Calavo Growers Inc Q3 FY2022 Earnings Call

Good afternoon, and welcome to the Third Quarter 2022 Calavo Growers Earnings Conference Call and Webcast. All participants will be in a listen-only mode. I will now turn the conference over to your host, Julie Kegley, Investor Relations for Calavo. Julie, you may begin.

Good afternoon. And thank you for joining us today to discuss Calavo Grower’s Financial Results for the Third Quarter of 2022. This afternoon, we issued our earnings release, and it is available in the Investor Relations section of our website at ir.calavo.com. With me on today’s call are Brian Kocher, President and Chief Executive Officer; and Shawn Munsell, 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 reports on Form 10-K and 10-Q. As you saw in our earnings press release, we have begun our new segment reporting structure. What was the Fresh segment is now known as the Grown segment. The Foods and RFG segments have been combined into the new Prepared segment. In our discussion today, we may refer to the prior segment names as we make the transition. With that, I will now turn the call over to Brian Kocher.

Thank you, Julie, and good afternoon, everyone. We appreciate you joining us today. As we look back at Q3, we continued to make meaningful operational and structural progress. Compared to Q3 last year, gross profit more than doubled to $18.5 million; net income improved to $0.07 per share compared to a loss of $0.74 a share last year, and adjusted EBITDA improved by more than $7 million. Our liquidity and capital ratios all improved and we filled very key leadership roles with talent that allows us to fight above our weight category. On a sequential basis from the second quarter, gross profit declined, while net income was up $0.08 per share versus a loss of $0.01 a share in Q2. Adjusted EBITDA was down by $4.6 million. Unfortunately, one tough month of commodity volatility and continued input cost pressure in our guacamole product line masked tremendous improvement in the fresh cut portion of our Prepared segment, formerly known as RFG. The former RFG business achieved almost 8% gross margins in Q3, and I am excited about the structural changes in place to manage that business with an everyday intensity. Temporary avocado price volatility affected both the Grown and Prepared segments. Let me explain those impacts a little further. First, in the Grown segment, the Grown segment finished the quarter modestly down compared to Q3 last year. Just think about the work that we did during the quarter to deliver gross profit that finished basically flat with Q3 of 2021. Avocado volume was down almost 20% due to a combination of short supply from Mexico and our intentional approach to mitigate losses as we were selling through high-priced inventory. Mexican import volume also was down 34% versus the second quarter and 35% year-over-year for the quarter. But we managed to mitigate those declines by increasing our sourcing from California, Peru, and Colombia. During July alone, market prices decreased over $20 a carton from the beginning of the month to the end of the month. Yet through aggressive inventory management and minute-by-minute attention to sales prices, our team managed to squeak out positive gross profit during July and achieve our overall targeted margin per case for the quarter. Overall for the quarter, gross profit per carton was still around $3.65. However, with the market conditions and constraints on available fruit during the quarter, we simply did not have enough sellable volume to increase our gross margin in Grown sequentially from Q2. I am proud of how we managed commodity volatility in the market and already look forward to more normal conditions in Q4. As evidence of our ability to react quickly to temporary changes in the market, by August, we already recovered from the July decrease in avocado market prices and our margins have rebounded from the July levels. We expect the Grown segment to return to realizing margins per carton within a normalized range this quarter. But there is likely to be near-term volatility associated with volume. With the price of fruit as high as it was at the beginning of the third quarter, we did see the retail trade pull back on promotions and shrink display sizes. In August, supply and demand started rebalancing, and we are pushing volumes where appropriate while tracking toward our overall targeted gross profit per carton. In August, we opened our Jalisco facility for exports to the U.S. market. We have another option to help us manage market exposures. With our network of grower partners, we now have access to the largest GLOBALG.A.P. acreage in Jalisco. This broadens our sourcing capability, has provided additional volume with which to promote and drive sales and provides us with optionality and flexibility, which should benefit the business both in the short and long term. As mentioned, the Prepared segment also felt pressure from higher avocado costs. As we indicated during our call last quarter, our guacamole business within the Prepared segment, formerly known as the Foods segment, was pressured by the cost of fruit. Input costs in Q3 were up 50% compared to last year. And while we implemented price increases, we could not keep up with the rising cost of inputs. Volume was down approximately 19% versus the prior year due to price and margin pressures and lingering COVID demand softness in the international markets. However, input costs consistently declined over the course of the quarter following the peak in May. We are now selling product for positive gross margin and expect margins to strengthen as we work through our frozen inventory. We also expect our alternative sourcing, process improvement initiatives, and price increases to support gross margin in the fourth quarter. As the Grown segment and the guacamole product line pressured adjusted EBITDA in the quarter, I am most excited about the progress in our Prepared segment. Despite facing challenges, the Prepared segment performed very well in Q3, showing an $11 million gross profit improvement year-over-year in addition to sequential improvement over Q2. We achieved 5% gross margin in Prepared, but that included a nearly 8% gross margin within the fresh cut product line, formerly known as RFG. We continue making steady progress toward our goal of 10% to 12% gross margin for the former RFG segment. Again, this improvement is structural and throughout the entire P&L. Pricing, cost mitigation, labor productivity, yield enhancements, and transportation savings, all improved gross margins. Our team in Prepared is managing this business with an hour-by-hour urgency and the improvement in this segment is both confidence and momentum building. In addition, pricing and efficiency improvements from Project Uno gained steam, capturing $15 million in the third quarter and approximately $30 million of benefits year-to-date. I’d like to wrap up my remarks today by saying how thrilled I am to have our leadership team finalized and in place. We recently filled three key roles on the management team, including Shawn Munsell, who began in June as Chief Financial Officer; Danny Dumas, who started in July as Senior Vice President and General Manager of Grown; and Helen Kurtz, who joined in August as Senior Vice President and General Manager of Prepared. Each one of these individuals has been involved in broad international business. Nothing at Calavo is too big for these seasoned leaders, and even in a short period of time, I have seen their growth and profit orientation positively impact our business and team. We have the right people in these important roles. With the passion, energy and competitiveness of a full team driving Calavo, we are positioned to take our performance to the next level and demonstrate that progress through continued sequential profit improvement. With that, I will turn the call over to Shawn Munsell to report on the financials.

