Q1 2021 Calavo Growers Inc Earnings Call Santa Paula Mar 11, 2021 (Thomson StreetEvents) — Edited Transcript of Calavo Growers Inc earnings conference call or presentation Wednesday, March 10, 2021 at 10:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * James E. Gibson Calavo Growers, Inc. – CEO * Kevin Manion Calavo Growers, Inc. – CFO ================================================================================ Conference Call Participants ================================================================================ * Eric Jon Larson Seaport Global Securities LLC, Research Division – Research Analyst * Mitchell Brad Pinheiro Sturdivant & Co., Inc., Research Division – Research Analyst * Pooran Sharma Stephens Inc., Research Division – Senior Research Associate * Ryan Robert Meyers Lake Street Capital Markets, LLC, Research Division – Equity Research Analyst * William James Newby D.A. Davidson & Co., Research Division – Senior Research Associate * Lisa Mueller Financial Profiles, Inc. – SVP ================================================================================ Presentation ——————————————————————————– Operator [1] ——————————————————————————– Greetings, and welcome to the Calavo Growers, Inc. First Quarter 2021 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Lisa Mueller, Investor Relations. Thank you. Lisa, you may begin. ——————————————————————————– Lisa Mueller, Financial Profiles, Inc. – SVP [2] ——————————————————————————– Thank you, operator, and thank you all for joining us today to discuss Calavo Growers first quarter 2021 financial results. This afternoon, we issued our earnings release, and this document is available in the Investor Relations section of our website at ir.calavo.com. I’m here today with Jim Gibson, Chief Executive Officer of Calavo; and Kevin Manion, Chief Financial Officer. On today’s call, management will provide prepared remarks, and then we will open the call up for your questions. Before we begin, I would like to remind you that today’s comments will include forward-looking statements under the federal securities laws. Forward-looking statements are identified by words such as will, be, intend, believe, expect, anticipate or other comparable words and phrases. Statements that are not historical facts such as statements about our outlook for revenue and adjusted EBITDA are also forward-looking statements. Our actual financial condition and results of operations may vary materially from those contemplated by such forward-looking statements. Discussion of the factors that could cause our results to differ materially from these forward-looking statements are contained in our SEC filings, including our reports on Form 10-K and 10-Q. With that, I would now like to turn the call over to Jim Gibson. Jim, please go ahead. ——————————————————————————– James E. Gibson, Calavo Growers, Inc. – CEO [3] ——————————————————————————– Thank you, Lisa, and good afternoon, everyone. We hope you and your families are healthy and safe during this challenging time. We appreciate you joining us to discuss our 2021 first quarter results. Today, I’ll kick things off with a high-level overview of the quarter and current state of our company and the industry. Then Kevin will provide commentary on our first quarter financial results, balance sheet and guidance. We will then open up the line for Q&A. It seems incredible that 1 year ago, we were facing the first real effects of COVID pandemic. And while we have been successfully adapting to the new environment over the last several quarters, our first quarter results were mixed, reflecting improvement in some areas and challenges in others due to the ongoing impact of the pandemic. Our core avocado business delivered improved results for the quarter. Market demand for avocados continues to rise, albeit at slower pace due to the pandemic, and supply remains plentiful given the strong crop out of Mexico. These dynamics continue to weigh on prices, which on average were down 14% year-over-year. However, we grew our volume and delivered higher avocado gross margins in the quarter as we did a good job of managing our pricing spread and our sales mix. Our RFG business was negatively impacted by industry-wide supply chain disruptions, namely delivery delays at most of the U.S. ports due to the implementation of additional safety measures related to the pandemic. This dynamic impacted the availability and quality of some fresh fruit and vegetables, which created added challenges. We also continue to be impacted by the closure of our co-packing partner in the Midwest from April 2020. Our Food segment was again adversely impacted by lower foodservice demand resulting from the pandemic, offset slightly by favorable input commodity prices. Taken in the aggregate, our first quarter results were generally in line with our expectations, and adjusted EBITDA was at the high end of our guidance range. With respect to our Fresh business, it bears repeating that even with increasing demand, when we are sourcing avocados, we are buying a full spectrum of sizes and grades that come off the trees, and our sales team then moves to match these sizes and grades with appropriate customers. Foodservice has historically represented about 20% of our avocado business, usually serves to absorb the supply of #2 grade fruit, and at the same time, allows us to retain margin and good volume growth. This has been a challenge over the last