Calavo Growers, Inc.

Good afternoon and welcome to the third quarter 2022 Calavo Growers Earnings conference call and webcast. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star zero. I will now turn the conference over to your host, Julie Kegley, Investor Relations for Calavo. Julie, you may begin.

Good afternoon and thank you for joining us today to discuss Calavo Growers financial results for the third quarter of 2022. This afternoon we issued our earnings release and it is available in the investor relations section of our website at ir.calavo.com. With me on today's call are Brian Cooker, President and Chief Executive Officer and Shawn Munsell, Chief Financial Officer. We will begin with 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 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. A discussion of the factors that could cause a material difference in our results compared to these forward-looking statements is contained in our SEC filings, including our reports on Form 10-K and 10-Q. As you saw in our earnings press release, we have begun our new segment reporting structure. What was the fresh segment is now known as the grown segment. The foods and RFG segments have been combined into the new prepared segment. In our discussion today, we may refer to the prior segment names as we make the transition. 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. As we look back at Q3, we continue to make meaningful operational and structural progress. Compared to Q3 last year, gross profit more than doubled to $18.5 million. Net income improved to 7 cents per share compared to a loss of 74 cents a share last year, and adjusted EBITDA improved by more than $7 million. Our liquidity and capital ratios all improved, and we filled very key leadership roles with talent that allows us to fight above our weight class. On a sequential basis from the second quarter, gross profit declined, while net income was up $0.08 per share versus the loss of a penny or share in Q2. Adjusted EBITDA was down by $4.6 million. Unfortunately, one tough month of commodity volatility and continued input cost pressure in our guacamole product line masked tremendous improvement in the fresh cut portion of our prepared segment. formerly known as RFG. The former RFG business achieved almost 8% gross margins in Q3, and I'm excited about the structural changes in place to manage that business within everyday intensity. Temporary avocado price volatility affected both the grown and prepared segments. Let me explain those impacts a little further. First, in the grown segments. The grown segment finished the quarter modestly down compared to Q3 last year. Just think about the work that we did during the quarter to deliver gross profit that finished basically flat with Q3 of 2021. Avocado volume was down almost 20% due to a combination of short supply from Mexico and our intentional approach to mitigate losses as we were selling through high-priced inventory. Mexican import volume also was down 34% versus the second quarter and 35% year-over-year for the quarter. But we managed to mitigate those declines by increasing our sourcing from California, Peru, and Colombia. During July alone, market prices decreased over $20 a carton from the beginning of the month to the end of the month. Yet through aggressive inventory management and minute-by-minute attention to sales prices, our team managed to squeak out positive gross profit during July and achieve our overall targeted margin per case for the quarter. Overall for the quarter, gross profit per carton was still around $3.65. However, with the market conditions and constraints on available fruit during the quarter, we simply did not have enough sellable volume to increase our gross margin in grown sequentially from Q2. I'm proud of how we manage commodity volatility in the market and already look forward to more normal conditions in Q4. As evidence of our ability to react quickly to temporary changes in the market, by August, we already recovered from the July decrease in avocado market prices, and our margins have rebounded from the July lows. We expect the grown segment to return to realizing margins per carton within a normalized range this quarter. but there is likely to be near-term volatility associated with volume. With the price of fruit as high as it was at the beginning of the third quarter, we did see the retail trade pull back on promotions and shrink display sizes. In August, supply and demand started rebalancing, and we are pushing volumes where appropriate while tracking toward our overall targeted gross profit per carton. In August, we opened our Jalisco facility for exports to the US market. We have another option to help us manage market exposures. With our network of grower partners, we now have access to the largest global GAP-certified acreage in Alisco. This broadens our sourcing capability, has provided additional volume with which to promote and drive sales, and provides us with optionality and flexibility, which should benefit the business both in the short and the long term. As mentioned, the prepared segment also felt pressure from higher avocado costs. As we indicated during our call last quarter, our guacamole business within the prepared segment, formerly known as the food segment, was pressured by the cost of fruit. Input costs in Q3 were up 50% compared to last year. And while we implemented price increases, we could not keep up with the rising cost of inputs. Volume was down approximately 19% versus the prior year due to price and margin pressures and lingering COVID demand softness in the international markets. However, input costs consistently declined over the course of the quarter following the peak in May. We are now selling for positive gross margin and expect margins to strengthen as we work through our frozen inventory. We also expect our alternative sourcing process improvement initiatives, and price increases to support gross margin in the fourth quarter. As the grown segment and the guacamole product line pressured adjusted EBITDA in the quarter, I am most excited about the progress in our prepared segment. Despite facing challenges, the prepared segment performed very well in Q3, showing an $11 million gross profit improvement year over year in addition to sequential improvement over Q2. We achieved 5% gross margin in prepared, but that included a nearly 8% gross margin within the fresh cut product line, formerly known as RFG. We continue making steady progress toward our goal of 10 to 12% gross margin for the former RFG segment. Again, this improvement is structural and throughout the entire P&L. Pricing, cost mitigation, labor productivity, yield enhancements, and transportation savings all improve gross margins. Our team in PREPARED is managing this business with an hour-by-hour urgency, and the improvement in this segment is both confidence and momentum building. In addition, pricing and efficiency improvements from Project UNO gain steam. capturing $15 million in the third quarter and approximately $30 million of benefits here to date. I'd like to wrap up my remarks today by saying how thrilled I am to have our leadership team analyzed and in place. We recently filled three key roles on the management team. including Sean Munsell, who began in June as Chief Financial Officer, Danny Dumas, who started in July as Senior Vice President and General Manager of Grown, and Helen Kurtz, who joined in August as Senior Vice President and General Manager of Prepared. Each one of these individuals have been involved in broad international businesses. Nothing at Calabo is too big for these seasoned leaders. And even in a short period of time, I've seen their growth and profit orientation positively impact our business and team. We have the right people in these important roles. With the passion, energy, and competitiveness of a full team driving Calabo, We're positioned to take our performance to the next level and demonstrate that progress through continued sequential profit improvement. With that, I'll turn the call over to Sean Munsell to report on the financials.