Thank you, Brian. It’s good to be here as part of the Calavo team. We provided year-over-year comparisons in our press release. So, I will focus my discussion on a sequential basis from the second quarter. On a consolidated basis, third quarter revenue was $342 million, an increase of $10.6 million from the second quarter of 2022. Grown segment revenue was $207.6 million, down about $3 million from the second quarter, as the average selling price of avocados increased by 14%, while avocado volumes were about 10% lower due to supply constraints in Mexico and intentional steps taken to maintain margins. Prepared segment revenue was $134.9 million, up $14 million from the second quarter, benefiting from price and mix initiatives. Consolidated gross profit was $18.5 million, down $3.2 million from the second quarter. The decrease primarily was due to a $6.4 million decline in gross profits in the Grown segment from the volume constraints, inventory sell-through challenges, and margin management decisions Brian outlined. The decline in Grown was partly offset by a $3.2 million sequential improvement in Prepared. Within Prepared, the former RFG portion of the segment realized a significant increase in gross profit from ongoing operational initiatives, achieving a 7.7% gross margin from just over 2% in the prior quarter. The improvement was even more pronounced relative to the negative 5.4% gross margin in the prior-year quarter, which included some unfavorable one-time adjustments, representing a recovery of almost $15 million year-over-year. However, as we shared, negative gross profits in our guacamole line in the third quarter, caused by input cost increases, tempered overall Prepared gross profit. For additional perspective on segment performance, year-to-date gross profit through the third quarter totaled $53.5 million, up from $48.3 million for the prior year. The $5 million increase year-to-date is attributed to gross profit increases of approximately $1 million and $4 million in our Grown and Prepared segments, respectively. In the Grown segment, year-to-date gross profit per carton for avocados increased by over 20% or almost $10 million. However, the benefit was mostly offset by a 15% decline in volume and an unfavorable foreign exchange impact. The gross profit increase of $4 million in Prepared consisted of a $14 million recovery in the former RFG portion of the segment, much of which occurred in the third quarter, partly offset by an almost $10 million decline attributed to our guacamole line from input cost pressure. Year-to-date fruit input costs are up over 70%, which has exceeded the pace of price increases. SG&A was $16.7 million for the quarter or 4.9% of sales. Adjusted EBITDA was $8.1 million for the third quarter, down from $12.7 million in the second quarter of 2022, mainly driven by lower gross profit in the Grown segment, partly offset by higher gross profit in Prepared. Relative to prior year, third quarter adjusted EBITDA was up $7 million, primarily on higher gross profit in Prepared. On a year-to-date basis, adjusted EBITDA totaled $25.5 million, about flat to prior year, as higher segment gross profit of about $5 million was offset mostly by higher SG&A, attributed primarily to increased compensation and bonus expense and other costs. Now, turning to our financial position, during the quarter, we generated strong cash from operations of over $20 million, including from improvements in cycle times for working capital. We further strengthened our balance sheet by paying down debt by $16 million in the third quarter and $38 million since the end of the first quarter. The company ended the quarter with $31.4 million of total debt, which included $25.6 million of borrowing under our line of credit, plus other long-term obligations and finance leases. Unrestricted cash and equivalents totaled about $3 million as of July 31 and available liquidity was approximately $20 million, providing ample resources for investment. The volatility that affected the third quarter is subsiding in the fourth quarter, and we expect more normal conditions to persist over the balance of the quarter. In Grown, gross profit per carton has started to recover in August, and margins are now tracking toward the historical range of $3 per carton to $4 per carton, but volume will remain challenged in the near term. We are focused on growing this business. The recently announced opening of our Jalisco facility for exports to the U.S. underscores our growth plans. In Prepared, we started buying fruit in August for our guacamole line at prices that will generate more normalized gross margins as we flow through inventory over the balance of the quarter. We will continue implementing operating improvements within our Prepared-RFG business as planned, although we typically experienced some seasonal softness in the business in the fourth quarter as food availability and demand moderate. We still expect the Prepared-RFG business to attain ongoing gross margins of 10% to 12% by the end of fiscal 2023. That concludes my prepared remarks and I will turn it back over to Brian.

