Greetings, and welcome to Calavo Growers Incorporated Third Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Lisa Mueller, Investor Relations for Calavo Growers. Thank you, Ms. Mueller. You may begin.

Thank you operator, and thank you all for joining us today to discuss Calavo Growers third quarter 2020 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 am here today with Jim Gibson, Chief Executive Officer of Calavo; and Kevin Manion, Chief Financial Officer. On today's call, management will provide prepared remarks and then we will open the call up for your questions. In order to maximize participation while keeping our call to an hour, we will be observing a two-question limit during the Q&A portion of the call. Participants can then reenter the queue if you have follow-up 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, intend, believe, expect, anticipate or other comparable words and phrases. Statements that are not historical facts such as statements about our outlook and adjusted EBITDA 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 would now like to turn the call over to Jim Gibson. Jim, please go ahead.

Thank you, Lisa. Good afternoon and welcome to Calavo's third quarter earnings call. I want to thank our entire team across our global operations for all their hard work and navigating through the prolonged pandemic. Their resilience and resolve have allowed us to maintain our supply chain and remain a trusted partner to our customers. Consumer demand for avocados remains robust. Our third quarter volume was up 18% year-over-year and well above our historical third quarter averages. This growth is reflective of the upward trend in industry volume, which continues to signal that avocados are becoming a staple for customers. And we are pleased to see our supply chain continuing to meet demand even in the face of a sustained pandemic environment. On a daily basis, we are working closely with our longstanding grower relationships in Mexico, California, and Peru to ensure that we maintain the supply of high-quality fruit to our customers year-round. We are also ensuring that our own plants and facilities remain a safe working environment for our employees. While we are operating in a very dynamic environment, we remain confident in our abilities as a strong operator. The growing demand for avocados, our robust supply chain, and strong long-term relationships with growers around the globe continue to position segments of our business for long-term success. Turning to the third quarter. Our results were impacted by seasonal supply dynamics as well as COVID-19. Despite our increased volumes year-over-year, lower prices due to higher aggregate supply compared to last year weighed on our performance. It was also a challenging quarter on the demand side for our RFG and Food segment. At the beginning of the quarter, consumer demand and store openings rebounded from crisis lows as certain states gradually be opened. Then in late June, a spike in…

Thank you, Jim and good afternoon to everyone on the call. For the second time we welcome you from scenic Santa Paula, California. I'll start by discussing our financial results for the third quarter, followed by our balance sheet and outlook. Please note that all comparisons are year-over-year unless otherwise noted. We will also be discussing non-GAAP results and a reconciliation of non-GAAP financial measures is included in our earnings release. On a consolidated basis, third quarter revenue decline 25% year-over-year. Avocado volume increased 18% year-over-year, which is a sign of the category strength. The lower avocado prices resulted from increased supply compared to last year led to the decline in revenue versus last year. I'd like to point out that avocado pricing and margins were at or near historical highs in Q3, 2019. We've been pleased to see sequential improvement in the business over the course of the quarter and through August. In this dynamic operating environment, we have been successfully evolving our business to meet new challenges. Our teams have been mobilized to find creative solutions for our customers and end consumers who are still feeling the brunt of COVID-19. And the ongoing impact of COVID-19 has impacted our Fresh, Foods and RFG segments differently as I will discuss. Gross profit declined 14% year-over-year to $30.8 million from $35.8 million in the third quarter of 2019. Lower gross profits in the Fresh segment drove the decline overall and mass gross profit increases in both RFG and Foods relative to the third quarter of 2019. As we noted on our second quarter call, profitability trends improved at the end of the second quarter and into the third quarter. Accordingly, gross profit increased 40% sequentially from the second quarter due to higher profitability in all three segments, and especially in…

Thank you. We will now have our question-and-answer session. [Operator Instructions] Our first question comes from Rob Dickerson, an analyst. Please proceed with your question.

