Good afternoon and welcome to the First Quarter 2022 Calavo Growers Earnings Conference Call and Webcast. I will now turn the conference over to your host, Larry Clark, Investor Relations for Calavo. Thank you. You may begin.

Good afternoon and thank you for joining us today to discuss Calavo Growers financial results for the first quarter of 2022. This afternoon, we issued our earnings release and it's available in the Investor Relations section of our website at ir.calavo.com. With me today on today's call are Brian Kocher, President and Chief Executive Officer of Calavo; and Mariela Matute, Chief Financial Officer. We will begin with their prepared remarks and then open 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, 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. Discussion of the factors that could cause the material difference in our results compared to these forward-looking statements are contained in our SEC filings, including our reports on Form 10-K and 10-Q. With that, I'll now turn the call over to Brian Kocher. Brian?

Thank you, Larry, and good afternoon, everyone. We appreciate you joining us. It's my pleasure to speak with you today in my first earnings call as President and CEO of Calavo Growers. I joined the company on February 1st, and six weeks into this new role, I'm confident that I made the right decision at the right time with the right company. I'm impressed by the talent of the Calavo team and their willingness and desire to drive our financial performance and achieve our potential. I'm encouraged by the early results of Project Uno and that we are on track to reach $70 million in EBITDA improvement in 2023. Most importantly, I'm excited about our opportunity to improve month-by-month and quarter-by-quarter. We carry our mantra forward: be better today than yesterday and better tomorrow than today. We can see the impact of that mindset in the sequential improvement in gross profit, adjusted EBITDA, and adjusted net loss from quarter four to quarter one. We are making solid progress toward our goal of improved profitability, but challenges still remain. We must address these challenges in multiple ways to continually enhance our operating performance. As it relates to headwinds, the pandemic is becoming endemic and inefficiencies associated with labor shortages have eased, but they have not been eliminated. We must remain vigilant in managing our labor costs, making them more stable and predictable and we will do this through productivity improvements, process initiatives, and further automation where possible. Higher freight costs have continued to be an issue. To address this for the first time, we launched an RFP for freight and consolidated our transportation under one national program. This should result in substantial savings and reduce volatility as we implement our new carrier agreements throughout the balance of the year. Although stabilizing and reducing costs are important, I'm excited that we have also made good progress on our pricing initiatives to date as customers recognize the need for price increases in this higher cost environment, but also appreciate the value we provide in the marketplace. Additionally, we are working with each of our customers to ensure they have the right product mix and this will support our continued efforts in SKU rationalization. Another structural component that is part of Project Uno relates to asset utilization. Last fall, we announced the closure of our Florida RFG plant and spent November and December consolidating operations into our Georgia facility. The Georgia facility is one of our newer plants and required substantial reconfiguration to accommodate the volume, so it is taking a little longer to reach optimal throughput. It is also worth noting the consolidation began during the Omicron surge in the Southeast when labor supply was especially problematic and certainly caused short-term inefficiencies during our December transition. In fact, we have already seen labor stabilize and corresponding productivity improvements at our Georgia facility in both January and again in February. Lastly and importantly, Project Uno has helped shape our reality of one-kilometer. Over the course of the last three months, human resources, finance and accounting, and transportation have all consolidated in the shared service centers that enable the entirety of Calavo to operate more efficiently. We will continue deploying best practice sharing and central services where they make sense to drive improved productivity across Calavo. Despite the ongoing challenges that our industry is facing, we are navigating them head-on. We are optimistic that with the plans we are implementing, we are well on the road towards improved profitability and stability in our business. Now, let