Calavo Growers Inc Q3 FY2021 Earnings Call

Thank you, operator and thank you all for joining us today to discuss Calavo Growers third quarter 2021 financial results. This afternoon, we issued our earnings release and this document is available in the Investor Relations section of our website at ir.calavo.com. I'm here today with Steve Hollister, Interim Chief Executive Officer of Calavo and Farha Aslam Interim Chief Financial Officer. On today's call, management will provide prepared remarks, and then we will 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 the Federal Securities Laws. Forward-looking statements are identified by words, such as will, be, intent, believe, expect, and anticipate for other comparable words and phrases. Statements that are not historical facts, such as statements about our expected improvements in operating profit are also forward-looking statements. Our actual financial condition and results of operations may vary materially from those contemplated by such forward-looking statements. Discussions of the factors that could cause our results to differ materially from these forward-looking statements are contained in our SEC filings, including our reports on Form 10-K and 10-Q. With that, I'd now like to turn the call over to Steve Hollister. Steve, please go ahead.

Thank you and good afternoon, everyone. We appreciate you joining us to discuss Calavo Growers' third quarter 2021 results. As you saw from today's press release after more than 10 years with Calavo, Jim Gibson has retired as CEO. Jim was one of the founders of Renaissance Food Group, which was later acquired by Calavo and has been a key growth driver of our company's expansion in the Fresh Refrigerated foods category ever since. On behalf of the board and the company, we want to thank Jim for his years of service to Calavo and wish him well in his future endeavors. The board has begun a search for Jim's permanent successor, and I am stepping in as Interim CEO. A little about my background. I have served on Calavo's board for the last 13 years, and I know firsthand the company and the people I am joining. In my time on the board, the company has tripled in size, growing to be the avocado industry leader that it is today. Personally, my background in agricultural and commercial finance, as well as agricultural operations and management, have prepared me to lead Calavo during this interim period. While there is no perfect time for a transition like this, given our strong team here, the board and I are confident that we can execute a smooth transition. With such a long and rich history, I am honored to be here leading Calavo, a company that founded an industry. Now turning to the quarter on hand today, I'll structure my remarks in three sections to provide you with: One, a high-level overview of the quarter; two, highlights on overall trends we are seeing in the industry; and three, an update on our initiatives to improve profitability, including an update on ESG. Following my remarks, Farha will address our financial results, balance sheet and outlook, and then we will open the line for questions. Now, moving on to the results for the quarter; our core avocado business was relatively flat year-over-year, lower supply and delays in the expected avocado supply from Mexico and California, along with smaller fruit sizes, negatively impacted sales volume, which was 8% lower than a year ago. As we have noted in the past, we are best positioned to deliver margin when we have a wide array of avocado sizes to meet the varied demands of our customers. On the positive side, the market demand for avocados remains strong, reflected in the 10% increase in our average selling prices. Our RFG and Food segments delivered double-digit sales growth as the recovery from the pandemic continues. While sales were higher, RFG's business was negatively impacted by industry-wide inflation and labor and freight costs, coupled with supply issues and some fresh fruit and vegetables. The increase in sales in our Food segment was partially due to higher international sales. However, profitability was lower due to higher commodity prices. Taken together, our third-quarter revenues were generally in line with our expectations, but with inflationary pressures still present, gross margin and profitability fell far short of our initial expectations. Looking ahead, the same trends impacting our bottom line have persisted into the current quarter. However, for the second half of the fourth quarter, we anticipate a more favorable environment in terms of avocado supply and pricing. The Peru and California seasons are finished, and we expect the larger crop coming from Mexico in mid-September, which should have a better size distribution. This new crop will also benefit our Foods business, but with the higher prevalence of smaller avocado sizes, which will help with costs. Demand at RFG remains strong, but that business continues to be impacted by all the inflationary pressures that we have discussed. While we are working through pricing improvements to help mitigate those costs, we expect there to be a lag effect. As a result, we should start seeing a positive impact as we exit the fourth quarter. Now taking a step back, in the third quarter of 2020, we unveiled our one company initiatives and I am pleased to share that we have made significant progress on their implementation to date. We have successfully consolidated the organizational structures of our three business segments. Today, we have a centralized leadership team that oversees finance and operations. This allows for better operational efficiency oversight and resource allocation. We've also optimized our segments with a unified go-to-market strategy to drive organic growth and profitability. Our highly complimentary Fresh Foods and RFG business segments no longer operate in silos. We have centralized our sales function as Rhonda, a produce industry veteran, was recently promoted to Executive Vice President of Sales for both Foods and RFG to lead our sales teams as they pursue business development cohesively. As a result, these enhanced synergies provide us with greater visibility across the business and offer a multitude of cross-selling opportunities. Additionally, for our international markets, we are utilizing our Jalisco packing house in Mexico to drive incremental sales. We have also enhanced our employee development program, providing training and opportunities for career advancement and are using these efforts to identify and mentor talent for future leadership roles. The actions we have taken through our one company program, we believe will lead to the long-term success of Calavo Growers. While we have made good progress on this front, we are not yet finished. In the third quarter, we launched Project UNO, a strategic review of our business that requires a holistic look at our operations in the face of the changes we see in the marketplace. This profit improvement program is expected to generate additional operating income of approximately $70 million over the next 24 months. Total costs associated with the program are estimated at about $30 million. Through this extensive review of our operations, we have identified potential opportunities for reducing costs and expanding gross margins. Broadly speaking, some of the key opportunities include enhanced commercialization achieved through optimizing our SKU, labor, and customer mix. The optimization of facilities and systems through adjustments in our production, labor, and automation, and finally sourcing optimization achieved through better distribution and purchasing. We have amazing products of the highest quality and we are closely analyzing the most advantageous product set that best serves our customers. Ultimately, we want to align our customers and skillset to our most profitable opportunities. Our RFG business has an outstanding distribution platform across the U.S., and we see the opportunity to add line extensions, to accommodate product sets from our food segment. It is probably an understatement to say that the impact of COVID has been disruptive to our business. There are new dynamics to play. The shift in the labor force is just one example, and we are working to determine if these shifts are permanent. We're also moving purposely to match our production with demand and available skill pools. In summary, this profit improvement program is expected to substantially increase our operating profits while delivering new levels of value and performance to our customers. Before I turn the call over to Farha, I want to highlight a few of this year's ESG accomplishments, particularly as they pertain to the environment. We established our first carbon footprint analysis with 2019 as a baseline. Here, we know that climate change and our ability to mitigate carbon risk is a top priority for investors. This project sets the stage for us to develop a roadmap to get Calavo to a net-zero carbon footprint. Given the drought conditions in the west, we undertook a water usage case study since ten of our manufacturing facilities are in areas with high baseline water stress. Most of the water we use is for washing produce and cleaning our processing equipment; less than 1% is consumed in our products. So we have a significant opportunity to reduce usage through water recycling and reuse processes and technologies, finally demonstrating our commitment to the environment. We are ramping up our investments in environmental projects. Over the next four years, we are committing more than $4 million for waste reduction, water conservation, recycling, and energy control projects. They make good business sense, but then average payback time of two years. I want to thank our entire team for making these sustainability efforts a reality. With that, I will turn the call over to Farha.

