Q1 2023 Calavo Growers Inc Earnings Call
Speaker 2: Good afternoon and welcome to the first quarter of the 2023 Calabo Growers Earnings Conference Call and Webcast. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero.
Speaker 2: I will now turn the conference over to your host, Julie Kegley, Investor Relations for Collabo. You may begin.
Speaker 3: Good afternoon and thank you for joining us today to discuss Calavo Growers financial results for the first quarter of fiscal 2023. This afternoon we issued our earnings release and it is available in the investor relations section of our website at ir.calavo.com.
Speaker 3: With me on today's call are Brian Cooker, President and Chief Executive Officer, and Shawn Munsell, Chief Financial Officer. We will begin with prepared remarks and then open up the call for your questions.
Speaker 3: Before we begin, I would like to remind you that today's comments will include forward looking statements under federal security laws. Forward looking statements are identified by words such as will, be, intend, believe, expect, anticipate, or other comparable words and phrases.
Speaker 3: Statements that are not historical facts, such as statements about expected improvement in revenue and operating profit, are also forward-looking statements. Our actual results may vary materially from those contemplated by such forward-looking statements.
Speaker 3: A discussion of the factors that could cause a material difference in our results compared to these forward-looking statements is contained in our SEC filings, including our reports on Form 10-K and 10-Q. With that, I will now turn the call over to Brian Cooker.
Speaker 4: Thank you, Julie, and good afternoon, everyone. We appreciate you joining us today.
Speaker 4: Our fiscal first quarter results reflect challenging conditions in both segments, but we have taken action and expect that our results will improve as we progress through the fiscal year.
Speaker 4: In the grown segment, high volumes of Mexican avocados, especially small fruit, combined with still high retail shelf prices, pressured wholesale prices and margins more than anticipated during the quarter. In some regions, itPaca Bonita has even added translucent DarFrankendVirginia diapers to market.
Speaker 4: While we expected industry avocado volume to increase during the quarter, we did not anticipate prices and margins to contract as much as they did.
Speaker 4: The average case price in our first quarter fell to about $28 versus around $34 in the fourth quarter and $43 in the prior year quarter.
Speaker 4: We also expected prices and margins to improve approaching the Super Bowl.
Speaker 4: Although conditions did improve later in January , the impact was more muted than anticipated.
Speaker 4: Prepared segment performance was better than the prior year, but was weaker than expected due to a combination of volume softness and winter weather.
Speaker 4: We expected a decline in prepared segment earnings versus the fourth quarter due to seasonality in our fresh cut division.
Speaker 4: But we experienced softness in volume that exceeded typical seasonality, with total prepared segment volume down about 13%.
Speaker 4: Velocity slowed in the quarter, which we partly attribute to a decline in volume sales across retail food categories as consumers reacted to inflation and tough general economic conditions.
Speaker 4: Separately, we incurred weather events during the quarter that cost about a million dollars of unfavorable incremental costs in the fresh cut division.
Speaker 4: mainly from the temporary closure of some of our manufacturing facility.
Speaker 4: Understanding our first quarter results in the context of the market around us is important.
Speaker 4: Avocado import volume from Mexico grew over 8% versus the same quarter in 2022.
Speaker 4: But retail sales volume only grew about 3%, while total US inventories rose almost 7%.
Speaker 4: We attribute the relatively lower retail volumes in part to retail prices.
Speaker 4: which haven't declined to the same extent as wholesale prices.
Speaker 4: Higher inventories also pressured wholesale prices of avocados and compressed margins as the industry worked through aging inventory.
Speaker 4: During the quarter, our prepared segment faced the pressures from a declining category. In retail, dollar volume sales are up across almost all prepared categories in which we participate. Thank you guy
Speaker 4: However, according to IRI, unit volumes declined in produce categories as a whole and almost every category in which we participate by anywhere from 2 to 5% in the second half of 22.
Speaker 4: Consumers either traded down or passed on certain convenience categories in the store perimeter. 1.
Speaker 4: As unit volume declines on a store by store basis, our margins suffer and prepare as we lose benefits from fixed cost absorption.
