Earnings Call Transcript - CVGW Q1 2023

Operator, Operator

Good afternoon, and welcome to the First Quarter 2023 Calavo Growers Earnings Conference Call and Webcast. I will now turn the conference over to your host, Julie Kegley, Investor Relations for Calavo. You may begin.

Julie Kegley, Investor Relations

Good afternoon, and thank you for joining us today to discuss Calavo Growers' financial results for the first quarter of fiscal 2023. 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 our reports on Form 10-K and 10-Q. With that, I will now turn the call over to Brian Kocher.

Brian Kocher, CEO

Thank you, Julie, and good afternoon, everyone. We appreciate you joining us today. Our fiscal first quarter results reflect challenging conditions in both segments, but we have taken action and expect that our results will improve as we progress through the fiscal year. In the Grown segment, high volumes of Mexican avocados, especially small fruit, combined with still high retail shelf prices, pressured wholesale prices and margins more than anticipated during the quarter. While we expected industry avocado volume to increase during the quarter, we did not anticipate prices and margins to contract as much as they did. The average case price in our first quarter fell to about $28 versus around $34 in the fourth quarter and $43 in the prior year quarter. We also expected prices and margins to improve approaching the Super Bowl. Although conditions did improve later in January, the impact was more muted than anticipated. Prepared segment performance was better than the prior year but was weaker than expected due to a combination of volume softness and winter weather. We expected a decline in Prepared segment earnings versus the fourth quarter due to seasonality in our fresh-cut division, but we experienced softness in volume that exceeded typical seasonality, with total Prepared segment volume down about 13%. Velocity slowed in the quarter, which was partly attributed to a decline in volume sales across retail food categories as consumers reacted to inflation and tough general economic conditions. Separately, we incurred weather events during the quarter that cost about $1 million of unfavorable incremental costs in the fresh cut division, mainly from the temporary closure of some of our manufacturing facilities. Understanding our first quarter results in the context of the market around us is important. Avocado import volume from Mexico grew over 8% versus the same quarter in 2022, but retail sales volume only grew about 3%, while total U.S. inventories rose almost 7%. We attribute the relatively lower retail volumes in part to retail prices, which haven't declined to the same extent as wholesale prices. Higher inventories also pressured wholesale prices of avocados and compressed margins as the industry worked through aging inventory. During the quarter, our Prepared segment faced pressures from a declining category. In retail, dollar volume sales are up across almost all prepared categories in which we participate. However, according to IRI, unit volumes declined in produce categories as a whole in almost every category in which we participate by anywhere from 2% to 5% in the second half of '22. Consumers either traded down or passed on certain convenient stick categories in the store perimeter. As unit volume declines on a store-by-store basis, our margins suffer and Prepared as we lose benefits from fixed cost absorption. We believe the worst is behind us for the fiscal year, and we expect to see sequential improvement in our results as we progress throughout the year. But margin volatility in Grown and volume softness in Prepared may persist in the near term. We did see conditions in the Grown segment improve in February. And we've realized volume increases versus the prior year in the 7% to 9% range and avocado margins within our targeted range of $3 to $4 per case for most of the second quarter. However, the start of the avocado seasons in California and Peru may lead to ongoing volatility in Grown margins. In our Prepared segment, the one perimeter of the store category that saw unit volume growth in the second half of '22 was deli grab-and-go items. As mentioned during our last call, our new customer acquisition strategy has been focused on deli grab-and-go items, and we are on schedule to onboard new Prepared deli and grab-and-go volume with 2 national customers in the second half of the year. We expect volume weakness to persist until then. The operating environment coupled with our first quarter results has caused us to lower our fiscal year margin expectations for both segments. For 2023, we estimate adjusted EBITDA in the range of $40 million to $45 million. While we are not setting the precedent of giving annual EBITDA guidance, we believe it is important to provide an indication of our expectations for this year given the first quarter results. Investing to grow the business, resulting in long-term shareholder value is undeniably our top capital allocation priority. We are also committed to paying a dividend with competitive yield and payout metrics relative to benchmarks. However, the metrics associated with our current dividend rate have been elevated since fiscal 2020 and remain elevated under the current operating environment. We plan to reset the dividend to a level that provides more market-aligned metrics. We anticipate the Board of Directors will declare a dividend of $0.10 per share for the second quarter. Although we remain committed to growing the business, we also plan to reduce our fiscal 2023 capital expenditures while we navigate near-term uncertainties. We now expect capital expenditures for fiscal 2023 of approximately $13 million. These adjustments reflect deliberate fiscal discipline that allow us to continue prioritizing investment for growth while maintaining competitive dividend metrics. Although the start to the fiscal year has been disappointing, we remain focused on making steady, lasting improvements to the business. During the second quarter, we initiated activity on several fronts that will offer immediate benefits to earnings. As an example, we recently went live with the first phase of a new transportation management system that enables RFPs on most of our outsourced freight, which will significantly improve the competitiveness of our freight costs. This system will be fully implemented during the second quarter. In early March, we implemented a restructuring of our U.S. and Mexico operations that will allow us to upgrade essential organizational capabilities and to streamline and reduce costs related to certain functions. We recently consolidated activities within our Grow distribution network to streamline operations and reduce costs. And we recently entered into an agreement to exit our noncore salsa business as we intend to direct more resources towards guacamole growth. Pricing is always a focus for us. As you probably know, we price our Grown product on a daily basis. However, our Prepared business has been comprised of almost exclusively annual or multiyear fixed-price contracts. Over the course of the last 6 months, we have converted more than 50% of our expected annual Prepared revenue stream to contractually committed pricing windows that range between 2 and 4 times a year, allowing us to react quickly to changes we see in market dynamics, inflation and industry costs. These actions do not represent an exhaustive list of improvement activities that are underway, but I wanted to highlight some of the most influential and relevant items that will have immediate impact. I'd like to wrap up my prepared comments by saying that despite market and category performance that was less than our expectations, our commitment hasn't wavered. We are still focused on performance improvement, on growth and on generating shareholder value. It's our job to manage through a challenging market condition, and we must be and are nimble in our response to changing market dynamics. The path to growth is not a straight line and there are obstacles, but we will keep driving forward. And now I'll turn the call over to Shawn to report on the financials.

