Q3 2021 Calavo Growers Inc Earnings Call
Greetings and welcome to the collateral growers third quarter 2021 earnings call.
At this time all participants are in a listen only mode.
A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
Please note this conference is being recorded.
I will now turn the conference over to your host Lisa Mueller Investor Relations for Colombo. Thank you you may begin.
Thank you operator, and thank you all for joining us today to discuss a lot about 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 Doc Labo Dotcom I'm here today with Steve Hollister interim Chief Executive Officer of Colorado, and Florida, Awesome 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 intend believe expect anticipate or other comparable words and phrases.
Statements that are not historical facts, such as statements about our expected improvements in operating profit also forward looking statements.
Our actual financial condition and results of operations may vary materially from those contemplated by such forward looking statements.
Got you and other factors that could cause our results to differ materially from these pools.
Men are contained in our SEC filings, including our reports on Form 10-K, and thank you.
With that I would now like to turn the call over to Steve Hollister.
Please go ahead.
Thank you and good afternoon, everyone.
We appreciate you joining us to discuss global growers third quarter 2021 results.
As you saw from today's press release after more than 10 years with Colombo, Jim Gibson has retired as CEO.
Jim was one of the founders of Renaissance Food Group, which was later acquired by global and has been a key growth driver of our company's expansion and the fresh refrigerated foods category Eversheds.
On behalf of the board and the company, we want to thank Jim for his years of service to club O 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.
A little about my background.
I have served on Columbia's board for the last 13 years, and I know firsthand the company and the people I am joining.
In my time on the board.
The company has tripled in size and grown 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 clubbed with during this interim period.
Well 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.
Honored to be here, leading clabo.
A company, that's founded and industry.
Now turning to the quarter in hand today all structure in my remarks in three sections to provide you with one.
A high level overview of the quarter.
Too high.
Highlights on overall trends, we're seeing in the industry.
And three <unk>.
Based on our initiatives to improve profitability, including an update on ESG.
Following my remarks, Laura will address our financial results balance sheet and outlook and then we will open the line for questions.
Now moving onto 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 positioned 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 remains 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 as business was negatively impacted by industry wide inflation in labor and freight cost coupled with supply issues, 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 in California seasons are finished and.
And we expect a larger crop coming from Mexico in mid September, which should have a better size distributions.
This new crop will also benefit our foods business with a higher prevalence of smaller avocado sizes.
Help with costs.
Amanda RFG remained 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 effects 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 'twenty 'twenty.
We unveiled our one company initiative and I'm pleased to share that we have made significant progress on the implementation to date.
We have successfully consolidated the organizational structures of our three business segments.
Day, 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 complementary fresh foods, and RFG business segments no longer operate in silos.
We have centralized our sales function as Ron arise.
[noise] approached industry veteran.
He was recently promoted to executive Vice President of sales both foods at 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 lease co 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 mentored talent for future leadership roles.
The actions we have taken through our one company program. We believe will lead to long term success of club O growers.
While we have made good progress on this front, we are not yet finished.
In 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 is 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.
Rodley speaking some of the key opportunities include.
Enhanced commercialization.
Achieved through optimizing our skus, our pricing and customer mix.
The optimization of facilities and systems achieved through adjustments in our production labor and automation.
And finally sourcing optimization achieved through better distribution they are purchasing.
We have amazing products of the highest quality.
We are closely analyzing the most advantageous product set that best serves our customers.
Ultimately, we want to align our customer and skill sets 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 set from our food segment.
And it is probably an understatement to say that the impact of Covid has been disruptive to our business.
There are new dynamics at play.
Shifting the Labor Force is just one example.
And we are working to determine if these shifts are permanent.
We're also moving purposefully to match, our production with demand and available paper pools.
In summary, this profit improvement program is expected to substantially increase our operating profit, while delivering new levels of value and performance to our customers.
Before I turn the call over to <unk> 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 for 2019 as a baseline year.