Great. Thanks so much. From Jefferies. Anyway, well, to get all things considered, great job in the quarter. A couple of quick questions, I have two. My first question is I guess, Jim, there's kind of a lot in the release -- your commentary just around the addition of Farha. So, welcome Farha, [indiscernible] it's great to have you at the Board with some Board members stepping off about the same time, there's some additional promotion in the management structure. And then you're also speaking to towns like increased potential around productivity and further efficiency, right, as you streamline the business. So, I guess kind of that first question is just, is this kind of this more holistic approach around board oversight different management structure vis-à-vis there kind of more of a push for better streamline business opportunity with higher -- had a margin extension potential over time, say over the next one to three years. I'm just trying to gauge kind of where they fit in terms of time the new Calavo versus the old Calavo. Thanks.

Sure. Rob, thanks for the question. Absolutely. I think the first -- the first thing I would say is that -- and you noticed with the promotion of Mark Lodge to Chief Operations Officer, the idea there is along with the centralized organization is to begin to take advantage of the ability to operate as a single entity, certainly packinghouses or manufacturing operations, just like food manufacturing operations. And so, there are many things that we can do inside of both of those entities twill all align and be able to take advantage of. Then, the other part of that is that we can begin to align our metrics so that we're measuring the same thing and beginning to establish opportunities to improve those performance objectives as we move through time. So, I think the idea is that we bring Calavo together as a single management team over all three segments of the business, and then we begin to manage those segments taking advantage of the synergies between them and then where we can eliminating the redundancies that may we -- mainly like a siloed-type entity would bring to bear. As far as the -- I'm sorry. Go ahead.

Okay. Great. Yeah. Please go ahead.

No. I was just going to say we absolutely are excited about Farha coming onto the Board. I think she's just a great addition to our board. She is bringing at least from my perspective, a different viewpoint which is always a benefit for us. And then, just as you kind of mentioned, it is our ongoing kind of effort to continue to bring diversity to the Board and at the same time kind of shift a little bit of the independence and then over time begin to work on the size of the Board. So, yeah. So that's an initial move for us and we're excited about it. At the same time, we're really sorry to see Dorcas and Gene go. And we just -- all those years of experience, the things that they bring to the Board are invaluable and we're going to have to take those with us. So, we wish them a lot of great luck going forward.

Okay. Got it. And then I guess just secondly kind of more near term in terms of the avocado pricing environment, seems like maybe things have started to improve a little bit just recently. I know in the last call you kind of talked about hopefully being able to kind of get through that extra supply that might be coming into Peru? And then, do you know the better harvest in California and some excess in Mexico. So kind of the first part is just, kind of how do you see that extra supply kind of coming through August into September, how that could impact pricing in the near term? And then just kind of like the general commentary around just food service demand in the Uber near term and how that could impact avocado pricing overall within the next three to six months, let's say. That's it. Thanks.

Sure. Well, I think, generally, we're feeling that a favorable benefit associated with a little bit of consolidation now that the California crop is ending for us. Peru is ending. And so, we're focused at this point on a lot of Mexican product, which allows us to really orient on that supply and focus on costs and inventory control laying in our supply chain and then pricing over the top. So, the pricing environment, it's a little difficult to feel at this point, but certainly we can focus on margin and volume inside of that.

And then just in terms of food service, like just any perspective, it sounds like you're saying there's some rebound that occurred, maybe it was kind of touch and go, kind of the feel and expectation is hopefully it's more go than over the next couple of months.

Yeah. I think, it’s a general favorable trend. Certainly, there are -- and we see it every day in the news, there are parts of the country that are still severely impacted, and that certainly impacts us. Our large food service customers, we believe are operating fairly well, but the broad diversity of smaller operations are certainly impacted -- still impacted in this environment.

All right. Great. Thanks. I'll pass it on.

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

Thanks. Good afternoon, guys.

Hi, Ben.