me take a few moments and talk about our business segments. In our Fresh segment, avocado prices were 64% higher compared to the first quarter of 2021. Lower available supply in Mexico drove prices higher and also impacted our volume during the quarter, which was down 12% year-over-year. Our gross profits were down year-over-year, mainly due to a $1.6 million adverse swing in foreign currency rates. Excluding the impact of foreign exchange, gross profit per carton for the first quarter of 2022 was $3.31, which was $0.54 a case higher than the prior year period. Additionally, as a sign of continuous improvement, Fresh gross profit also improved by $4.3 million from the fourth quarter of 2021 as higher prices more than offset the cost pressures that we've been experiencing. In the RFG segment, our overall operating performance improved with the exception of our Georgia facility. Sales increased 6% compared to Q1 last year. Our gross margin loss widened slightly during the quarter as increased pricing and improved product mix were offset by headwinds from commodity cost inflation, higher labor turnover that led to increased costs, and some short-term ramp-up costs as our Georgia facility transitioned Florida customers. However, excluding our Georgia facility, RFG's gross margin improved by $700,000 from the same quarter as last year and $150,000 over the fourth quarter of 2021. To continue improving sequential results at RFG, we are passing along higher input costs through our pricing initiatives with our customers, driving labor productivity through process and automation, revising our raw product sourcing procedures to stabilize input costs, and rationalizing SKUs where it makes sense. In our Foods segment, sales increased 4% year-over-year due to improved retail demand. However, increased fruit and labor costs pressured gross profit for the segment, which was down $2.5 million from the first quarter of 2021, but up $300,000 from the fourth quarter of 2021. We are currently working with our customers on pricing, which we expect to see reflected in our results in the coming quarters and are constantly assessing our raw product sourcing model and techniques to stabilize costs and improve margin. Let me just briefly touch on two items that are not part of our quarterly results, but are worth mentioning. As you are probably aware, the USDA temporarily banned the export of avocados into the United States from the Michoacan region of Mexico, effectively halting the shipment of avocados into the country. Fortunately, the ban lasted only seven days and it occurred the week after the Super Bowl, which is typically a slow week for avocado sales. We had enough inventory to continue servicing our customers and because the ban was resolved quickly, the effects on our customers and our business were minimal. The disruption to the supply chain has caused choppiness in the volume of the fruit coming into the U.S. and that could lead to temporary shortages. However, we expect this choppiness to resolve within the next few weeks. The second area discussed relates to avocado supply. As we move from the Michoacan harvest into the California crop, we anticipate prices to remain firm and supplies to remain tight. As was mentioned in our previous call, the State of Jalisco was approved to ship fresh avocados into the U.S., and we expect the fruit to enter the country by mid-year. We are looking forward to the added flexibility when managing market dynamics that will come from an additional sourcing region and an additional facility. In the back half of the year, as fruit from Jalisco begins to move into the U.S., our volume should improve and we have already accounted for that impact in our overall sourcing strategy. Before turning it over to Mariela, I would like to make a few closing remarks. I'd like to thank Steve Hollister for his leadership while serving as Interim CEO and for his support as I joined Calavo. Steve was able to shepherd Project Uno and get the ship headed in the right direction and Calavo is better for it. I'd also like to congratulate Steve on being named Chairman of the Board. We have a strong diverse Board of Directors who take their governance responsibilities very seriously and it's my privilege to work with Steve and the Board to move Calavo forward. As CEO, I want to bring clarity to our organization through a common purpose with goals and objectives that make us better decision-makers and better operators focused on what matters to us and our customers. We will relentlessly execute this focus and the discipline necessary to drive operational and financial improvements. We will put Calavo back on a path of sustainable profit growth with the ultimate goal of generating shareholder value. With that, I'll now turn the call over to Mariela.

