Q3 2022 Calavo Growers Inc Earnings Call
Good afternoon, and welcome to the third quarter 2022 Palazzo growers earnings conference call and webcast all participants will be in a listen only mode. So do you need assistance. Please take note of a conference specialist by pressing star zero.
I will now turn the conference over to your host Julie casually Investor Relations for Collazo.
Julie you may begin.
Good afternoon, and thank you for joining us today to discuss collado growers financial results for the third quarter of 2022.
This afternoon, we issued our earnings release and is available in the Investor Relations section of our website at IR Dot Clabo Dot Com with me on today's call are Brian Coker, President and Chief Executive Officer, and Sean Myself, Chief Financial Officer, We will begin with prepared remarks, and then open up the call for your questions.
Before we begin I would like to remind you that today's comments will include forward looking statements under federal Securities laws forward looking statements are identified by words, such as will be intend believe expect anticipate or other comparable words and phrases statements that are not historical facts such as statements about.
The expected improvement in revenue and operating profit are also forward looking statements.
Our actual results may vary materially from those contemplated by such forward looking statements.
A discussion of the factors that could cause a material difference in our results compared to these forward looking statements is contained in our SEC filings, including our reports on Form 10-K and 10-Q.
As you saw in our earnings press release, we have begun our new segment reporting structure. What was the fresh segment is now known as the ground segment.
The foods and <unk> segments have been combined into the new prepared segment in our discussion today, we may refer to the prior segment names as we make the transition with that I will now turn the call over to Brian Cooker.
Thank you Julie and good afternoon, everyone. We appreciate you joining us today as.
As we look back at Q3, we continued to make meaningful operational and structural progress compared to Q3 last year gross profit more than doubled to $18 5 million net income improved to seven cents per share compared to a loss of 74 cents a share last year and adjusted EBITDA.
By more than $7 million.
Our liquidity and capital ratios, all improved and we feel very key leadership roles with talent that allows us to fight.
Above our weight class.
On a sequential basis from the second quarter gross profit declined while net income was up eight cents per share versus a loss of a penny a share in Q2.
Adjusted EBITDA was down by $4 6 million.
Unfortunately, one tough month of commodity volatility and continued input cost pressure in our guacamole product line map tremendous improvement in the fresh cut portion of our prepared segment, formerly known as RFG.
The former RFG business achieved almost 8% gross margins in Q3 and I'm excited about the structural changes in place to manage that business within everyday intensity.
Prairie avocado price volatility affected both the grown and prepared segments, let me explain those impacts a little further.
First in the ground segment.
The ground segment finished the quarter modestly down compared to Q3 last year, just think about the work that we did during the quarter to deliver gross profit that finished basically flat with Q3 of 2021.
Avocado volume was down almost 20% due a combination of short supply from Mexico, and our international approach to mitigate losses, as we were selling through high priced inventory.
Mexican import volume also was down 34% versus the second quarter and 35% year over year for the quarter.
But we managed to mitigate those declines by increasing our sourcing from California, Peru and Colombia.
During July alone market prices decreased over $20, a carton from the beginning of the month to the end of the month.
Yet through aggressive inventory management and minute by minute attention the sales prices our team managed to squeak out positive gross profit during July and achieve our overall targeted margin per case for the quarter.
Overall for the quarter gross profit per carton was still around $3 65.
However, with the market conditions and constraints on available fruit during the quarter, we simply did not have enough sellable volume to increase our gross margin and grown sequentially from Q2.
I'm proud of how we manage commodity volatility in the market and already look forward to more normal conditions in Q4.
As evidence of our ability to react quickly to temporary changes in the market by August we already recovered from the July decrease in avocado market prices and our margins have rebounded from the July loves we.
We expect the ground segment to return to realizing margins per carton within a normalized range. This quarter, but there is likely to be near term volatility associated with volume.
With the price of fruit as high as it was at the beginning of the third quarter, we didn't see the retail trade pull back on promotions and shrink display sizes.
In August supply and demand started rebalancing and we are pushing volumes where appropriate while tracking toward our overall targeted gross profit per carton in August we opened our <unk> facility for exports to the U S market.
We have another option to help us manage market exposures.
With our network of grower partners, we now have access to the largest global GAAP certified acreage I know Lee Scott.