Thanks, Shawn. Since the day I sat in the CEO chair, I have made a big deal about and focused on continuous improvement. The third quarter brought some tough challenges, and before we go to questions, I just want to give you some perspective of how I feel about our performance. I am thrilled with the progress we are making in the fresh cut product lines of our Prepared segment, formerly RFG. We are delivering profit improvement throughout the P&L. We are making structural changes to the management and oversight of the business so that our profit improvement is sustainable. These aren’t one-off events where we are just getting a little lucky. I am proud of the way we managed significant commodity volatility in a historically high-priced avocado market. We tightened our inventory starting in June, we managed to get out of the inventory over the course of a three-week to four-week period and kept our avocado customers serviced and priced right in the market. As a total company, I am excited that we somehow managed to deliver improved adjusted EBITDA and adjusted net income versus Q3 2021, when avocado volume was down 19%. If you would have told me that market prices on avocados would decline $20 a case over the course of a month, volume would be off by 19% for the quarter, guacamole and processed products would have had negative gross margins, and we still improved adjusted EBITDA and net income versus the year-ago period, then I would have been shocked. This is a great example of why a healthy and profitable Prepared segment balances some of the commodity risk that we have in our Grown segment. I am encouraged that in the midst of driving all our change, we improved days sales on hand in receivables, days payable on hand, inventory levels, and other balance sheet areas to pay down debt in the quarter. We paid down almost $40 million of debt in the last six months, which is fantastic. So, actually, I am really proud of this quarter. I am disappointed that we didn’t deliver sequential improvement, but proud of the progress we made in our efforts to control what we can control. I am not satisfied or happy unless we are improving every single day. We have work to do. But shareholders have both the management team and an entire organization that are trying to get better each and every day. My promise to you is I will be restlessly discontent until we are delivering sequential quarter-over-quarter improvements in adjusted EBITDA. We just want to get better each and every day. Sometimes the market allows us to do so, but when it doesn’t, we still compete, we still fight, and we still work to optimize the market conditions in our favor. Simply, that’s our job. So, with that summary, we will turn it over to questions.

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

Hey, guys. Jim Salera on for Ben. You mentioned the fall in avocado prices. I wanted to ask, how should we be thinking about supply-demand setup as we pivot into the fall? Is the recent fall-off in avocado pricing just a function of supply picking back up, or are you seeing any evidence of the planned restructure from the consumer side?