several quarters as expectation — our expectation is that as demand returns from our foodservice customers in the second half of 2021, we will be able to return to our pre-pandemic sales and gross margin levels. In terms of operations, we saw good results and savings from increasing utilization of our Uruapan packing house. With respect to our RFG business, we believe the challenges we encountered during the quarter are short term in nature. And we are cautiously optimistic that we’ll return to top line growth and increase profitability in the second half of the year as the country ports are returning to more normalized conditions, and we move beyond the anniversary of the closure of our Midwest packing house from April of 2020. In addition, as the pandemic becomes less of an operational risk, many of our facilities will return to more normalized operations, which should boost margins as well. Finally, our Food segment continued to be adversely affected by lower foodservice demand resulting from the pandemic, offset slightly by favorable input commodity prices as we take advantage of the excess supply of avocados from Mexico. Our efforts to grow our international sales in this segment are still in the early stages as we selectively seek distribution partners in our targeted markets. We have made investments to support this side of the business, which we expect to show returns in the second half of the year. We have made great strides with our ESG initiatives this quarter. We joined the packing Sustainability Council and the Hass Avocado Task Force on avocado sustainability to contribute to the industry’s sustainability commitment. We have also begun developing a carbon footprint measurement so we can better measure our impact and report on this metric to our stakeholders. In Mexico, we are now saving upwards of 5,000 liters of water per week following new efforts to optimize water usage in the fruit washing area. We have also expanded our relationship with food technology company, Apeel, bringing their plant-based technology to customers in Florida and Texas. And our use of Shelf Engine’s intelligent forecast system has been implemented in one of our largest retail partners and is already reducing food waste by reducing spoilage and eliminating shrinkage. Finally, our upcoming Annual Shareholder Meeting is mainly virtual. And our use of notice and access saves costs and is environmentally friendly. Turning to governance. It is our long-term objective to both rightsize and refresh our Board. Lee Cole recently stepped down from our Board following his retirement as CEO and Chairman last year. We are grateful to Lee for his decades-long commitment to Calavo and the strong foundation he put in place that we are building upon today. Lee’s departure and that of 2 other long-standing directors, Dorcas Thille and Gene Carbone, are in line with our Board’s commitment to reduce its size to 9 members by 2023, of which 7 will be independent. We are thrilled to now also have Farha Aslam as our — on our Board as of January 2021. She serves on our Audit, Compensation and Sustainability Committees and she has already made great contributions. Our Board independence rate now stands at over 63% with 7 independent directors out of a total of 11. Our governance activities in the quarter include the Board’s creation of a Sustainability and Corporate Responsibility Committee and the implementation of an antihedging and antipledging policy. Both initiatives reflect long-standing values of our company and yet are an opportunity for us to continue to formalize and lay the foundation for strong ESG leadership in the years to come. Looking ahead, we expect to see a continuation of current trends, at least through the first half of 2021, with a large supply of avocados from Mexico continuing to weigh on prices and foodservice demand unable to fully recover until a majority of the country is vaccinated and we move closer to herd immunity. I want to thank our entire team of 4,000 colleagues across our global operations for their tireless efforts and their ability to be both flexible and innovative regardless of the many obstacles we’ve had to overcome. In the meantime, we continue to implement strategic initiatives designed to enhance our long-term growth prospects, capitalizing on opportunities to increase operating leverage and realize synergies across our entire organization. We remain committed to investing in our people and advancing our sustainability initiatives as well as maintaining best-in-class communication with our investors all with a focus on long-term growth, improved profitability and enhanced value for our shareholders. With that, I’ll turn the call over to Kevin. ——————————————————————————– Kevin Manion, Calavo Growers, Inc. – CFO [4] ——————————————————————————– Thank you, Jim, and good afternoon from our global world headquarters in scenic Santa Paula, California. I know that you have other earnings calls options at this time of day, and I thank you for joining us, particularly our new analyst at Seaport Global and D.A. Davidson. I’ll start by discussing our financial results for the first quarter, followed by our balance sheet and outlook. Please note that all comparisons are year-over-year unless otherwise noted. We will also be discussing non-GAAP results, and a reconciliation of non-GAAP financial measures is included in our earnings release. We issued our proxy statement