Thank you, Brian. It is great to be partnering with you and good afternoon, everyone. As Brian noted, we have made progress in our efforts to counter the market disruption caused by COVID, and there is more work to do. Here is a recap of our efforts to date. We have realized price increases across the RFG and Foods customer base. We have eliminated approximately 4.5% of our less profitable SKUs. We have adopted an e-sourcing process across all of our facilities and have begun integrating back-office functions to improve and speed up execution and free cash flow. As we consolidated our FTE food processing operations from Florida into our Georgia facility, we expect improved capacity utilization. As a result of these actions, we realized approximately $5 million of profit improvement in the first quarter compared to the fourth quarter, bringing our total profit improvements since the beginning of Project Uno to approximately $9 million. We expect to see gradual increases in improvement in each quarter of the current fiscal year and we'll update you on a quarterly basis as we make progress. Now turning to a discussion regarding our financial results for the first quarter. As we have provided detail on the year-over-year comparisons in our press release, I will focus my discussion on the improvements we made on a sequential basis from our fourth quarter. On a consolidated basis, first-quarter revenue was consistent with the fourth quarter of 2021. Fresh segment revenue was sequentially higher as both volume and average prices were up quarter over quarter. This was offset by lower sequential revenue on both the RFG and Foods segments, mainly due to lower seasonality. Consolidated gross profit increased to $13.3 million, up $4.2 million from the fourth quarter. The increase was due almost entirely to a $4.3 million increase in gross profits at the Fresh segment. The Foods segment had a $348,000 sequential increase in gross profit and RFG posted a $384,000 higher loss in the quarter. As we note, net of the consolidation inefficiencies in our Atlanta facility during this summer, RFG gross profit would have increased by $150,000 sequentially. While RFG is beginning to realize price increases, labor productivity gains, and the benefits of our SKU rationalization, it is still facing higher labor, material, and freight cost. The Foods segment is also experiencing similar cost pressures, which limited our sequential improvement in gross profit. SG&A was $15.3 million for the first quarter, down $1 million from the fourth quarter of 2021. The improvement was primarily due to lower restructuring costs, which include consulting management recruiting and severance costs, as well as lower variable incentive compensation. Adjusted EBITDA was $4.7 million for the first quarter, an improvement of $3.3 million from the fourth quarter of 2021, mainly driven by the higher gross profit in the Fresh segment. During the quarter, we generated cash from operations of $2.5 million. Keep in mind, our first quarter is typically a slower quarter for cash generation due to seasonality. We invested $2.5 million in CapEx in the quarter, mostly focused on automation investments. With such full-year CapEx to be at or below fiscal 2021, with the majority of the investments targeting projects that will increase our operational efficiency. Now turning to our financial position. Subsequent to quarter end, we reached an agreement with our lenders and amended our credit facility, which among other things reduces the total capacity of the facility to $80 million. With this amendment, our pro forma liquidity at quarter end would have been $21 million, which is sufficient for our working capital growth and our investment plans as we continue to implement Project Uno and drive performance improvements across the business. And finally, as Brian said, the long-term outlook for our business remains favorable. The pace of more improvement should continue and accelerate over the next two years, consistent with our Project Uno plan. In Q1, January was gross profit positive and early Q2 is showing improvement over January. However, industry-wide inflationary pressures on raw materials, freight, packaging, and labor costs are ongoing and uncertain. We have and will continue to implement pricing and operational initiatives to offset these increased costs. With that, I will turn the call to the operator for questions.

Our first question is from Ben Bienvenu of Stephens. Please proceed with your question.

I want to start on the RFG business. So you're working through consolidating rationalizing capacity there. You alluded to pricing increases that you're putting in place. You also referenced inflation across the industry. Do the pricing increases that you put in place cover the inflationary cost pressures that you have in that business? And to the extent you could talk about, when you look at the options ahead of you as you work to recalibrate that business, what do you think the path to an ultimate margin profile of that business looks like? That's my first question.

Thanks, Ben. Appreciate it. I think a couple of things to think about with RFG. One, even for the first quarter, our price increases were able to offset some of the pressures that we saw on commodity cost increases and inflation. We did have, as we mentioned in our prepared remarks, as we were consolidating some of the assets in the Southeast with a little bit of inefficiency partly caused by Omicron, but certainly I would call it short-term and we continue to see improvement in January, see improvement in February and even to date March in our Atlanta productivity. So I do think price increases are offsetting our cost inflation. The fact of the matter is though cost inflation is not stagnant, so we are making sure that we have a mindset associated with managing - constantly managing our portfolio. And it's a string of many things. It's the cost side where we're doing e-sourcing, as Mariela mentioned; it's the revenue side as we are working on continuous pricing increases, sensitivity to input cost and triggers for input cost price increases. It's also labor productivity where either we're working on training, process improvement or some investments in automation where it makes sense. So I don't think it's exactly one answer. It's a combination of those, but we are squarely focused on pricing and our work, I think the one thing you can take away, our work on pricing, our work on SKU rationalization that should never finish. That should be a constant optimization of pricing, SKU optimization, and labor productivity. It's like quality, food safety, and culture; that work never finishes.