We know that climate change and our ability to mitigate carbon risk is a top priority for investors and those projects sets the stage for us to develop a roadmap to get club O 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 this for Washington 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 <unk>.
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 or waste reduction water conservation recycling and energy control projects.
They make good business sense with an average payback time of two years.
I want to thank our entire team for making these and all our sustainability efforts a reality.
With that I will turn the call over to par.
Thank you, Steve and good afternoon, everyone. It has been a pleasure to work with a lot of those finance team for the last few weeks as interim CFO. The organization has strong capabilities that are supporting colombos turnaround and the CFO transition now let.
Let's 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.
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 reopens from the pandemic.
We also experienced higher international revenue in our foods segment.
As we expand our efforts outside of the U S.
Revenue in the fresh segment was 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 in avocado supply from Mexico, and California, coupled with sub optimal fleet sizes in that segment.
As Steve noted.
Gross profit for the third quarter was 7.9 million down from 38 million in last year's third quarter.
And our gross profit margin percentage declined two two.
2.8% compared to 11.4%.
The decline in gross profit and margin percentage occurred in all three of our segments.
Due to a number of factors, including inflationary pressures on labor raw material and freight as.
As well as lower sales volume and less desirable fruit.
In the fresh segment.
Next both in quality and sizes.
In addition, higher avocado costs adversely impacted gross margins in our food segment.
SG&A expenses improved to $16.0 million from $17.0 million a year ago, mainly due to lower stock based compensation and a decrease in salary and benefits expense as a result.
<unk> initiatives and a reclassification of certain items consistent with our pre announcement.
<unk> EBITDA was $1 million for the quarter.
Net loss in the third quarter was 13 million or 74 cents per share included in this loss were $21.0 million in total provisions for our Mexican tax liability for the 4024 tax years.
Which 1.3 million was recorded as other expense and $17.0 million was recorded as a discrete item in income tax provision expense.
<unk>, we've recovered 6 million in the quarter from fresh round, 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 and liquid investments and available debt capacity.
Total cash 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 in all three businesses are very dynamic. So we are choosing to refrain from providing revenue or adjusted EBITDA guidance until the environment has stabilized that said fundamentals in the business or improve.
Moving in the fourth quarter compared to the third quarter.
Margins in the fresh business were compressed in August due to supply pressure of a large peruvian crop and tight supplies from Mexico and California.
September as the harvest of Mexico's main crop.
Gets under way.
Profit margins are improving.
Yeah.
The estimates regarding the size of the Mexican crop vary 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 now.
More of the benefits of our pricing and efficiency efforts would likely fall to the bottom line in fiscal 'twenty 'twenty. Two first is the fiscal fourth quarter 2021.
SG&A is expected to be $13 million to $15 million, which is in line with our historical run rate.
Interest expense for the final quarter is anticipated to be approximately 300000.
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. Thank you.
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Our first question comes from the line of Ben Bienvenu with Stephens. Please proceed with your question.
Hey, Thanks, good afternoon everybody.
Good afternoon.
So I wanted to ask as it relates to sort of a critical path from here with your strategic review.
Project do you know what steps you have identified and are putting in place today to improve profitability and then you know when you think about your engagement with third party consultants.
And do you expect to have all of the insights from that review of the business at your disposal to move forward and implement change with the business.
Keith would you like to start.
Sure I'd be happy to.
Some of the things that we've already identified.
And the profitability and strategic.
Listening of club of moving forward.
Our for how our physical footprints with all of our existing facilities not only.
For Kellogg, who can also with RFG in the project sooner, where we're trying to.
Figure out how to consolidate as much as possible how to a good example.
Sample so that would be you know 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 SEC has to be more of a precious commodity.
Labor situations, you know, where where do we have a beneficial labor pool as opposed to maybe some of their more stressed.
Those are those are some of them.