Thank you for joining us, Jim. This is Brian. We've observed a rebalancing of supply and demand. This summer's harvest was significantly larger than last year, which did pressure prices but also helped us lower our purchase costs. A key strength of our business model is our ability to buy and sell daily. When we have inventory, we can react swiftly to market changes. In July, we managed to offload some high-priced inventory, which was double what it is now, within three or four weeks, and still achieved a gross profit, albeit modest. For the quarter, we ended up at the upper end of our range, with around $3.65 gross profit per case. However, we lacked sufficient sellable units for sequential profit growth. Looking ahead, the larger summer harvest has eased some pricing pressures, with forecasts for Mexico's upcoming fall harvest continuing to rise. We're leveraging this opportunity to drive volume. Additionally, our recent acquisition in Jalisco provides us with more fruit for promotions and allows us to take advantage of cost differences between growing regions. Overall, while you can never fully predict commodity trading, supply and demand dynamics are more typical for this time of year, leading to more standard acquisition costs and sales prices.

Great. And on the consumer side, the demand disruption, I mean, I know price has come down, but they are still up pretty materially year-over-year. Have you seen anything just with the consumer feeling inflation pressures everywhere changing their buying behavior at all?

I think it's challenging for us to determine that, Jim, for two reasons. Firstly, we are operating in a supply-constrained environment, which makes it hard to assess actual demand. What we have available sells out, so we can't clearly understand what consumers are doing in relation to retail prices, as there isn't enough fruit to analyze elasticity. Secondly, to be transparent, as I mentioned in my prepared remarks, at the start of the quarter, when prices were highest, some retailers stopped promoting or reduced display sizes. We did observe some retailers pulling back, which likely affected volume. However, even if we had more demand, we wouldn't have been able to sell more due to limited volume. It's a complex analysis, but I appreciate our business model. Currently, we are purchasing the fruit we need on a daily basis, which means I don't have to sell fruit from my own farm into a weak market. There are advantages and disadvantages, but I value our position as a fruit marketer, allowing us to adapt quickly to market changes while maintaining our overall gross profit per box within historical ranges. We have done well in this regard. Consider this, Jim: we managed to achieve the same gross margin this quarter despite a 19% decrease in volume and negative currency effects. That’s quite impressive compared to the same quarter last year. I believe this highlights the strength of our model as seen in this quarter.

Great. I appreciate the additional color. If I can sneak one more in, you guys have added a lot of talent to the team as of late and just where are you in building out the team? Are you guys almost where you want to be or where you want to be? And then what new ability does it give you now that you are kind of playing with a full desk?

I am really excited about our team. We have completed our hiring process. We appointed Shawn as CFO, whom many of you have met this quarter. We also brought on Danny Dumas as General Manager and Senior VP for our Growth division. Danny has extensive experience in global commodities, including bananas, pineapples, and avocados, so I am thrilled about that. Additionally, we have Helen Kurtz as the General Manager of our Prepared segment. While she may not have direct produce experience, she brings significant expertise in managing tight-margin agricultural products from her time in the chicken industry and has valuable brand and CPG experience from her tenure at General Mills. I'm truly excited about the talent we have and the onboarding process, as some of them are still acclimating to their new roles. Overall, we have a solid team in place. Another important point is that this transition has been very structured. Rob Wedin, who managed our avocado business for many years, is working closely with Danny on a structured transition plan. Similarly, Ron Araiza, involved in our Prepared segment for many years, is also on a structured transition plan with Helen. I appreciate having experienced individuals who have driven results assisting in the transition to our new leaders. I’m optimistic about our team’s direction, combining profit orientation with growth focus. Our facility operations are stable, and we can produce high-quality products with excellent fill rates at the right cost. Now, we need people who can help us grow, and with Helen and Danny managing the P&Ls and Shawn facilitating access to necessary investments, I feel really positive about our leadership team moving forward.

That’s great. I appreciate your time, and I will pass it on.

Thank you. Our next question comes from Ben Klieve with Lake Street Capital Markets. Please proceed with your question.

All right. Thanks for taking my questions. First, I have a couple on the processed avocado side. First, I have just kind of a high-level question about how you source your supply for that business and how that’s changed throughout Project Uno. I am really kind of curious how nimble that process is and then great to watch you build up inventory as when prices fall to capitalize on that kind of environment when prices are high. Can you talk about that part of the business and really how it’s changed over the last year?

