Calavo Growers, Inc. Announces Fiscal 2011 Third Quarter Operating Results

Calavo Growers, Inc. (Nasdaq-GS: CVGW), a global avocado-industry leader and an expanding provider of value-added fresh food, today reported a solidly profitable fiscal 2011 third quarter on the strength of revenues that rose 44 percent owing to sharply higher avocado sales. However, the company said net income in the most recent quarter was constrained principally by high fruit costs in its Calavo Foods business segment, as well as the effects of a smaller supply of fresh avocados in the marketplace.

Operating results for the most-recent quarter include those of Renaissance Food Group, LLC (RFG), which became part of the company on June 1, 2011. RFG’s results are included in the company’s Calavo Foods business segment. For the three months ended July 31, 2011, net income of $2.7 million, equal to $0.18 per diluted share, compares with $5.9 million, or $0.41 per diluted share, in the year-earlier third quarter. Revenues advanced to $165.1 million, which represents an increase of more than $50 million from $114.6 million in the fiscal 2010 third quarter. (RFG accounted for $22.8 million of the revenue increase.) Third-quarter gross margin narrowed to $11.3 million, or 6.9 percent of total revenue, from $15.3 million, or 13.3 percent of revenue, in the comparable period last year.

Net income for the nine months ended July 31, 2011 equaled $7.4 million, or $0.50 per diluted share. This compares with nine-month net income last year of $13.0 million, equal to $0.89 per diluted share. Revenues for the initial nine months of fiscal 2011 climbed 29 percent to $375.2 million from $291.1 million in the year-earlier corresponding period. Gross margin totaled $29.4 million, or 7.8 percent of total revenues, versus $37.2 million, or 12.8 percent, for the first three quarters of fiscal 2010.

Chairman, President and CEO Lee E. Cole stated: “While the fiscal 2011 third quarter presented challenges due principally to the limited avocado supply and strong avocado demand, Calavo’s ability to navigate them and remain solidly profitable underscores the strength of our business model. Simultaneously, the company made measurable strides in building a stronger, larger and more broad-based enterprise. On June 1, we completed our acquisition of Renaissance Food Group and its portfolio of brands, which contributed to quarterly revenues that reached record levels. Calavo’s operating results, though, principally reflect the two-fold impact on gross margins due to the significantly smaller year-over-year avocado supply.

“Most significantly, the limited supply of avocados drove up fruit costs overall, and specifically, in our prepared avocado business, where fruit prices have risen by more than 70 percent from last year’s third quarter. This factor accounts for the majority of the decrease in our third-quarter operating results year over year. Secondarily, the cyclically lower volume of fresh avocados from California resulted in moving fewer overall units, which reduced production efficiencies and increased our per-unit packing costs. We expect this to change with next year’s anticipated larger crop.”

Third-quarter revenues in Calavo’s Fresh business segment advanced 29 percent to $130.0 million, primarily due to higher avocado prices, versus $100.7 million in the corresponding period last year. The company shipped 1.3 million, equal to 27 percent, fewer Fresh units in the most recent quarter when compared to the same period in fiscal 2010. The year-over-year unit decrease is principally due to the aforementioned smaller avocado supply, as well as lower tomato volumes in the most recent period. Gross margin as a percentage of Fresh segment revenues was $10.2 million, equal to 7.9 percent sales. This compares with gross margin of $12.7 million, or 12.7 percent of Fresh sales, in last year’s third quarter.

Calavo Foods business segment revenues rose to $35.1 million, an increase of 153 percent from $13.9 million in the corresponding fiscal 2010 quarter. Results in the most recent quarter include $22.8 million in revenues attributable to RFG. Excluding the acquired company’s contribution to sales, Calavo Foods’ third-quarter revenues equaled $12.3 million. The year-over-year decline (excluding RFG revenues) is in part the result of the discontinuance of sales to certain high-volume, low-margin customers of Calavo’s frozen-avocado product as the company continues to focus growth initiatives on its ultra-high pressure guacamole. Lower prepared avocado sales in concert with higher fruit costs narrowed Calavo Foods gross margin to $1.1 million, or 3.2 percent of business-segment revenues, in the most recent quarter. This compares with gross margin of $2.5 million, or 18.2 percent of Calavo Foods revenues, in last year’s third quarter.

