CALAVO GROWERS INC Q3 FY2021 earnings call

• Jim Gibson retired as CEO; Steve Hollister is Interim CEO. - Quarter overview: Core avocado sales volume down 8% due to supply issues, but average selling prices up 10%. RFG and Food segments had double-digit sales growth but were impacted by inflation and costs. - Industry trends: Avocado supply and pricing trends, RFG demand trends. - Initiatives to improve profitability: Project UNO, which is expected to generate ~$70 million in operating income over 24 months with ~$30 million in costs. Focus on optimizing SKU, customer mix, facilities, systems, and sourcing. ESG accomplishments: First carbon footprint analysis, water usage case study, and over $4 million investment in environmental projects over 4 years.

Core avocado business was relatively flat year over year. Sales volume was 8% lower than a year ago due to lower supply, delays in avocado supply from Mexico and California, and smaller fruit sizes, but average selling prices increased by 10%. RFG and Food segments delivered double-digit sales growth. RFG's business was negatively impacted by industry-wide inflation, labor, and freight costs. Food segment's sales increase was partially due to higher international sales, but profitability was lower due to higher commodity prices. Revenue contribution: Core avocado's contribution, RFG's double-digit growth contribution, and Food segment's double-digit growth contribution.

• Fourth quarter outlook: Anticipates more favorable avocado supply and pricing in second half of fourth quarter. Inflationary pressures still present, but expecting a positive impact as we exit fourth quarter. - Financial outlook: Refraining from providing revenue/EBITDA guidance until environment stabilizes, but fundamentals improving in fourth quarter. SG&A expected to be 13-15 million, interest expense ~$300,000, tax rate to return to ~25% in fourth quarter.

• Inflationary pressures on labor, raw materials, and freight. - Labor shortages and availability issues, especially in RFG. - Supply chain issues affecting avocado supply and sizing. - Uncertainty regarding the permanence of labor force shifts due to COVID.

Q: What steps are being taken to improve profitability and when will insights from third-party consultants be available?

A: Looking at footprint consolidation, labor pool assessment, transportation efficiency. It's a dynamic process with specific actions already identified and project owners assigned, not waiting for a big tome.

Q: What's driving the cost of goods sold increase in the Foods segment?

A: Disproportionate number of fruit available for Food segment vs fresh market, leading to higher fruit costs and sizing issues. Elevated expense expected in fourth quarter but starting to mitigate.

Q: How is the loss in RFG business driven?

A: Strong demand but constrained by labor availability. Optimizing product mix to reduce labor component will help margins recover.

Q: Where are the stages of completion for Project UNO?

A: Working on pricing, manufacturing footprint optimization, SKU and customer mix optimization, automation, labor and distribution cost reduction, and efficient sourcing. It's a dynamic process with specific key areas being addressed.

Q: Thoughts on the dividend given cash balance decline?

A: Plan is not to change dividend initially, viewing problems as temporary and confident in returning to historical profitability levels within a couple of years, with a strong balance sheet to fund recovery efforts.