earlier in the month, which identifies a number of governance enhancements such as our antihedging, antipledging policy, Board self-evaluations and creation of a Sustainability Committee. We also have updated an Investor Relations presentation on our website at ir.calavo.com. On a consolidated basis, first quarter revenue was $220 million, which is at the midpoint of our guidance. This is a decline of $53 million or 19% year-over-year. This was primarily driven by 3 factors: lower avocado prices, which decreased 14% from last year and had an impact of $16 million; $25 million lower RFG revenues from the loss of our Midwest co-packing relationship, which, as Jim said, cycles in April; and the ongoing impact of COVID-19, which particularly impacted our foodservice customers. Even with the decline in consolidated revenue, avocado volumes increased 2% year-over-year, reflecting the ongoing trend of higher consumer demand. Gross profit increased 13% year-over-year to $17.8 million from $15.8 million in the first quarter of 2020, and our gross profit margin percentage expanded to 8.1% from 5.8%. The increase in gross profit and margin percent was mainly due to improvements in the Fresh segment as we delivered higher avocado gross margins in the quarter by managing our pricing spread and sales mix better than in the prior year. As you may remember, the food quality was a significant issue last year with avocados. These improvements were partially offset by a decline in gross profits in the RFG business due to a number of factors, including higher labor costs and increased spoilage on fresh fruit and vegetables resulting from major port delays, poor quality and yield due to weather events in Florida and Central America and unabsorbed overhead due to lower overall volumes. SG&A expenses declined 13% to $14.2 million from $16.3 million in the year ago quarter, primarily due to the decrease in salary and benefit expense as a result of our consolidation initiatives enacted in May 2020. Adjusted EBITDA was $9.4 million for the quarter compared to $4.5 million for the comparable period in the prior year and came in at the high end of our guidance that we provided on last quarter’s call. Net income for the first quarter was $5.3 million or $0.30 per share, up from a net loss of $938,000 or negative $0.05 per share loss in the prior period — prior year period. Adjusted net income was $3 million or $0.17 per share compared to $0.8 million or $0.04 last year. Now moving on to our 3 business segments. Sales in the Fresh segment decreased 13% year-over-year to $115.5 million from $133.2 million in the first quarter of 2020. Importantly, while revenue declined, avocado volume increased 2% from the prior year as consumer demand for avocados continues to grow. Similar to last quarter, this quarter’s higher volume was offset by a 14% decline in the average selling price as a result of increased market supply due to the large Mexico harvest this year. And unlike last year, when foodservice and wholesalers that serve smaller retailers and restaurants helped absorb supply, COVID continued to constrain sales to these customers in the first quarter. As a reminder, our exposure to foodservice is about 20% and wholesalers comprise an incremental 6%. Gross profits in the Fresh segment increased $6.5 million to $13.1 million or 11.3% of revenue, up from $6.6 million or 4.9% of revenue in the first quarter of 2020. Please note that on the last table of the earnings press release, we disclosed pounds of avocados sold and gross margin of $0.12 per pound compared to $0.05 per pound last year. At 25 pounds per case, this returns us to our historical target range of $3 to $4 per case. In RFG, sales declined to $90.3 million for the first quarter from $120.9 million in the prior year period. The decrease primarily reflects lost sales from the termination of our co-packer relationship in the Midwest, which ended in April of last year, so we’ll lap comparison during the second quarter. Excluding the co-packer impact, revenue declined 6%, primarily driven by a 4% decline in volume and less favorable product mix of more cut food and vegetables compared to last year when the mix consisted of more value-added meals. Gross profit for the first quarter decreased to breakeven compared to a gross profit of $2.9 million or 2.4% of sales in the same period last year. This decline was due to weather-related supply chain disruptions leading to major port delays and poor quality of fruit, which impacted yields. Labor shortages due to COVID also contributed to lower yields and higher costs. For the Foods segment, sales were again impacted by soft demand in the foodservice channel due to COVID-19. For the quarter, sales declined to $16.5 million, down from $20.5 million in the year ago quarter. Foodservice comprises about 50% of this business. Gross profit was $4.7 million or 28.7% of sales as compared to $6.4 million or 31% of sales in the first quarter of 2020. The lower gross margin was primarily the result of lower volumes, partially offset by a decrease in avocado costs. Turning to our balance sheet. We ended the quarter with $148 million of cash, liquid investments and available debt capacity. During the quarter, we amended and extended the terms of our secured credit facility, increasing the revolver commitment by $20 million now to be a total of $150 million and extending the maturity by 5 years. Total debt, including finance