Earnings Transcript for CVGW - Q3 Fiscal Year 2021

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

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

Farha Aslam: Thank you, Steve and good afternoon, everyone. It has been a pleasure to work with Galapagos finance team for the last few weeks as interim CFO, the organization has strong capabilities that are supporting Calavo's turnaround and the CFO transition. Now let us review the quarter and provide some color on our outlook for the business. I'll start with revenue on a consolidated basis. Third quarter revenue was 285 million, which is at the high end of our pre-announcement guidance range. And up 5% year over year, this was primarily driven by revenue increases in RFG and our food segment of 14% and 12% respectively. The nice rebound in both segments reflects improved consumer demand. As the country reopened from the pandemic. We also experienced higher international revenue in our foods segment. As we expand our efforts outside of the us revenue in the fresh segment was rev relatively comparable to the prior year period. As higher average selling prices were largely offset by lower sales volume, which was negatively impacted by the delay and avocado supply from Mexico and California, coupled with sub optimal fruit sizes in that segment, as Steve noted gross profit for the third quarter was 7.9 million down from 30.8 million in last year's third quarter. And our gross profit margin percentage declined to 2.8% compared to 11.4%. The decline in gross profit and margin percentage occurred in all three of our segments and was due to a number of factors, including inflationary pressures on labor, raw materials and freight, as well as lower sales volume and less desirable fruit in the fresh segment sales mix, both in quality and sizes. In addition, higher avocado costs adversely impacted gross margins in our foods segment SG&A expenses improved to 12.4 million from 13.4 million a year ago, mainly due to lower stock-based compensation and a decrease in salary and benefit expense as a result of consolidation initiative and a reclassification of certain items consistent with our pre-announcement adjusted EBITDA was 1 million for the quarter net loss in the third quarter was $13 million or $0.74 per share included in this loss were 13.8 million in total provisions for our Mexican tax liability for the 2011 and 2013 tax years of which $1.3 million was recorded as other expense and $12.5 million was recorded as a discrete item in income tax provision expense. Additionally, we recovered 6 million in the quarter from fresh realm, reflecting the fulfillment of its separation agreement with the company after adjusting for these and other standard items. Adjusted net loss was 3 million or 17 cents per share. Now turning to our balance sheet, we ended the quarter with 144 million of cash liquid investments and available debt capacity, total debt as of July 31, 2021, including finance leases was 43 million. We continue to have a strong balance sheet and low leverage enabling us to invest in our current infrastructure to drive future growth and improved profitability. Now turning to our near term outlook, the trends and all three businesses are very dynamic. So we are choosing to refrain from providing revenue for adjusted EBITDA guidance until the environment has stabilized. That said fundamentals in the business are improving in the fourth quarter compared to the third quarter margins. And the fresh business were compressed in August due to supply pressure of a large Peruvian crop and tight supplies from Mexico and California in September as the harvest of next coast, main crop gets under way. Profit margins are improving the estimates regarding the size of the Mexican crop, very widely, but barring any weather issues we anticipate having adequate supplies to meet customer needs the foods and RFG businesses are facing incremental inflationary pressure on freight labor and material costs versus the fiscal third quarter year over year inflation ranges from 10% to 30%, depending on the product and location we're working to mitigate the impact of higher costs with pricing and cost savings from project UNO. More of the benefits of our pricing and efficiency efforts will likely fall to the bottom line in fiscal 2022 versus the fiscal fourth quarter 2021. SGNA is expected to be 13 to 15 million, which is in line with our historical run rate interest expense for the final quarter is anticipated to be approximately 300,000. We look for a tax rate to return to approximately 25% in the fourth quarter. With that, I'll turn the call over to the operator for questions.

Operator: At this time, we will be conducting a question-and-answer session. [Operator instructions] Our first question comes from the line of Ben Bienvenu with Stephens. Please proceed with your question afternoon, everybody.

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

Lisa Mueller: Steve, would you like to start?