This broadens our sourcing capabilities has provided additional volume with which to promote and drive sales and provides us with optionality and flexibility, which should benefit the business both in the short and the long term.
As mentioned in the prepared segment also felt pressure from higher avocado cost.
As we indicated during our call last quarter, our Walker moly business within the prepared segment, formerly known as the food segment was pressured by the cost of fruit.
Input costs in Q3 were up 50% compared to last year.
And while we implemented price increases we could not keep up with the rising cost of inputs.
Volume was down approximately 19% versus the prior year due to price and margin pressures and lingering COVID-19 demand softness in the international markets.
Hello <unk>.
Put cost consistently declined over the course of the quarter. Following the peak in May we are now selling product for positive gross margin and expect margins to strengthen as we worked through our frozen inventory.
We also expect our alternative sourcing process improvement initiatives and price increases to support gross margin in the fourth quarter.
As the ground segment and the work remotely product line pressure adjusted EBITDA in the quarter I am most excited about the progress in our prepared segment.
Despite facing challenges the prepared segment performed very well in Q3, showing an 11 million dollar gross profit improvement year over year. In addition to sequential improvement over Q2.
We achieved 5% gross margin in prepared but that included a nearly 8% gross margin within the fresh cut product line, formerly known as RFG.
We continue making steady progress toward our goal of 10% to 12% gross margin for the former RFG segment.
Again, this improvement is structural and throughout the entire P&L.
Pricing cost mitigation labor productivity yield enhancements and transportation savings all improved gross margins our team in prepared is managing this business with an hour by hour urgency and the improvement in this segment is both confidence and momentum building.
In addition, pricing and efficiency improvements from project tuna gained steam capturing $15 million in the third quarter and approximately $30 million of benefits year to date.
I'd like to wrap up my remarks today by saying, how thrilled I am to have our leadership team finalized and in place.
We recently filled three key roles on the management team, including Sean Myself, who began in June as Chief Financial Officer, Danny do marks who started in July as senior Vice President and General manager have grown and Helen Kirk who joined in August as senior Vice President and general manager of prepared.
Sure.
Each one of these individuals have been involved in broad international businesses nothing at Colorado is too big for the seasoned leaders and even in a short period of time I've seen their growth and profit orientation positively impact our business and team.
We have the right people in these important roles.
With the passion energy and competitiveness of our full team driving Calaba, we're positioned to take our performance to the next level and demonstrate that progress through continued sequential profit improvement with that I will turn the call over to Sean myself to report on our financials.
Thank you Bryan it's good to be here as part of the collateral team we provided year over year comparisons in our press release, So I will focus my discussion on a sequential basis from the second quarter.
On a consolidated basis third quarter revenue was $342 million, an increase of $10 6 million from the second quarter of 2022.
Ground segment revenue was $207 6 million down about $3 million from the second quarter as the average selling price of avocados increased by 14%, while avocado volumes were about 10% lower due to supply constraints in Mexico, and intentional steps taken to maintain margins.
Prepared segment revenue was $134 9 million up $14 million from the second quarter benefiting from price and mix initiatives.
Consolidated gross profit was $18 5 million down $3 2 million from the second quarter. The decrease primarily was due to a $6 $4 million decline in gross profits in the ground segment from the volume constraints inventory sell through challenges and margin management decisions Brian outlined.
The decline in growth was partly offset by a $3 $2 million sequential improvement in prepared within prepared the former RFG portion of the segment realized a significant increase in gross profit from ongoing operational initiatives, achieving a seven 7% gross margin from just over 2% in the prior quarter the improve.
Movement was even more pronounced relative to the negative five 4% gross margin in the prior year quarter, which included some unfavorable one time adjustments represented a recovery of almost $15 million year over year.
However, as we share negative gross profits in our guacamole line in the third quarter caused by input cost increases tempered overall prepared gross profit.
For additional perspective on segment performance year to date gross profit through the third quarter totaled $53 5 million up from $48 3 million for the prior year.
$5 million increase year to date is attributed to gross profit increases of approximately $1 million and $4 million in are grown in prepared segments, respectively in.
And the growth segment year to date gross profit per carton for avocados increased by over 20% or almost $10 million. However, the benefit was mostly offset by a 15% decline in volume and an unfavorable foreign exchange impact.
