we eliminated products that either no longer made sense for us to produce or for the customer to sell. And even looking internally, we continue to evaluate our own processes to improve labor and throughput efficiencies at our foods facilities. Finally, and potentially the biggest impact to the cost of our fruit and margin headwinds in our foods business, the summer avocado crop in Mexico should arrive in mid-July. We expect the new supply will provide some relief to overall prices, which should also flow through to our margins in the food segment. our food segment remains an important piece of our overall business and strategy. Although pressured, this segment is still gross profit positive. We continue to see strong demand for both processed avocado and prepared guacamole at retail and in food service due to the ongoing consumer trends for healthy, flavorful foods. Additionally, the business provides a strategic advantage to our avocado portfolio as it allows us to buy the full crop from growers. For example, when we take an acre of fruit, we allocate retail-grade quality fruit to our fresh segment and other grades to our food business. They're providing an outlet for the entire harvest. In summary, regarding the foods business, we will continue working every line in this segment's P&L to drive a fair return on sales. That wraps up our segment discussion. Now let's move on to the balance sheets. We continue to maintain a healthy balance sheet. We paid down over $22 million in debt in the quarter and ended April with $48.1 million of total debt, which included $41.9 million of borrowings under our line of credit and $6.2 million of long-term obligations and finance leases. Unrestricted cash and cash equivalents totaled $2.3 million as of April 30, 2022. Total available liquidity at quarter end was $15.9 million, including unrestricted cash, investments, and available borrowings under the facility. We believe our existing liquidity position is sufficient for our working capital needs and investment plans as we continue to implement Project UNO and drive performance improvements across the business. Capital expenditures for the year are projected to total approximately $15 million, which is consistent with fiscal 21. However, we are being judicious in our capital allocation. We are prioritizing those projects which have an extremely quick payback or provide a significant structural advantage in the future. We will not spend the capital unless we are satisfied that the return is right and projects can be executed crisply and cleanly. For a moment, I would like to look ahead to the next several quarters. We expect to see continued sequential improvement in our operating results while generating positive cash flow from operations. In modeling our business, our investors should remember several things. With respect to Project UNO, we announced Project UNO in the third quarter of 2021 and targeted approximately $70 million of annualized EBITDA improvement within two years. As of the end of Q2, we achieved approximately $13 million in positive impact. Last quarter, we further indicated that investors should think about Project UNO benefits in terms of sequential, gradual improvement over the next seven or so fiscal quarters. While inflation headwinds have been more significant than we originally anticipated, we expect steady progress will continue subject to seasonality and that the project uno benefits will be predominantly recognized in our rfg business as it relates to rfg and we start thinking about the next fiscal year our rfg business is progressing toward our target gross margin range of 10 to 12 percent by the end of 2023 however Also remember, RFG has some seasonality, and profits in the back half of the year usually outperform the front half of the fiscal year. In relation to avocados, demand continues, and the cost of avocados from Mexico are historically high. As supply normalizes, we fully expect avocado prices in the market to decrease. Even as we anticipate supply and prices To return to normalized levels, we expect our sourcing initiatives and the breadth of our customers across all distribution channels and all product sizes will allow us to maintain gross margin per case within the historical range of $3 to $4. Specifically for our foods business, we are still seeing cost pressure for fruit used as ingredients in our guacamole and other prepared foods. We will continue to increase prices across our customer portfolio in our food segment. However, we believe the high prices of raw materials will continue well into the third quarter. And therefore, food segment margins will remain compressed. And lastly, as an overall outlook on our business, we expect inflation to continue. And we plan to combat higher costs with all the tools at our disposal, including pricing actions across the portfolio, throughput and labor productivity initiatives, and sourcing programs to leverage our scale. Now, finally, as one more update item before I conclude my prepared remarks, Colabo is conducting a search for a new chief financial officer, and we're working with an outside search firm as well as within our own professional networks to identify candidates. Interviews are already underway. While not one single initiative, project, or program has been postponed, slowed, or halted while the CFO chair is open, we are moving with great speed to place a successor. However, finding the right person, not speed, is our primary goal. And I'm confident we'll do that given the strong slate of candidates we're interviewing. In summary, I'm proud that we are controlling what we can control, and our initiatives and efforts are showing up as sequential improvements in our operating results. I'm happy that our team has embraced change and is driving our performance improvement with an everyday relentlessness. However, while happy and proud, I am not, and our team is not yet satisfied with our progress. We expect and hold each other accountable for continuous, sequential improvement and will not rest. We strive to be better today than we were yesterday and better tomorrow than we are today. We also know that while we have several metrics that are important to the health of our business, progress in our minds is measured by what shows up in the financial statements and how fast we are driving cash flow in our business. That concludes my prepared remarks. Now I'd like to turn the call back to the operator for questions.