leases, was $45 million, and our leverage ratio was 0.75x. We continue to have a strong balance sheet and low leverage, positioning us to take advantage of potential opportunities and invest in the current infrastructure for the future. In addition, we paid our annual cash dividend of $1.15 per share in December, which represented a 4.5% increase from the prior year and our ninth consecutive year of increasing dividends. This yields about 1.5% at recent stock prices. Finally, in the first quarter, we entered into a separation agreement with FreshRealm. Essentially, we relinquished our previously written-off promissory note and equity in FreshRealm in exchange for a new $6 million note and equity participation in any future monetization event. As we look to the second quarter of 2021, we see a continued near-term impact from the pandemic as it remains difficult to predict when foodservice demand will return to pre-COVID levels. While we continue to see avocado volumes growing, we believe that the same supply and demand dynamics will keep pricing at lower levels than the prior year. In addition, our RFG business continues to face increased labor cost and unabsorbed overhead due to lower volumes. Therefore, we expect second quarter revenues to be in the range of $255 million to $275 million, which is a year-over-year decrease of 6% at the midpoint, and adjusted EBITDA to be between $14 million and $18 million, which is an increase of 19% at the midpoint from the second quarter of 2020. The slightly wider EBITDA guidance range reflects both the impact of the recent severe weather events in the Northwest, Texas and the Northeast, in which we were not able to ship or produce in our RFG facilities in those regions as well as the near-term uncertainty of our labor pool due to the reluctance of many workers towards getting vaccinated at this time. This forecast also presumes a stable Mexican peso exchange rate. Jim and I look forward to seeing you at 2 upcoming virtual conferences: the D.A. Davidson Consumer Conference being held tomorrow and the ROTH Annual Conference on March 16. On a final note, Jim and I would like to congratulate our former CEO and Board Chairman, Lee Cole, on his retirement and thank him again for building this company that we are now entrusted with. With that, I’ll turn the call over to the operator for questions. ================================================================================ Questions and Answers ——————————————————————————– Operator [1] ——————————————————————————– (Operator Instructions) Our first question comes from Brian Holland with D.A. Davidson. ——————————————————————————– William James Newby, D.A. Davidson & Co., Research Division – Senior Research Associate [2] ——————————————————————————– It’s actually Bill Newby on for Brian Holland today. I guess just any more color you guys can give us on, I guess, visibility you have into the supply environment here as we move away from Mexico and towards California? I know we’re going to have — there’s some recent changes in Colombia’s ability to come into the U.S. market, and Peru is expecting to have a higher supply this year. So I guess — I mean are you still optimistic that we can see supply kind of tighten up from these levels as we move through the year? I guess any thoughts on that and I guess confidence in the visibility through the rest of the year? ——————————————————————————– James E. Gibson, Calavo Growers, Inc. – CEO [3] ——————————————————————————– Sure. So I think as we’re looking into the second quarter, definitely, Mexico is still going to be a strong player, and California will start to come on. So we expect that the supply is going to be — continue to be strong in this period of time. But we are seeing that as the economy is beginning to open up, we feel that there’s latent demand that is beginning to press on that supply/demand balance. And so as a result of that, there is pricing pressure in the upside. And we’re following that up. So on our side of the world, when that’s occurring, we’re really working on maintaining that good cost structure that allows us to stay in front of the pricing change. So we’re balancing our inventory position with demand as we move through the supply chain. And that allows us in an up-price market to continue to advance margin, and we expect that margin will benefit as well. ——————————————————————————– William James Newby, D.A. Davidson & Co., Research Division – Senior Research Associate [4] ——————————————————————————– Right. No, that’s helpful. I appreciate the color there. And then I guess just a couple of quick ones on RFG and I guess how you guys are thinking about the varying kind of dynamics as we move into 2Q and through the rest of the year here. I guess are you still seeing delays at the U.S. ports, one? And then I guess any more specificity you can provide on where you guys are seeing tailwinds on the commodity prices and if you expect those to continue into 2Q and the latter part of the year? ——————————————————————————– James E. Gibson, Calavo Growers, Inc. – CEO [5] ——————————————————————————– Yes. So we’re — on most of the fruit commodities, we’re still offshore and will be that way for most of the second quarter. So we’ll continue to feel the impacts of the quality situation associated with the weather challenges that they’ve had in their environments. And so as we continue through the quarter, I think the delays are relaxing. We’re