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

Benjamin Bienvenu: When you expect to have the full insights from your third-party consultants at your disposal to move forward with their suggestions for what you might do, or is that just a fluid, ongoing process that comes in and waves they've come in and done a done, pardon me?

Lisa Mueller: I wanted to highlight there have been -- this is a dynamic process that we're engaging in, and we're not waiting for sort of a big tome and then going to work. It's rather, we're very actively engaging. The entire organization in project Juneau have identified very specific actions that we plan to take, have assigned project owners to lead the efforts. And we, as an organization are going after the cost savings, you know, starting yesterday, so we're already on it.

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

Lisa Mueller: Steve, would you like me to check that?

Steve Hollister: Sure. Most of what we do with our Food segment is we use product is that would be fairly low on the consumer demands whether it's number three avocados or some that have a significant amount of scarring. But generally that we don't pack as number one or number two. And what we found out in Mexico is that from a production standpoint there is a disproportionate number of fruit available for us to use in the food segment, as opposed to that, which is going fresh market. So that has led to some, some problems getting the right sizing. And then also the, the cost of them a little higher typically. I mean, it's just, it's more of a factor of, you know, what we're paying for the fruit, our labor costs. Don't send it into Jane's that much down in Mexico where you want to add anything else for that. Yeah. There's strong Mexican demand in Mexico for a smaller crop, and that pushed up our fruit costs. We'll continue to see that elevated expense in our P&L in the fourth quarter, but we are starting to see some of that inflation begin to mitigate. So as we progress into fiscal 2022, we do expect margins to incrementally improve from current levels. Fair enough. Typically that does also coordinate at a house to do too with a new crop coming in in Mexico. We're basically weeks away from that and that always leads us to maybe a more beneficial pricing scenario as well.

Benjamin Bienvenu: Okay. Very good. Thanks so much for the color and best of luck. Thank you. Thank you.

Operator: Our next question comes from the line of Rob Dickerson with Jefferies. Please proceed with your question.

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

Steve Hollister: So, obviously there are going to be some movement or there'll be some movement on the volume side, and then hopefully a better products will finish still better pricing, but just in terms of kind of the other costs, maybe this is more for you. Yeah, as you kind of call out freight in labor it's, it seems like, you know, that could continue. And this is what a lot of companies are saying that second continue for you through the next year, but the hope is that kind of that, price relative to crop sizing hopefully get better next year. So therefore what you're kind of implying in saying somewhat implicitly is that next year would be that right, but maybe not as good as you would historically, because there's just a higher cost inflationary environment in other parts of the business. Is that like, how do you set there? I think fundamentally, you've got it right, Rob. We are facing higher freight labor and material costs, and we are working to pass it through in terms of higher pricing, but we're also taking a look at our own business and working to optimize our SKU mix rationalize our customer base and product base to improve the margins and ensure that we are producing products at the right place to really minimize the labor, the labor and the freight needs for our production. So as we implement those pricing and cost improvement efforts, we expect our margins to recover.

Rob Dickerson: Got it. Okay, perfect. And then on a segment level coming back kind of the prior question asks, but then to focus on RFG versus foods Archie was posted a bit of a loss in the quarter. But it would seem as if maybe some of the demand would kind of gradually be coming back, just given your channel exposure. So I just want to clarify that the loss posted in the quarter, somewhat a function of just supply, frankly, not meeting that demand, later on top of other additional cost pressures. I just see you, and I'm asking you really, because obviously that once saving the business is kind of more volume recovery, there's a loss of, it's kind of less about the volume recovery. It's really just more about the near term dynamic between cost and pricing and supply.

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

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

Steve Hollister: Well, first off from the co-CFO standpoint we are we're right on the customer of hiring a new CFO. We've been from the board committee standpoint and we are -- we have identified two applicants. So we're getting close to doing that. The CEO search is underway. I say part of what you're, when you were talking my reception is not -- I'm not field to it, so I may have missed a little bit of what you said there. But I think it was more about how are we, how are we get getting back on track? And is that a, is that a fair assumption?