The gross profit increase of $4 million in prepared consisted of a $14 million recovery and the former RFG portion of this segment much of which occurred in the third quarter, partly offset by an almost $10 million decline attributed to our guacamole line from input cost pressure.
Year to date fruit input costs are up over 70%, which has exceeded the pace of price increases.
SG&A was $16 7 million for the quarter or four 9% of sales while our bottom line was $16 6 million from the second quarter of 2020 to the third quarter also included an increase of $800000 associated with our new performance based bonus plan adjusted EBITDA was $8 1 million.
For the third quarter down from $12 7 million in the second quarter of 2022, mainly driven by lower gross profit in the ground segment, partly offset by higher gross profit and prepared realm.
Relative to prior year third quarter, adjusted EBITDA was up $7 million, primarily on higher gross profit and prepared.
On a year to date basis, adjusted EBITDA totaled $25 5 million about flat to prior year as higher segment gross profit of about $5 million was offset mostly by higher SG&A attributed primarily to increased compensation and bonus expense and other costs.
Now turning to our financial position during the quarter, we generated strong cash from operations of over $20 million, including from improvements in cycle times for working capital.
We further strengthened our balance sheet by paying down debt by $16 million in the third quarter and $38 million since the end of the first quarter as a result net debt to adjusted EBITDA was about one times as of July 31.
Continuing our disciplined use of cash we invested $3 9 million in capex in the quarter, mostly focused on efficiency, we expect full year capex to approximate $12 million.
The company ended the quarter with $31 4 million of total debt, which included $25 6 million of borrowing under our line of credit plus other long term obligations and finance leases unrestricted cash and equivalents totaled about $3 million as of July 31, and available liquidity was approximately $20 million providing ample.
As for investment.
The volatility that affected the third quarter as subsiding in the fourth quarter, and we expect more normal conditions to persist over the balance of the quarter.
And grown gross profit per carton started to recover in August and margins are now tracking towards the historical range of $3 to $4 per carton, but volume will remain challenged in the near term.
We're focused on growing this business the recently announced the opening of our <unk> facility for exports to the U S underscores our growth plans.
And prepared we started buying fruit in August for our guacamole line at prices that will generate more normalized gross margins as it flows through inventory over the balance of the quarter.
We will continue implementing operating improvements within our prepared RFG business as planned although we typically experience some seasonal softness in the business in the fourth quarter as food availability and demand moderate.
We still expect the prepared RFP business to attain ongoing gross margins of 10% to 12% by the end of fiscal 2023.
That concludes my prepared remarks, and I will turn it back over to Brian .
Thanks, Sean.
Since the day I sat in the CEO Chair I've made a big deal about and focus on continuous improvement.
The third quarter brought some tough challenges and before we go to questions. I just wanted to give you some perspective of how I feel about our perform performance.
I'm thrilled with the progress we are making in the fresh cut product lines of our prepared segment, formerly RFG. We are delivering profit improvement throughout the P&L, we are making structural changes to the management and oversight of the business. So that our profit improvement is sustainable these aren't one off events, where we're just getting.
A little Lucky.
I am proud of the way, we manage significant commodity volatility in a historically high priced avocado market with.
We tightened our inventory starting in June we managed to get out of the inventory over the course of a three or four week period and kept our avocado customer service and priced right in the market.
As the total company.
I am excited that we somehow manage to deliver improved adjusted EBITDA and adjusted net income versus <unk> 21 win.
Mockado volume was down 19%.
If you would've told me that market prices on avocados will declined $20 a case over the course of a month.
Volume would be off by 19% for the quarter.
Welcome all and processed products.
Would've had negative gross margins and we still improved adjusted EBITDA and net income versus the year ago period than I would've been shot.
This is a great example of why a healthy and profitable prepared segment balances some of the commodity risk that we have in our growth segments.
I'm encouraged that in the midst of driving all our change we improved days sales on hand, and receivables days payable on hand inventory levels and other balance sheet areas to pay down debt in the quarter.
We paid down almost $40 million of debt in the last six months, which is fantastic.
So actually I'm really proud of this quarter I am disappointed that we didn't deliver sequential improvement, but proud of the progress we made in our efforts to control what we can control I am not satisfied or happy unless we're improving every single day, we have work to do.
But shareholders have both the management team and an entire organization that are trying to get better each and every day.