Speaker 4: We believe the worst is behind us for the fiscal year and we expect to see sequential improvement in our results as we progress throughout the year.
Speaker 4: But margin volatility in grown and volume softness in prepared may persist in the near term.
Speaker 4: We did see conditions in the ground segment improve in February .
Speaker 4: And we've realized volume increases versus the prior year in the 7 to 9 percent range and avocado margins within our targeted range of $3 to $4 per case for most of the second quarter.
Speaker 4: We've realized volume increases versus the prior year in the 7 to 9% range and avocado margins within our targeted range of $3 to $4 per case for most of the second quarter. However,
Speaker 4: The start of the avocado seasons in California and Peru may lead to ongoing volatility in grown margins. In our prepared segment, the one perimeter of the store category that saw unit volume growth in the second half of 22 was deli grab and go items. As mentioned during our last call...
Speaker 4: Our new customer acquisition strategy has been focused on deli, grab and go items, and we are on schedule to onboard new prepared deli and grab and go volume.
Speaker 4: with two national customers in the second half of the year.
Speaker 4: We expect volume weakness to persist until then.
Speaker 4: The operating environment, coupled with our first quarter results, has caused us to lower our fiscal year margin expectations for both segments. For 2023, we estimate adjusted EBITDA in the range of $40 to $45 million.
Speaker 4: While we are not setting the precedent of giving annual EVA day guidance, we believe it is important to provide an indication of our expectations for this year given the first quarter results. For more information, visit www.fema.gov
Speaker 4: Investing to grow the business, resulting in long-term shareholder value, is undeniably our top capital allocation priority.
Speaker 4: We are also committed to paying a dividend with competitive yield and payout metrics relative to benchmarks.
Speaker 4: However, the metrics associated with our current dividend rate have been elevated since fiscal 2020 and remain elevated under the current operating environment.
Speaker 4: We plan to reset the dividend to a level that provides more market-aligned metrics.
Speaker 4: We anticipate the Board of Directors will declare a dividend of 10 cents per share for the second quarter.
Speaker 4: Although we remain committed to growing the business, we also plan to reduce our fiscal 2023 capital expenditures while we navigate near-term uncertainties.
Speaker 4: We now expect capital expenditures for fiscal 2023 of approximately 13 million.
Speaker 4: These adjustments reflect deliberate fiscal discipline that allow us to continue prioritizing investment for growth while maintaining competitive dividend metrics.
Speaker 4: Although the start to the fiscal year has been disappointing, we remain focused on making steady lasting improvement to the business.
Speaker 4: During the second quarter, we initiated activity on several fronts that will offer immediate benefits to earnings.
Speaker 4: As an example, we recently went live with the first phase of a new transportation management system that enables RFPs on most of our outsourced freight, which will significantly improve the competitiveness of our freight costs. This system will be fully implemented during the second quarter.
Speaker 4: In early March, we implemented a restructuring of our US and Mexico operations that will allow us to upgrade essential organizational capabilities and to streamline and reduce costs related to certain functions.
Speaker 4: We recently consolidated activities within our grown distribution network to streamline operations and reduce costs.
Speaker 4: And we recently entered into an agreement to exit our non-core salsa business as we intend to direct more resources towards guacamole growth.
Speaker 4: Pricing is always a focus for us. As you probably know, we priced our grown products on a daily basis.
Speaker 4: However, our prepared business has been comprised of almost exclusively annual or multi-year fixed-price contracts. Thanks for joining us.
Speaker 4: Of the course of the last six months, we have converted more than 50% of our expected annual prepared revenue stream.
Speaker 4: to contractually committed pricing windows that range between two and four times a year, allowing us to react quickly to changes we see in market dynamics, inflation, and industry costs.
Speaker 4: These actions do not represent an exhaustive list of improvement activities that are underway, but I wanted to highlight some of the most influential and relevant that items that will have immediate impact.
Speaker 4: I'd like to wrap up my prepared comments by saying that despite market and category performance that was less than our expectation, our commitment hasn't wavered.
Speaker 4: We are still focused on performance improvement, on growth, and on generating shareholder value.
Speaker 4: It's our job to manage through a challenging market condition.
