8-K: Calavo Growers Reports Mixed Q4 and Fiscal Year 2023 Results Amidst Investigation

Calavo Growers, Inc. announced its fourth quarter and fiscal year 2023 financial results, showing a slight decrease in net sales and a net loss, while also disclosing an internal investigation into its Mexico operations.

Summary

• Calavo Growers reported a 1.0% decrease in net sales for the fourth quarter of 2023, totaling $241.2 million, compared to the same period last year.
• The Grown segment saw a 5.6% increase in net sales, reaching $125.7 million, while the Prepared segment experienced a 7.9% decrease, with net sales of $116.1 million.
• Gross profit for the quarter was $15.5 million, down from $20.4 million in the prior year, with the Grown segment's gross profit increasing slightly and the Prepared segment's gross profit decreasing significantly.
• The company reported a net loss of $7.9 million, or $0.45 per diluted share, compared to a net loss of $3.3 million, or $0.19 per diluted share, for the same quarter last year.
• Adjusted EBITDA for the quarter was $7.0 million, compared to $9.6 million in the prior year.
• For the full fiscal year 2023, net sales decreased by 18.4% to $972.0 million, with both the Grown and Prepared segments experiencing declines.
• The company's full-year net loss was $8.3 million, or $0.47 per diluted share, compared to a net loss of $6.2 million, or $0.35 per diluted share, in the previous year.
• Adjusted EBITDA for the full year was $31.3 million, down from $35.1 million in the prior year.
• Calavo is currently undergoing an internal investigation into its Mexico operations, which has been voluntarily disclosed to the SEC and DOJ.

Sentiment

Score: 4

Explanation: The sentiment is negative due to the decrease in sales, net loss, and ongoing investigation. While there are some positive aspects, the overall financial performance and the uncertainty surrounding the investigation weigh heavily on the sentiment.

Positives

• The Grown segment experienced a 5.6% increase in net sales for the quarter.
• Grown segment gross profit increased slightly by $0.2 million compared to the prior year quarter.
• The average selling price of avocados in the Grown segment increased by 25% compared to the prior year.
• Gross profit in the guacamole division increased to $2.5 million from $2.3 million in the prior year quarter.
• Selling, general and administrative expenses decreased due to lower incentive compensation and outside service costs.
• The company has $40.0 million of available liquidity as of October 31, 2023.
• Gross profit improved sequentially in the prepared segment as they completed onboarding for a large national account customer.

Negatives

• Total net sales decreased by 1.0% for the fourth quarter.
• The Prepared segment experienced a 7.9% decrease in net sales for the quarter.
• Gross profit decreased to $15.5 million from $20.4 million in the prior year quarter.
• The company reported a net loss of $7.9 million for the quarter, compared to a net loss of $3.3 million in the same period last year.
• Adjusted EBITDA decreased to $7.0 million from $9.6 million in the prior year quarter.
• Full-year net sales decreased by 18.4%.
• The company's full-year net loss was $8.3 million.
• Adjusted EBITDA for the full year decreased to $31.3 million from $35.1 million in the prior year.
• Avocado volume declined by 8.7% in the Grown segment.
• Prepared segment gross profit declined by $5.1 million from the prior year quarter.

Risks

• The company is undergoing an internal investigation into its Mexico operations, which could result in material fines and penalties.
• The company cannot currently predict the timing or outcome of the internal investigation or any actions by the SEC, DOJ, or Mexican authorities.
• The company cannot currently estimate the amount or range of loss or potential impact on its consolidated financial statements associated with the investigation.
• The company's business is sensitive to changes in market prices of avocados and other agricultural products.
• There are risks associated with potential future acquisitions, including integration.
• The company is exposed to potential data breaches and other cyber-attacks.
• The company is dependent on large customers and key personnel.
• There are risks associated with doing business internationally, including currency fluctuations and trade restrictions.
• The company faces competitive pressures, including from foreign growers.
• There are risks of recalls and food-related injuries to customers.
• The company is susceptible to wage inflation and potential labor disputes.
• The company is reliant on co-packers for a portion of its production needs.
• The company is exposed to the impact of environmental regulations and climate change.
• The company is exposed to the effects of increased interest rates on its cost of borrowing and consumer purchasing behavior.
• The company is exposed 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 looks forward to delivering shareholder value in fiscal 2024 and is working towards completing the sale of its fresh cut business. They are also focused on growing volume in their prepared business.

Management Comments

• I am pleased with our fourth quarter results as we continued to focus on the fundamentals of our operations, said Lee E. Cole, President and Chief Executive Officer of Calavo Growers, Inc.
• We continue to work toward completing the sale of our fresh cut business to F&S Fresh Foods and will share more details when we are able.
• We look forward to delivering shareholder value in fiscal 2024 as we also celebrate the Company's 100th anniversary.
• Avocado margins softened compared to the third quarter due to seasonality and an unfavorable foreign exchange impact of $3.0 million; however, margins improved versus the prior year quarter due to our margin management discipline.
• Gross profit improved sequentially in our prepared segment as we completed onboarding for a large national account customer in our fresh cut division, while our guacamole business continued to perform well operationally and benefitted from lower input costs.

Industry Context

The report indicates a mixed performance in the produce industry, with the vegetable category experiencing slightly down unit sales, while fruit sales turned positive. The company's results reflect the broader market trends, with some segments performing better than others. The company is also navigating challenges related to supply chain and input costs, which are common in the industry.

Comparison to Industry Standards

• Calavo's performance is mixed when compared to industry standards. While the Grown segment saw some positive results, the overall decrease in net sales and profitability is concerning.
• Companies like Mission Produce (AVO) and Fresh Del Monte Produce (FDP) are key competitors in the avocado and fresh produce space. Calavo's 18.4% decrease in annual net sales is a significant underperformance compared to the industry average.
• The gross profit margin of 6.4% for the quarter is lower than the industry average for fresh produce companies, which typically range from 10% to 15%.
• The adjusted EBITDA of $7.0 million for the quarter is also below the industry average for companies of similar size, indicating potential operational inefficiencies.
• The ongoing investigation into the company's Mexico operations is a significant risk that could further impact its financial performance and reputation, setting it apart from peers who are not facing similar issues.

Legal Proceedings

• The company has disclosed an internal investigation into its Mexico operations to the SEC and DOJ.
• The investigation relates to potential issues under the Foreign Corrupt Practices Act (FCPA).
• The company is cooperating with the SEC and DOJ in connection with these matters.

Stakeholder Impact

• Shareholders are negatively impacted by the net loss and decreased profitability.
• Employees may be affected by the ongoing restructuring and potential changes in operations.
• Customers may be impacted by potential supply chain disruptions or changes in product offerings.
• Suppliers may be affected by changes in the company's purchasing patterns.
• Creditors may be concerned about the company's financial performance and the potential impact of the investigation.

Next Steps

• The company will continue to work towards completing the sale of its fresh cut business.
• The company will continue its internal investigation into its Mexico operations and cooperate with the SEC and DOJ.
• The company will focus on growing volume in its prepared business in fiscal 2024.
• The company's sales and operations teams are focused on fulfilling customer demand for the Super Bowl.

Key Dates

Keywords

Calavo Growers, avocado, produce, financial results, net sales, gross profit, net loss, EBITDA, investigation, Mexico, Foreign Corrupt Practices Act, FCPA, SEC, DOJ