8-K: Calavo Growers Reports Mixed Q1 2024 Results Amidst Strategic Divestiture

Calavo Growers experienced a slight dip in net sales and a net loss in Q1 2024, while making progress on the sale of its fresh cut business and anticipating improved performance in the coming quarters.

Summary

• Calavo Growers reported a 3.9% decrease in total net sales to $127.6 million for the first quarter of 2024 compared to $132.8 million in the same period last year.
• The Grown segment saw a 4.0% decrease in net sales to $113.0 million, while the Prepared segment experienced a 2.9% decrease to $14.6 million.
• Gross profit was $12.5 million, down from $13.1 million in the prior year quarter, with the Grown segment decreasing by $1.3 million and the Prepared segment increasing by $0.7 million.
• The company reported a net loss from continuing operations of $2.6 million, or $0.15 per diluted share, compared to a net loss of $0.7 million, or $0.04 per diluted share, in the prior year.
• Adjusted net loss was $0.2 million, or $0.01 per diluted share, compared to an adjusted net income of $0.8 million, or $0.05 per diluted share, in the same period last year.
• Adjusted EBITDA was $4.8 million, slightly up from $4.6 million in the prior year quarter.
• The company is in the process of selling its fresh cut business and expects the transaction to close in the second fiscal quarter.
• Calavo anticipates SG&A cost reductions of $20 million or more on an annualized basis and a reduction of depreciation and amortization expense of approximately $10 million on an annualized basis due to the divestiture.

Sentiment

Score: 5

Explanation: The sentiment is neutral to slightly negative due to the reported net loss and sales decline, but there are positive aspects such as improved avocado margins and the planned divestiture, which could improve future performance. The ongoing investigation and market risks temper the positive outlook.

Positives

• Avocado margin per case improved compared to the prior year quarter.
• Prepared segment gross profit improved due to lower fruit costs.
• The company is making progress on the sale of the fresh cut business.
• Calavo anticipates significant SG&A cost reductions and reduced depreciation and amortization expenses.
• The average selling price of avocados increased by 20% compared to the prior year.
• The company expects a solid rebound in earnings in the second quarter and fiscal 2024.
• The company declared a quarterly cash dividend of $0.10 per share.

Negatives

• Total net sales decreased by 3.9% year-over-year.
• The Grown segment experienced a decrease in net sales and gross profit.
• The Prepared segment also saw a decrease in net sales.
• The company reported a net loss from continuing operations of $2.6 million.
• Adjusted net loss was $0.2 million.
• Tomato gross profit declined.
• SG&A expenses increased due to professional fees related to an ongoing investigation.

Risks

• The company's investigation into potential issues under the Foreign Corrupt Practices Act is ongoing.
• The company is exposed to risks related to weather, market prices, supply chain disruptions, and dependence on large customers.
• There are risks associated with doing business internationally, including currency fluctuations and governmental actions.
• The company faces potential legal claims and tax disputes, including an assessment imposed by the Mexican Tax Administrative Service.
• The company's ability to realize the expected expense savings from the divestiture is not guaranteed.
• The company is exposed to risks associated with the environment and climate change, especially as they may affect sources of supply.

Future Outlook

Calavo expects a solid rebound in earnings in the second quarter and fiscal 2024 due to improved avocado margins, improved tomato performance, and the ramp-up of the California avocado season. The company also anticipates completing the sale of its fresh cut business within the fiscal second quarter and realizing significant SG&A cost reductions.

Management Comments

• Our first quarter results were affected by temporary market dynamics within our avocado business, particularly for smaller sized fruit, and we are pleased to report that conditions have improved in February and March, said Lee Cole, President and Chief Executive Officer of Calavo Growers, Inc.
• We expect a solid rebound in earnings in the second quarter and fiscal 2024 owing to improved avocado margins, improved tomato performance and the ramp up of the California avocado season.
• We continue to anticipate completing the sale of our fresh cut business within the fiscal second quarter.
• We expect to realize SG&A cost reductions from both the sale of the fresh cut business as well as other cost reductions as we make our corporate structure more efficient.
• We are targeting SG&A savings of $20 million or more on an annualized basis and already have begun implementing some efficiencies in our corporate structure.
• We also anticipate a reduction of depreciation and amortization expense of approximately $10 million on an annualized basis due to the divestiture.

Industry Context

The results reflect the challenges in the fresh produce industry, including market fluctuations and supply chain issues. The divestiture of the fresh cut business indicates a strategic shift towards focusing on core operations and improving profitability. The company's focus on cost reduction and efficiency aligns with broader industry trends.

Comparison to Industry Standards

• Calavo's performance is mixed compared to industry peers. While the company saw an improvement in avocado margins, the overall sales decline and net loss are concerning.
• Companies like Mission Produce (AVO) and Fresh Del Monte Produce (FDP) also operate in the fresh produce sector and have reported varying results, with some showing stronger sales growth and profitability.
• Calavo's divestiture of its fresh cut business is a strategic move that could improve its financial position, similar to how other companies have streamlined operations to focus on core competencies.
• The company's focus on cost reduction and efficiency is a common theme in the industry, as companies seek to improve profitability in a competitive market.
• The 20% increase in avocado prices is a positive sign, but the 18% volume decline indicates a need to balance pricing and volume strategies.

Legal Proceedings

• The company's investigation into certain matters and potential issues under the Foreign Corrupt Practices Act is ongoing.
• The company continues to cooperate fully with the Securities and Exchange Commission and the Department of Justice.

Stakeholder Impact

• Shareholders will receive a quarterly cash dividend of $0.10 per share.
• Employees may be affected by the restructuring and cost reduction initiatives.
• Customers may experience changes in product offerings due to the divestiture of the fresh cut business.
• Suppliers may be impacted by changes in sourcing and sales decisions.
• Creditors will be monitoring the company's financial performance and debt levels.

Next Steps

• The company will focus on completing the sale of the fresh cut business.
• Calavo will implement cost reduction measures to achieve SG&A savings of $20 million or more on an annualized basis.
• The company will work to improve tomato performance and capitalize on the California avocado season.
• Calavo will continue to cooperate with the Securities and Exchange Commission and the Department of Justice regarding the ongoing investigation.

Key Dates

Keywords

Calavo Growers, avocado, fresh cut, produce, financial results, divestiture, net sales, gross profit, EBITDA, SG&A, tomato, Foreign Corrupt Practices Act