Speaker 4: And we must be and are nimble in our response to changing market dynamics.
Speaker 4: The past of growth is in a straight line and there are obstacles.
Speaker 4: but we will keep driving forward. And now I'll turn the call over to Sean to report on the financials.
Speaker 5: Thank you, Brian . As we stated on our full year 2022 earnings call in December , seasonality plays a significant role in the cadence of our earnings.
Speaker 5: While the first quarter is typically our seasonally weakest quarter, this year we experienced an additional market-driven pressures which adversely impacted our results. But as Ryan said, we do expect to deliver sequentially improving results as we progress through the fiscal year.
Speaker 5: On a consolidated basis, first quarter revenue was $226 million, a decrease of $48 million from the first quarter of 2022. Grown segment revenue was $118 million, down $45 million from last year, as the average selling price of avocado decreased by 35%.
Speaker 5: as prices continue to adjust from their highs in the summer. Avocado sales volumes were up over 3% due to increased supply from Mexico.
Speaker 5: Industry imports from Mexico were estimated to be up over 8% versus the prior year quarter, while industry avocado retail sales were estimated to be up by about 3%.
Speaker 5: Prepared segment revenue was $108 million, down 4 million from the prior year quarter, its higher prices partly offset volume declines of about 13%.
Consolidated gross profit was $14 million, up over $1 million from the prior year quarter, primarily driven by a $3 million increase in prepared segment gross profit, partially offset by a $2 million decline in grown segment gross profit. Grown segment gross profit for the first quarter was $9.5 million compared to $11.6 million.
to decline from the fourth quarter of fiscal 2022.
Additionally, the strengthening of the peso relative to the US dollar increased operating costs in Mexico in dollar terms, although that impact was mostly offset in the quarter by favorable balance sheet evaluation.
We have seen an improvement in avocado margins to within our targeted range of $3 to $4 per case for most of the second quarter.
The prepared segment generated gross profit of $5 million, up from $1.6 million in the prior year quarter. What kind of market do you want us toG
Gross margin rose to 4.6%, which consisted of a gross margin of just over 1% in the fresh cut division, and approximately 26% in the guacamole division.
The improvement in fresh cuts from a loss last year was driven by pricing and other operating improvements that were partly offset by higher raw material costs as well as weather-related impacts of approximately $1 million, mainly from manufacturing facility closures. Gross margin in the Guacamole Division almost doubled from the prior year on lower fruit costs and yield improvements.
Adjust the debit dial with 3.6 million for the first quarter down from 4.7 million in the first quarter of 2022.
Now, turning to our financial position. During the quarter, we increased our line of credit borrowings to about $16 million to fund working capital needs.
Caching equivalents remained at about 2 million as of January 31. Available liquidity was approximately 26 million at quarter end, and additionally we invested about 5 million in CAPEX in the first quarter, which included investments to support volume additions in the second half and prepared.
Based on current market conditions and our outlook for the remainder of the year, we now expect capital expenditures of approximately $13 million.
Now I'll briefly share some thoughts on our outlook for the remainder of 2023. In the grown segment, per case margins are expected to be at or near the low end of our $3-$4 range, as we anticipate ongoing margin volatility as the Californian-proof seasons begin. Volume for the balance of the years expected to increase.
and be approximately commensurate with changes in supply from our primary sourcing regions. In the prepared segment, gross margins in the fresh cut division will be at or near the low end of the 10 to 12 percent range as we end the fiscal year, primarily due to softer volume in the near term.
Although new customer distribution points in volume are scheduled to launch in the back half of the year, gross margins in the Guacamole division are expected to approximate 20%.
As Brian mentioned, we recently finalized plans to restructure some of our operations and to exit our salsa business.
We expect one-time charges in the second quarter related to these activities to total approximately $3.2 million, including cash and non-cash costs associated with severance, asset impairments, and implementation expenses.
The payback on cash costs is expected to be approximately one and a half years or less.
And finally, I'll wrap up by saying that we have a strong balance sheet and sufficient liquidity to manage through the current market challenges.
We remain committed to investing to grow the business to strengthen our future earnings.
That concludes my prepared remarks, and I will turn it back over to Brian . Thanks, Sean.