Okay, understood. Thank you. My second question is on the Fresh products business. The margin and the volume actually held up well just given how challenging the environment has been, so I wonder if you could talk about the challenges you're facing in that business. You alluded to choppy supply that's ongoing into the second quarter, but could you talk to some of the details that you guys have underway with respect to quantifying that business? I think that is the core of the business, it's a really solid business.

Sure. So I think a couple of things. When you are a distributor and a marketer, like we are, optionality is really important. So the fact that we have Jalisco that's coming on probably in our third quarter, the fact that Peru and California are now coming on, it gives us some optionality. And again, Mexico is the lion's share of that avocado supply, but having a little bit of options and potentially arbitraging between sourcing regions for either quality sake or price sake is really important to us driving continuous profits. I think the other thing, and again, it is a commodity business, so the other thing that's been helpful has been at least in maintaining a market is there has been tightness of supply. So if we look at our import figures from Mexico, I'd say profits were - excuse me, imports were down probably 10% year-over-year; our volume was down 12%. I think it's important to notice we also want to grow. But we want to grow in the segments of the market that makes sense for us. Growth for growth sake just won't work in a commodity trading business. So growing in the segments of the avocado supply chain that are attractive, that have good returns, I think that's where we focus our time, effort, and energy.

Our next question is from Rob Dickerson of Jefferies. Please proceed with your question.

Great, thanks so much. I guess, first question, is this - as you've kind of stepped into this new seat as CEO, Brian, obviously the product, it was kind of, let's say, fully developed there. It seems as if there is decent progress on what the strategic outlook will going to be. I'm just curious kind of given your background and the broader produce space, have there been any areas that you kind of were surprised about or anything on the go forward where you think there could be some potential upside extractive just outside of - we're talking rationalization, labor productivity, but have you - lot of times they're already been inactive, this is now kind of a more of a rethinking how to improve it, but I'm assuming you're not in the role just to execute there, had to do something you saw or think of that might be incremental as you think forward the next few years.

Thanks, Rob. I appreciate the question. So a couple of things I thought about when I thought about Calavo. First and foremost, a long legacy of leadership in this industry dating back to Lee Cole, dating back to Rob Wedin and his efforts, and a long history and legacy of leadership and that was exciting for me. I think the other thing that was important are some of the macroeconomic conditions that are tailwinds for Calavo. Looking at avocado in a category where demand has exceeded supply for several years in a row and it looks like it will continue doing so. There are even consumption per capita opportunities in the U.S., forget international, even though there are opportunities internationally. So having those chances, I think produce being in - right in line with U.S. trends on health and wellness is really critical for the long-term success and one of the things that excited me. Value-added produce growing disproportionately to produce as a whole is really exciting for our RFG and Foods segments. Now just a couple of bits of data on that. If you look at Grab and Go and what I call fresh-cut, that's grown depending on the category data you see from 20% to 25% over the course of the last year, that's a category that you'd really like to play in when someone - that's something that's growing that much. And I will tell you one thing that that's really interesting. Purchase intent in Gen Z, millennials, and Gen Y is anywhere from three to five times higher than purchase intent for baby boomers, and that's a huge tailwind as we think about opportunities for RFG long-term. So those are some of the broad economic opportunities that I looked at, some of the tailwinds that I looked at with Calavo joining the organization. I was excited about Project Uno, excited that they did the thought work on that. We have execution to work on. We have to execute that well and bringing the right discipline and reviews to drive results is important. So Project Uno was in fact a big benefit as I was coming into the seat. And then I think the two other things that I'd say. I mentioned it specifically in consumption opportunities for the U.S., but globalization of produce, globalization of avocados is a real opportunity for us. And then lastly, I just - I really liked the idea of being in, in ag and in produce where the food is good, it's good for you, it's healthy, it's sustainable, it hits a lot of cultural significant intent - purchase intent criteria and so I'm excited about that.