Shawn Munsell, CFO

Thank you, Brian. As we stated on our full year 2022 earnings call in December, seasonality plays a significant role in the cadence of our earnings. While the first quarter is typically our seasonally weakest quarter, this year, we experienced some additional market-driven pressures, which adversely impacted our results. But as Brian said, we do expect to deliver sequentially improving results as we progress through the fiscal year. On a consolidated basis, first quarter revenue was $226 million, a decrease of $48 million from the first quarter of 2022. Grown segment revenue was $118 million, down $45 million from last year as the average selling price of avocados decreased by 35% as prices continue to adjust from their highs in the summer. Avocado sales volumes were up over 3% due to increased supply from Mexico. Industry imports from Mexico were estimated to be up over 8% versus the prior year quarter while industry avocado retail sales were estimated to be up by about 3%. Prepared segment revenue was $108 million, down $4 million from the prior year quarter as higher prices partly offset volume declines of about 13%. Consolidated gross profit was $14 million, up over $1 million from the prior year quarter, primarily driven by a $3 million increase in Prepared segment gross profit partially offset by a $2 million decline in the Grown segment gross profit. Grown segment gross profit for the first quarter was $9.5 million compared to $11.7 million for the first quarter last year. Our margin per case for avocados fell to about $2.20 in the quarter versus about $3 per case last year. Generally, tighter spreads between field costs and sales drove margins lower, with avocado prices continuing to decline from the fourth quarter of fiscal 2022. Additionally, the strengthening of the peso relative to the U.S. dollar increased operating costs in Mexico in dollar terms, although that impact was mostly offset in the quarter by favorable balance sheet revaluation. We have seen an improvement in avocado margins to within our targeted range of $3 to $4 per case for most of the second quarter. The Prepared segment generated gross profit of $5 million, up from $1.6 million in the prior year quarter. Gross margin rose to 4.6%, which consisted of a gross margin of just over 1% in the fresh cut division and approximately 26% in the guacamole division. The improvement in fresh cut from a loss last year was driven by pricing and other operating improvements that were partly offset by higher raw material costs as well as weather-related impacts of approximately $1 million, mainly from manufacturing facility closures. Gross margin in the guacamole division almost doubled from the prior year on lower fruit costs and yield improvements. SG&A was $16.4 million for the first quarter, up from $15.3 million in the prior year. The increase primarily was due to higher costs associated with employee compensation, including stock-based compensation. Adjusted EBITDA was $3.6 million for the first quarter, down from $4.7 million in the first quarter of 2022. Now turning to our financial position. During the quarter, we increased our line of credit borrowings to about $16 million to fund working capital needs. Cash and equivalents remained at about $2 million as of January 31. Available liquidity was approximately $26 million at quarter end. Additionally, we invested about $5 million in CapEx in the first quarter, which included investments to support volume additions in the second half in Prepared. Based on current market conditions and our outlook for the remainder of the year, we now expect capital expenditures of approximately $13 million. Now I'll briefly share some thoughts on our outlook for the remainder of 2023. In the Grown segment, per case margins are expected to be at or near the low end of our $3 to $4 range as we anticipate ongoing margin volatility as the California and Peru seasons begin. Volume for the balance of the year is expected to increase and be approximately commensurate with changes in supply from our primary sourcing regions. In the Prepared segment, gross margins in the fresh cut division will be at or near the low end of the 10% to 12% range as we end the fiscal year primarily due to softer volume in the near term, although new customer distribution points and volume are scheduled to launch in the back half of the year. Gross margins in the guacamole division are expected to approximate 20%. As Brian mentioned, we recently finalized plans to restructure some of our operations and to exit our salsa business. We expect one-time charges in the second quarter related to these activities to total approximately $3.2 million, including cash and noncash costs associated with severance, asset impairments and implementation expenses. The payback on cash cost is expected to be approximately 1.5 years or less. And finally, I'll wrap up by saying that we have a strong balance sheet and sufficient liquidity to manage through the current market challenges. We remain committed to investing to grow the business to strengthen our future earnings.