I want to start on the RFG business, in particular the margins, which were really impressive in the quarter. I know that's been a focus for you all as you work to kind of streamline some of the operational components of that business and work through filling up the past day that you have in place. Can you give us a sense for the various components of the margin improvement? And then, I know that the back half of the year is typically seasonally higher margin type environment, but is this kind of a go-forward reasonable baseline for what, say a 3Q margin could look like, because this is -- this is a notable recovery and I think pretty encouraging as it relates to the long-term for this business in light of how significant the recovery is?

Yeah, Ben, I think we can begin to count on this kind of deal in the third quarter, certainly. And you've heard me talk about it before is that this effort now to convert ourselves more to owned facility-type operations is beginning to bear the fruit that we expected to. And just as I was mentioning a little bit before on the operational side, it allows us to really get into the metrics to focus on continuous improvement. I know our teams have really -- and we've actually installed infrastructure on continuous improvement. So, we have people in the facilities that are working on specific things. And then the obviously the plants are being compared side-by-side and even our youngest plan beginning to benefit from that continuous comparison, it's kind of a best practice kind of concept. So, we can really lever our own plants as we do that. And then we still enjoy the co-packing environment. We use it strategically, obviously, where we don't have operations and we're still benefiting from that regard. But yes, I would expect that that we would continue to benefit from that. Certainty in the third corner on our raw materials side, we generally have better raw material costing and that's a benefit that'll go forward. But the long-term effect of labor improvement will continue to benefit as we move from quarter-to-quarter, and we're feeling that even into the fourth quarter right now.

Okay. That's great. Thanks for the color. I want to -- my second question is a bit of a follow-up on Rob question around the fresh avocado side of things and supply/demand. Knowing that demand is typical to forecast in the ebb and flow of food service in the COVID environment, any insight you can give us on supply because I know we do heavier supply and that’s weighed on prices. You mentioned the transition near term, but do you have any sense of -- excuse me -- the transition of supply in near term back to Mexico, can you give us any sense of what the crop is looking like for next year to the extent you have insight into it and are we expecting another big crop into 2021?

Well, I think as we're making the transition, we're certainly feeling that the Mexican summer crop is strong and the quality of the crop seems to be very good as well. So, we're really satisfied with that, and we believe that that supply will be equally strong going into the end of the fourth quarter and enable us to be in a good position to meet consumer demand. You are right. It's very difficult to discuss and try to determine the forward look on this because even -- I don't know if you noticed the heat wave that rolled through California over the last couple of days was in the avocado areas was up over 110 degrees and that has yet to be determined at what the impact will be. And so, it's kind of that kind of scenario that we face in this kind of world.

Understood. Thanks for the time and best of luck.

Thank you.

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

Yeah. Hi. Good afternoon. So, question on -- you talk about your near term priorities and it's not a lot of numbers around it, and I know obviously a lot of the stuff, soft benefits in the near term. But are these -- are anything -- anything that you do in the near term have an impact on gross profit or just general profitability in the near quarter, the fourth quarter or early next year, are these really efforts -- long-term efforts in terms of synergies at one company and things like that.

Right. Well, I think as we were just kind of talking in the prior questions, I think that the concept of centralized control is even having an impact as we roll up -- it's almost like the first piece of it on the Renaissance side was the central -- the creation of company-owned facilities that we can manage across the board and see their performance, manage them side-by-side, establish common metrics, get best practice going in place. And now as we move Mark Lodge into the central position in Calavo, we begin to expand that effort into our other operations and begin to measure them in similar ways. So, we expect to take operational efficiencies fairly early as we go forward through the fourth quarter, in the first quarter of next year.

Okay.

On the organizational piece, which is maybe not necessarily gross margin, is that we expect that we're going to find as a result of centralization the opportunity to take care of some redundancy in the operation of impacts that are long-term and go forward.

Okay. And then -- so as you think about the avocado business and how does suits the impact of the food service being down? Is there -- how does that affect -- I mean, obviously, we're seeing more volume pickup at the retail level, but there's obviously excess volume coming from the lack of food service sales. So, how does that affect your pricing? How does that affect margins? How would you describe like last quarter any changes in mix that affected the business that you can share with us?