As I said on the call last quarter, we've been undergoing a long-term strategic planning process. We've completed the majority of the work and we'll be presenting to our board of directors in May.
We look forward to rolling it out to you later this year.
We spent the last year addressing foundational opportunities to stabilize our business, including finding the right market savvy talent to lead our organization.
Now, our plan is to take Calavo from an improving company to a growing company. And despite the slow start to the year, that's still the plan.
We have the right service levels, product portfolio, and capabilities to grow. We have the right people and key roles who know how to execute and overcome the challenges of our dynamic business.
We have the focus and determination to be successful, and we will.
That concludes our prepared remarks. I'll now turn the call over to the operator to begin the Q&A.
Thank you. If you would 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 and for participants using speaker equipment and maybe necessary to pick up your handset before pressing the star keys.
Our first question is from Ben, the NVU. Would Stevens please proceed?
Thanks so much. Appreciate taking my questions.
Hey, thanks so much. Appreciate taking my questions. Sir Ben, how can we help?
I want to start on the prepared business. You talked about volume down, double digits as a result of higher pricing year over year. Can you talk a little bit about the demand elasticities you're seeing from consumers in the marketplace? Would you expect that as we start to see broader inflation normalized that these volumes pick back up? Or is there some...
That's a very normal part of our prepared business, cyclicality and seasonality.
The thing that sort of
was greater than we expected, was the category performance itself. So if you think about it during those second half of...
22 overall produce was actually down. Value added produce was down on a volume basis. On a dollar basis it's up but the category itself on a unit sales basis was actually down. Total produce was down 3% and...
Non-value add or whole commodity was was down 4% so value added Fair better, but was still down There are some bright spots in that category performance and they exist in the deli aisle and and what we saw in the deli aisle was
snacks, prepared meals, some of the prepared or pre-fliced meat and cheeses have unique volume growth.
So even though Delhi was down, we saw some Delhi categories in which we participate that on a unit basis were up.
Even though Delhi was down, we saw some Delhi categories in which we participate that on a unit basis were up. We do see inflation moderating.
And I certainly think that will help in long term, we still see growth in our prepared categories. Both Wachemollian and FreshCut. We see growth long term. And we hear it from the retail trade, we hear it from IRI, we see it in some of the planning that our customers.
Okay, that makes sense. My second question is related to the restructuring plans. You noted a handful of plans that you have, all of which makes sense. Is it your expectation that this is the last of the restructuring decisions that will be made or is it possible there might be others?
And then along those lines, as you noted, your position in Calabo for growth again, when we think about what you've done with CAPEX for this year, which also makes sense, how should we think about the arc of spending as we move forward down the line?uel inspired by Camp centrifuge.
Okay, great question. So a couple of things that I would say. As you remember, two years ago, Calava went through or a year and a half, went through a significant restructuring where a lot of assets, facility closures, things of that nature.
This is certainly in order of magnitude is left, but is needed. What I would say is now we're doing some of the finer, more precise changes to the organization. We consolidated distribution centers in our avocado business. So that's one of the changes that you make. Time mentioned.
that we're exiting and transitioning out of a non-core salsa business, which will provide us some mixed benefits that will help us. I think the other big one is, if you're going to grow, you have to have...
the talent and the amount of skills and capabilities that are growth oriented. So what you see otherwise is us also.
reducing and streamlining some operations in the US and Mexico and using those funds to put more skills and capabilities in growth areas. And whether that's international or Glock or on our prepared fresh cut or even in channel development where we see club and and- and- and-- we got on-n- uiy view as well.
national retailers as big opportunities, you see us reinvesting those funds. So that's what I'd call the summary and context between the Project Uno launch and what we're communicating today. Ben, I think it's also appropriate, we will never be finished making changes in trying to make our organization.
resources in the areas that have the biggest chance to grow.
Okay, very good.
Our next question is from Mitch Penhero with Serbia.
Please proceed. Good afternoon.
I guess my first question is,
So, you know, I guess, you know, the project, you know, and the whole, you know, the plan was that, you know, it would take a couple years, three years, plus to get back to like your performance, your bit, duh, generation back in 2000, fiscal 19.