All right, fair enough. And then just kind of quickly on the cadence for the year or I guess maybe the trajectory given there is no - there is no guidance, so there's probably not much credence. I thought I heard comment in the prepared remarks about maybe limited gross profit sequential improvement as you did in the Q2 relative to Q1. And I just couldn't - I couldn't tell if that were one different segment or that's total company, so maybe just any clarification remarks you could provide as we kind of think of Q2 relative to Q1? And then just obviously the dynamic between cost and pricing? Thanks. That's it.

This is Mariela. And yes, we are planning to continually improve our profit generation and accelerate the benefits of improvements quarter-over-quarter as Project Uno takes off. So our plan today consists of margin enhancements every quarter as we execute our price initiatives, our SKU rationalization, and our plant optimization and procure many initiatives. So we will have some higher growth and some quarters that will be better than Q1. And it will vary, but we will expect that trajectory to improve for our quarter.

Our next question is from Ben Klieve of Lake Street Capital. Please proceed with your question.

All right, thanks for taking my questions. Just a couple from me. One on the consolidation of your shipping relationship down to a nationwide provider, I'm curious when that started if we saw - if you saw any effect on that from that on the Q1 financials and kind of - really kind of how we can - kind of how material of a benefit that's going to be here over the next couple of quarters?

Hi, Ben, Mariela. We don't have any benefits in Q1. We use fine - we've not finalized negotiations with many national carriers. We put the RFP back in February and we got many responses and those responses are confirmed would savings. And now more important than ever is to have good transparency on our freight and supply and our ability to pass foods to charges and have been transparent with the cost per mile as you know the inflation in freight has hit us severely in the past. So we are excited about this initiative and this will allow us to have some timing information to understand the freight increases and to pass those through our customer base with data-driven analytics.

Okay, thank you. And then one other one for me. On your effort of SKU rationalization, I forget the number you quoted. I think you said something like 4% or 5% of SKUs have been rationalized thus far. When you look at that, are you looking at kind of broad categories for it to be completely rationalized and just in markets that you don't like or are you really just kind of looking at kind of fine-tuning SKUs within all broad categories and getting the lowest performing SKUs across the board or both.

Yes, so this is a process that we do in line or working with our customers and with our suppliers because it's not only beneficial, so we are looking at some ingredients, packaging order size to sometimes change the SKU offering in line with what the demand and consumer signs are telling us. So this is an ongoing conversation to consolidate in some cases into different SKUs and also working with customers to enhance that SKU offering and result into our win-win economics where the SKU produces higher margin, but also higher quality benefit for the end consumer.

Ben, the only other thing that I would add is this - this should be a continuous cycle of rationalization and innovation, so that we are constantly refreshing our SKU portfolio, both for growth, but also cost efficiencies. And I would think of it not only as product but sometimes it's ingredients as well, potentially harmonizing proteins amongst various sandwiches or cheeses amongst various offerings. So we really ought to think of this as an ongoing program to manage the portfolio of product offerings that we have with customers. And just as Mariela mentioned, do that in conjunction with the customer, so that we're driving growth and driving efficiency on the shelf.

Got it. And I heard those comments that you made in your prepared remarks about kind of driving continuous improvement loud and clear and that's great to hear and good to hear you reiterate that. So, very good. All right. I appreciate you both taking my questions and I'll jump back in queue.

Thank you.

Our next question is from Eric Larson of Seaport Research Partners. Please proceed with your question.

Well, thank you for taking my question. Good afternoon, everyone. And congratulations, Brian. I look forward to working with you and if we get a chance hopefully we can get together and visit each other in person. So congrats.

Thank you very much, looking forward to it.

Well, and good luck. And so the first question I have for you, Brian, you came from a business - you came from Chiquita which as we all know that the global banana markets, they are large, they are very global in nature. And the one thing that I think Calavo could probably use some help with is why can't they do internationally what they've done in the United States? And I think they are on a path to start doing some of that, but is this an area where you can add a lot more value given your background with Chiquita?