My promise to you is I will be restlessly discontent until we are delivering sequential quarter over quarter improvements in adjusted EBITDA, We just want to get better each and every day, sometimes the market allows us to do so but when it doesn't we still compete we still fight and we still.
Work to optimize the market conditions in our favor.
Simply that's our job.
So with that summary, we'll turn it over to questions.
Operator.
Thank you we will now be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the queue.
Participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Okay.
Yes.
Okay.
Thank you. Our first question is from Ben Bienvenu with Stephens. Please proceed with your question.
Hey, guys, Jim somewhere around for them.
You mentioned.
Paul and avocado prices I wanted to ask how should we be thinking about the supply demand setup as we pivot into the fall is the recent falloff in avocado pricing just a function of supply picking back up or are you seeing any evidence.
Construction on the consumer side.
Well I think first of all Jim Thanks for dialing in this is Brian .
Do think what we've seen is is supply and demand rebalancing the summer harvest the summer Bloom was significantly more than the prior year that put some pressure on prices.
It also allowed us to reduce our purchase cost I think one of the great values that you have in our business model is that we're buying and selling on an everyday basis.
So when we have inventory and we have a couple of weeks inventory, we're able to move quickly as the market.
Forces change so we actually got out of some very high priced inventory twice as much as it is today over the span of three to four weeks and we did it in the month of July and somehow still manage to deliver gross profit in July it wasn't a lot, but we managed to deliver gross profit and if you think of us for the quarter.
We're at the higher end of our range I think we ended up somewhere around $3 65, a case.
In terms of gross profit per unit, we just didn't have enough sellable units.
To generate sequential quarter over quarter profit improvements now looking forward I do think you see the summer Bloom that was bigger.
<unk> brought some relief on prices.
Estimates that we see for <unk>.
Mexico in the coming fall and harvest season continue to increase so we're using some of that to promote to go out and drive volume, where we can I think that our addition of police go in in August has allowed us another source to.
A gift fruit available for promotion and be arbitrage between growing areas. If there is a cost advantage in one or the other so.
I think the overall supply and demand economics are.
Never want to say normal.
Commodity trading environment, but are are more typical at this time of the year and therefore you see.
Acquisition cost and a more typical range in UC sales price per case in a more typical range.
Great.
Consumer side their demand description I know prices have come down, but they're still up pretty materially year over year, but have you seen anything just yet.
The consumer is feeling inflation pressures everywhere.
They're buying behavior at all.
No.
I think it's really hard for us to see that Tim for two reasons one we.
We're in a.
Supply constrained environment. So I don't know that we see real demand, we see whatever we have available to sell sells out.
So it's hard I think for us to say really what the consumer is doing or not doing relative to retail price because there's not enough fruit to gauge elasticity. That's one now on the flip side and to be transparent and I think I included this in my prepared remarks, we did see at the beginning of the <unk>.
Order when the prices were at their highest we saw some retailers who stopped promoting and we saw some that shrunk display sizes. So we did see some retailers back off a little bit I think that have had some things to do with volume, but again, if we had more volume or sorry, if we had more demand we couldnt sell sold more because.
We didn't have more volume so it's a little bit of a tricky analysis to walk through but again I like our model.
We look at it now we're buying the fruit we need now on a daily basis I don't have to sell.
Fruit coming off my own farm, whether I like it or not into a bad market as an example, so.
There is pluses and minuses, but I like the fact that we're a marketer of fruit and because of that we can move with the market quickly.
And we can keep our overall gross profit per box gross gross profit per carton, we can keep that in our historical range and I think we've done a really good job of about I mean think of it this way Tim.
We manage to deliver the same gross margin in this quarter with 19% less volume.
The negative currency impact that's pretty impressive.
Since the same quarter of last year. So I think there are so there is some value in our in our in.
In our model that youre seeing in the quarter.
Great I appreciate the additional color if I can sneak one more in you guys have added a lot of talent to the team as of late.
Just where are you in building out the team.
Almost where you want to be or where you want to be and then what new ability doesn't give you now that you're kind of playing with a full deck.
Well I'm really excited about our team we are complete we filled the CFO role with Sean who many of you have met over the course of the quarter and some will continue meeting.
Phil.
Our general manager for <unk> and senior VP for our grown division with Danny do mock Danny is a long time global commodity player.