Sure. So, first of all, Ben, thanks again for calling in. I appreciate it and hope you are doing well. This processed avocado business. We have tried to transition over the course of the last several months. Predominantly, if you go back a year ago, we were predominantly buying fruit from our own packing house, transitioning fruit from our own packing house that were the remnants of the pack out of our own harvest, and over the course of the last six months in particular, we really tried to diversify that portfolio. So, in the old model, you could see basically whatever we were paying for the product, we were selling in the market as whole fruit, we would be paying for our processed fruit as well, just as the remainder. A weighted average would be the same. So we have expanded that geographically. So we have gone to now Jalisco and we are sourcing fruit out of Jalisco. We have gone to that to some other states in Mexico. We have sought out volume from other countries, be it Peru or guacamole, even when prices or, sorry, Peru or Guatemala, even when prices were really high, we were buying partially processed avocado to blend it in or blend it in with our finished good products. So the whole sourcing environment has changed over the course of the last six months, I would say, Ben, and that’s really helped. I think just transparently, a couple of other things have helped. One, the overall supply-demand dynamics have changed. We are now buying raw product for our processed business that is roughly 35% of what it was eight weeks ago, nine weeks ago. And we have got some productivity initiatives, so we have got a host of initiatives that are all centered around how do I drive one more pound through the system per day with one less FTE and producing one less pound of shrink when I do it. So we have got a lot of that going. And of course, the price increases have helped. Now that the input costs have come down. But frankly, we raised prices four times. We just couldn’t keep up, and the market couldn’t bear more price increases, and we tested that to make sure. Hopefully, that helps.

That was really helpful. This leads me to a follow-up question. Regarding the shift in strategy over the last six months to diversify your inputs, what are your expectations for its impact in a more stable operating environment compared to what you experienced in July? Do you believe you can return to the profitability levels this company achieved in 2019, or do you see a more realistic target somewhere in between?

Yeah. Ben, this is Shawn. I will take that question. So, like Brian said, we are now buying fruit that’s probably a third of what we were paying at its peak back in the summer. And it’s going to take a few weeks for that to flow through inventory. But when it does, I would expect that in this month in September, we are going to start to really see gross margins that are consistent with what we would expect on a historical basis.

Okay. Thank you. And one more for me and I will get back in queue.

Hey, Ben. I just want to add one more thing since you mentioned it in your first question. From a management standpoint, with the current price of raw product now at a level where, without any inventory, we would achieve our target margins if we sold today. Additionally, we are taking steps to utilize our capacity effectively. We are rebuilding our frozen inventory at these current raw product costs rather than the costs from eight weeks ago. This is an important aspect of managing our business and our profit and loss, as well as addressing risks as they arise. By building frozen inventory at today’s prices, we can mitigate some of the challenges we might encounter in the future due to fluctuations in supply and demand.

And just one more thing to add there too, Ben, is Brian alluded to it. We have got some efficiency projects that we are kicking off that we expect should be installed and operational kind of in early 2023, and that’s going to give us a couple of points of lift too once they are up and running. So efficiency, yield improvement, so we should see some benefit from that in the not too distant future.

Got it. That’s all helpful information. I have one more quick question that builds on what you just said about the various improvements in place. The sequential gross margin improvement for RFG from the second quarter to the third quarter was quite significant, increasing from 2% to 8% in that legacy RFG business. Was there anything one-time in nature that contributed to that increase, or was this increase in line with your expectations, and can we consider this the new baseline for that business as we head into the next quarter?

Yeah. There wasn’t anything, I would say, kind of unusual or like non-recurring in nature there, Ben. We are just making steady progress across the P&L. I will say the vast majority of the improvement from the second quarter was price related. But we also had some labor and productivity improvements and also starting to see more of the benefits from our transportation and warehousing initiatives as well.

Got it. Okay. Very good. Well, I appreciate it.

Hey, Ben. Just before we move on from RFG, I want to express how proud I am of RFG this quarter. We anticipated this in June, and while this isn’t quite the culmination, it represents a cumulative effect; we still need to work towards our target margins. This is reflected across the P&L, as Shawn mentioned. I doubt there are many other accounts you track that are seeing year-over-year savings in transportation like we are. We have achieved savings in transportation, improved labor productivity, and yield enhancements. Although we are facing raw materials costs, pricing adjustments have been able to offset that, demonstrating effective leadership. Every plant manager is working hard on this every day, and our salespeople are actively engaging with customers to ensure we provide great solutions. I’m truly proud of our achievements. If you had asked me during last quarter's call, I would have been confident we’d improve, but I didn’t expect us to approach almost 8%, which is very significant. However, we still have some distance to cover to reach our 10% target margin for the legacy RFG business. Historically, the final 25% of improvement is the most challenging. We are committed to continuing our efforts every single day. Additionally, keep in mind that there is some seasonality in this business; as we enter the winter months, sourcing for fruit and winter pricing can complicate matters. Therefore, I wouldn’t say that 8% is the absolute minimum. We aim to consistently move toward a target range of 10% to 12% by the end of 2023, as we've discussed.