And, you know, somewhere, you know, you did it, I think roughly 80 million in fiscal So my team...
somewhere, you know, you did, I think roughly 80 million in fiscal mighting. And, um...
And you know what we'll be you know you're looking maybe around 40 45 this year
And you know, you're looking maybe around 40, 45 this year. And so I guess...
And then I see, you know, we're lower in the dividend. We're cutting capital spending a little bit, a little disciplined here. But it doesn't, is this, is this not getting back to fiscal 19 levels any time soon?
You know, I don't see in the cash flow a drastic need to cut the dividend and a niche analysis.
and catbacks. I mean, I can see being, you know, financially, you know, sort of conservative, but it doesn't, it seems like you're messaging that things are a lot worse, at least in the climb out of the bottom and back to the fiscal 19 level. And I'm wondering what has changed.
Well, let me try to take a shot at that and I'll also let Sean add in. I don't know that we're... Let me rephrase that. I know we're not saying it's worse.
But I think in light of the first quarter performance and our outlook for the balance of the year, I think it's fair to say that our progress towards where we believe we can be in terms of the EBITDA and cash flow generation has slowed. It's slowed. And we've got to adjust to now instead of a market that was growing.
particularly in our prepared fresh cut on where we thought we'd be at the end of the year on an exit run rate on gross profit. So I do think that that's one of the things that we're recognizing is that this market, we'll face some challenges, we face some challenges with consumer performance, I think we'll be in a period in avocados where we're...
and respectful that there's some volatility in grown margin as well. So it's really the combination of those two. I would also just be totally clear-mixed. There's not a CAPEX project that we're cutting, that we think is a high yield, high return, and high growth initiative. In fact, most of the CAPEX that we've launched and spent in the first quarter.
turning project. And then on the dividend, as I mentioned, we want to make sure we're paying a dividend that has yield and payout metrics that are consistent with the peer group. And frankly, with the cash flow and earnings generation over the last several years, our dividend payout ratios have been twice our peer group. And so now is the time to make all of those adjustments.
very helpful. Are you?
Are you seeing anything in the grown business?
anything in the the grown business that
Is is, you know.
structureally different, you know, do you see anything structure in the industry that might, that would impede your ability to get back to where you were, you know.
four years ago? Well, I think there are things that have changed in the growing business from four years ago. And let's just look at a sourcing perspective. Mexico, Peru, and Colombia are all bigger in terms of volume available to export to the U.F. than they were.
four years ago. All of the supply is greater. Now that being said, the demand has been greater. As well, we can't see the demand because it's been constrained for a couple of years. COVID for a year, food service gone down for a year. Last year it was constrained because Mexican export volume was...
historically low or certainly lower than the prior year. But we do believe that demand has been constrained and we'll see demand that keeps up and keeps pace with supply. I do think supply and demand will...
If you compare to 10 years ago, I think supply and demand is more balanced today than it was 10 years ago. And exceeded supply.
Again, I think that's also a strength of a marketer model. We've got an opportunity to buy and sell on a daily basis. We have an opportunity to flex our inventory up and down, and we have an opportunity to take some risk when we want to or think it's opportunistic to take advantage of volume growth. We also have the opportunity to dial back some volume.
But when you have a little bit more balanced supply and demand, I think it brings in some volatility that maybe we didn't have 10 years ago, I'm going to say, or five years ago. And that's the case of any evolving commodity market.
Yeah, the other thing too much I'd say that was, you know, unusual in the quarter is that, you know, retail prices were more stubborn than wholesale prices.
Right, and we started to see inventory buildup that put more pressure on wholesale prices and that, you know, that in part narrowed those margins.
Is this just a function of the grocery trade? You know, you have a hydrocargen or is it just, you know, it's an abandoned ciert the
Why is it stubbornly high? Yeah, just retailers holding margins. Yeah, I think to be fair, retailers were also slower to price up last year when the wholesale prices were going up. So I think they moved a little slower on the front end and are moving a little slower on the back end. We see more promotional activity going on.
and investment in price, we continue looking at it. Consumers are certainly looking at it. There's been some recent data by our IRI that would suggest consumers, almost half of consumers are looking for products that are on sale now.