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. So we're taking a look at I mentioned transportation and warehousing to get more efficient and enjoying.
Do our business not only to our customers, but also intercompany.
And and so those are those are some of the things that we're already working on right now.
And what was the second half of the question.
When do you expect to have the.
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 in waves.
Yes.
This means that it does.
Pardon me.
Oh I wanted to highlight to Ben this is a dynamic process that we're engaging in and yes, we're not waiting for sort of a big town and then going to work. It's rather we are very actively engaging on the end.
[noise] tire organization in project, who now have identified.
Very specific actions that we plan to take have assigned project.
Project owners to lead the effort.
And we as an organization are going after the cost savings.
Starting yesterday.
We're already on it.
Okay, Okay great.
Drilling down into the business segments, if I look at the results and your quality foods segment, and we've seen periods in the past our margins have been pressured on fruit costs.
I suspect it has to do with sizing, but you know as I. 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 of those 40 apes their market prices are roughly flat year over year. So does it have to do with the availability of various sizes of the throughput you need or hopes that you would use them that product might be helped me understand the raw material components that play they're driving.
Cogs increase year over year.
Steve would you like me to take that.
Sure sure ill most of what we do with all of the food segment as we use.
That would be fairly low on the consumer demands whether it's number three avocados or is it something that have a significant amount of scoring.
But generally something we don't Packers in number one or number two.
And what we found out in Mexico as it so that from a production standpoint.
There is a disproportionate number of.
Of fruit available for us to use in the food segment as opposed to that which is growing fresh market. So that has led to some some problems getting the right sizing and then also the cost have been 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 of our labor costs don't tend to change that much down in Mexico.
You have anything else to that.
Yeah, there was strong Mexican demand in Mexico for a smaller crop.
And that pushed up our freight cost will continue to see that elevated expense in our P&L in the fourth quarter, but we are starting to see some.
Some of that inflation begin to mitigate.
So as we progress into fiscal 'twenty 'twenty, two we do expect.
Margins to incrementally improve from current levels.
Okay fair enough usually that does that.
Also.
As a partner.
That has to do with a new crop coming in in Mexico.
Basically weeks away from that and that always leaves us to maybe a more beneficial pricing scenario as well.
Okay very good thanks, so much for the color and best of luck.
Thank you.
Thank you. Our next question comes from the line of Rob Dickerson with Jefferies. Please proceed with your question.
Alright, great. Thank you so much.
Couple of quick questions I guess.
First question is.
I mean, it sounds like.
These pressures continue through into Q4 to some extent until you get to the latter part of the quarter GAAP.
Given you know hopefully some changing dynamics in the forthcoming Mexican crop.
So you know.
Obviously, they're going to be some movement or there'll be some movement on the volume side, and then hopefully a better products delfin, there's still better pricing, but just in terms of kind of the other costs, maybe some bar for you for <unk>.
Kind of call out freight.
And labor.
It seems like that could continue and this is what a lot of companies are saying because I believe that can continue for us through next year, but the hope is that part of that you know price relative to crop cycle.
They get better next year. So therefore, what you're kind of implying same somewhat implicitly you think that next year would you bet.
But maybe not as good as you would historically because there's just a higher cost inflationary environment. The other parts of the business is that like.
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 S. Ku mix.
Rationalize our customer base and product base to improve the margins.
And ensure that we are producing.
<unk> at the right place to really minimize the delay until the labor and the freight needs.
For our production.
Okay fair enough.
As we implement those pricing and cost improvement efforts, we expect our margins to recover.
Got it okay perfect.
And then on a segment level.
Coming back because the prior question to ask 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 wanted to clarify that you know the loss posted in the quarter.
You know, it's somewhat a function of just supply.
Not meeting that demand you know later on top of you know other additional cost pressures how do you see.
And I'm asking because obviously that one segment of the business instead of more volume recovery. There's a law. So it's kind of less about the white recovered its really just more about the near term dynamics between cost and pricing and supply.