Brian Kocher, CEO

Thanks, Shawn. As I said on the call last quarter, we've been undergoing a long-term strategic planning process. We have completed the majority of the work and we'll be presenting to our Board of Directors in May. We look forward to rolling it out to you later this year. We spent the last year addressing foundational opportunities to stabilize our business, including finding the right market-savvy talent to lead our organization. Now our plan is to take Calavo from an improving company to a growing company. And despite the slow start to the year, that's still the plan. We have the right service levels, product portfolio and capabilities to grow. We have the right people in key roles who know how to execute and overcome the challenges of our dynamic business. We have the focus and determination to be successful, and we will. That concludes our prepared remarks. I'll now turn the call over to the operator to begin the Q&A.

Operator, Operator

Our first question is from Ben Bienvenu with Stephens.

Benjamin Bienvenu, Analyst

I want to start on the Prepared business. You talked about volume down double digits as a result of higher pricing year-over-year. Can you talk a little bit about the demand elasticities you're seeing from consumers in the marketplace? And would you expect that as we start to see broader inflation normalize, that these volumes pick back up? Or is there something else along the critical path that you see needing to take place for the volume of that business to improve?

Brian Kocher, CEO

Yes. We've been spending a lot of time on that, Ben. And I think a couple of things to think about. One, certainly seasonally, we expected volume to at least decrease from the fourth quarter, a very normal part of our Prepared business cyclicality and seasonality. The thing that sort of was greater than we expected was the category performance itself. So if you think about it, during the second half of '22, overall produce was actually down. Value-added produce was down on a volume basis. On a dollar basis, it's up, but the category itself on a unit sales basis was actually down. Total produce was down 3% and nonvalue add or whole commodity was down 4%. So value-added fared better, but was still down. There are some bright spots in that category performance, and they exist in the deli aisle. And what we saw in the deli aisle was snacks, prepared meals, some of the prepared or presliced meat and cheeses have unit volume growth. So even though deli was down, we saw some deli categories in which we participate that on a unit basis were up. We do see inflation moderating. And I certainly think that will help. And long term, we still see growth in our Prepared categories, both guacamole and fresh cut. We see growth long term. And we hear it from the retail trade. We hear it from IRI. We see it in some of the planning that our customers are doing. But certainly, inflation in the last half of the year in the first part of this year, it caught up to the consumer, I'd say. And it did so in a manner that was probably more significant than we expected.