Right. Well, I mean, the idea on the avocado side is that we're selling all the sizes that are coming out of the harvest. And so that is from the smallest 84 count to the largest 32 count, and then in number one grade and number two grade. And so if the harvest matches our customer base in volume and in size, then we're very successful. And if we have gaps in that scenario, meaning that we're larger in number two count -- or number two grade -- I'm sorry, and we don't have the right customer to match, then that begins to degrade our margin, because we have to move that product in some fashion. And so over time the impact of food services that we lose some flexibility in our ability to shift our sizes into that customer base. And so, it has an impact on margin. If the growing season and the harvest -- and I would mention like right now coming out of Mexico, the harvest is very clean. It looks good. And the number two count will say is not as heavy, then it's not as big of an impact. But if the number two count gets bigger and we don't have enough location for it into the food service area, then it hinders margin.

And in this past quarter, how did that play out? Was it -- I mean, your margins were good in the quarter on the Fresh side. So, how did that happen? Does it happen because you had the right mix, or there was less impact on food service?

This quarter was pretty dynamic in that there was a COVID kind of -- for lack of a better term, relaxed -- to an effect in the early part of the quarter. And then things began to change kind of in the middle part of the quarter. And it locked back down again on the restaurant side of things in certain parts of the country. Peru was coming into play and came in with heavy supply at pretty competitive prices. And so, all of that was in play in the quarter. So, as we rolled through in the early part of the quarter, yeah, our distribution was very good. Our margins were very strong. And then we were challenged by the specter of Peru in the second part of the quarter, but we were able to hold ourselves together to maintain a fairly -- in our world a good margin for the quarter. It was just a rough comparison to a really high margin last year.

Okay. Yeah. Thank you for the color.

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

Hi, guys. I might be a little early on this, but can you talk about kind of attributes or segments that you're looking at for potential acquisitions? And in that same bank, can you give us any more update on Simply Fresh Fruit and how that business it’s been going?

Hi. It's Kevin Manion. On the M&A front, certainly, there's a lot of things to look at, and we've been looking at a lot of stuff. So, we've gone through with the board our M&A. And I think there are several paths to go down and it's probably appropriate to talk about them as we've gone down one of those paths specifically. And then to Simply Fresh Fruit, timing was difficult for us as we closed that acquisition at the end of February. And that was one that went into the hospitality industry. And it was ideal for us because it was a regional business in which we were able to copy their manufacturing models and customers across America with the shutdown due to COVID, as you can see a hospitality industry has not opened up. So, it's an opportunity that is waiting for us ones the market gets there, but the market is not there at the moment.

The interesting part on that side of things though is that Renaissance is a solutions based organization. And so as things have changed on the hospitality side of distribution, they're working on products that may be able to kind of work through the COVID environment is an example in the hotel kind of scenario, where instead of doing a salad bar or a fruit bar in the morning they're beginning to establish or develop products that could be of the grab and go style. And so, they're continuing to work with those customers. I know we have a couple of rollouts that are planned. I think they're just holding them until they believe that the environment is right. So, we continue to go forward. I think there's a big opportunity for Renaissance to leverage that channel the market as we go forward. And this is kind of really forcing us to innovate, which is not generally a bad thing.

Okay. And then last one for me. Any interruptions during the quarter to operations in any of your facilities from COVID outbreaks.

No. We were -- I think every one of our facilities has been operating in environments that have been challenging, meaning that COVID has been in the cities and towns that they operate. But I think as we've talked at different times earlier, maybe last quarter is that we've really focused on establishing the operating environment for those facilities, really focusing on lunch and break area spacing and establishing the way that employees enter the facilities. And we do every morning the toolbox safety meetings where we talk about how people are feeling and things like that. So, really the teams have focused very hard on operating in the environment and to their credit have operated very successfully in it.

Okay. Great. Thank you.

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