Probably you're right, we are seeing really strong demand and our RFG business and really the constraint in that business today is labor and the availability of getting folks in.
Into our plants.
Now has.
As we optimize our product mix to reduce.
The labor component in our product mix.
We should see our margins for copper.
Got it Okay fair enough fair enough.
Chris last question, probably more for Steve.
Because I I'm sure people will ask outside of myself is this.
In the past a year or so.
You have the the CFO kind of resign over the summer, but that was off of the prior CEO CFO, having lapped two I still know well it was great.
And then I feel like with Jim.
It did seem to be dealing with eastern Java.
There for quite some time, a cloud, though overall helped implement.
<unk> assistance.
To kind of go forward strategy.
But now I just have to ask Jim Jim is label kind of really kind of when you would think things would start to start we'd start to pick up a bit. So I'm just the direct question is Jeff.
So when you sit down.
With the entire board at this point.
What is that conversation.
Is there an issue with the employee retention or was this something that's not occurring that maybe they had expected to occur and then how do you prevent kind of that you know unexpected departure.
You'd have to recur going forward and maybe that's you know around best in plans and overall incentive compensation. So that's kind of a broader question of.
What do we do what what do we do that we now don't have a permanent CEO.
Sorry to ask directly if that's happened yet thank you.
Well first of all.
From a CFO standpoint, where we're right on the cusp of hiring a new CFO we've been.
Reward committee standpoint furloughed.
We have identified two or.
Applicant so we're getting close to doing that the CEO search is underway.
Yeah.
Part of what you're doing.
You were talking.
My my receptions.
So right.
Alright, and then just a little bit of what you said there.
But I think it was more about how we would get back on track and is that a fair assumption.
Yeah Yeah.
You know if you're close to hiring probably that's great. It's just kind of a broader question as you know.
As you go through the search process to look for a new CEO. So we can try to limit the turnover.
Is there a way.
Yeah.
So, let's say to try to retain that talent for longer than 12 months period of time.
Yeah.
I'm, sorry, if our partner in Europe.
Answer that.
Sure I'm happy to step in so Rob.
We anticipate hiring.
Hiring a new CEO and new CFO that will serve.
Four.
And really Shepherd this turnaround at Colorado, and then take the organization to Oracle and project, who now from being a 1 billion dollar company to be a $2 billion company within five years, and we're very confident that.
We havent robust process and we'll find it.
Bright leadership.
This organization and in the meantime, we have a very very deep capable organization.
That is operating Wow during this transition.
Yes.
Okay perfect. Thank you so much I'll pass it on.
Thank you.
Thank you. Our next question comes from the line of Mexican Hero with Diovan and company. Please proceed with your question.
Yeah, Hi.
Good afternoon.
Hum.
I have several questions.
So.
You go back historically, you know obviously <unk> is.
Agricultural base company.
Let me go back.
<unk> F G and even through Paris, the fresh business and even Colorado foods.
Has been you know well this volatility you've been able to control it pretty well your profitability and stable and.
That's that's a you know given the underlying growth of the of the whole category and your leadership in Europe.
Long years of experience I would expect you know.
I would expect you to be able to you know get the avocado business back up and running.
Fashion.
RFG business that I'm beginning to question.
You've done really well with their growing from you know whenever it was when you bought it $100 million in sales and now it's approaching.
Protein what was over.
Approaching 500 million, so that's good, but I wonder, whether and how that business really step on the other side.
And not to say that I'm, suggesting you know, we put that business right now but.
It might be is it is it a business that you can control the volatility.
Did not give guidance and a lot of it seems centered on RFG.
Did that give guidance like this business. It seems like you don't have visibility.
And you know I remember it.
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 package from here on out because of COVID-19, but I'm actually finding most of the salad bars.