Benjamin Bienvenu, Analyst

Okay. That makes sense. My second question is related to the restructuring plans. You noted a handful of plans that you have, all of which makes sense. Is it your expectation that this is the last of the restructuring decisions that will be made? Or is it possible there might be others? And then along those lines, as you noted your position in Calavo for growth again, when we think about kind of what you've done with CapEx for this year, which also makes sense, how should we think about kind of the arc of spending as we move forward down the line?

Brian Kocher, CEO

Okay. Great question. So a couple of things that I would say. As you remember, two years ago, Calavo went through 1.5 years where it went through a significant restructuring, where a lot of assets, facility closures, things of that nature. This is, certainly in order of magnitude is less, but is needed. What I would say now is we're doing some of the finer, more precise changes to the organization. We've consolidated distribution centers in our avocado business. So that's one of the changes that you make. Shawn mentioned that we're exiting and transitioning out of a noncore salsa business, which will provide us some mix benefits that will help us. I think the other big one is if you're going to grow, you have to have the talent and the amount of skills and capabilities that are growth-oriented. So what you see otherwise is us also reducing and streamlining some operations in the U.S. and Mexico and using those funds to put more skills and capabilities in growth areas. Whether that's international or guac or on our prepared fresh cut or even in channel development where we see club and national retailers as big opportunities, you see us reinvesting those funds. So that's what I would call the summary and context between the Project Uno launch and what we're communicating today. Ben, I think it's also appropriate, we will never be finished making changes in trying to make our organization more efficient. I don't see big restructuring charges and things of that nature, but we will never be finished because our customers are always changing, the category is changing and we need to make sure that we're driving our organization to be efficient, effective and place our resources in the areas that have the biggest chance to grow.

Operator, Operator

Our next question is from Mitch Pinheiro with Sturdivant.

Mitchell Pinheiro, Analyst

My first question is regarding Project Uno. The initial plan indicated it would take more than three years to return to the performance levels, specifically the EBITDA generation seen in fiscal '19, which was around $80 million. Now, it appears we might achieve only about $40 million to $45 million this year. Additionally, I notice that we are reducing the dividend and slightly cutting capital spending, which seems a bit conservative. However, it doesn’t appear necessary to make these cuts based on cash flow. While I understand the need for financial caution, your messaging suggests that the recovery to fiscal '19 levels will take longer than expected. I'm curious to know what has changed.

Brian Kocher, CEO

Let me try to address that, and I'll have Shawn contribute as well. We're not saying things are worse, but based on our first quarter performance and outlook for the rest of the year, it's fair to acknowledge that our progress towards our goals for EBITDA and cash flow generation has slowed. We need to adjust because the market that was growing, at least this quarter and likely next quarter, is now not growing in terms of unit volume, possibly just on price, but not in revenue. This slowdown has affected our trajectory towards our objectives, leading us to lower some guidance, particularly in our Prepared fresh cut segment regarding our expected end-of-year gross profit run rate. We recognize that the market will face challenges, and we have encountered difficulties with consumer performance. For avocados, there’s been an ongoing period where supply has exceeded demand, and with increasing supply from California and Peru during a robust Mexican season, we are being cautious due to potential volatility in grown margins. This situation is due to a combination of factors. Additionally, I want to clarify that we are not cutting any CapEx projects that we believe have a high return and growth potential. Most of the CapEx we initiated and used in the first quarter relates to new customer launches planned for the second half of the year. We will not reduce our investments in high-return projects. However, we are tightening up our approach, aiming to be disciplined and responsible to ensure we focus on high-return initiatives. Regarding the dividend, we want to maintain a payout that aligns with industry standards. Over recent years, our dividend payout ratios have been double those of our peers, so now is the appropriate time for these adjustments.

Mitchell Pinheiro, Analyst

Very helpful. Are you noticing anything in the Grown business that is fundamentally different? Do you perceive any structural issues in the industry that could hinder your ability to return to your previous position from four years ago?