Well, I appreciate the question, Eric, and thank you. I think there are certainly opportunities for international expansion. We want to do this right. We want to do it in the right sequence. We wanted to do it with the right resource allocation. And again, I think our clear focus has been trying to drive the right EBITDA and profit improvements through Project Uno and other initiatives and that's one that I am squarely focused on in terms of priorities. That being said, there is an opportunity to grow internationally. We've tried to even address that with some resources that we have now. I don't know if it comes out exactly clear in the earnings release, but I think in the first quarter, we had somewhere around 20% or 22% growth in international sales. So you will see us continue to try to drive business internationally where it makes sense, but I want to get back to one comment about the avocado category as a whole. We want to grow. We want to expand, but we want to do it in segments of the market that makes sense for us. And I think there are opportunities certainly in international where it makes sense. And we'll continue to look at that as we kind of go along this path of driving profit growth.

Okay. My next question is, I know you've only been there for what six weeks or something like that. But when you look at the RFG business, yes, it's significantly more complicated I think than really the avocado business, more labor intensive, probably even more logistic intensive. And we've always had the assumption that this business can get into the mid-high single-digit sort of EBIT margins. And I'm curious on your perception of that, is this a business that can achieve that? And then as a follow-up to that, is there - can you give us a little bit of the timeframe of when - you're talking gradually continually improving some profit margins here, but is there a timeframe for when RFG is actually going to contribute to the bottom line again here? Is it measuring on a quarter? Is it two quarters? Is it three quarters? I mean, how should we be evaluating the progress in RFGs in the near-term stuff too?

Sure. So I appreciate again the question and trying to provide a little bit of clarity. First of all, I think we have always thought in our minds that RFG could get into double-digit gross margin. And I see a path to get there. When Calavo announced Project Uno - they did - we did we - Calavo talked about that being a two-year journey and so I think that reference and that timeframe is still right. And as I mentioned on one of the previous questions, it is a multi-faceted approach. It's pricing, it's volume growth, it's material efficiency and sourcing strategy, it's labor efficiency and productivity, it's SKU rationalization, it's working with customers to ensure we've got the right product on the shelf for the consumer, all of those things feed into it, but I believe that there is a long-term path for success. I believe over the course of the next seven quarters, you'll kind of see the work of Project Uno, you'll see us each and every quarter get better and that improvement will accelerate over the course of the next seven quarters. So I can't give you a definitive number on next quarter and the quarter after, but if you think about it in those terms, we're excited about RFG in the portfolio and what it has to offer. And I will get back to those two market data segments that I mentioned before, Grab and Go's, Cut Fruit, whatever you want to kind of categorize that, it's growing between 20% and 25% a year, that's a market that I think we have some expertise in and we want to play in. That and then the purchase intent figures that I mentioned before, Gen Z, Gen Y and millennials are anywhere from two to five times more likely to buy Grab and Go or Freshcut produce items than Baby Boomers. And as the composition of consumers tilt more and more heavily to those three generations, that should yield real growth opportunity for the category and that's why we're excited about it.

Our next question is from Mitch Pinheiro of Sturdivant and Company. Please proceed with your question.

I had couple of questions just sort of staying on RFG. So volumes were flat and I'm sure SKU rationalization played into that, but what's happening on your customer end? I mean, so obviously flat-flat, but when you look across your customers, is there sort of one segment of customers that are still struggling - where are we on your customers sort of grow back to normalcy?

This is Mariela, and I want to follow up on Brian’s previous comments regarding market expectations and the demand following the COVID surge. We are observing a shift from customers toward Grab and Go, Fresh-Cut Fruits and Vegetables, and prepared foods in airports and other channels. Our volume remained flat mainly due to the closure of our Florida facility, as we consolidated some of the appealing volume into Georgia. We are making tough decisions to optimize our product line to better engage in this large industry. Our customers are collaborating with us. Additionally, it's important to note that in Q1, we experienced seasonal demand fluctuations, with a decline in Fresh Fruit consumption during the winter months. We are focusing on product optimization with our customers as a means to achieve cost savings. We anticipate continued demand and aim to expand this business once we establish the right product line for the market.