The lids to be open air bars self served and it's actually so I'm wondering whether we but no as it as a as a leadership leadership there that do we know what's happening in RFG and so can you talk a little bit about your confidence there.
<unk>.
Whether I misspoke on any on any of my premises.
Yeah, Let me let me just.
To give a few comments about our RFG and that was on the board. When we were looking at RFG and then ultimately.
Consummated their purchase of it in the earn out through all of that and.
And I have a bit of a better background in protest 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 perfect complement to what we do with the fresh foods segment.
And.
It's unfortunately, it's a unfortunately, however, you want to look at it it's a.
The dynamic business it is constantly changing as the consumer tastes change in Europe.
And more areas may be slack and some others and so we have to we have to deal with that along the way and maybe we haven't done the best in the past it is making some of those.
But we are certainly focused on right now in fact in project business 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 skus that maybe maybe don't fit in with our product set as well as they used to.
And it probably being produced in areas that are most.
Sufficient for us and so not only just.
Looking at all of our Skus 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.
Typically in that industry, it's the nickels and dimes that you make somehow some extra dollars and so we're focusing on the things that we can control, primarily which is the cost inputs.
And the locations.
Dealing with the staffing shortages that are at the center.
Ooh era.
And also taking a look at the products that we sell in and trying to align the pricing that we're getting for our products more in line with Weyerhaeuser.
So all of those things together are giving us I think a much better footprint than before because we're very bullish on that.
Products and in the business and that's why we're trying to consolidate it.
Segment.
And the one club O.
Footprint and move forward with it under that I think we're going to see not only.
<unk> from from the direct.
So we got into it and in the sales price.
Indirect costs from SG&A to maybe revising our resources with him.
Greater collateral.
Framework.
To complement what RFG does.
Alright.
Thanks, Steve.
So RFG is been impacted by Covid, perhaps.
As much as any business in the food industry.
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.
Be inflationary.
On a more sustained basis that we're probably going to see higher freight costs both for incoming students.
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.
Have they 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 dynamic part of the food industry consumers want to eat fresh they want to eat healthy and they want that convenience that <unk>.
RFG offers and that is why we are going to continue to invest to grow this business does.
Is that help.
Yes. It does thank you.
Staying on RFG for a second.
Could you.
Highlight like.
So RFG sales were up about $14 million.
In the quarter, yet were down about $14 million in gross profit.
It was the.
Can you talk either percentage wise or dollar wise, but some of the buckets of those costs through our I mean, I know, we've gone over labor and freight and some material cost, but can you just.
Somehow work work is down and to the to the how we went from $8 million minus $6 million.
$14 million.
You know 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 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 taken some time, but we are getting pricing and at the same time.
Our entire organization is very engaged and we.
Reducing those costs and they're doing it pretty successfully and are working to deliver the bottom line as quickly as possible.
Okay.
More questions as it relates to project, even though I did I hear you correctly, where you say, there's you're looking for $70 million of operating income.
Cost savings over the next 24 months with about $30 million cost to achieve that is that correct.
That's correct.
And so 70 is a big number.
It was like.
That's like a whole year's worth of operating income that you think you can take out and deliver over two years.
And and that's why he left I'd love to hear.
But as that relates as it relates to.
You know it.
Youre going to have a new CEO.
You know do we I know, there's a lot of low hanging fruit no pun intended but theres a lot of stuff that you can get on that you said.
Youre working on yesterday and so.
So it is.
We sure we got $70 million of savings is that is that.
Just ballpark number or is that conservative.
We're just starting to look at all the various places we can save money.
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 a whole lot about.
From current levels so.
$70 million would get back closer to our historical norm.
And that is what gives us confidence because this business has delivered that level of profitability in the past in terms of adjusted EBITDA.
And we.
Has very specific numbers across multiple projects screens.
And.
That number is very doable.
In our expectations.
Okay.
And then final question as it relates to the dividend.
So you know your cash balance is.
Has declined.
When you look at the balance sheet, you can see some cat working capital use but.
