Calavo Growers, Inc.

Good afternoon and welcome to the first quarter 2023 Calavo 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, Investor Relations for Calavo. You may begin.

Good afternoon, and thank you for joining us today to discuss Colabo Growers' financial results for the first quarter of fiscal 2023. 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 are Brian Cooker, President and Chief Executive Officer, and Shawn Mansell, 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. 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. Our fiscal first quarter results reflect challenging conditions in both segments, but we have taken action and expect that our results will improve as we progress through the fiscal year. In the grown segment, high volumes of Mexican avocados, especially small fruit, combined with still high retail shelf prices, pressured wholesale prices and margins more than anticipated during the quarter. While we expected industry avocado volume to increase during the quarter, we did not anticipate prices and margins to contract as much as they did. The average case price in our first quarter fell to about $28 versus around $34 in the fourth quarter and $43 in the prior year quarter. We also expected prices and margins to improve approaching the Super Bowl. Although conditions did improve later in January, The impact was more muted than anticipated. Prepared segment performance was better than the prior year, but was weaker than expected due to a combination of volume softness and winter weather. We expected a decline in prepared segment earnings versus the fourth quarter due to seasonality in our fresh cut divisions. but we experienced softness in volume that exceeded typical seasonality, with total prepared segment volume down about 13%. Velocity slowed in the quarter, which we partly attribute to a decline in volume sales across retail food categories as consumers reacted to inflation and tough general economic conditions. Separately, We incurred weather events during the quarter that caused about a million dollars of unfavorable incremental costs in the fresh cut division, mainly from the temporary closure of some of our manufacturing facilities. Understanding our first quarter results in the context of the market around us is important. Avocado import volume from Mexico grew over 8% versus the same quarter in 2022. But retail sales volume only grew about 3%, while total U.S. inventories rose almost 7%. We attribute the relatively lower retail volumes in part to retail prices, which haven't declined to the same extent as wholesale prices. Higher inventories also pressured wholesale prices of avocados and compressed margins as the industry worked through aging inventories. During the quarter, our prepared segment faced the pressures from a declining category. In retail, dollar volume sales are up across almost all prepared categories in which we participate. However, according to IRI, unit volumes declined in produce categories as a whole and almost every category in which we participate by anywhere from 2% to 5% in the second half of 22. Consumers either traded down or pass on certain convenience categories in the store perimeter. As unit volume declines on a store-by-store basis, our margins suffer in PREPARED as we lose benefits from fixed cost absorption. We believe the worst is behind us for the fiscal year, and we expect to see sequential improvement in our results as we progress throughout the year. but margin volatility in grown and volume softness in prepared may persist in the near term. We did see conditions in the grown segment improve in February, and we've realized volume increases versus the prior year in the 7% to 9% range and avocado margins within our targeted range of $3 to $4 per case for most of the second quarter. However, The start of the avocado seasons in California and Peru may lead to ongoing volatility in grown margins. In our prepared segment, the one perimeter of the store category that saw unit volume growth in the second half of 22 was deli grab-and-go items. As mentioned during our last call, our new customer acquisition strategy has been focused on deli grab-and-go items, and we are on schedule to onboard new prepared deli and grab-and-go volume with two national customers in the second half of the year. We expect volume weakness to persist until then. The operating environment, coupled with our first quarter results, has caused us to lower our fiscal year margin expectations for both segments. For 2023, we estimate adjusted EBITDA in the range of $40 to $45 million. While we're not setting the precedent of giving annual EBITDA guidance, we believe it is important to provide an indication of our expectations for this year, given the first quarter results. Investing to grow the business, resulting in long-term shareholder value, is undeniably our top capital allocation priority. We are also committed to paying a dividend with competitive yield and payout metrics relative to benchmarks. However, the metrics associated with our current dividend rate have been elevated since fiscal 2020 and remain elevated under the current operating environment. We plan to reset the dividend to a level that provides more market-aligned metrics. We anticipate the Board of Directors will declare a dividend of 10 cents per share for the second quarter. Although we remain committed to growing the business, we also plan to reduce our fiscal 2023 capital expenditures while we navigate near-term uncertainties. We now expect capital expenditures for fiscal 2023 of approximately $13 million. These adjustments reflect deliberate fiscal discipline that allow us to continue prioritizing investment for growth while maintaining competitive dividend metrics. Although the start to the fiscal year has been disappointing, we remain focused on making steady, lasting improvement to the business. During the second quarter, we initiated activity on several fronts that will offer immediate benefits to earnings. As an example, we recently went live with the first phase of a new transportation management system that enables RFPs on most of our outsourced freight. which will significantly improve the competitiveness of our freight costs. This system will be fully implemented during the second quarter. In early March, we implemented a restructuring of our U.S. and Mexico operations that will allow us to upgrade essential organizational capabilities and to streamline and reduce costs related to certain functions. We recently consolidated activities within our grown distribution network to streamline operations and reduce costs. And we recently entered into an agreement to exit our non-core salsa business as we intend to direct more resources towards guacamole growth. Pricing is always a focus for us. As you probably know, we price our grown product on a daily basis. However, our prepared business has been comprised of almost exclusively annual or multi-year fixed price contracts. Over the course of the last six months, we have converted more than 50% of our expected annual prepared revenue stream to contractually committed pricing windows that range between two and four times a year, allowing us to react quickly to changes we see in market dynamics, inflation, and industry costs. These actions do not represent an exhaustive list of improvement activities that are underway, but I wanted to highlight some of the most influential and relevant items that will have immediate impact. I'd like to wrap up my prepared comments by saying that, despite market and category performance that was less than our expectations, our commitment hasn't wavered. we are still focused on performance improvement, on growth, and on generating shareholder value. It's our job to manage through a challenging market condition, and we must be and are nimble in our response to changing market dynamics. The path to growth isn't a straight line, and there are obstacles, but we will keep driving forward. And now I'll turn the call over to Sean to report on the financials.