Brian Kocher, CEO

There have been changes in the Grown business compared to four years ago. From a sourcing standpoint, Mexico, Peru, and Colombia have significantly increased their export volumes to the U.S. since then. While the supply is strong, demand has also been high but constrained over the past couple of years due to COVID and a decline in food service. Last year saw limited demand because Mexican export volumes were unusually low. We believe this demand constraint will continue to align with supply moving forward. When looking back ten years, I see the current supply and demand situation as more balanced than before, when demand often outpaced supply. Our marketing model allows us to buy and sell daily, adjust inventory as needed, and take calculated risks when it comes to potential volume growth. We can also reduce volume if profit margins are not favorable. Overall, I am confident that our model can support a gross margin of $3 to $4 per case over time, with no significant structural changes looming. However, a more balanced supply and demand may introduce some volatility that wasn't as present five or ten years ago, which is a common characteristic of an evolving commodity market.

Shawn Munsell, CFO

Yes. And then the other thing, too, Mitch, I'd say that was unusual in the quarter is that retail prices were more stubborn than wholesale prices, right? And we started to see inventory buildup that put more pressure on wholesale prices, and that, in part, narrowed those margins.

Mitchell Pinheiro, Analyst

Is this simply a result of the grocery trade having a higher margin, or is there another reason why it remains stubbornly high?

Shawn Munsell, CFO

Yes, just retailers holding margin.

Brian Kocher, CEO

Retailers were slower to increase prices last year when wholesale prices rose. Consequently, they have been somewhat slow to respond on both the front and back ends. We are observing more promotional activities and investment in pricing. Consumers are certainly aware of this, with recent data indicating that nearly half of shoppers are now seeking sales. We have been collaborating with our retailers and customers to develop promotional activities that are beneficial for them and for the category. Due to shelf life considerations, we are better positioned to implement these strategies in our Grown and guacamole products compared to our Prepared fresh cut business.

Mitchell Pinheiro, Analyst

Great. Just one last question about the Prepared side. It sounds promising that you have a few new customers coming in during the second half, which should help with your fixed cost leverage a bit. So, all things considered, we should expect to see a gradual improvement in gross margin for Prepared throughout the year. Is that correct?

Shawn Munsell, CFO

Yes, that's completely fair.

Operator, Operator

Our next question is from Ben Klieve with Lake Street Capital Markets.

Benjamin Klieve, Analyst

I have a couple of questions. First, I’d like to know about the decision to eliminate the salsa line, especially considering the recent developments with the partnership with Old El Paso. Could you explain the reasoning behind deciding to divest this product, particularly in light of the significant changes that occurred in late 2022?

Shawn Munsell, CFO

Yes, the salsa business is a decent product with good potential, but it didn't have the necessary presence in our portfolio. Considering the economics of that segment, it made sense to reallocate those resources to our guacamole business, and that’s what we’re doing. Ultimately, this divestiture will improve our financials by approximately $400,000 a year.

Brian Kocher, CEO

Ben, it's also important to highlight that we have established a co-packing relationship. Last quarter, we discussed our partnership with General Mills, which serves as an additional resource for us. We still have that option available. We have developed the capacity and co-packing capabilities so we can continue to market Old El Paso brand products, such as guacamole, which we produce ourselves, and salsa, which we will now be producing with a third party, while still maintaining the ability to handle that.

Benjamin Klieve, Analyst

Got it. Okay. And then another question CapEx expectations that you have $13 million for this year, $5 million in the first quarter. And Brian, you noted that a lot of that was attributable to the new contracts coming online. $8 million over the next 3 quarters, that's not an awful lot of CapEx. Can you talk about how much of that CapEx is related to just kind of the basic maintenance CapEx that you have to do versus any investments in growth that are coming here over the next 3 quarters?

Shawn Munsell, CFO

Yes, most of the deferral of the capital expenditure compared to the original $18 million is due to lower-performing growth and profit improvement projects that we can reactivate at any time. It seemed wise to defer this until conditions improve, considering the performance in Q1 and the current outlook. Regarding maintenance capital expenditure, it will be approximately $4 million to $5 million this year, which aligns with our guidance from last year.

Brian Kocher, CEO

Ben, it’s important for you and the other listeners to remember that we have a strong balance sheet. We have added seasoned working capital debt funded through our credit facility. We have ample liquidity and access to capital. If we come across a compelling growth opportunity, we won't let our previous guidance prevent us from making a smart investment. We want to avoid being penny-wise and pound-foolish. We will make investments at the right time, but it’s also a signal to our entire organization that we aim to be disciplined and responsible, ensuring we seek good returns before investing. We have capital available, and if we identify something beneficial and exciting, we will proceed without hesitation.