Thank you, Steve, and good afternoon, everyone. It has been a pleasure to work with Calavo's finance team for the last few weeks as interim CFO. The organization has strong capabilities that are supporting Calavo's turnaround and the CFO transition. Now let us review the quarter and provide some color on our outlook for the business. I'll start with revenue on a consolidated basis. Third quarter revenue was $285 million, which is at the high end of our pre-announcement guidance range and up 5% year-over-year. This was primarily driven by revenue increases in RFG and our food segment of 14% and 12% respectively. The nice rebound in both segments reflects improved consumer demand as the country reopened from the pandemic. We also experienced higher international revenue in our foods segment as we expand our efforts outside the U.S. Revenue in the fresh segment was relatively comparable to the prior year period as higher average selling prices were largely offset by lower sales volume, which was negatively impacted by the delay and avocado supply from Mexico and California, coupled with sub-optimal fruit sizes in that segment. As Steve noted, gross profit for the third quarter was $7.9 million, down from $30.8 million in last year's third quarter. Our gross profit margin percentage declined to 2.8% compared to 11.4%. The decline in gross profit and margin percentage occurred in all three of our segments and was due to a number of factors, including inflationary pressures on labor, raw materials, and freight, as well as lower sales volume and less desirable fruit in the fresh segment sales mix, both in quality and sizes. In addition, higher avocado costs adversely impacted gross margins in our foods segment. SG&A expenses improved to $12.4 million from $13.4 million a year ago, mainly due to lower stock-based compensation and a decrease in salary and benefit expense as a result of our consolidation initiative and a reclassification of certain items. Consistent with our pre-announcement adjusted EBITDA was $1 million for the quarter. The net loss in the third quarter was $13 million or $0.74 per share. Included in this loss were $13.8 million in total provisions for our Mexican tax liability for the 2011 and 2013 tax years, of which $1.3 million was recorded as other expenses and $12.5 million was recorded as a discrete item in income tax provision expense. Additionally, we recovered $6 million in the quarter from Fresh Realm, reflecting the fulfillment of its separation agreement with the company. After adjusting for these and other standard items, adjusted net loss was $3 million or $0.17 per share. Now turning to our balance sheet, we ended the quarter with $144 million of cash, liquid investments, and available debt capacity. Total debt as of July 31, 2021, including finance leases, was $43 million. We continue to have a strong balance sheet and low leverage, enabling us to invest in our current infrastructure to drive future growth and improved profitability. Now turning to our near-term outlook, the trends in all three businesses are very dynamic, so we are choosing to refrain from providing revenue or adjusted EBITDA guidance until the environment has stabilized. That said, fundamentals in the business are improving in the fourth quarter compared to the third quarter. Margins in the fresh business were compressed in August due to supply pressure from a large Peruvian crop and tight supplies from Mexico and California in September, as the harvest of Mexico's main crop gets underway. Profit margins are improving. The estimates regarding the size of the Mexican crop vary widely, but barring any weather issues, we anticipate having adequate supplies to meet customer needs. The foods and RFG businesses are facing incremental inflationary pressure on freight, labor, and material costs versus the fiscal third quarter. Year-over-year inflation ranges from 10% to 30%, depending on the product and location. We're working to mitigate the impact of higher costs with pricing and cost savings from Project UNO. More of the benefits of our pricing and efficiency efforts will likely fall to the bottom line in fiscal 2022 versus the fiscal fourth quarter of 2021. SG&A is expected to be $13 to $15 million, which is in line with our historical run rate. Interest expense for the final quarter is anticipated to be approximately $300,000. We look for a tax rate to return to approximately 25% in the fourth quarter. With that, I'll turn the call over to the operator for questions.

