Calavo Growers, Inc. Q3 FY2022 earnings call

• Brian Kocher highlighted progress in the Prepared segment's fresh cut, noting a $11 million Y/Y gross profit improvement and a 7.7% gross margin in the former RFG. He discussed managing significant avocado price volatility, tightened inventory, and new leadership hires (CFO, Grown GM, Prepared GM). - Shawn Munsell reported financials, with Q3 revenue up $10.6 million sequentially, consolidated gross profit down $3.2 million Q/Q due to Grown segment constraints but offset by Prepared. SG&A was $16.7 million, adjusted EBITDA $8.1 million Q3. Balance sheet improved with $40 million debt paydown in 6 months, and CapEx expected to be ~$12 million full year.

Grown segment: Compared to Q3 2021, gross profit was part of the overall improvement. Revenue in Q3 was $207.6 million, down ~$3 million from Q2. Avocado volume was down almost 20% due to Mexico supply issues, but sourcing from California, Peru, and Colombia was increased. Year-to-date, gross profit per carton for avocados increased over 20% but was offset by a 15% volume decline and unfavorable foreign exchange. Prepared segment: Combined Foods and RFG. Guacamole faced input cost pressure with costs up 50% Y/Y, but fresh cut (formerly RFG) had ~8% gross margin in Q3. Revenue in Q3 was $134.9 million, up $14 million from Q2. Year-to-date, gross profit in Prepared improved by $11 million Y/Y, with a $14 million recovery in the former RFG portion but a ~$10 million decline from guacamole due to input costs.

• Grown segment expects gross profit per carton to track historical range of $3 to $4 per carton in Q4, with more normal market conditions. - Prepared segment expects guacamole margins to strengthen as frozen inventory is worked through and price increases take effect. - Anticipates sequential quarter-over-quarter improvements in adjusted EBITDA, aiming for continuous profit improvement.

• Commodity price volatility affecting both Grown and Prepared segments. - Input cost pressures, especially in guacamole. - Retailers reducing promotions and shrinking display sizes at the start of the quarter. - Seasonality impacts on the Prepared segment, with typical softness in Q4.

Q: How is the supply-demand setup for avocados heading into fall and consumer behavior amidst inflation?

A: Brian Kocher said supply-demand is rebalancing with summer bloom providing relief, but it's hard to gauge consumer behavior due to supply constraints. Saw retailers back off promotions and shrink display sizes at peak prices.

Q: What are expectations for processed avocado profitability in a more normal environment?

A: Shawn Munsell said buying fruit at a third of peak prices in summer, and with inventory flow-through, expect normal margins in September. Brian Kocher added building frozen inventory at current costs and efficiency projects to lift margins.

Q: How does the RFG segment's gross margin improvement translate to double-digit range?

A: Shawn Munsell said less than half of the improvement to double-digit margins will be from fixed cost leverage; it'll be across the P&L with pricing, mix benefits, labor optimization, and productivity.