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

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

Operator: Thank you. Our next question comes from the line o Mitchell Pinheiro from Sturdivant & Co., Inc.. Please proceed with your question.

Mitchell Pinheiro: Yeah. Hi, good afternoon. Hey, I have several questions. So, you know, if you go back, you know, historically, you know, obviously Calavo is an agricultural based company and you go back pre RFG and even through current, the fresh business and even Calavo Foods has been while volatility you've been able to control it pretty well, your profit of the been stable and that's given the underlying growth of the, of the whole category and your leadership and your long years of experience, I'd expect you to be able to get the avocado business back up and running in a normal fashion.

Steve Hollister: It's the RFG business that I'm, beginning to question. You've done really well with it growing from, you know whatever it was when you bought it a hundred million in sales and now it's, you know, approaching what was over or approaching 500 million.

Mitchell Pinheiro: So that's good, but I wonder whether and how that business really fiddle at the other side and not to say that I'm suggesting, you know, you know, we punt that business right now, but is it might be, is it, is it a business that you can control the volatility to, to not give guidance? And a lot of it seems centered on RFG to not give guidance. It's like this business, it seems like you don't have visibility. And, I remember asking in a prior conference call about, RFG was certain that all the open salad bars that you had were going to be all pre-packaged from here on out because of COVID, but I'm actually finding most of the salad bars where I live to be open air bars. Self-era and it's actually, so I'm wondering whether we even know as a, as a, as a leadership there that do we know what's ha happening in RFG. And so can you talk a little bit about your confidence there and whether I, you know, misspoke on any, on any of my premises?

Steve Hollister: Yeah. Let me, give a few comments about RFG and I was on the board when we were looking at RFG and, and then ultimately consummated the purchase of it, and then the earn out through all of that. And I have a bit of, a bit of background in produce as well. It's, it's a segment that has always been growing since I've been on the board and the supermarkets, we viewed it as a compliment to what we do with as the fresh and the food segment. And it's unfortunately it's or unfortunately, however you want to look at it, it's a dynamic business that is constantly changing as a consumer tastes change and, and get defined in more areas, maybe slack on some others. And so we have to deal with that along the way, and maybe we haven't done the best in the past. It making some of those first changes, but we are certain we focused on right now, in fact, in project general, that is one of the major things that we are working on. And we've identified a number of areas there where we probably can reduce some skews that maybe, maybe don't fit in with our products set, as well as they, they used to, and, and probably being produced in areas that that are on most efficient for us. And so not only just looking at all of our Kus and maybe reducing some of those, but also where are we going to produce them in a better area that says, maybe require less freight to get the product in there and typically in that industry, it's the nickelles and knives that you make, not so much the dollars. And so we're focusing on the things that we can control primarily, which is the, the cost and input and, and the locations dealing with the staffing shortages that have been present since the COVID era, and also taking a look at the, at the products that we sell and, and trying to align the pricing that, that we're getting for our products, more aligned with what our costs are, you know, so all of those things together are giving us, I think, a much our footprints to move forward with. We're very bullish on that product and, and that business. And that's why we're trying to consolidate it in our food segment in, in the one Calavo footprint and, and move forward with it under that. And I think we're going to see not only, you know, benefits from the, from the direct cost that we have that into it and, and the sales price, also the indirect cost for SG&A to maybe utilizing resources within greater Calavo framework to compliment what RFG does. Alright,

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

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

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

Mitchell Pinheiro: Okay. Two more questions as it relates to project UNO. Did I hear you correctly where you say there there's, you're looking for 70 million of operating income cost savings over the next 24 months, went with about 30 million in costs to achieve that, is that correct?