Good afternoon. I want to ask as it relates to sort of the critical path from here with your strategic review of Project UNO, do you know what steps you've identified and are putting in place today to improve profitability? And then, when you think about your engagement with third-party consultants, when do you expect to have all of the insights from that review of the business at your disposal to move forward and implement change with the business?

Sure. I'd be happy to. Some of the things that we've already identified to help us with the profitability and strategic positioning of Calavo moving forward include our physical footprint with all of our existing facilities, not only for Calavo, but also with RFG. We are in the project, trying to figure out how to consolidate as much as possible. A good example for that would be taking a look at RFG and determining where we should be producing certain commodity mixes where it makes more sense, not only from a production standpoint but also logistically to take advantage of maybe some freight distribution inefficiencies we've had to deal with in the past, that are becoming more of a precious commodity. Labor situations, where do we have a beneficial labor pool, as opposed to maybe some that are more stressed? Those are some of the major things that we're looking at right now too. And it's something that we should do on an ongoing basis anyway. As for maybe some of the other inputs that we're taking a look at, I mentioned transportation and how to get more efficient in doing our business, not only to our customers, but also internally within our company. Those are some of the things that we are already working on right now. And what was the second half of that question?

I wanted to highlight that this is a dynamic process we are engaging in, and we are not waiting for a comprehensive plan before we begin. Instead, we are actively involving the entire organization in Project UNO, identifying specific actions to take, and assigning project owners to lead these efforts. As an organization, we are pursuing cost savings, starting immediately, so we are already on it.