So consumers are certainly looking for what they believe is a deal and we've been working with our retailers and our customers on how to drive promotional activity that makes sense for them and makes sense for the category. And we probably, because of the shelf life,
We can do that more in grown and we can do that more in walk than we can in our prepared fresh cut business. This last question is on the on the prepared side.
So it sounds good, you have a couple new customers coming on in the second half. That should help your fixed cost leverage.
So if so in a lot of this you should all things being equal we should see a gradually improving gross margin prepared throughout the year is that fair? Yeah, that's completely fair. Okay, okay, that's all I have. I'll get back in.
All right, thanks for taking my questions. Just a couple for me. First, I want to ask about the decision to rid the business of the salsa line, particularly in the context of the news last quarter about the securing the relationship with old El Paso. Can you talk about kind of the decision to get to this point that you thought this needed to get?
but essentially it just didn't have the critical mass and the portfolio. And given the economics of that business, just made sense for us to divert those resources to our guac business and that's what we're doing. So it's going to be...
You know, it's you know, frankly, we're we're gonna be you know better by about four hundred thousand dollars a year by by making that Investiture Then I think the other thing that's important to know is that we've arranged a copacking relationship so Remember I think last year we talked about our last last last quarter we talked about that relationship with General Mills
sell old El Paso brand products, whether it's Glock, which obviously we do ourselves or salsa, which we'll have with now what will be a third party, we retain the capabilities to do that. Got it. Okay. Thank you. And then another question on the CAPAX expectations that you have $13 million for this year.
that cap act is related to kind of a basic maintenance cap act, Jeff to do versus, you know, versus any investments in growth that are coming here over the next three quarters.
Yeah, sure. So I'd say that most of the deferral of the cat-back versus that original 18-ben, you know, that was like Brian said, that was kind of the lower performing kind of growth and profit improvement projects that, you know, we can reactivate at any time.
So just felt like it was, you know, proven given, you know, given the Q1 performance and given the current outlook, you know, just to plan to defer that until we see conditions change. But as far as the kind of composition of maintenance cap X, it's going to be about $4 or $5 million this year, about in line with what we guided last year.
Ben, I think the other thing that's really important for you and the other listeners on the call to remember is we have a really good balance sheet. We added basically seasoned working capital debt that we funded through our credit facility. We've got plenty of liquidity and access to capital.
So if we find a compelling growth opportunity, we're certainly not going to let the guidance that we gave
hold back a really smart investment. We're gonna be, we don't wanna be penny wise in pound foolish here. We're gonna invest when it's right, but I think it's also a good signal to our entire organization that we wanna be disciplined and we wanna be responsible and we want the returns to be really good for us to make an investment. But we've got capital and we find something that's accretive and exciting.
We won't be held back. Got it, Roger. Thank you. Thank you for that. I'll take you taking my questions. I'll get back in queue. Our next question is from Eric Larson with C-Port Research. Please proceed.
All right, yeah, thanks for taking my questions. The first one in your prepared comments about the quarter, you said that there was a lot of food coming out of Mexico.
and it was of a smaller size. Did that impact pricing? Was it a bad mix?
of avocado sizes in the quarter two that hurt you, can you give a little clarity to that?
Eric, I think it's a really good question and insightful question. So yes, we did have more volume. Think of it this way and forgive me because I'm not an agronomist, okay? Forgive me. But when you have more fruit on the tree, each individual piece of fruit gets less nutrients.
Right, the root systems didn't all the sudden grow and magically can be more nutrient. So the size curve did work against us a little bit. Smaller fruit came out because the mix was a little off, we had more large size fruit business than we had available large size fruit and we didn't have enough small size fruit business.
So, we certainly saw it impact the margin on the small fruit where we were really working hard to get rid of some excess small fruit and overall that weighed down gross profit per case.
We saw it impact the margin on the small fruit where we were really working hard to get rid of some excess small fruit and overall that way down gross profit per case.
Yep, no it does. I just noticed that you had made a point of it in your comments and I know that mix can be important so that's why I asked.