He has been in banana as he has been in pines. He has been an avocados. He knows the game in the system and so I'm excited about that.
And then we build the general manager of our of our prepared segment with Helen Curt who has not as much experience in.
Produce directly but Helen has tremendous experience in very tough type margin agricultural products with within the chicken industry. He's got a lot of brand and CPG experience from a general mills days, So I'm really excited about that.
The talent that we have we're onboarding that talent some of them have just a couple of days of experience now so but.
But we've got a really good team I think the other aspect of this is this was a very structured transition.
So we have Rob Levine, who formerly managed our avocado business for years and years and years, who is who is on a transition plan is structured transition plan with Danny we have Ron <unk> who's been involved in our prepared segment for years and years and years, who has a very trend structured transition plan with talent. So I like this.
As we have the assistance of a players who have helped deliver results. We have the assistance of them in transitioning our new leaders.
So I'm excited about where we are of our team.
I'm I'm excited to have sort of.
Our group debt profit oriented, but also growth oriented we've got our facility stable. We can produce very high quality product with high fill rates. We have got the right cost profile now we need people that can help us grow and I think with Helen and Danny running.
<unk>, Shawn with helping us with providing access to investment where we need them.
Really excited about the leadership team we have in place.
That's great.
Thank you, Tom and then I'll pass it along.
As a reminder.
Wonder if you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
Okay.
Our next question comes from Ben Clause with Lake Street Capital Markets. Please proceed with your question.
Alright, Thanks for taking my questions first I have a couple on the processed avocado side.
First I just kind of a high level question about about kind of how you source your supply for that business and how that's changed throughout project now.
I'm really kind of curious.
How nimble that processes and the degree to what your buildup inventory is when prices fall.
Capitalize on.
And that kind of environment.
Our high can you talk about.
That that part of the business and really how it's changed over the last year.
Sure. So first of all Ben Thanks, again for calling in and appreciate it and hope you're doing well.
This process avocado.
Business, we've tried to transition over the course of the last several months predominantly if you go back a year ago, we were predominantly buying.
Fruit from our own packinghouse buying transitioning fruit from our own packinghouse.
That were the remnants of the pack out that one of our own harvests and over the course of the last six months in particular, we've really.
Tried to diversify that that portfolio. So in the old model you could see basically whatever we were paying for the product we are selling in the market as whole fruit.
We would be paying for our process as well just as a remainder our weighted average would be the same.
So we've expanded that geographically so so we've gone to now at least go and we're sourcing crude out of police go we've gone to that to some other states in Mexico, we saw our volume from other countries.
Peru or work remotely, even when prices start Peru, or what the model even when prices were.
Really high we were buying.
Partially processed avocado to blended in our blended in with our finished good products. So the whole sourcing environment has changed over the course of the last.
Six months I would say, Ben and Thats really hard I think just transparently a couple of other things about one the overall supply demand dynamics have changed where now buying we're now buying raw product for our process business that is roughly <unk>.
35% of what it was eight weeks ago nine weeks ago.
And we've got some productivity initiatives. So we've got a host of initiatives that are all centered around how do I drive one more power through the system per day with one less FTE and producing one less pound of shrink when I do it. So we've got a lot of that going in.
Of course, the price increases have helped now.
Now that the.
Input cost have come down, but frankly, we raised prices four times, we just couldnt keep up in the market couldn't bear more price increases and we tested that to make sure.
Hopefully that helps.
Yes, Brian that was really helpful and then.
That stimulates a follow up I mean, this kind of shift in strategy over the last six months to diversify your inputs.
What are your expectations for what that can deliver in.
I don't know if you can even say the word normalized anymore, but you know what I mean.
More regular operating environment, then you encountered in July I mean, do you think that you can get back to the kind of profitability levels that the company saw in this business you know in 2019.
Or somewhere between between the.
Between here and there kind of a realistic target.
Yes, Dan this is Shawn I'll take that question. So like Brian said, we're now buying fruit that probably a third of what were paying at its peak back in the summer and it's going to take a few weeks for that to flow through inventory, but when it does that would expect that.
In this month in September .
We're going to start to really see gross margins that are consistent with what we'd expect on a historical basis.
Okay.
Okay, Alright, Thank you and one more for me and I'll get back in queue.