still feeling some of the impacts of fruit quality specifically. So that will continue to weigh on us. And then the other part of it is that — and you guys — you just saw us go through it probably, but we do have a facility in Houston. Houston was down for a week with the ice and water situation. The Pacific Northwest, we have a facility up in Clackamas. So they were impacted by that ice storm. And then we have a facility in Swedesboro, New Jersey, that was impacted by that snowstorm. So each one of those facilities were impacted in the month of February. They’ve recovered and they’re back in running form. And so our expectation is that as we kind of move through the quarter, performance will get better and better. And then as we move into the third quarter, we’re beginning to see ourselves moving towards the domestic season, and that’s always a really strong period for Renaissance. ——————————————————————————– Kevin Manion, Calavo Growers, Inc. – CFO [6] ——————————————————————————– Yes. I think as we mentioned in our guidance, we probably already absorbed a range of $0.5 million to almost $1 million of cost because of those weather incidents. ——————————————————————————– William James Newby, D.A. Davidson & Co., Research Division – Senior Research Associate [7] ——————————————————————————– And I guess — and then on the commodity prices, I guess, any additional color there? ——————————————————————————– Kevin Manion, Calavo Growers, Inc. – CFO [8] ——————————————————————————– Well, I think as Jim said, they’re all imported products now, so that should be pretty steady, which is meaning it’s high right now, and it will stay about the same levels for most of the quarter until the domestic fruits start coming in, and that will lower our overall average price. But right now, particularly melons and pineapples have had a tough road. And so the prices are high because there’s fewer of them. And then sort of the knock-on effect there, quite frankly, is the fruit’s been beat up a little bit in transport as it sits at the ports. And so by the time we’ve got it, the efficiency of us getting through that fruit is low and the output of that fruit is lower. So it’s been a tough slog on the margin side on that. And we think that will improve as the second quarter goes on. ——————————————————————————– Operator [9] ——————————————————————————– Our next question comes from Eric Larson with Seaport Global Securities. ——————————————————————————– Eric Jon Larson, Seaport Global Securities LLC, Research Division – Research Analyst [10] ——————————————————————————– Yes. Sorry for my cough here. The question that I have is really overall avocado volumes, up 2%. Your mix is 80% retail, 20% foodservice. I guess the question is we’ve been running — this industry has consistently run growth of double-digit volumes, and it’s been for quite some time. So I guess the question is, are we still seeing the strong — I guess what the issue is, is that I thought 2% volume would be better because you still have really stronger growth at retail, obviously, offset a little bit by foodservice. But I guess I’m — with lower pricing, although it’s an inelastic product by my judgment, it seems like that volume number inherently should be higher. Am I missing something here? ——————————————————————————– James E. Gibson, Calavo Growers, Inc. – CEO [11] ——————————————————————————– Well, I think there are a couple of things in play. There’s definitely — supply is a large player, inhibiting price. Demand is not kind of in the historical reference. I would say the demand is continuing to increase but impacted, certainly, on the foodservice side by the restrictions associated with lockdowns and things like that. Shopping habits have changed quite a bit in the pandemic. And so people are not necessarily shopping on the daily cycle. They’ve kind of increased their cycle to maybe a couple of times a week or once a week. So that has an impact on the way that they look at avocados. We know that we shifted during the pandemic and started really pushing and offering bagged avocados. And those sales have moved up dramatically. And we think it’s obviously because it’s easy for a shopper to walk by and pick up a bag and not have to handle different pieces of fruit. And so it’s — all of that is certainly in play is the way we look at it. And then the other piece of it is that as we’ve lost the foodservice side of the demand piece, again, we’re buying everything that’s coming out of the field. And so there are probably more of the #2 grade product than we have homes for. And so we’re balancing that supply kind of quality condition against demand and the number and amount of customer base that we go after in this period of time. And so we’re really focused on servicing our known customers and trying to service them really well at the expense of chasing individual customers at lower prices and things like that. ——————————————————————————– Eric Jon Larson, Seaport Global Securities LLC, Research Division – Research Analyst [12] ——————————————————————————– Okay. So COVID-19 may have — just by consumer buying habits and other things, may have taken a little bit of the superior top line growth rate for the industry. Maybe off the table near term, does this industry get back to sort of a — can it grow double digit again if you get back to a normal environment, whatever normal means? ——————————————————————————– James E. Gibson, Calavo Growers, Inc. – CEO [13] ——————————————————————————– Well, we certainly believe that’s the case. I mean, I think even in the current period right now, we can feel that demand is beginning to press upward. It’s lifting. And there’s certainly, as a result of that, pressure on price to move upward as well. And so we think that that’s really a good sign in this environment that as we kind of pull through more vaccinations, local governments releasing lockdowns and allowing for businesses to reopen and whatnot, that people are going to get out and about again and begin to really aggressively buy that great commodity, which is an avocado. ——————————————————————————– Kevin Manion, Calavo Growers, Inc. – CFO [14] ——————————————————————————– Yes. I think one of the things that we certainly saw this quarter is the events that normally propel that margin or that volume growth, whether it’s Christmas or something like Super Bowl, the lift was much more muted this year, but the carry of that lift was very short. So historically, I think we’d expect a nice lift for Super Bowl and then it carries for another week or so. This year, it was a couple of days and back down to normal. And I think those are the things that will bring us back to the opportunity for double-digit growth going forward. ——————————————————————————– Eric Jon Larson, Seaport Global Securities LLC, Research Division – Research Analyst [15] ——————————————————————————– Okay. No, that makes some sense. So just a real near-term question. You’ve talked about sort of the overall abundance of #2 fruit and kind of the overhang and maybe a pricing overhang on the market. Are we getting past that amount of fruit that’s coming to market? Was that a grower issue, a weather issue? And is that an overhang that still exists with us and maybe even until foodservice recovers? ——————————————————————————– James E. Gibson, Calavo Growers, Inc. – CEO [16] ——————————————————————————– Right. I mean it’s — like I said, it’s natural coming out of the field that there would be #2 great fruit coming along with everything else. It’s just that at this point, with foodservice, not all the way back. That’s — those are natural homes for that product, and it allows for people like us to maintain margin inside of that and then also aggressively work to grow the business because we can sell the full spectrum of sizes and grades. ——————————————————————————– Eric Jon Larson, Seaport Global Securities LLC, Research Division – Research Analyst [17] ——————————————————————————– Got it. Okay. So it’s still really a foodservice issue as opposed to a crop quality or something like that that’s taking place in Mexico? ——————————————————————————– James E. Gibson, Calavo Growers, Inc. – CEO [18] ——————————————————————————– Correct. Absolutely. ——————————————————————————– Kevin Manion, Calavo Growers, Inc. – CFO [19] ——————————————————————————– I think what we’ve seen overall is the quantity of #2 has decreased from last year when it was a very big issue that did have an overhang. We don’t see that issue this year. ——————————————————————————– Operator [20] ——————————————————————————– Our next question comes from Ben Bienvenu with Stephens. ——————————————————————————– Pooran Sharma, Stephens Inc., Research Division – Senior Research Associate [21] ——————————————————————————– This is actually Pooran jumping on for Ben. I just — I just wanted to start off and just ask about avocado prices. I know you seasonally get a bump kind of Super Bowl and a little bit after. But we’ve seen a pretty big price rally here in recent weeks. So I just wanted to get your take. Is this that Super Bowl, maybe that March Madness kind of rally, is this maybe a return to foodservice? I know you said your foodservice business was lower, but maybe the pace of improvement has been greater. So I just kind of want to get your take on the recent avocado price rise. ——————————————————————————– James E. Gibson, Calavo Growers, Inc. – CEO [22] ——————————————————————————– Yes. Well, I think definitely, there’s a feel that demand is increasing or it is about to really increase. And so we’re seeing rising prices coming out of Mexico, and transversely, the price is going up out to the retail customer base. And so that is beginning to occur. And as it does occur, there’s opportunity for us to generate margin. And as a result of higher prices, it allows for us to aggressively go out and seek new customers. ——————————————————————————– Pooran Sharma, Stephens Inc., Research Division – Senior Research Associate [23] ——————————————————————————– Okay. Great. And then has — if you can just provide as much color as you can on this. But as your — the conversations you’ve been having with customers kind of in the foodservice arena. Obviously, you said you’re gauging the pace of improvement. You’re kind of expecting demand, like there’s a feel for it. But are you seeing that in your conversations with your customers? Or is this kind of just a general kind of feeling? ——————————————————————————– James E. Gibson, Calavo Growers, Inc. – CEO [24] ——————————————————————————– Well, I think foodservice is kind of in a couple of different brackets. There’s — it’s more like the quick-serve kind of concept, and that is definitely recovering and has been recovering very well and working pretty well for us. What we’re looking for is more of the wholesale environment for us that services individual restaurants and restaurant — small restaurant