This one's really for the prepared side and maybe I'm missing something here, but if you average $28 a carton and your avocado price is in the quarter, it wasn't that long ago we were talking $70, $80, right? And I think you said in the last quarter, sequentially it was $43.
So talk to me, what am I missing in this with the fruit prices coming down?
Why should your margins have been better in prepared? Yeah, and your observation is spot on. So the cost of the fruit going into the guacamole business is absolutely improved, certainly versus prior year, but also versus the fourth quarter.
And you can see that in the gross margin that we achieved in the quarter, it was about 26%. And that 26%, I mean it's not exclusively the improvement in the fruit, but it's also the improvement in the operations. I mean that plant is running as well as it's ever run, given some of the investments and the changes in operations that we made.
last year. So 26% growth margin in the first quarter for the guacamole division, but remember that guacamole division is about a fifth of our total prepared. Right? So we did see the benefits, but it's on a smaller portion of that total prepared portfolio.
But okay, that makes sense. For some reason I was thinking that I'm still not quite used to thinking about you as grown and prepared yet. I'm still in your old format. And so that last comment made a lot of sense.
So going forward, you kind of gave us some ideas of what a Justinian Bada's going to look like and so forth. But you'll still have those relatively easy comps for ingredients yet for your guac.
And you're but you're taking pricing up in other areas that had a lot of elasticity is what I'm reading is you go into a little bit more detail on the left to city part. So yeah Eric let me make sure that I understand.
Your basic question is you'll have some favorability in unit cost on input costs on GWOC.
question is you'll have some favorability in unit cost on input cost on block.
where is the other improvement coming? Right. Okay, so I think we've got a couple of things. One, remember I really believe that the balance of the year volume is going to be an important part of our story. We've got some deli customers coming on, two national deli customers coming on in the second half.
it won't help the second quarter. We'll see prepared, fresh-cut challenges in volume throughout the second quarter, so it won't help the second quarter, but it will help the second half. And with that, we'll see absorption benefits, and we'll see some other things that...
that happen in the second half of the year. I think we will get some positive unit cost benefit in our guacamole business, but we also need volume to help us there. The guac category for the first time in a long time over the course of the last.
three months anyway, was down on a unit volume basis as well. Up on a dollar basis down on a unit volume basis. So one of the other things that I think is hard to see is we made great progress in getting lower input cost and taking advantage of that market. We made really good progress in yield and labor efficiency in our block plant. What some of that was...
Let's say used up by lower fixed cost absorption because of lower volume So John really really the prepared story from now on. I mean the fact of the matter is we had year over year
labor productivity improvements from what we did from the fourth quarter. So first quarter of 22 to first quarter of 23, we have labor productivity. But with reduced volume, fourth quarter of 22 to first quarter of 23, we lost a little bit of labor productivity again because of the unit volume. So I think as you look at prepared, it is...
improvements, but we didn't from the fourth quarter. So first quarter of 22 to first quarter of 23, we had labor productivity. But with reduced volume, fourth quarter of 22 to first quarter of 23, we lost a little bit of labor productivity, again, because of the unit volume. So I think as you look at prepared, it is growing the volume.
with the category, but also with new distribution, continuing to manage our cost profile, labor productivity, all the things that we're talking about so that that new volume is leveraged disproportionately. Got it, okay, so, and I apologize maybe for the ambiguity toward the end of that question, but.
Historically, this is historically what has been sort of attractive for the fresh avocado business, right? Is that even at high prices, consumers would pay absurdly high prices for an avocado. It seemed that demand was more inelastic.
And what it sounds like today, you said that retail places were very sticky on the outside, much sticker than wholesale.
But in, you know, in past years, the price wouldn't have been that big of a deal. So if customers aren't buying your avocados, and you had down volumes, what are they switching into? What's your competitive strategy?
root for avocados that consumers seem to be going to now that it might be more price sensitive? Well let me try to clarify a couple of things. First of all the category for produce was down. Avocados were still up in the first quarter year over year. I think it was about on a unit volume basis I think it was two.
just a question of price elasticity or any elasticity. If you remember in the third quarter when prices were extraordinarily high, retail stopped promoting and even started shrinking display sizes.