Hey, I'm, sorry, just one more thing because you brought it up in your first question. So here's the other thing that we're doing just from a management perspective now that the price of raw product as is in a range, where if we were if we have no inventory we have no accumulated inventory, we're selling it today, we'd be at our target market.
Margins right.
But the other thing that we're doing is trying to take advantage of capacity. So we're building frozen inventory backup at these wall product cost not.
The raw product costs from eight weeks ago, and I think that's another just important part of how you manage the business how you manage the P&L how you manage your.
You are kind of the risks as they come down the pipe as we are building frozen inventory now at today's prices. So that we can smooth some of the challenges that we may face in the future as supply and demand dynamics change and got you and just one more thing to add there to Ben is.
Bryan alluded to we've got some we've got some efficiency projects that we're kicking off that we expect should be installed and operational kind of in early 2023, and that's going to give us a couple of points of lift to once they are what they are up and running so efficiency yield improvements.
So we should see some benefit from that.
In the not too distant future.
Got it got it that's all helpful color.
One more quick one for me then it gets to.
Kind of building on something you just said about all the various improvements in place at RFG.
The sequential gross margin improvement really it was pretty dramatic from the second to the third quarter I think you said from 2% to 8%.
And that legacy RFG business.
Was there anything kind of onetime in nature from.
To lead to that increase.
And.
Or was that really kind of progression as you expected and now that's kind of the call it the new floor.
For that for that business, maybe heading into the next quarter.
Yeah. This is Sean there wasn't anything I would say kind of unusual or nonrecurring in nature there Ben.
We're just.
We're just.
We're just making steady progress across the P&L I will say the vast majority of the improvement from the second quarter was price related but we also had some some labor and productivity improvements and also starting to see more of the benefits from our transportation.
And warehousing initiatives as well.
Got it okay very good well I appreciate it.
Yes go ahead, Brian Jess just before we leave RFG.
I'm really proud of RFC this quarter.
Really proud.
And then transparently I would say.
We saw this coming kind of in the June ish timeframe.
<unk>.
This is the culmination and I don't want to say culmination really it's.
Cumulative effect, let's say not culmination because we still have work to do to get to our target margins, but this is across the P&L Sean mentioned it I'm not sure you got many other of your.
<unk>.
Your.
Accounts that you are following I'm not sure that <unk> got many other of them that are have year over year savings in transportation.
We've got savings in transportation, we've got labor productivity, we've got yield enhancement sure. We've got raw product material cost, but as Shawn mentioned pricing had been able to offset that this is just some good old fashion leadership granting we've got every plant manager who is grabbing on this every day, we've got every <unk>.
<unk> person who's out there grinding on pricing every day, we're working with the customers to to make sure that we've got a great solution for them. So I'm really proud I would say if you would've asked me on this call last quarter I knew we would improve I didn't know that we would get to almost.
8%, but we see we saw it sort of in the Middle of June and then we just kept driving it. So it's a this is really really significant now the other aspect. There are two other things that all kind of remind you about one we still have a ways to go to get to our 10%.
<unk> margin for this legacy <unk> business and the fact of the matter is the last 25% of improvements always tougher than the first 75% and but we're here and we're going to take it and grind. It every single day.
The second thing that I would say is just kind of remember there is some seasonality to this business.
You go into the winter months and you go to winter sourcing for fruit you have winter pricing too, but things get a little a little tougher in dicier.
Don't know that I'd necessarily say all right, 8% is the rock for the absolute floor.
But we're going to try to continually march to that 10% to 12% coming out of a 2023. If you remember that's what we talked about by the time, we come out of 2023 that legacy RFG business will be somewhere in the range of 10%.
12%.
Got it got it.
That all was very helpful.
Plenty of a lot of improvement has been made already that congratulations to you on that progress.
That does it for me thanks for taking my questions I'll get back in queue.
Thanks, a lot Ben.
Thank you. Our next question is from Ben Bienvenu with Stephens. Please proceed with your question.
Hey, guys it seems like.
I wanted to ask a follow up on police go.
How much if you can dose group did you pull out the lease.
So in August and as you guys just got everything.
Okay.
It was probably it started off slow.
Jim and then I'd, probably say of our Mexican volume had gone up to about 10%, 12% I think going forward for the next.
Month, or so you might see it as high as 25% of our Mexican volumes.