Steve Hollister: That's correct. And so 70 is a big number, you know, it was like, you know, that's, that's like a whole year's worth of operating income that you think you can take out and deliver over two years. It, and, and that's okay. And that's, I'd love to hear, but as that relates, as it relates to you know, you're, you're going to have a new CEO, do we -- I know there's a lot of low hanging fruit, new pun-intended, but there's a lot of, you know, stuff that you can get on, as you said far, you're working on yesterday. And so is, are we sure we got 70 million of savings? Is that, is that just ballpark number is that conservative? We're just starting to look at all the various places we can save money and we sure that's the right number, Mitch. We put, we highlighted that this is not just a cost savings, it's a profit improvement. So it's a, really what we think of a profit recovery plan for Calavo from current levels. So 70 million would get back closer to our historical norm, and that is what gives us confidence, this business has delivered that level of profitability in the past in terms of a adjusted EBITDA and we have very specific numbers across multiple project streams. And that number is very doable in our expectations.

Mitchell Pinheiro: Okay. And then final question as it relates to the dividend. So, your cash balance is, has declined. When you look at the balance sheet and then you can see some CA working capital use, but with the, with spending 30 million on other, on capital spending with, related to project do with the decline in EBITDA, just from the pressures that you've mentioned how should we look at the dividend? I mean, you you've, you know, you've increased it. I, I just wonder whether, is it safe? Yeah. Is there, is this -- are we in a period where we're probably not going to see dividend increases at all? Curious your thoughts on that?

Steve Hollister: Well, our plan at this point, I we're, we're going to be addressing the dividend very shortly, but our plan at this point in time is not to not to change it. We don't, we think that the problems that we've got at this point in time are temporary and that we -- as we mentioned, we think we can get back to historical levels here within the couple of years. So we don't, but we need to take any type of actions of the contrary against what we've been doing. You know, we're comfortable in that amount. I think we can make it back further quickly. Okay. All right, so just looking, just looking at my own cash flow projections, I just, it looks like you may have to borrow to pay the dividend is that at least temporarily, is that, is that fair or you think you're going to be able to do it with cash flow, free cash flow. So it'll depend on the timing of our recovery Mitch. So and the pace, but our view is that we have a strong balance sheet to fund our recovery efforts.

Mitchell Pinheiro: Okay. I appreciate the answers. Thank you very much.

Operator: Thank you. Thank you. Our final question comes from the line of Ben Klieve with lake street, capital markets. Please proceed with your question.

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

Lisa Mueller: Steve sure. Would you like me to take a quick comment on that?

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

Lisa Mueller: Okay. Ben, thanks, Steve. Ben, the key is freight in, in that equation. So what we are doing is working to minimize inter plant freight costs to really is production, to be close to the customer so that we can reduce our expenses for those products.

Ben Klieve: Okay. All right. Fair enough. Well, best of luck navigating all these all these issues that those are for me, I'll get back in Q

Operator: Our next question comes from the line of Eric Larson from Seaport Global. Please proceed with your question.

Eric Larson: Thank you everyone. I'm sorry. I queued in a little bit late. So I guess my first question is, is back to project UNO. So he sort of Jim sort of announced that program early on in his in his CEO tenure. So the question I have is what, at what stage of completion are you in the program? Are you a 30% the way through it? 50 did, did COVID delay a bit of it? And I guess that's the first question far? Why don't you take an answer?

Steve Hollister: Sure. So Eric project, we participate completing it in the next 24 months in achieving 70 million in profit improvement from current levels.

Eric Larson: Yeah. I think Mitch kind of got to that point. But so what is the heavy listing that's left? Do you have to do it conversions? I mean, what, what, what is in front of you to complete that project within 24 months? What are the big components of that, of that, you know, integration?

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

Eric Larson: Okay. So, you've got some heavy lifting to do. So when you look at each division, you know, RFG is probably the most labor intensive. So how labor intensive is RFG employees per million dollars of revenue. Is there a way that you can help quantify us that help quantify that for us so that we maybe can understand the magnitude of the labor issue?

Steve Hollister: Labor is a significant cost in RFG. I can't unpack it. So in such detail before you, I on a conference call for competitive reasons but one of the factors we can address is working to optimize our mix to reduce the labor component. And that is what we are doing as part of project earn out.

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

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

Steve Hollister: I am sorry for that.

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

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

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

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

Eric Larson: Okay. Thank you. I'll follow up with you folks.

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

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

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