Okay, great. Drilling down into the business segments. If I look at the results in your club of foods segment, I know we've seen periods in the past where margins have been pressured on fruit costs. I suspect it has to do with sizing, but if I look at your cost of goods sold in the segment, up materially 44% year-over-year, but if I just look at like standard sizes 48, their market prices are roughly flat year-over-year. So does it have to do with the availability of various sizes of the fruits that you need or costs that you would use in that product? Maybe help me understand the raw material components that are driving that COGS increase year-over-year.

Sure. Most of what we do with our Food segment involves using products that would be fairly low on consumer demand, whether it's number three avocados or some that have a significant amount of scarring, but generally that we don't pack as number one or number two. What we've found in Mexico is that from a production standpoint, there is a disproportionate number of fruits available for us to use in the food segment, as opposed to those that go to the fresh market. This has led to some problems getting the right sizing, and also the cost of them has typically increased. I mean, it's just more of a matter of what we're paying for the fruit. Our labor costs don't send it into the same level down in Mexico. Would you want to add anything else for that?

Yeah, there's strong Mexican demand for a smaller crop, and that pushed up our fruit costs. We'll continue to see that elevated expense in our P&L in the fourth quarter, but we are starting to see some of that inflation begin to mitigate. As we progress into fiscal 2022, we do expect margins to incrementally improve from current levels. Fair enough. Typically, that does also correlate with a new crop coming in from Mexico. We're basically weeks away from that, and that often leads us to a more beneficial pricing scenario as well.

Okay, great. Thank you so much. A couple of quick questions, I guess, the first question is it sounds like there are these pressures continuing through into Q4 to some extent till you get to the latter part of the quarter, given, you know, hopefully some changing dynamics and that kind of forthcoming Mexican crop.

So, obviously there will be some movement on the volume side, and then hopefully a better product will yield better pricing, but just in terms of kind of the other costs, maybe this is more for you. As you call out freight and labor, it seems like, you know, that could continue. And this is what a lot of companies are saying that could continue for you through the next year, but the hope is that kind of that price relative to crop sizing hopefully gets better next year. So therefore what you're kind of implying—am I understanding that correctly?

I think fundamentally, you've got it right, Rob. We are facing higher freight, labor, and material costs, and we are working to pass it through in terms of higher pricing, but we're also taking a look at our own business and working to optimize our SKU mix and rationalize our customer and product base to improve the margins and ensure that we produce products at the right place to really minimize labor and freight needs for our production. So as we implement those pricing and cost improvement efforts, we expect our margins to recover. Got it. Okay, perfect. And then on a segment level, coming back to the prior question, RFG versus foods, it appears RFG posted a bit of a loss in the quarter. However, it would seem as if maybe some of the demand would kind of gradually be coming back, given your channel exposure. So I just want to clarify that the loss posted in the quarter was somewhat a function of just supply not meeting that demand, layered on top of other additional cost pressures. I'm asking you really, because obviously that once saving the business is kind of more volume recovery, there's a loss—it’s kind of less about the volume recovery; it's really just more about the near-term dynamic between cost and pricing and supply.

Rob, you're right. We are seeing really strong demand in our RFG business, and really the constraint in that business today is labor and the availability of getting folks into our plants. Now, as we optimize our product mix to reduce the labor component in our product mix, we should see our margins recover.

Got it. Okay, fair enough. Last question? Probably more for Steve because I am sure people will ask. I thought to myself, it's just over the past year or so, like, you had the CFO kind of resign over the summer, but that was off of the prior CFO having left too. And I feel like with Jim seeming to be doing a decent job, Jim was there for quite some time at Calavo over all helped implement, you know, with the board's assistance kind of go-forward strategy. But now, like, just have to ask that Jim is leaving, right? It's really kind of, when you would think things would start to pick up a bit. So I'm just, the direct question is just, when you sit down, you know, with the entire board at this point, you know, what is that conversation like? What is their issue with employee retention? Was there something that's not occurring that you maybe had expected to occur? And then how do you prevent that unexpected departure from reoccurring going forward, and maybe that's around investing plans and overall set of compensation? So just the broader question of how do we ensure we now don't have a permanent CEO and CFO.