With the spending $30 million on other on capital spending with you know related to project you know with the decline in EBITDA just from the pressures that you've mentioned.
How should we look at the dividend I mean, you use.
Increased it I just wonder whether you know is it is it.
Safe.
Is there is this are we in a period, where we're probably not going to see dividend increases at all I'm curious your thoughts on that.
Yeah.
Well I mean, our.
Our plan at this point in time, where we're gonna be addressing the dividend very shortly but our plan at this point in time is not to change it.
We don't we think that.
Problems and we've gotten to this point in time or so.
And for Aerie and that we.
As we mentioned, we think we can get back to historical levels here within the next couple of years. So we don't think we need to take any type of of action to the contrary because we've been doing with them.
We're comfortable in that amount.
We can make it back.
I mean, so I mean, alright, so just looking I'm just looking at my own cash.
Our cash flow projections I guess it looks like you may have to borrow to pay the dividend.
Is that at least temporarily is that is that fair or are.
You think youre going to be able to do it with cash flow our free cash flow.
That's part of it all closer to that than I am sure thing.
So it'll depend on the timing.
Timing of a recovery Mitch so and the pace.
But our view is that we have a strong balance sheet to fund our recovery efforts.
Yeah.
Okay I appreciate the.
The answers thank you very much.
Thank you. Thank you. Our final question comes from the line of Ben <unk> with Lake Street Capital markets. Please proceed with your question.
Alright, Thanks for taking my question I kind of.
Similar sentiment to Miss around the RF are the RFG segment and had a question about that that taken specifically.
Really I'm curious about the performance that you've seen kind of from from.
Across your facilities.
If there the degree to what Youre seeing.
Kind of a meaningful delta in.
And profitability from from one location to another.
Most notably based upon how new the facilities or the degree of automation that are included within those facilities.
And you know and in labor costs from one location to another.
Can you talk about kind of if there are.
Pieces within RFG that are performing well.
And any kind of lessons you're taking from from oney.
Any of the any of the locations.
Maybe doing so.
Okay.
Steve do you like me to take a quick comment on that yeah. We've.
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 it would it's obvious that some do better.
Better than others, and there's a number of reasons for that to the cost of labor in certain parts of the country availability.
You know whether can enter into it too and places like down in Florida, Houston, you know theres been hit in the past.
But those are not specifically due to cause those those external factors I would call him.
In our case.
A lot of it is just moving the product around getting raw product into.
The southern plants as it was much easier for us because it's more available unless.
Unless for you to get it into places like Riverside or Houston.
And so we're trying as I mentioned earlier, we're trying to get our product mix more synchronized with the best places to produce it.
And so those what those.
Those areas are not particularly beneficial to us to produce a certain product mix, we either rule.
Locate that to another plant or we will just continue with and so that type of thing is helping us.
In fact, when you take a look at our facilities and going through the project mix.
Those type of decisions or some of the ones that present themselves more readily than others, because it's a or as you may have tried to make this something worked in the past.
And if we don't have the customer mix with your customer base to sustain those plants and their current footprint and we take a look at other ways to try and accomplish the same thing as a lower cost.
Alright, and then.
Thanks, Steve then the key is freight.
And that equation. So what we are doing is working to minimize inter plant freight costs.
To really optimize production to be close to the customer.
So that we can reduce our expenses for those products.
Okay.
Alright fair enough well best of luck navigating all these are all these issues are that does it for me I'll get back in queue.
Vin.
Thank you for your.
Our next question comes from the line of Eric Larson with Seaport Research. Please proceed with your question.
Thank you everyone I'm, sorry, I didn't a little bit late so.
I guess my first question is is back to project, who know so.
Jim sort of announced that program early on and he is.
And you see your tenure so the question I have is.
At what stage of completion are you in in the program.
Are you a 30% the way through at 50.
Did COVID-19 delay a bit of it and.