Operator, Operator

Our next question is from Eric Larson with Seaport Research.

Eric Larson, Analyst

In your prepared comments about the quarter, you mentioned there was a lot of food coming out of Mexico and it was of a smaller size. Did that affect pricing? Was there a bad mix of avocado sizes in the second quarter that hurt your performance? Could you provide some clarity on that?

Brian Kocher, CEO

Eric, I think it's a really good question and insightful question. So yes, we did have more volume. Think of it this way and forgive me because I'm not an agronomist, okay, forgive me. But when you have more fruit on the tree, each individual piece of fruit gets less nutrients, right? The root systems didn't all of a sudden grow and magically convey more nutrients. So the size curve did work against us a little bit. Smaller fruit came out because the mix was a little off, we had more large-sized fruit business than we had available large-sized fruit, and we didn't have enough small-sized fruit business. So we certainly saw it impact the margin on the small fruit where we were really working hard to get rid of some excess small fruit. And overall, that weighed down gross profit per case. Makes sense?

Eric Larson, Analyst

Yes. No, it does. But I just noticed that you had made a point of it in your comments, and I know that mix can be important. So that's why I asked. So this one's really for the Prepared side, and maybe I'm missing something here, but if you average $28 a carton and your avocado prices in the quarter, I mean it wasn't that long ago, we were talking $70, $80, right? And I think you said in the last quarter sequentially, it was $43 a carton. So in your Prepared business, I mean, a novice looking at your business would say, 'Wow, your ingredients cost for Prepared should have given you quite a bit of margin headway.' So talk to me, what am I missing in this? With the fruit prices coming down, why shouldn't your margins have been better in Prepared?

Shawn Munsell, CFO

Yes, your observation is accurate. The cost of the fruit used in our guacamole business has definitely improved compared to last year and also the previous quarter. This is reflected in the gross margin we achieved this quarter, which was approximately 26%. While the improvement in fruit costs contributed to this margin, it was also due to enhancements in operations. Our plant is performing at its best, thanks to the investments and operational changes we made last year. It's important to note that the guacamole division accounts for about one-fifth of our total Prepared business. We did see benefits, but it's important to remember that this is a smaller segment of our overall prepared portfolio.

Eric Larson, Analyst

That makes sense. I'm still getting used to thinking of you as Grown and Prepared. I still consider your old format, so your last comment resonated with me. Going forward, you provided some insights into what adjusted EBITDA will look like. You still have relatively easy comparisons for ingredients regarding your guacamole, but you're raising prices in areas that have significant elasticity. Could you elaborate a bit more on the elasticity aspect?

Brian Kocher, CEO

So yes, Eric, let me make sure I understand. Your main question is about the favorable unit costs for guacamole and the input costs associated with it. Where is the additional improvement coming from? I believe there are several key points to consider. First, the volume for the rest of the year will be crucial for our progress. We have two national deli customers that will begin working with us in the second half of the year. This will not impact the second quarter, and we expect challenges with prepared and fresh cut products during that time. However, we anticipate it will be beneficial in the second half, leading to absorption benefits and other positive developments. We expect to see a favorable impact on our unit costs in the guacamole segment, but we need to increase volume to realize this benefit. Interestingly, the guacamole category recently saw a decline in unit volume despite an increase in dollar sales. Additionally, although we have made significant strides in reducing input costs and improving yield and labor efficiency at our guacamole facility, some of those gains have been offset by lower fixed cost absorption due to decreased volume. Essentially, in the Prepared category, we've improved year-over-year labor productivity, although we didn't see that from the fourth quarter of last year to the first quarter of this year. We experienced productivity improvements from the first quarter of 2022 to the first quarter of 2023, but the reduced volume from the fourth quarter to the first quarter led to a slight drop in productivity. Going forward, our focus will be on increasing volume alongside category growth, establishing new distribution channels, and managing our cost structure and labor productivity effectively to maximize the benefits of this new volume.