So, it wasn't just a pricing story and whether it's inelastic or elastic, but they also reduced display sizes, reduced the amount of available volume. As we are fighting to get that back, the rest of the commodities don't stand still.
taking a little bit of time. So I would suggest the category is not only.
reacting to price and the change in price, but also promotional activity and display sizes, and we're starting to see that come back. In fact, Sean, so far in the second quarter, we might be up 9%, 9% we're up in the second quarter on a unit volume basis for avocados. Here we go.
Yeah, so it's worth emphasizing that once we rolled into February , we did start to see a meeting and improvement in conditions in the grown segment. Not just an improvement in the gross profit, but the volume as well. So just kind of better flow through the volume.
But you know, you listen to the prepared remarks. You know, the cautionary side of that is we know that there's a lot of fruit coming in from Mexico. We know that the California seasons get underway, the Peruvian seasons right around the corner. And so, you know, there's a potential for some ongoing volatility with that supply coming.
Okay, yeah, no, that, that, I mean, that makes some sense. And it's just a little bit different thinking than, than what we've always had, because retailers have always, they've been expanding, you know, their display of avocados, it's been a very hot item, it's very healthy oriented. And, you know, to hear that maybe, you know, the retailer even took display away from it is
even last year.
year, supply was constrained.
And so, you know, consumers are fickle. If supply is constrained and maybe they just can't get an avocado out of that day, and it's not the high usage consumer. The high usage consumer is going to go look, going to go buy, going to buy their avocados every day, you know, twice a week, whatever their rhythm is. Those are going to be the first five days of the price pirates trade of whit They did
but some of the low usage consumers, to the extent that it's not available, or potentially not available because it's not seen as promoted or not seen on the shelf size like it was, I think there's a little bit of what I'd call winning them back.
Let's say okay, but the category is to remember just to be clear produce
For the second half of the year, total produce unit sales was down 3%, avocados was still, that last quarter was up 3%.
Okay, that's the important factor. Okay, thank you. We have reached the end of our question and answer session. I would like to turn the conference back over to Brian for closing comments.
Look, we really appreciate you dialing in, asking the questions, giving Sean and I a chance to talk to you about the business and where we're headed. The fact of the matter is we didn't deliver the earnings we expected in the first quarter. And the market conditions that our business faced.
It cost us to re-evaluate the landscape for the balance of the year. We need earnings growth and we need unit volume growth across our platforms. However, I'll tell you why I have hope.
We're investing in sales talent where the market has the biggest opportunities for growth. Club Channel, International, Wacomole, Deli Resources are all being funded by repurposing $1.7 billion in 2019, creating $alled out by compl photograph and $ Saturdays over social media.
and or reducing expenses in other areas. We must gain new customers and gain new distribution with our existing customers. Our distributor model for avocados is strong and it's flexible. And over time, we've been able to consistently deliver our targeted gross profit per box. And so that gives me help and comfort. We mentioned in our fourth quarter earnings release that we expect growth in our deli product line.
We are on track to launch two national customers with deli items in our third quarter. We know the value proposition in deli is promising. Our value proposition in deli is promising. And that volume growth will help us in the second half as we look at fixed cost absorption and really maximizing the efficiency that we've been able to drive.
There isn't a day that goes by that we don't worry about yield, input costs, transportation, labor productivity, and FCNA, and we're going to continue beating on that every day. And ultimately, even though we see some short-term challenges, the categories in which we play are performing at the better end of the spectrum of all of produce.
So those things give me hope. Are business models right? We're working on the right things. We need to be agile. But we didn't deliver the results that we expected in this quarter. We need to get better each and every day. And while these challenges have slowed the progress that we expected, we're going to
We're quickly repurposing resources. We're quickly making this organization leaner. We're focused on gaining sales distribution and continue to deliver sequential cash flow and earnings improvement.
We're quickly repurposing resources. We're quickly making this organization leaner. We're focused on gaining sales distribution and continue to deliver sequential cash flow and earnings improvement. And that's what I'd like to leave you today.
I thank you for your time today and thank you for your continued support of Calava. Thank you. This will conclude today's conference. You may disconnect your lines at this time and thank you for your participation.
And F.