chains, and that has been pretty much devastatingly impacted by the pandemic. And so as local governments begin to open up and allow for that type of dining experience, then those are going to — that’s going to open up opportunities for us to sell into that environment again. And our expectation is that it feels like with the pace of the vaccines picking up, Johnson & Johnson now in play, we believe that distribution is going to get stronger and stronger. Governments are beginning to open up in the environments that they operate in. And then the other piece of it is that we’re moving into springtime now where weather is getting nicer and nicer and people want to get out. And even in those generally colder environments, the weather is getting nicer and more apt to handle the dining experience as they transition. ——————————————————————————– Pooran Sharma, Stephens Inc., Research Division – Senior Research Associate [25] ——————————————————————————– Got it. Appreciate the color. I just had one more question I wanted to ask you about. Do higher freight rates represent an issue for you guys at all? Are you — does that worry you? How, if at all, is it impacting avocado prices? Is there any connection there? ——————————————————————————– James E. Gibson, Calavo Growers, Inc. – CEO [26] ——————————————————————————– Well, freight is definitely in play at this point. It’s one of the key measurement indicators that we use, and it’s definitely inside of our pricing. Generally, we have contracts on a variety of our routes, and those are holding. But we’re certainly monitoring as we run from — as an example, from the border to our value-added distribution centers and really operating to reduce that kind of cost. What we can do is we work with our customers, and some of our customers will take direct loads right from the border. And so we’re able to offset some of the kind of that natural freight of a stopover in direct delivery. And so we work those kind of angles as best we can. We’ve got a lot of freight on the road, which includes avocados and fresh food from the Renaissance side of things. And so where we can, we either combine or we also are working on backhauls that allow for us to mitigate the cost of overall freight. ——————————————————————————– Operator [27] ——————————————————————————– Our next question comes from Mitch Pinheiro with Sturdivant & Company. ——————————————————————————– Mitchell Brad Pinheiro, Sturdivant & Co., Inc., Research Division – Research Analyst [28] ——————————————————————————– I jumped on late. I guess it’s probably asked or you probably mentioned it, but the avocado, your Fresh product margin was better than I expected. And I realize you — obviously, you benefit from lower fruit costs, and I saw there’s some foreign currency help. But I was just surprised given the challenges that you have, where you have #2 fruit nowhere to go and things like that, how are you able to deliver the type of margins that you did? ——————————————————————————– James E. Gibson, Calavo Growers, Inc. – CEO [29] ——————————————————————————– Yes. Well, I think our sales crowd is doing a really good job of managing inside of this environment, specifically on the inventory control side so that we’re always looking at the fresh cost and putting price over the top of that. But then the other piece that we’ve really focused on in this quarter and will continue throughout the balance of the year is working on the nonfruit costs, meaning the manufacturing, and as I was just talking about, the distribution piece of our business. And so one of the things we’re really focused on specifically in Mexico is pushing a lot of material through our packing now. So we take on all the efficiencies, the volume variance associated with fixed overhead, and we can generally translate that efficiency into additional margin at the bottom line. ——————————————————————————– Mitchell Brad Pinheiro, Sturdivant & Co., Inc., Research Division – Research Analyst [30] ——————————————————————————– And that’s even with — despite just a 2% volume increase, I mean, that’s not a lot of sort of throughput leverage typically. But — so you still accomplished that with a lower volume growth. ——————————————————————————– James E. Gibson, Calavo Growers, Inc. – CEO [31] ——————————————————————————– Right. We’re in the factory as well, working to optimize throughput. So it’s always hours in overtime. The other part of it, too, is there are times when we need to or can’t purchase outside of the packing house. And we’re making conscious decisions to run as much volume as we can through those — through that packing house so we can take full efficiency there. ——————————————————————————– Mitchell Brad Pinheiro, Sturdivant & Co., Inc., Research Division – Research Analyst [32] ——————————————————————————– So all things being equal, if you look — what — we could expect continued favorable sort of throughput plant efficiency as you move forward here? ——————————————————————————– James E. Gibson, Calavo Growers, Inc. – CEO [33] ——————————————————————————– Correct, yes. Our — we’ve got initiatives even beyond the packing house into our supply chain, meaning the use of our value-added distribution centers, the way we bring — as I was talking a little bit earlier in the questioning about the way we look at freight and try to optimize our freight lanes given the 3 business units that we operate in. So there are things that we can do on the nonfruit