Well, first off from the co-CFO standpoint, we are on the cusp of hiring a new CFO. We've been working from the board committee standpoint, and we have identified two applicants. So we're getting close. The CEO search is underway. I say, part of what you were talking about—my reception is not—I may have missed a little bit of what you said there. But I think it was more about how are we getting back on track? Is that a fair assumption?

Yeah, if you're close to hiring a CFO, that's great. It's just kind of the broader, you know, question is if, as you go through the search process and look for a new CEO, is there a way to try to retain that talent for longer than a 12 month period of time? That's, I'm sorry, part—can you answer that? I'm getting a lot of feedback.

Sure. I'm happy to step in. So Rob, we anticipate hiring a new CEO and new CFO that will serve for, you know, shepherd this turnaround at Calavo and then take the organization to our goal in project UNO, from being a $1 billion company to be a $2 billion company within five years. And we're very confident that we have a robust process and will find the right leadership for this organization. In the meantime, we have a very, very deep capable organization that is operating well during this transition.

Yeah. Hi, good afternoon. Hey, I have several questions. So, you know, if you go back, you know, historically, obviously Calavo is an agricultural-based company and you go back pre-RFG and even through current, the fresh business, and even Calavo Foods has been, while volatile, you've been able to control it pretty well, your profit has been stable. And that's given the underlying growth of the whole category and your leadership and your long years of experience. I'd expect you to be able to get the avocado business back up and running in a normal fashion. It's the RFG business that I'm beginning to question. You've done really well with it growing from, you know, whatever it was when you bought it a hundred million in sales, and now it's, you know, approaching what was over or approaching 500 million. So that's good, but I wonder whether and how that business really fits on the other side. And not to say that I'm suggesting, you know, we punt that business right now, but might it be a business that you can control the volatility to not give guidance? And a lot of it seems centered on RFG to not give guidance. It's like this business, it seems like you don't have visibility. And, I remember asking in a prior conference call about RFG, was certain that all the open salad bars you had were going to be all pre-packaged from here on out because of COVID, but I'm actually finding most of the salad bars where I live to be open air bars. So I'm wondering whether we even know as a leadership there that do we know what's happening in RFG. And so can you talk a little bit about your confidence there and whether I, you know, misspoke on any of my premises?

Yeah, let me give a few comments about RFG. I was on the board when we were looking at RFG and then ultimately consummated the purchase of it, and then the earn-out through all of that. I have a bit of background in produce as well. It’s a segment that has always been growing since I've been on the board and in supermarkets. We viewed it as a compliment to what we do in our fresh and food segments. Unfortunately, it’s a dynamic business that is constantly changing as consumer tastes change and get defined in more areas, while they may slack in some others. And so we have to deal with that along the way, and maybe we haven't done the best job in the past at making some of those first changes, but we are certain, focused on right now, in fact, in Project UNO, that is one of the major things that we are working on. We've identified a number of areas there where we probably can reduce some SKUs that may not fit in with our product set as well as they used to, and probably be produced in areas that are not most efficient for us. So not only just looking at all of our SKUs and maybe reducing some of those, but also determining where we are going to produce them in a better area to minimize freight to get the product in there. In that industry, it’s the nickels and dimes that you make, not so much the dollars. Therefore, we're focusing on the things that we can control primarily, which are the cost and input, and the locations dealing with the staffing shortages that have been present since the COVID era and also taking a look at the products that we sell and trying to align the pricing we are getting for our products more aligned with what our costs are.

Thanks, Steve. RFG has been impacted by COVID perhaps as much as any business in the food industry. Initially, there was uncertainty regarding how permanent the inflation we were seeing was, and that's why pricing has lagged. Now that we see that labor is probably going to be inflationary on a more sustained basis, we are probably going to see higher freight costs, both for incoming fruit and fruit products, as well as our delivery costs that we need to pass those on. Our customers are starting to recognize that these costs are more permanent and that we do need to take pricing. Therefore, we are getting it in the market. So we're optimistic about those margins recovering, and as Steve highlighted, our commitment to the business is really anchored in what we view as probably the most on-trend and dynamic part of the food industry. Consumers want to eat fresh, they want to eat healthy, and they want the convenience that RFG offers. That's why we are going to continue to invest to grow this business. Does that help?

