8-K: Calavo Growers Reports Mixed Q3 Results, Doubles Dividend After Fresh Cut Sale

Calavo Growers, Inc. announced its third quarter 2024 financial results, highlighted by a dividend increase and the sale of its Fresh Cut business, while also experiencing some profit declines.

Summary

• Calavo Growers reported a 11.7% increase in total net sales to $179.6 million for the third quarter of 2024 compared to the same period last year.
• The Grown segment saw a 13.3% increase in net sales, reaching $163.2 million, while the Prepared segment experienced a 2.4% decrease to $16.4 million.
• Gross profit decreased by 8.7% to $20.1 million, with the Grown segment's gross profit decreasing by $1.2 million and the Prepared segment's gross profit decreasing by $0.8 million.
• Net income was $5.4 million, or $0.30 per diluted share, down from $8.7 million, or $0.48 per diluted share, in the prior year quarter.
• Adjusted net income increased to $10.2 million, or $0.57 per diluted share, compared to $7.7 million, or $0.43 per diluted share, in the prior year quarter.
• Adjusted EBITDA was $13.5 million, slightly up from $13.0 million in the same quarter last year.
• The company sold its Fresh Cut business on August 15, 2024, for $83.0 million, with estimated after-tax net cash proceeds of approximately $75.0 million.
• A goodwill impairment charge of $9.3 million was recorded due to the sale of the Fresh Cut business.
• The Board of Directors doubled the cash dividend to $0.20 per share, payable on October 30, 2024.

Sentiment

Score: 6

Explanation: The sentiment is moderately positive due to the increased sales and dividend, but tempered by the decrease in net income and gross profit, as well as the foreign currency losses and goodwill impairment.

Positives

• The company achieved a third consecutive quarter of year-over-year improvement in adjusted EBITDA.
• Strong avocado margins in the Grown segment helped offset temporary supply disruptions from Mexico.
• The company successfully reduced its net debt by $9.5 million during the quarter.
• The sale of the Fresh Cut business generated significant cash proceeds.
• The dividend was doubled, indicating confidence in future performance.
• The average selling price of avocados increased by 25% compared to the prior year.

Negatives

• Total gross profit decreased by 8.7% to $20.1 million compared to the prior year quarter.
• Net income decreased to $5.4 million, or $0.30 per diluted share, from $8.7 million, or $0.48 per diluted share, in the prior year quarter.
• The Prepared segment experienced a 2.4% decrease in net sales and a $0.8 million decrease in gross profit.
• The company recorded a $4.2 million foreign currency remeasurement loss compared to a $2.0 million gain in the prior year quarter.
• A goodwill impairment charge of $9.3 million was recorded due to the sale of the Fresh Cut business.
• Avocado volume declined by 4.5% due to supply disruptions from Mexico.

Risks

• The company is subject to risks associated with weather, which can impact market prices and operational costs.
• The business is sensitive to changes in market prices of avocados and other agricultural products.
• Potential disruptions to the supply chain could negatively impact operations.
• The company faces competitive pressures, including from foreign growers.
• There are risks associated with doing business internationally, including currency fluctuations.
• The company is currently cooperating with the SEC and DOJ regarding an internal investigation into potential issues under the Foreign Corrupt Practices Act.
• The company is subject to the resolution of pending investigations, legal claims and tax disputes, including an assessment imposed by the Mexican Tax Administrative Service (the SAT).

Future Outlook

The company expects to deliver solid financial results for the fourth quarter and fiscal year, and intends to invest in its core avocado and guacamole businesses and return cash to shareholders. They also plan to launch new guacamole products in the fourth quarter.

Management Comments

• Our third quarter results reflect continued momentum in our flagship avocado business, said Lee Cole, President and Chief Executive Officer of Calavo Growers, Inc.
• Despite temporary industry supply disruptions from Mexico during the quarter, we generated strong financial results due to our operational flexibility and our resilient team.
• Although our guacamole business experienced headwinds from higher fruit input costs compared to the third quarter last year, our volume increased 7% due to our focus on growing the business.
• We intend to deploy the cash that we generated from the sale of our Fresh Cut business by investing in our core avocado and guacamole businesses and by returning cash to shareholders over time.
• Given the renewed focus on our core operations, improvements in our financial performance, and our confidence in our operational execution going forward, I am pleased to share that we have doubled the quarterly dividend to $0.20 per share.

Industry Context

The results reflect the challenges of the fresh produce industry, including supply chain disruptions and fluctuating input costs. The company's focus on its core avocado business and new product launches aligns with industry trends towards specialization and innovation.

Comparison to Industry Standards

• Calavo's 11.7% increase in net sales is a positive sign, but the decrease in gross profit indicates potential margin pressures, which is a common challenge in the fresh produce industry.
• Companies like Mission Produce (AVO) and Fresh Del Monte Produce (FDP) also face similar challenges related to supply chain and input costs, making Calavo's performance comparable to its peers.
• The 25% increase in average avocado selling price is significant, but the 4.5% volume decline suggests that the company may need to focus on balancing price and volume to maintain profitability.
• The sale of the Fresh Cut business and the subsequent dividend increase are strategic moves that could improve shareholder value, similar to how other companies in the industry have divested non-core assets to focus on their strengths.

Legal Proceedings

• The company is currently cooperating with the Securities and Exchange Commission (SEC) and the Department of Justice (DOJ) regarding an internal investigation into potential issues under the Foreign Corrupt Practices Act (FCPA).

Stakeholder Impact

• Shareholders will benefit from the increased dividend and the company's focus on core operations.
• Employees may be impacted by the restructuring and sale of the Fresh Cut business.
• Customers may see new product offerings and improved service due to the company's focus on its core businesses.
• Suppliers may be affected by changes in the company's supply chain and sourcing strategies.

Next Steps

• The company plans to invest in its core avocado and guacamole businesses.
• The company intends to launch new guacamole products in the fourth quarter.
• The company will continue to cooperate with the SEC and DOJ regarding the internal investigation.
• The company will focus on improving margins in the Prepared segment.

Key Dates

Keywords

avocados, guacamole, financial results, dividend, Fresh Cut business, net sales, gross profit, EBITDA, supply chain, foreign currency, Mexico