Got it. That was very helpful, and a lot of improvement has been made already. Congratulations to you all on that progress. I think that does it for me. Thanks for taking my questions. I will get back in queue.

Thanks a lot, Ben.

Thanks, Ben.

Thank you. Our next question is from Ben Bienvenu from Stephens. Please proceed with your question.

Hey, everyone. Jim Salera, filling in for Ben. I wanted to follow up on Jalisco. Can you share how much fruit was harvested from Jalisco in August now that everything is operational?

It started off slow, and I’d estimate that our Mexican volume reached around 10% to 12%. Looking ahead to the next month or so, it could potentially rise to as high as 25% of our Mexican volume.

Do you have a target range or a target contribution that it should make up kind of as like a go-forward run rate?

I wouldn’t think of it that way, Jim, if you bear with me. What we want to consider is selling Mexican fruit into the U.S. market and whether it comes from Michoacan or Jalisco, that’s our opportunity to take advantage of the acquisition price and the efficiency of our packing houses, as well as how one can dilute fixed costs more effectively than the other. The transportation to the border is about the same, so that’s not a factor. We aim to be flexible in our approach. Remember, we make these buying decisions every day, and we recently placed an order for tomorrow’s volume. Each day, we decide how much we take from Michoacan and how much from Jalisco, always keeping our business interests in mind. In this commodity sector, even small amounts matter, and we work tirelessly for every penny each day. Therefore, it is challenging for me to state that there is a specific target for Jalisco. What we do have a target for is our return in the market, which we’ve consistently indicated falls within the $3 to $4 per case range. Our ability to operate within that range and achieve those margins depends on diverse sources, including Peru, California, Colombia, Jalisco, and Michoacan. Our responsibility is to ensure we balance and optimize sourcing from all those locations to secure the necessary fruit and do so at a cost that allows us to meet our targeted margins per case.

Okay. Appreciate the follow-up question. Thanks, guys.

Thank you.

Thank you. Our next question comes from Mitch Pinheiro with Sturdivant and Company. Please proceed with your question.

Yeah. Hi. Good afternoon.

Hi, Mitch.

I have a couple of questions. I'm curious about the avocado situation. I might have misheard you, but did you mention that you could be facing volume challenges in the near term? I see that volumes coming from Mexico are looking strong this August. Is there a slowdown, or what leads you to say that?

Yeah. The near-term volume challenge, Mitch, what we were referring to there is just as we are working through kind of the inventory levels, as prices are stabilizing and costs are stabilizing, just ensuring that we are managing our margin as we are transitioning to a more kind of normal environment.

Mitch, I think, the other thing that we also have to transparently face, and we did this, I mentioned this a little bit earlier. We saw during the beginning of the quarter that retailers stopped promotions and shrunk display sizes, and now we are getting them to ramp promotions back up and in large display sizes. So, there is a little bit of that that we have to restart the category on and retrain the consumer that product’s available now. So, what we were alluding to is that, I don’t think we can go from 19% down on a volume basis year-over-year to breakeven or 10% higher year-over-year, right? There is a ramp-up period that we wanted to make sure that we articulated.

Yeah. And then can you remind me, on the Grown side, what percentage of your business is retail versus foodservice and then if you could talk about any differences in demand or any changes among those channels?

Yeah. It’s about 60-40 favoring retail.

How has foodservice been performing? Is there a volume decline due to a lack of good fruit or because of prices? Can you discuss the menu adjustments they are making?

If you look at the volume decline we saw in the third quarter, we experienced a slightly greater impact on the retail side compared to the foodservice side. This was mainly due to the lack of promotions, but honestly, the difference between the two was quite modest.

Okay. And then how about this…

Hey, Mitch. I would say the other aspect of that is that we were in a volume constrained environment. Foodservice can be a bit more flexible regarding size, as it’s an ingredient for their finished product. Sometimes they will look for a better price or size of product. However, they are generally trying to focus on the big Mexican themed foodservice players, and they are not going to remove guacamole or avocados from the menu, but we have to work with them to try to meet their price point.