Yes, it does. Thank you. Staying on RFG for a second, if Farha could you highlight, like, if RFG sales were up about $14 million in the quarter, yet we’re down about $14 million in gross profit. What were the—can you talk either percentage-wise or dollar-wise, what some of the buckets of those costs are? I know we've gone over labor, freight, and some material costs, but can you just somehow work us down and how we went from $8 million to – to minus $6 million?

For me to tease out those costs individually would be difficult. But we can follow up offline to give you some color. But know that the entire supply chain is facing that inflation, but that our customers are recognizing that we are experiencing very real cost increases in our business. Therefore, as we go, it’s taking some time, but we are getting pricing. At the same time, our entire organization is very engaged in reducing those costs. They're doing it successfully and are working to deliver the bottom line as quickly as possible.

Okay. Two more questions as it relates to Project UNO. Did I hear you correctly where you say you’re looking for $70 million in operating income cost savings over the next 24 months, with about $30 million in costs to achieve that, is that correct?

That's correct. $70 million is a significant amount, roughly equivalent to an entire year's worth of operating income that you expect to achieve over two years. That's understandable, and I would like to get your thoughts on it. Considering that a new CEO will be joining, I know there are many easy opportunities to explore, but there are also plenty of other areas to focus on, as you mentioned, Farah, and you're already making progress on that. Are we confident that we can realize $70 million in savings? Is this figure just an estimate, or is it a conservative projection? We highlighted that this is not just a cost savings; this is a profit improvement. So it's really what we think of as a profit recovery plan for Calavo from current levels. So $70 million would get back closer to our historical norm, and that is what gives us confidence. This business has delivered that level of profitability in the past in terms of adjusted EBITDA, and we have very specific numbers across multiple project streams. Therefore, that number is very doable in our expectations.

Okay. And then the final question relates to the dividend. Your cash balance has declined. When you look at the balance sheet, you can see some working capital usage, but with spending $30 million on other capital related to the project, do with the decline in EBITDA, just from the pressures that you've mentioned how should we look at the dividend? I mean, you've increased it. I just wonder whether, is it safe? Are you in a period where we're probably not going to see dividend increases at all? Curious your thoughts on that?

Well, our plan at this point— we’re going to be addressing the dividend very shortly, but our plan at this point in time is not to change it. We think that the problems we've got at this point are temporary and we, as we mentioned, think we can get back to historical levels here within a couple of years. But we don't need to take any actions contrary to what we've been doing. We're comfortable with that amount. I think we can make it back further quickly.

Okay. All right, so just looking at my own cash flow projections, it looks like you may have to borrow to pay the dividend, at least temporarily. Is that fair or do you think you're going to be able to do it with cash flow, free cash flow?

So it'll depend on the timing of our recovery, Mitch. The pace, but our view is that we have a strong balance sheet to fund our recovery efforts.

Okay. I appreciate the answers. Thank you very much.

Thank you. Our final question comes from the line of Ben Klieve with Lake Street Capital Markets. Please proceed with your question.

All right. Thanks for taking my question. I tend to have some similar sentiment to Mitch around the RFG segment and had a question about that segment specifically. I'm curious about the performance that you’ve seen across your facilities and if there is a degree to which you're seeing a meaningful delta in profitability from one location to another, most notably based on how new the facilities are, the degree of automation that are included within those facilities, and labor costs from one location to another. Can you talk about if there are pieces within RFG that are performing well and lessons you're taking from any of the locations that may be doing so?

We constantly take a look at the facilities we have at RFG and have a number of different metrics that we measure them against. It’s obvious that some form better than others, and there are a number of reasons for that too. The cost of labor in certain parts of the country varies. Weather can enter into it too in places like down in Florida or Houston that have been hit in the past. Those are not specifically due to those external factors. I would call them in our case; a lot of it is just moving the product around, getting raw product into the Southern plants is much easier for us because it's readily available with less freight to get it into places like Riverside or Houston. Therefore, as I mentioned earlier, we are trying to get our product mix more synchronized with the best places to produce it. Those areas that are not particularly beneficial for us to produce a certain product mix, we either will relocate that to another plant or we will discontinue it. That type of thing is helping us. In fact, when you take a look at our facilities and going through Project UNO, those types of decisions present themselves more readily than others. You may have tried to make something work in the past, and if we don't have the customer mix to sustain those plants and their current footprint, then we look at other ways to achieve the same thing as lower cost.