Okay, so what was - so if you didn't have the Georgia, just the disruption in the sort of the relocation, I mean, volumes - you're suggesting volumes would have been up in RFG?

Yes.

Okay. And I mean, so what's the Grab and Grow - Grab and Go market - I mean, what's that growth rate right now with your customers? I mean, is that growing or - I still don't have a sense, are we - is customer demand, I mean, is it where it was in 2019 or have - has there been a sort of a lost to that of demand or volume in that segment?

Mitch, I think two things that I would say. It's absolutely continues to grow. All right. There is no doubt that Grab and Go is growing. I think in our results, it's hard to see. And just frankly a lot of the growth that happened in certain segments of our portfolio was offset because there were certain SKUs that we rationalized, but in transition, in our capacity, there were also certain customers where we couldn't find the path for mutual success is probably the best way I can say it. So, you do see in this quarter, you see a little bit of growth that's offset by some of the changes we made - we made to stabilize the RFG business. First rule of improving profit, stabilize business. Next rule, growth. So I think you'll have a chance to see some of that in quarter two because, A, we will get some seasonality impact; B, we will have a more stable customer base; and C, I think this has been really encouraging for us in sort of the first 45 days of the second quarter is labor productivity has improved, material costs have improved, we've seen fill rates improve, all of those things obviously help improve your volume line as well. But I think in the first quarter, growth is masked a little bit because we had some other changes going on in both the SKU and customer portfolio.

Our next question is from Eric Larson of Seaport Research Partners. Please proceed with your question.

Well, thank you for taking my question. Good afternoon, everyone. And congratulations, Brian. I look forward to working with you and if we get a chance hopefully we can get together and visit each other in person. So congrats.

Thank you very much, looking forward to it.

Well, and good luck. And so the first question I have for you, Brian, you came from a business - you came from Chiquita which as we all know that the global banana markets, they are large, they are very global in nature. And the one thing that I think Calavo could probably use some help with is why can't they do internationally what they've done in the United States? And I think they are on a path to start doing some of that, but is this an area where you can add a lot more value given your background with Chiquita?

Well, I appreciate the question, Eric, and thank you. I think there are certainly opportunities for international expansion. We want to do this right. We want to do it in the right sequence. We wanted to do it with the right resource allocation. And again, I think our clear focus has been trying to drive the right EBITDA and profit improvements through Project Uno and other initiatives and that's one that I am squarely focused on in terms of priorities. That being said, there is an opportunity to grow internationally. We've tried to even address that with some resources that we have now. I don't know if it comes out exactly clear in the earnings release, but I think in the first quarter, we had somewhere around 20% or 22% growth in international sales. So you will see us continue to try to drive business internationally where it makes sense, but I want to get back to one comment about the avocado category as a whole. We want to grow. We want to expand, but we want to do it in segments of the market that make sense for us. And I think there are opportunities certainly in international where it makes sense. And we'll continue to look at that as we kind of go along this path of driving profit growth.

Okay. My next question is, I know you've only been there for what six weeks or something like that. But when you look at the RFG business, yes, it's significantly more complicated I think than really the avocado business, more labor intensive, probably even more logistic intensive. And we've always had the assumption that this business can get into the mid-high single-digit sort of EBIT margins. And I'm curious on your perception of that, is this a business that can achieve that? And then as a follow-up to that, is there - can you give us a little bit of the timeframe of when - you're talking gradually continually improving some profit margins here, but is there a timeframe for when RFG is actually going to contribute to the bottom line again here? Is it measuring on a quarter? Is it two quarters? Is it three quarters? I mean, how should we be evaluating the progress in RFGs in the near-term stuff too?