Right. And then on guacamole side, any differences between foodservice and retail?

No. Nothing really to speak of there, Mitch.

Okay. Finally on RFG, it looks like, I was doing the quick math. It looks like sales year-over-year was up about 14%. Is that about right?

I didn’t think it was 14%, was it, maybe.

Yeah.

But you don’t break it out, I was just trying to back into it, but I was doing it quickly and that’s hard for me to do.

But, yes. Sorry, Mitch. You are trying to focus on the RFG part of the business.

Yeah. Just trying to get a sense for it seemed like it was mostly pricing versus volume. I was curious about how that was.

Yeah. Yeah. Your math is about right there, and year-over-year volume is down just a little in RFG. So, yeah, year-over-year when you look at that topline number, that was mostly the impact of pricing.

And what are your conversations like with your customers in the RFG segment now?

Oh! I think the good news for us is our customer discussions are now focused on growth. If you think about this time last year, RFG was struggling to fulfill orders, find the right profit profile, and get the appropriate labor mix in the facility. We have stabilized all of our facilities. Our fill rate over the last quarter was around 99% or 99.1%, which is impressive for a perishable product. We are excited about the service and the stabilized operation. We have mentioned some of the metrics related to labor productivity, yield improvements, and fill rate consistency, and now we have the opportunity to discuss how we can work together to grow the category again. So I am enthusiastic about moving from stabilization to growth and leverage in RFG.

So… In that business, do you think there is potential for stabilization in volume as we approach the fourth quarter and the first quarter of next year, considering the seasonality and its impact on margins?

Yeah. I think it’s stabilized, probably a little bit of softening, just seasonal softening as we go into the fourth quarter. But, yeah, otherwise, roughly in line with what we are seeing this quarter. And just one other comment too, Mitch, going back to your earlier point about the topline. Keep in mind, that’s a combination of price, but there are also some mix benefits that are flowing through as well as we are working through our SKU optimization process, and of course, that’s going to be an ongoing process for it. So you are seeing some of those benefits as well and that bleeds into those conversations that we are having with our customers.

Okay. And then one more thing, to get from the 8% range in gross margin to double-digit range, I know it’s going to take a lot of work. But I mean, how much of that is going to be dependent on just fixed cost leverage, just simple more volume through your facilities? Is it most of it, half of it, any way to think about that?

I would estimate that it will be less than half of that, Mitch. The path forward for us, considering what led us to achieve 7.7% last quarter, will involve factors that contribute to reaching 10% to 12%. However, similar to our previous journey, it will affect the entire P&L. We will continue to experience pricing advantages, improved product mix, labor optimization, and productivity, while also focusing on increasing volume at our plants.

All right. Well, thank you for your time.

Thank you for joining the call, Mitch. I want to discuss RFG in relation to our volume strategy. While increasing volume and leveraging fixed costs will be beneficial, we've made significant structural changes in how we manage this business. For instance, our plant managers are now fully aware of the labor deployed in real-time and can make adjustments on the spot, which was not possible a year ago. We also have a seasonal calendar in place for sourcing raw products, with 93% of our raw materials now sourced via contracts through an online tool, something that we didn't have previously. Our transportation network has improved significantly, with over 70% of our spending now managed through RFP, allowing for greater consistency with carriers—a system that wasn't established a year ago. Furthermore, we have implemented a comprehensive training program designed for plant managers, assistant plant managers, and line supervisors, ensuring they know how to respond effectively when metrics fluctuate, which we also lacked last year. When I refer to the sustainability of our improvements in RFG, I do not imply that we won't experience small setbacks in a given quarter; however, we have established a solid framework to manage our operations continuously, every hour of every day. Our leaders are motivated, and we are all aligned to work together as a team. It's crucial to emphasize that our recent successes are not just a matter of luck for this quarter.

Paul, do we have any more questions?

At this time, there are no further questions. I’d like to turn the floor back over to Brian Kocher for any closing comments.

Okay. Thanks, Paul. Thank you all for dialing in. We appreciate your support. We appreciate you giving us a chance to help us explain our business and where we are making the opportunities and where we are driving the results. So thank you very much. We look forward to talking to you next quarter, and again, appreciate all your support.

This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.