Okay. Ben, the key is freight in that equation. What we are doing is working to minimize inter-plant freight costs to drive production to be close to the customer so that we can reduce our expenses for those products.

Thank you everyone. I'm sorry, I queued in a little bit late. So I guess my first question is back to Project UNO. So Steve, Jim sort of announced that program early on in his tenure. The question I have is: At what stage of completion are you in the program? Are you 30% of the way through it? 50? Did COVID delay a bit of it? And I guess that's the first question. Farha, why don't you take an answer?

Sure. Project UNO, we anticipate completing it in the next 24 months in achieving $70 million in profit improvement from current levels.

Yeah, I think Mitch kind of got to that point. But so what is the heavy lifting that's left? Do you have to do conversions? What are the big components of that integration?

Sure. It's going to be implementing pricing, taking a look at our manufacturing footprint, really optimizing our SKU and customer mix, increasing automation in our plants, and really focusing on reducing labor and distribution costs in our product cost of goods sold and sourcing more efficiently. Those are some examples of key areas that we are working on.

Okay. So you've got some heavy lifting to do. When you look at each division, RFG is probably the most labor-intensive. So how labor-intensive is RFG in terms of employees per million dollars of revenue? Is there a way for you to help quantify that so we understand the magnitude of the labor issue?

Labor is a significant cost in RFG. I can't unpack it in such detail before you on a conference call for competitive reasons, but one factor we can address is working to optimize our mix to reduce the labor component. That is what we are doing as part of Project UNO.

Okay. So my final question is this, add a little bit to that is that the automation portion in RFG is…

Ladies and gentlemen, we are experiencing some technical difficulties. Please stand by while we reconnect our speaker, Steve Hollister. Ladies and gentlemen, we've reconnected Steve Hollister. Please proceed.

I am sorry for that.

Well, that's okay. Steve, it's Eric again. I just have one final question. I guess I am a little confused about the avocado sizing supply-demand. You're saying that the number one and number two's are in short supply, excessive supply of the smaller fruit—threes and fours. You're saying that there is strong demand in Mexico with a short crop. Well, it seems to me they will be consuming the threes and the fours. Can you just summarize the issues you're having with sizing again on your avocados and the pricing and the cost of those?

Sure. Without getting into actual direct costs and things like that. That is information that I am sure competitors would like to know what we're doing, but in Mexico, those number threes are used primarily in Mexico. That is a very popular size for the Mexican population and unfortunately, for us that's also the size that we use most for our foods. If you get the sizing of orchards, you might have more larger sizes and fewer smaller sizes, and so there is much more competition for that. So the costing goes up, and as a result of what we do in Foods, you never know when you're going out looking out; you can get a pretty good estimate of the sizing just by looking at an orchard, but you never really know until you bring it in and process it. In Mexico, you're typically bringing the crop by the acre, not doing any sizing of picking. We can sometimes find ourselves in the wrong sizes during that era, not only from a sizing standpoint, but also from a pricing perspective, and it ebbs and flows throughout the year. Historically, that has been the case where you get series real high for Foods, and when it’s lower, you try and really make up some volume on that, but this last year has been more good for us than most.

Okay. So there isn't—I mean, there is not an oversupply of threes and fours even though that's where the majority of the crop has been coming in.

Well, typically, any oversupply of the smaller sizes is just absorbed in Mexico, and so the crop has been fairly normal in Mexico. I don't think it's been too—there has been—Mexico is such a large producer, but for us it's been a lack of the sizes that we need to make the foods, and so we've had to use alternate sources for coming up the gas product either using some different sizes that will have a higher cost to land more or maybe going through different factors and things.

Okay. Thank you. I'll follow up with you folks.

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. I'll now turn the call over to Farha Aslam for closing remarks.

Thanks Alex and thanks to all of you for your interest in Calavo Foods. We look forward to sharing with you updates on Project UNO next quarter. Until then, be safe and well.

This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation and have a wonderful day.