Sure. So I appreciate again the question and trying to provide a little bit of clarity. First of all, I think we have always thought in our minds that RFG could get into double-digit gross margin. And I see a path to get there. When Calavo announced Project Uno - they did - we did we - Calavo talked about that being a two-year journey and so I think that reference and that timeframe is still right. And as I mentioned on one of the previous questions, it is a multi-faceted approach. It's pricing, it's volume growth, it's material efficiency and sourcing strategy, it's labor efficiency and productivity, it's SKU rationalization, it's working with customers to ensure we've got the right product on the shelf for the consumer, all of those things feed into it, but I believe that there is a long-term path for success. I believe over the course of the next seven quarters, you'll kind of see the work of Project Uno, you'll see us each and every quarter get better and that improvement will accelerate over the course of the next seven quarters. So I can't give you a definitive number on next quarter and the quarter after, but if you think about it in those terms, we're excited about RFG in the portfolio and what it has to offer. And I will get back to those two market data segments that I mentioned before, Grab and Go's, Cut Fruit, whatever you want to kind of categorize that, it's growing between 20% and 25% a year, that's a market that I think we have some expertise in and we want to play in. That and then the purchase intent figures that I mentioned before, Gen Z, Gen Y and millennials are anywhere from two to five times more likely to buy Grab and Go or Freshcut produce items than Baby Boomers. And as the composition of consumers tilt more and more heavily to those three generations, that should yield real growth opportunity for the category and that's why we're excited about it.

Our next question is from Mitch Pinheiro of Sturdivant and Company. Please proceed with your question.

I had couple of questions just sort of staying on RFG. So volumes were flat and I'm sure SKU rationalization played into that, but what's happening on your customer end? I mean, so obviously flat-flat, but when you look across your customers, is there sort of one segment of customers that are still struggling - where are we on your customers sort of grow back to normalcy?

This is Mariela, and I'm going to start with Brian's last answer - prior answer on the market expectations for the demand after COVID surge and we continue to see customers shifting towards Grab and Go and Fresh-Cut Fruits and Vegetables and prepared foods in airports and different channels. So our volume was flat primarily because we closed our Florida facility and we consolidated some of the attractive volume into Georgia. And we're making some hard calls to optimize their product line where we want to participate in this big industry. And our customers are working with us. And remember in Q1, we also had the seasonality demand; it goes down because Fresh Fruit is - in the winter is consumed less. So we are prioritizing our product optimization with our customers and it's a cue there to get cost savings. And we expect that demand will continue to be there and we plan to grow this business once we have the right product line to go to market.

Okay, so what was - so if you didn't have the Georgia, just the disruption in the sort of the relocation, I mean, volumes - you're suggesting volumes would have been up in RFG?

Yes.

Okay. And I mean, so what's the Grab and Grow - Grab and Go market - I mean, what's that growth rate right now with your customers? I mean, is that growing or - I still don't have a sense, are we - is customer demand, I mean, is it where it was in 2019 or have - has there been a sort of a lost to that of demand or volume in that segment?

Mitch, I think two things that I would say. It's absolutely continues to grow. All right. There is no doubt that Grab and Go is growing. I think in our results, it's hard to see. And just frankly a lot of the growth that happened in certain segments of our portfolio was offset because there were certain SKUs that we rationalized, but in transition, in our capacity, there were also certain customers where we couldn't find the path for mutual success is probably the best way I can say it. So, you do see in this quarter, you see a little bit of growth that's offset by some of the changes we made - we made to stabilize the RFG business. First rule of improving profit, stabilize business. Next rule, growth. So I think you'll have a chance to see some of that in quarter two because, A, we will get some seasonality impact; B, we will have a more stable customer base; and C, I think this has been really encouraging for us in sort of the first 45 days of the second quarter is labor productivity has improved, material costs have improved, we've seen fill rates improve, all of those things obviously help improve your volume line as well. But I think in the first quarter, growth is masked a little bit because we had some other changes going on in both the SKU and customer portfolio.

We have reached the end of the question-and-answer session. I will now turn the call back over to Brian Kocher for closing remarks.

Well, before we hang up, I'd just like to say thank you for your participation. I'd like to thank our shareholders for their continued support of Calavo. And I look forward to meeting many of you in the coming months, either in person or virtually. Until then, we wish you the best and thanks again for tuning in today and for your continued support.

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