Do you have a target range or target contribution that it could make up kind of like a go forward run rate.
No I wouldn't think of that way think of it that way Jim If you bear with me.
What we want to think about is selling Mexican fruit into the U S market and whether it comes from Mitchell Con or a lease go that's our opportunity to arbitrage.
One acquisition price on efficiency of our packing houses how does one dilute fixed cost more than the other the transportation to the border. It's about the same so that's not an impact. So we're trying to be a little fluid and there are remember we make these buy decisions every day and so we will.
And order in fact.
I think we probably just placed an order an hour ago for Tomorrow's volume and everyday we're deciding how much for Mitchell, okay, and how much from <unk> go and trying to do that and what's the best interest of our business remember in this commodity business pennies matter and so we'll fight it out for pennies every single.
Good day, and that's what we're doing so it's hard for me to say that there is a target for police go what there is a target for is our return in the market and we've said that consistently it's in that three to $4 per case range in the market and our opportunity to operate in that.
In that range to deliver that range is based upon a wide range of sources, including Peru, including California, including Colombia, including Jalisco, including Michigan economy, and so our job is to make sure. We're we're balancing and arbitrage amongst all those sources.
To get the get the fruit, we require and B.
Do it at a cost profile that allows us to deliver our targeted margins per case.
Okay, Great I appreciate the follow up question. Thanks, guys.
Thank you.
Thank you. Our next question is from Mitch Pinheiro with third event and company. Please proceed with your question.
Hey, good afternoon.
Hey, Mitch.
A couple of questions.
Just curious staying on the avocado side.
I may have misheard, you, but he said he might be volume challenged in the near term.
See I see the volumes coming in from Mexico, and you know very nicely here in August .
Is there has there been a slowdown or why would you say that.
Okay.
Yes, the near term volume challenges were currency there is just.
Yes.
As we're working through kind of the inventory levels as prices are stabilizing and costs are stabilizing just ensuring that we're managing our margin as we're transitioning to a more normal environment.
I think the other thing that we also have to transparently face.
We did this.
I mentioned this a little bit earlier, we saw during the beginning of the quarter that.
Retailers.
Promotions and shrunk display sizes and now we're getting them to ramp promotions back up and in large display sizes. So there is a little bit of that that we have to restart the category are and retrain the.
The consumer that product available now so what we're alluding to is that I don't think we can go from 19.
<unk> percent down on a volume basis year over year to breakeven or 10% higher year over year right. There is a ramp up period that we wanted to make sure that that we articulated.
And then.
Could you remind me on the on the ground side.
What percentage of your business is retail versus foodservice.
And then if you could talk about any differences in demand or.
Any any changes.
Those channels.
Yes.
Yes, it's about it's about 60 40 family favoring retail.
And so.
So how has foodservice performed I mean are we seeing.
Is there has there been.
Our volume decline there because of lack of good fruit.
Well because the prices and people they are backing off on the menu. There can you talk a little bit about that.
If you look at the volume decline that we experienced in the third quarter Mitch.
It was we probably saw a little bit more impact on the retail side than we did the foodservice side and again for the reasons, primarily that Brian cited kind of a lack of promotions.
But it would be honest with you the difference between the two was was fairly modest.
And then.
Mitch I would say the other aspect of that is again, we were in a volume constrained environment. So.
Foodservice can be a little more flexible in terms of size because it's an ingredient for their finished product so sometimes they'll chase a better price size of product.
But general Theyre trying and we're in big.
Mexican themed foodservice players as well and again theyre not going to take work amole, our avocados off the menu, but we've got to work with them to try to get at that price point right.
Alright.
And then on the guacamole side any any differences between foodservice and retail.
No nothing nothing really to speak of there Mitch.
Okay.
Finally on RFG it looked like.
It was doing the quick math, it looks like sales year over year.
It was up about 14%.
Is that about right.
Sean I didn't think it was 14% was it.
Maybe.
Yes.
Don't break it out.
I was just trying to back into it but I was doing it correctly and Thats hard for me to do.
Yes.
Yes, I'm sorry.
We're trying to do it for for RFG itself. The <unk> portion of the business, Yes, just trying to get a sense.
Basically trying to get a sense for.
It seemed like it was mostly pricing versus volume.
You know I was curious about how that was.
Yes, yes. Your math is about your math is about right there.