I guess, that's the first question.
Hum for why don't you take an answer.
Sure. So Eric project, you know, we anticipate completing it in the next 24 months and achieving $70 million in profit improvement from current levels.
Yeah, I I I think it's kind of got to that to that point, but.
So what does the heavy lifting that's left do you have to do it he conversions I mean, what what what is.
What is in front of you to complete that project within 24 months, what are the big components of that of that integration.
Sure so it's going to be implementing pricing.
Taking a look at our manufacturing footprint.
Really optimizing our SK and customer mix.
Increasing automation and our plane.
And I'm really focusing on.
Reducing labor.
And distribution cost.
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.
Okay. So you've got some heavy lifting to do so.
When you look at East Division are a key is probably the most labor intensive so hot.
How labor intensive is RFG, our employees per million dollars of revenue.
Is there a way that you can help quantify us help quantify that for us so that we can.
Maybe you can understand the magnitude of the labor issue.
Lakers a significant Uh huh.
Cost in RFG I can't unpack it so in such detail.
For you.
On a.
Conference call for competitive reasons.
But one of the <unk>.
Factors, we can address is working to optimize our mix to reduce the labor component in that.
That is what we are doing as part of project right now.
Okay. So my farm.
Okay.
A little bit to that says that the automation portion.
RFG as them.
Ladies and gentlemen, we are experiencing some technical difficulties. Please standby, while we reconnect our speaker Steve Hollister.
[music].
Yes.
[music].
Ladies and gentlemen, we have reconnected Steve Hollister. Please proceed.
I'm sorry for that.
Oh, that's okay, Steve it's Eric again.
I guess I just have one I just have one final question I guess I'm a little confused.
About the avocado sizing supply demand, you're saying that the number one number two is are in short supply excess supply of the smaller fruit three and four.
You're saying that you know theres strong demand in Mexico, with a short crop corn.
Seems to me they would be consuming the threes in the fours.
Can you can you just summarize.
The issues, you're having with sizing again on your avocados, and and the pricing and the cost of those.
For revenue.
Well without getting into actually direct costs and things like that because of it.
Fair enough that's information that I'm sure our competitors like to know what we're doing in Mexico.
Number threes are used primarily in Mexico that is a very popular science or the Mexican population and unfortunately for US. That's also besides that we use most of our claims processing for our food.
Right so.
If you get that through if you get the sizing of.
The Orchard, you might end up with more larger sizes and fewer smaller sizes.
And so there's much more competition for that so the cost goes up.
And that's the direct that's a direct very importantly, what we do in foods.
And so you never know when Youre going out looking at you can get a pretty good estimate and I am looking at an orchard.
Besides he is going to be but you never really know until you bring it into the process and that's the way things are done in Mexico, you're physically, bringing though you know the crop and buy the acre not seeing any type of size Vicky.
So that's how we can sometimes find ourselves on the wrong side of that curve.
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.
These are a real high cost for fruit and income.
And when it's lower you try and really make up some.
Volume on that but we.
We just this last year has been more difficult for us than most.
Okay. So there isn't I may have misheard this and there's not an oversupply of three and four even though that's where the majority of the crop has been coming in.
Yeah.
Well typically in the oversupply that you get of the smaller sizes is just absorbed in Mexico.
And so you know.
The crop has been fairly normal in Mexico, I don't think it's been too.
Theres been offered micro there was 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.
We've had to use alternate sources for coming up for GAAP product either either using some different sizes that could have a higher cost to them or are maybe going to different packers and things.
Okay. Thank you I'll follow up with you folks.
I appreciate it.
Thank you ladies and gentlemen, we have reached the end of the question and answer session. I will now turn the call over to far awesome for closing remarks.
Thanks, Alex and thanks to all of you who and for your interest in Colombo Foods, we look forward to sharing with you updates on project you know next quarter.
Until then be safe and well thanks very much.
This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.