Third-quarter selling, general and administrative (SG&A) expense totaled $6.8 million, which includes approximately $1.2 million attributable directly to RFG operations. Excluding that figure, Calavo SG&A remained substantially unchanged from $5.5 million recorded in the fiscal 2010 third quarter. SG&A as a percentage of total revenues equaled 4.1 percent, a decrease of about 700 basis points from 4.8 percent in last year’s third quarter, reflecting the initial top-line contributions by RFG in the most recent period. SG&A as a percentage of gross margin was 60.4 percent in the most recent quarter. This compares with 36.1 percent in the third quarter of fiscal 2010.

The Outlook Ahead

Commenting on the fourth quarter, CEO Cole said: “As anticipated, we are seeing certain promising early indicators of an easing in the avocado supply. This has been a stiff headwind to our operating performance the past two quarters. The seasonal supply of avocados sourced from Chile has begun in earnest and the crop is significantly larger than last year’s. Along with Mexico-sourced fruit, we expect increased availability of fresh avocados in the marketplace, easing the hamstrung supply—and high costs at Calavo Foods—we have encountered the past few quarters. We believe the expected improvement in fourth quarter fresh-avocado supply is the beginning of strong volume growth in fiscal 2012. Furthermore, the anticipated larger avocado volume in 2012 will place Calavo on the strong growth trend that has characterized our company’s performance over the past five years.”

Cole continued: “We continue to focus on building the Calavo Foods segment into a complete consumer packaged goods company. This will be the first full quarter incorporating RFG results. With our growing lineup of products and brands, including Garden Highway and Chef Essentials acquired with RFG, we are establishing a portfolio with the goal of being a leader in the important fresh-food category. Combining RFG’s offerings with Calavo’s current branded lineup of guacamole, Salsa Lisa and tortilla chips, provides us with significant presence when working with grocery retailers. In bringing together RFG’s just-in-time delivery platform with Calavo’s established strength in logistics, we gain meaningful competitive advantage in the refrigerated-distribution fresh products category.

“We are diligently staying the course with our proven strategy: diversifying sourcing, diversifying products and leveraging infrastructure. I am confident and optimistic about the improving picture for the balance of this year. Longer term, we are well positioned and have put in motion the programs to drive significant growth—and value creation—in fiscal 2012 and beyond,” Cole concluded.

About Calavo

Calavo Growers, Inc. is a global avocado-industry leader. The company also procures and markets diversified fresh produce items, ranging from tomatoes to tropical produce. An expanding provider of value-added fresh food, the company’s Calavo Foods business segment manufactures and distributes guacamole, guacamole hummus, salsa and tortilla chips under the respected Calavo brand name. Calavo Foods’ wholly owned subsidiary, Renaissance Food Group, LLC, creates, markets and distributes a portfolio of healthy, high-quality lifestyle products for consumers through fast-growing brands that include Garden Highway and Chef Essentials. Founded in 1924, Calavo serves food distributors, produce wholesalers, supermarket retailers and restaurant chains worldwide.

Safe Harbor Statement

This news release contains statements relating to future events and results of Calavo (including certain projections and business trends) that are “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. Actual results and events may differ from those projected as a result of certain risks and uncertainties. These risks and uncertainties include but are not limited to: increased competition, conducting substantial amounts of business internationally, pricing pressures on agricultural products, adverse weather and growing conditions confronting avocado growers, new governmental regulations, as well as other risks and uncertainties detailed from time to time in the company’s Securities and Exchange Commission filings, including, without limitation, the company’s Annual Report on Form 10-K for the year ended October 31, 2010. These forward-looking statements are made only as of the date hereof, and the company undertakes no obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise.

CALAVO GROWERS, INC.
NET SALES AND GROSS MARGIN BY BUSINESS SEGMENT (UNAUDITED)
(in thousands)

For the nine months ended July 31 2011, and 2010, inter-segment sales and cost of sales for Fresh products totaling $11.7 million and $9.6 million were eliminated. For the nine months ended July 31, 2011 and 2010, inter-segment sales and cost of sales for Calavo Foods totaling $18.0 million and $6.9 million were eliminated.

For the three months ended July 31, 2011 and 2010, inter-segment sales and cost of sales for Fresh products totaling $3.2 million and $2.1 million were eliminated. For the three months ended July 31, 2011 and 2010, inter-segment sales and cost of sales for Calavo Foods totaling $12.2 million and $2.5 million were eliminated.