side — or nonfruit cost side of things to benefit the overall program. And that’s what we’re really focused on in this environment. ——————————————————————————– Mitchell Brad Pinheiro, Sturdivant & Co., Inc., Research Division – Research Analyst [34] ——————————————————————————– Okay. And then just one other question. Again, it may have been answered. But with RFG, sales were a little lower than I expected. You attributed mostly to the comparison to the co-packer. But I mean it looked a little lower. Was there a — was there some — the lack of the ability to sell because of the port congestion and things like that? Or was it just sort of just straight ahead, mostly just the loss of that co-packer? ——————————————————————————– James E. Gibson, Calavo Growers, Inc. – CEO [35] ——————————————————————————– Yes. Kevin was — well, I was going to say, Kevin was talking a little bit about it on the Fresh side. But certainly, in this quarter, there are a couple holidays that generally Renaissance really counts on. And there was — if you remember, in that period of time, specifically in December, early January, there were waves of the pandemic coming through that had a definite impact on demand. And it also had impact on our operations, just working through that, specifically in like the Southern California regions and Houston in that period of time. So I think we lost some of the lift associated with retail holiday sales, meaning Thanksgiving, Christmas and… ——————————————————————————– Kevin Manion, Calavo Growers, Inc. – CFO [36] ——————————————————————————– Super Bowl. ——————————————————————————– James E. Gibson, Calavo Growers, Inc. – CEO [37] ——————————————————————————– Yes. ——————————————————————————– Operator [38] ——————————————————————————– (Operator Instructions) Our next question comes from Ryan Meyers with Lake Street Capital Markets. ——————————————————————————– Ryan Robert Meyers, Lake Street Capital Markets, LLC, Research Division – Equity Research Analyst [39] ——————————————————————————– First one from me. Could you give us some additional color on the sales mix in the Fresh/Foods segment and then how that helps kind of drive the gross margin there? ——————————————————————————– Kevin Manion, Calavo Growers, Inc. – CFO [40] ——————————————————————————– Fresh is — just from a vernacular standpoint, to make sure we got it, Fresh is all avocados. So the mix there is really more of a customer movement as compared to anything else. But I think maybe your questioning is compared to last year where we had #2 quality supply was probably 80% higher than it was this year. And #2 quality last year just didn’t have a home to go to. And so they were really depressing our margins. This year, we didn’t have as much, and our sales force has done a really great job throughout the pandemic of now finding a home for everything. So I think that’s the mix you’re referring to. ——————————————————————————– Ryan Robert Meyers, Lake Street Capital Markets, LLC, Research Division – Equity Research Analyst [41] ——————————————————————————– Right. Right. Okay. And then you called out — you said 20% of the mix was foodservices. How did this track throughout 2020 and as you guys sort of navigated through the pandemic? And then where do you think that, that number will kind of go? Is it going to stick around that 20%? Or how do you see that changing as things begin to improve? ——————————————————————————– Kevin Manion, Calavo Growers, Inc. – CFO [42] ——————————————————————————– Yes. Certainly, I think out of that 20%, their business — that segment was down anywhere from low 20s to 50%. And our team found a lot of new locations to put product, which was great and innovative and timely. And so I think foodservice will come back. I mean restaurants will come back. There’s no doubt about it as time comes on. And I think there’s a lot of pent-up demand to get there. The timing, we don’t see. And it’s unfortunate, I think a lot of our restaurateurs will be replaced by new restaurateurs, and that’s unfortunate just from a turnover perspective. But I do think the trends of whether it’s fresh product being sold or our foods products being sold as guacamole into those restaurant areas, we’re pretty optimistic. And certainly, one of them that we bought last year and closed last February was SFFI, Simply Fresh Fruit, which our timing was just really too bad. It didn’t work out, but we are still pretty optimistic that the hospitality business comes back, and that will be another good — great outlet for us as time goes on. So we are optimistic, and I think that full 20% will come back to us. If you sort of do the math, the 20% was down anywhere from 20 to 50, that gets to 4% to 10%. And so I think that’s the volume that comes back to us. Ideally, we’re up closer to the 10% than the 4% range. ——————————————————————————– Operator [43] ——————————————————————————– There are no further questions at this time. I would like to turn the floor back over to Jim Gibson for any closing comments. ——————————————————————————– James E. Gibson, Calavo Growers, Inc. – CEO [44] ——————————————————————————– I want to thank our shareholders for your continued support, and I look forward to updating you on our progress in our next quarter’s earnings call. Until then, stay healthy and safe. ——————————————————————————– Operator [45] ——————————————————————————– This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation. Have a wonderful evening.