And year over year volume is down just just a little in RFG. So.
So yes year over year, when you look at that that topline number that was mostly the impact of pricing.
And what are your conversations like with your customers in the RFG segment.
No.
Oh I think.
Good news for US is our customer now our discussion with customers it's about growth.
If you think about this time last year RFG was having trouble fulfilling orders, having trouble finding the right profit profile, having trouble getting the right labor mix and the facility we stabilized all of our facilities were still.
Our fill rate over the course of the last quarter was something like 99% or 99, 1% I mean, it's something crazy good for for a perishable product so.
We're excited about the service we've stabilized the operation we mentioned some of the metrics that we talked about in terms of labor productivity.
Yield improvements.
Fill rate consistency and so now we get a chance to talk to them about how do we how do we work together to grow the category again, so I'm excited about turning from stabilization phase two growth and leverage face in RFG.
<unk>, formerly <unk>, let's say.
In that business.
Inc.
So I understand sort of the seasonality of the business and what that could do to margins in the quarter and maybe first quarter.
If you see sort of a stabilization in volumes.
In that business going into the fourth quarter and first quarter of next year.
Yes, I think I think it's.
Stabilized probably a little bit of softening just seasonal softening as we go into the fourth quarter.
But but yes, otherwise it roughly in line with what we're seeing this quarter.
Just just one other comment too Mitch going back to your earlier point about the top line keep in mind. It that's a combination of price, but there's also some mix benefits that are flowing through as well as we're working through our our SKU optimization process and of course, that's going to be an ongoing process for it so youre seeing some of those benefits as well.
Bleeds into those conversations that we're having with our customers.
Okay and then.
One more thing to get to.
You know from the 8% range and gross margin to a double digit range.
I know, it's going to take a lot of work, but I mean, how much of that.
Is gonna be dependent on just fixed cost leverage just simple more volume through your facilities is it most of it half of it.
And any way to think about that.
Yes, I would say that it would be it would be less than half of that Mitch I mean really kind of the path forward for us. If you think about what got us to the 8%.
Specifically seven seven in the past quarter, and what is going to take us to 10% to 12%.
That's going to be a component of it but frankly, just like the path here, it's going to be a lot it's completely across the P&L. So we're going to continue to see pricing benefits more mixed benefits labor optimization productivity, but absolutely pushing more volume through those plants.
Alright, well thank you for your time.
Hey, Mitch Thanks, a lot for dialing in.
Let me just we'll just talk a little bit until and unless there's another until there is another question, but Mitch I think an important part of.
Thinking about RFG and this volume piece, yes volume will help and leveraging fixed costs will help but we have structurally changed the way we manage this business so significantly and just to give you. An example on labor in every plant every hour of the day our plant manager knows.
The labor that they've deployed so far they know that they know the productivity they are getting and they can make on the fly line balancing decisions that didn't exist a year ago.
We have a seasonal calendar of sourcing raw products now, we're 93% of our raw products in the in the legacy RFG business are now sourced under contract methodology using.
Online <unk>.
Mm tool that didn't exist a year ago, we've got a transportation network, where 70 odd percent of our of our transportation spend is under RFP.
Where multiple where we built carrier depth and consistency in our carriers.
That didn't exist a year ago, so the point.
We have launched a training program a system wide training program for plant managers assistant client managers and line supervisors to tell them exactly how they react when the metrics go one way or another that didn't exist and wasn't in place a year ago. So.
I talk about the sustainability of the improvements in RFG that is not ever meant to say one quarter that we might go backwards a little bit and then go forward is a little bit but the fact of the matter is we've put structure in place to manage this business every single hour every single day and frankly.
That's the only.
Way that I know how to do it is we've just got to grind and our leaders know they're.
There their incentive to do it we're all incentives the same way so that we're all pulling in the same direction as a team.
And.
I'm just.
I want to make sure we get across the sustainability of these improvements we didn't just get lucky this quarter.
Paul do we have any more questions.
At this time there are no further questions I'd like to turn the floor back over to Bryan Coca for any closing comments.
Okay. Thanks, Paul Thank you all for dialing in we appreciate your support we appreciate you've given us a chance to.
Help us explain our business in.
And where we're making the opportunities and where we're driving the results. So thank you very much we look forward to talking to you next quarter and again I appreciate all your support.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
Yes.