Eric Larson, Analyst

Got it. Okay. I apologize for any ambiguity at the end of that question. Historically, the fresh avocado business has been attractive because even at high prices, consumers would pay significantly for an avocado, indicating that demand was more inelastic. It seems today that retail prices are very resistant to increases, much more so than wholesale, but in previous years, pricing was less of a concern. If customers are not purchasing your avocados and there has been a decrease in volume, what alternatives are they turning to? What other products in the market are competing with avocados that consumers are now considering, especially if they are being more price sensitive?

Brian Kocher, CEO

Let me clarify a couple of things. First, the category for produce saw a decline, while avocados were up in the first quarter compared to the previous year, with unit volume increasing by about 2.7%. We are seeing a growth of approximately 3.3% or 3.4%. We believe we maintained our market share, or possibly even gained a percentage. Another point to consider is that the situation isn't solely about price elasticity. In the third quarter, when prices were exceptionally high, retailers reduced promotions and even decreased display sizes. This issue extends beyond pricing; the reduction in display sizes meant less available volume on shelves. While we are working to reclaim that space, other commodities are also competing for retail shelf space, such as strawberries, potatoes, and tomatoes. Consequently, we are making efforts to regain retail presence and promotional activities, which is taking some time. The category's performance is influenced not only by price fluctuations but also by promotions and display sizes, and we are beginning to see improvements in those areas. In fact, it looks like we might experience a boost in the second quarter.

Shawn Munsell, CFO

9%.

Brian Kocher, CEO

9%, we're up in the second quarter on a unit volume basis for avocados.

Shawn Munsell, CFO

Yes. So that's worth emphasizing that once we rolled into February, we did start to see a median improvement in conditions in the Grown segment. Not just an improvement in the gross profit, but the volume as well, so just kind of better flow-through of the volume. But you listen to the prepared remarks, the cautionary side of that is we know that there's a lot of fruit coming in from Mexico. We know that the California season is getting underway. The Peruvian season is right around the corner. And so there's a potential for some ongoing volatility with that supply coming.

Operator, Operator

We have reached the end of our question-and-answer session. I would like to turn the conference back over to Brian for closing comments.

Brian Kocher, CEO

Look, we really appreciate you dialing in, asking the questions, giving Shawn and I a chance to talk to you about the business and where we're headed. The fact of the matter is we didn't deliver the earnings we expected in the first quarter, and the market conditions that our business faced caused us to reevaluate the landscape for the balance of the year. We need earnings growth, and we need unit volume growth across our platforms. However, I'll tell you why I have hope. We're investing in sales talent, where the market has the biggest opportunities for growth. Club channel, international, guacamole and deli resources are all being funded by repurposing and/or reducing expenses in other areas. We must gain new customers and gain new distribution with our existing customers. Our distributor model for avocados is strong and it's flexible. And over time, we've been able to consistently deliver our targeted gross profit per box. And so that gives me help and comfort. We mentioned in our fourth quarter earnings release that we expect growth in our deli product lines. We are on track to launch 2 national customers with deli items in our third quarter. We know the value proposition in deli is promising. Our value proposition in deli is promising. And that volume growth will help us in the second half as we look at fixed cost absorption and really maximizing the efficiency that we've been able to drive in production and yields in labor hours. We will continue, and we have to beat that and drive improvement in every cost line of the P&L. And we're making this organization more efficient every day. There isn't a day that goes by that we don't worry about yield, input costs, transportation, labor productivity and SG&A, and we're going to continue beating them on that every day. And ultimately, even though we see some short-term challenges, the categories in which we play, are performing at the better end of the spectrum of all of produce and deli SKUs. Across produce, value-added products perform better than whole commodities. Avocados are one of only the few commodities that delivered year-over-year unit volume growth in Q1. And finally, convenient deli snacks and meal kits led the pack in the deli aisle. So those things give me hope. Our business model is right. We're working on the right things. We need to be agile, but we didn't deliver the results that we expected in this quarter. We need to get better each and every day. And while these challenges have slowed the progress that we expected, we're quickly repurposing resources. We're quickly making this organization leaner. We're focused on gaining sales distribution and continue to deliver sequential cash flow and earnings improvement. And that's what I'd like to leave you today. I thank you for your time today, and thank you for your continued support of Calavo.

Operator, Operator

Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.